-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L3fEE0/X9kxaPHNxKEtj/09lwVcU8QpUkss4cF3GytUnfOzyy2PiEvWZQWdDAulc ScJibC0qXmWqQzqxq5upcg== 0000008192-97-000012.txt : 19970317 0000008192-97-000012.hdr.sgml : 19970317 ACCESSION NUMBER: 0000008192-97-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC CITY ELECTRIC CO CENTRAL INDEX KEY: 0000008192 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210398280 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03559 FILM NUMBER: 97556790 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08232 BUSINESS PHONE: 6096454100 MAIL ADDRESS: STREET 1: PO BOX 1264 CITY: PLEASANTVILLE STATE: NJ ZIP: 08232 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC ENERGY INC CENTRAL INDEX KEY: 0000806393 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 222871471 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09760 FILM NUMBER: 97556791 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08234 BUSINESS PHONE: 6096454518 MAIL ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08234 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Registrant; State of I.R.S.Employer Commission Incorporation; Address; Identification File No and Telephone Number Number 1-9760 ATLANTIC ENERGY, INC. 22-2871471 (a New Jersey Corporation) 6801 BLACK HORSE PIKE, EGG HARBOR TOWNSHIP, NEW JERSEY 08234 609-645-4500 1-3559 ATLANTIC CITY ELECTRIC COMPANY 21-0398280 (a New Jersey Corporation) 6801 BLACK HORSE PIKE EGG HARBOR TOWNSHIP, NEW JERSEY 08234 609-645-4100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, No Par Value New York Stock Exchange of Atlantic Energy, Inc. Philadelphia Stock Exchange Pacific Stock Exchange 8.25% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, liquidation preference $25 per preferred security issued by Atlantic Capital I Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10K. X Estimated aggregate market value of the voting stock of Atlantic Energy, Inc. held by non-affiliates at March 6, 1997, was $898,943,385.00 based on a closing price of $17.25 per share for the 52,502,479 outstanding shares at such date. Atlantic Energy, Inc. owns all of the 18,320,937 outstanding shares of Common Stock of Atlantic City Electric Company. Documents Incorporated by Reference: Certain sections of the Notice of Annual Meeting of Shareholders and Proxy Statement in connection with the Annual Meeting of Shareholders, to be held April 23, 1997, have been incorporated by reference to provide information required by the following parts of this report: Part III-Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management. This combined Form 10-K is filed separately by Atlantic Energy, Inc. and Atlantic City Electric Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Atlantic City Electric Company makes no representation as to information relating to Atlantic Energy, Inc. PART I ITEM 1 BUSINESS 1 General 1 Competition 2 Nonutility Subsidiaries 8 Construction and Financing 10 Rates 12 Energy Requirements and Power Supply 13 Power Pool and Interconnection Agreements 15 Power Purchases and Sales 16 Capacity Planning 16 Nonutility Generation 18 Nuclear Generating Station Developments 19 Salem Station 22 Hope Creek Station 24 Peach Bottom 25 Fuel Supply 26 Oil 26 Coal 26 Gas 27 Nuclear Fuel 27 Nuclear Decommissioning 29 Regulation 31 Environmental Matters 33 General 33 Air 36 Water 37 Executive Officers 40 ITEM 2 PROPERTIES 43 ITEM 3 LEGAL PROCEEDINGS 43 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 44 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 44 ITEM 6 SELECTED FINANCIAL DATA 46 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 47 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 66 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 108 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 108 ITEM 11 EXECUTIVE COMPENSATION 108 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 108 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 108 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 109 SIGNATURES 110 i GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found in this report: Term Definition ACE ..... Atlantic City Electric Company ACO ..... Administrative Consent Order AEE ..... Atlantic Energy Enterprises, Inc. AEI ..... Atlantic Energy, Inc. or the Company AET ..... Atlantic Energy Technology, Inc. AGI ..... Atlantic Generation Inc. ASP ..... Atlantic Southern Properties ATS ..... Atlantic Thermal Systems, Inc. BPU ..... New Jersey Board of Public Utilities BWR ..... Boiling water reactor CAAA .... Clear Air Act Amendments CAFRA ... New Jersey Coastal Area Facility Review Act CCI ..... CoastalComm Inc. CERCLA .. Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 CON ..... Certificate of Need CORP .... New Jersey Commission on Radiation Protection CQIPS ... 8.25% Cumulative Quarterly Income Preferred Securities DOE ..... U. S. Department of Energy DRBC .... Delaware River Basin Commission EFNAA ... Electric Facilities Need Assessment Act EMF ..... Electric and magnetic fields EPA ..... Environmental Protection Agency EPAct ... Energy Policy Act of 1992 FERC .... Federal Energy Regulatory Commission GE ...... General Electric Company Hope Creek .. Hope Creek Nuclear Generating Plant HSW ..... Harrisburg Steam Works, Ltd. IGM ..... Interstate Gas Marketing IPP ..... Independent power producer ISO ..... Independent System Operator KW ...... Kilowatt-hours LEC ..... Levelized Energy Clause LLRW .... Low-level radioactive waste LLRWPA .. Low Level Radioactive Policy Act MTC ..... Market Transition Charge MTN ..... Medium Term Notes MW ...... Megawatt NJEDA ... New Jersey Economic Development Authority NJDEP ... New Jersey Department of Environmental Protection NJPDES .. New Jersey Pollution Discharge Elimination System NPDES ... National Pollution Discharge Elimination System - ii - GLOSSARY OF TERMS, cont'd NOx ..... Nitrogen Oxide NPDES ... National pollution discharge elimination system NRC ..... Nuclear Regulatory Commission NUG ..... Nonutility generators NWPA .... Nuclear Waste Policy Act OTRA..... Off-Tariff rate agreements PCCA .... Paxton Creek Cogeneration Associates Peach Bottom .. Peach Bottom Atomic Power Station PE ...... PECO Energy Company PJM ..... Pennsylvania-Jersey-Maryland Interconnection Assoc. Plan .... New Jersey Energy Master Plan, Draft Phase II PP&L .... Pennsylvania Power & Light Company PS ...... Public Service Electric and Gas Company PUHCA ... Public Utility Holding Company Act of 1935 PURPA ... Public Utility Regulatory Policy Act PWR ..... Pressurized water reactor RCRA .... Federal Resource Conservation and Recovery Act of 1976 Salem ... Salem Nuclear Generating Station SALP .... Systematic Assessment of Licensee Performance SARA .... Superfund Amendments and Reauthorization Act of 1986 SEC ..... Securities and Exchange Commission SERT .... Significant event response team SIP ..... State implementation plans Spill Act ... New Jersey Spill Compensation and Control Act - iii - PART I ITEM 1 BUSINESS General Atlantic Energy, Inc. (AEI or the Company), the principal office of which is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey, 08232-4130, telephone 609-645-4500 was organized under the laws of New Jersey in August 1986. The Company is a public utility holding company as defined in the Public Utility Holding Company Act of 1935 (PUHCA), and has claimed an exemption from substantially all of the provisions of the 1935 Act. For a complete description of the Company and its subsidiaries, see Note 1 of the Notes to Consolidated Financial Statements herein. Principal cash inflows of the Company include the receipt of dividends from Atlantic City Electric Company (ACE) and loans outstanding from a revolving credit and term loan facility established by AEI in September 1995. As of December 31, 1996, AEI has $37.6 million outstanding under such facility. Principal cash outflows of the Company in 1996 were primarily for the payment of dividends to common shareholders. ACE, which has a wholly-owned subsidiary, Deepwater Operating Company, is the principal subsidiary of the Company and is engaged in the generation, transmission, distribution, and sale of electric energy in the southern part of New Jersey. ACE's principal office is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey, 08232-4130, telephone 609-645-4100, and was organized under the laws of New Jersey on April 28, 1924, by merger and consolidation of several utility companies. ACE is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). At December 31, 1996, ACE had over 475,000 customers and employed 1,466 persons, of which 633 were affiliated with a national labor organization. With the exception of a municipal electric system providing electric service within the municipal boundaries of the City of Vineland, New Jersey, ACE supplies electric service to the southern one-third of the State of New Jersey. ACE is a utility whose peak load normally occurs during the summer months. Approximately 29% of 1996 revenues were recorded during the quarter ended September 30, 1996. Pending Merger On August 12, 1996, the Boards of Directors of AEI and Delmarva Power & Light Company (Delmarva) jointly announced an agreement to merge the companies into a new company named Conectiv, Inc. Following the merger, AEI will be merged into Conectiv, which will become the parent of Delmarva and AEI as well as AEI's subsidiaries. The purpose of the proposed merger is to create a regional company from two companies that share a common vision of the strategic path necessary to succeed in the increasingly competitive utility and energy services marketplace. Following the approval of the merger by the shareholders of both companies on January 30, 1996, ACE and Delmarva filed applications with the New Jersey Board of Public Utilities (BPU), the Delaware Public Service Commission and the Virginia State Corporation Commission. The applications seek the approval of each state's commission, as soon as possible, or before December 31, 1997, to merge the two companies. The proposed merger is also subject to review by the Pennsylvania Public Utility Commission and the Maryland Public Service Commission with the request for approval expected to be filed before the end of the first quarter 1997. In addition to state regulatory approvals, the proposed merger requires the approval of the FERC, the Nuclear Regulatory Commission (NRC), the Securities and Exchange Commission (SEC), the U.S. Department of Justice and the Federal Trade Commission. Application was made to the FERC on November 27, 1996 and subsequently amended on March 7, 1997 to reflect the additional information required under FERC's Merger Policy Statement issued in December 1996. The target date for receiving all necessary approvals, fulfilling all other conditions of the Merger Agreement, and closing the merger is December 31, 1997. For further information regarding the pending merger, refer to Note 1 of AEI's Notes to Consolidated Financial Statements. Competition Competition exists and is expected to increase for certain electric energy markets historically served exclusively by regulated utilities. In recent years, changing laws and governmental regulations permitting competition from other utilities as well as nonregulated energy suppliers have prompted some customers to use self-generation or alternative sources to meet their electric needs. The transition from strictly regulated to competitive resale and retail markets is changing the structure of the utility industry and the way in which it conducts business. The Public Utility Regulatory Policy Act (PURPA) created a new class of generating facilities, operated by independent power producers (IPPs), and required electric utilities to purchase the excess power from each IPP. As a direct result of PURPA, ACE has long-term contracts with four such IPPs for the purchase of 579 megawatts (MWs) of capacity and energy and experienced a decline in its sales to industrial customers, three of which contracted with IPPs for their power supply. ACE has subsequently regained two such customers. The Energy Policy Act of 1992 (EPAct) represented another significant step toward deregulation of the electric utility industry. The EPAct facilitated development of the wholesale power market and increased competition between utility and non- utility generators (NUGs). The EPAct created a class of NUGs called exempt wholesale generators that would be exempt from certain PUHCA regulations. The EPAct also gave the FERC the authority to order open access to the transmission facilities of electric utilities and the wheeling of wholesale electric power. In April 1996, the FERC issued Order No. 888 "Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Service by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities". The Order was designed to remove impediments to competition in the wholesale bulk power marketplace, to bring more efficient, lower cost power to electricity consumers, and provide an equitable means to transition the industry to the new environment. Under this Order, utilities that own, control or operate interstate transmission facilities are required to offer transmission services for wholesale energy transactions to others on a nondiscriminatory basis. Tariffs were established by the utilities for these services, under which a utility must also apply these tariffs to its own wholesale energy transactions. The Order also permits utilities to seek recovery of legitimate, prudent and verifiable unrecovered costs that become stranded as a result of providing open access transmission services pursuant to the Order. A utility may have been obligated to incur a cost on behalf of a customer(s) in the reasonable expectation of providing service and recovery of that cost. When the customer(s) no longer uses the utility for the service related to the cost, or there is a change in a regulator's recovery policy due to market forces concerning the cost, the cost may become stranded if the utility is precluded from recovery. As the electric utility industry transitions from a regulated to a competitive industry, utilities may not be able to recover certain costs which are known as "stranded" costs. Potential types of stranded costs could be (i) above-market costs associated with generation facilities or long term power purchase agreements and (ii) regulatory assets, which are expenses deferred and expected to be recovered from customers in the future. Flex-rate legislation promulgated into law in New Jersey in July 1995 allows the BPU, upon petition from any electric or gas utility, to adopt a plan of regulation other than the traditional rate base/rate of return regulation. In addition, on a case-by- case basis, the law allows utilities to petition the BPU for the right to offer customers, who meet certain conditions, off- tariff, discounted rates. The law provides for the recovery of up to 50 percent of the value of discounts in a subsequent base rate case if it can be adequately demonstrated that the discount benefits all ratepayers. A limited number of off-tariff pricing arrangements with ACE's customers have been made. Refer to "Results of Operations" in AEI's Management's Discussion and Analysis of Financial Condition and Results of Operations herein for further information regarding off-tariff rates (OTRAs). New Jersey Energy Master Plan On January 16, 1997, the BPU issued Draft Phase II of the New Jersey Energy Master Plan addressing wholesale and retail competition in New Jersey (the "Plan"). The Plan contains specific proposals for restructuring the electric power industry in the State of New Jersey. Beginning in October 1998, 5% of retail electric customer load of all classes (industrial, commercial and residential) would be given the ability to directly choose their electric power supplier. All customers would be phased-in, with the percentage increasing to 20% in April 1999, 35% in October 1999, 50% in April 2000, 75% in October 2000 and 100% in April 2001. The Plan suggests that retail competition in New Jersey be introduced approximately 12 to 18 months after the implementation of full wholesale competition as provided by FERC Order 888. The BPU proposes in its Plan that beginning October 1998, the costs for bundled electricity services, consisting of power generation, transmission, distribution and auxiliary customer services, such as metering and billing, be unbundled. Each electric utility, including ACE, would continue to be responsible for providing distribution service to all customers. Price and service quality for distribution service would continue to be regulated by the BPU. Other customer services would also continue to be offered by the electric utility, for a monthly fee, including metering, billing and account administration, which would also be regulated by the BPU. Transmission service would be provided by an Independent System Operator (ISO), which would be responsible for maintaining the reliability of the regional power grid. The ISO would be regulated by the FERC. The utility would continue to pass through the cost of transmission to customers in its regulated rates. The Plan also calls for further review of metering and billing in order to make recommendations for the long term related to introduction of competition into the customer services area. A distribution utility would be permitted to offer customer-side services, such as equipment repair and service contracts in a competitive marketplace. The Plan suggests that the BPU is committed to assuring that a fully competitive marketplace exists prior to the ending of its economic regulation of power supply. At a minimum, utility generating assets and functions must be functionally separated and operate at arms length from the transmission, distribution and customer service functions of the electric utility. The BPU reserves final judgment on the issue of requiring divestiture of utility generating assets until detailed analyses of the potential for market power abuses by utilities have been performed. In addition, the BPU believes that it is necessary to have a fully independent and operating ISO prior to the implementation of customer choice. The Plan would require each electric utility to file, no later than July 15, 1997, complete restructuring plans, stranded cost filings and unbundled rate filings. Review of the filings would be completed by October 1998. Consumer protections proposed in the Plan include maintaining the electric utility as a universal service or "basic generation service" provider; continued funding of social programs now provided by electric utilities; registration of all third party electric power suppliers with the BPU; establishment of standards of conduct for such third party suppliers; and continued funding for energy efficiency programs. The Plan proposes that utilities have an opportunity for a limited number of years to recover through rates stranded costs associated with generating capacity commitments made prior to the advent of competition. However, while the BPU proposes that the quantification of eligible stranded costs and a determination of stranded cost recovery should be undertaken on a case-by-case basis, the Plan recommends that there not be a guarantee for 100% recovery of all eligible stranded costs. The Plan provides that the opportunity for full recovery of such eligible costs is contingent upon and may be constrained by the utility meeting a number of conditions, including achievement of the goal of delivering a near term rate reduction to all customers of 5% to 10%. The Plan states that independent power contracts must be eligible for stranded cost recovery and strongly encourages all stakeholders to renew efforts to explore all reasonable means to mitigate independent power contracts. The Plan invites the FERC, the Congress and the New Jersey State Legislature to review the issue in order to provide an added impetus for parties to these contracts to seriously consider mitigation. With regard to utility-owned generation, the Plan states that the utility-owned generation costs permitted to be recovered in rates in the last base rate case prior to the Plan would be presumed to be eligible for recovery through a Market Transition Charge (MTC). Costs for utility generating plants incurred subsequent to the last base rate case of the utility would not be presumptively eligible for recovery through the MTC. The Plan further states that the BPU would entertain requests for recovery of such costs incurred after the conclusion of a utility's last base rate case; however, there would be a substantial shift in the burden of proof to be met by the utility to demonstrate that the utility had no more cost effective resource alternatives available to it at the time the commitment was made, which may include evidence of a market test. The BPU's Plan further states that utilities are obligated to take all reasonably available measures to mitigate stranded costs caused by the introduction of retail competition. The Plan notes that New Jersey is studying the "securitization" of stranded costs as a means of financing these costs at interest rates lower than the utility cost of capital, thereby helping to mitigate the rate impact of stranded cost recovery. A specific MTC would be established for each utility and would be a separate component of a customer's electric bill. The MTC would provide a mechanism to allow utilities the opportunity to recover stranded costs for a limited number of years, ranging from four to eight. Recovery of securitization may occur over a different period of time. The proposal also suggests that a cap may be imposed on the level of the MTC as a mechanism to achieve the goal of overall rate reduction. The Plan suggests the need for federal action in a number of areas as an integral part of electric restructuring. Of particular concern is the transport of nitrogen oxides and other pollutants to New Jersey from power plants located in the Midwest and Southeast. The Plan states that New Jersey will develop a contingency action plan if federal action fails to mitigate adverse environmental impacts caused by electric restructuring. The Plan states that the preliminary findings and recommendations contained therein are being released for the purpose of making the preliminary conclusions of the BPU concerning electric restructuring known and available to the State Legislature, the public, and interested parties, and for soliciting and receiving further public comments. After the analysis of the next round of public comments, the Plan states that the BPU intends to issue final findings and recommendations on electric industry restructuring in New Jersey to the Governor and the State Legislature for their consideration in April 1997. ACE is currently analyzing the BPU's Plan to determine its impact if adopted as drafted and intends to file its comments during the public comment period. ACE cannot predict what action will ultimately be taken by the BPU. If changes in the regulatory environment ultimately require a recognition of any amounts considered to be stranded costs, ACE, as the case may be, would be required to write down asset values, and such writedowns could be material. The effect of competition on the Company's equity from reductions in profit margins or extraordinary charges against income would reduce the amount of common equity in the capital structure and could result in lowered credit ratings on existing debt securities and higher corresponding financing costs. To the extent that additional equity capital is required, issuances of common stock may be necessary. To the extent that additional equity capital is required, the effect would be to reduce reported earnings per share, the amount of which ACE cannot presently determine. Other proposed regulatory and accounting changes have been suggested relating to matters at the state and Federal level which could have operating and financial implications for ACE. See "Regulation" and "Environmental Controls" herein for additional information and Note 10 of the accompanying Notes to Financial Statements herein. Nonutility Subsidiaries Atlantic Energy Enterprises, Inc. In January 1995, the Company formed a subsidiary, Atlantic Energy Enterprises, Inc. (AEE), a holding company, to which ownership of the existing nonutility businesses was transferred. Information regarding the principal assets and the results of operation of each these subsidiaries can be found in Note 6 of AEI's Consolidated Financial Statements. AEE's five-year business plan projects an investment of approximately $307 million primarily in Atlantic Thermal Systems, Inc. (ATS), Atlantic Generation, Inc. (AGI) and ATE Investment, Inc. (ATE). The amount of capital invested by AEE in these and other nonutility subsidiaries will be affected, to a large degree, by the rate of development of the respective businesses, by the business opportunities which may exist and by the opportunities for external financings by such subsidiaries. Atlantic Thermal Systems, Inc. AEE's wholly-owned subsidiary, ATS, commenced operations in 1994 and is engaged in the development and operation of thermal heating and cooling systems. Through a special purpose limited partnership, ATS currently provides heating and cooling service to six hotel/casinos located in Atlantic City under long-term requirements contracts, and is actively engaged in negotiations to provide comparable service to other large use commercial and institutional customers located in Atlantic City, New Jersey. This subsidiary is currently completing construction of a $60 million district heating and cooling production plant and distribution piping system. When completed in mid-1997, this system will produce steam and chilled water for distribution to a number of casino/hotel and other large use customers located in the Midtown region of Atlantic City. In April 1995, ATS filed a petition with the BPU for an Order declaring that ATS is not a public utility subject to the BPU's jurisdiction by reason of its business activities in Atlantic City. It is ATS' position that its service to a limited number of large use energy consumers does not invoke the requisite public interest that is a prerequisite to public utility classification. The petition is still pending final resolution. ATS has obtained $12.5 million for certain qualified equipment at the Atlantic City facility from the New Jersey Economic Development Authority (NJEDA). These funds are currently held in escrow pending resolution of the public utility issue. During 1997, ATS expects to apply for additional funds from the NJEDA and will seek to have the public utility issue restriction removed as a condition for use of the NJEDA funds. ATS is actively pursuing potential business opportunities throughout the United States. Depending on the degree of success that ATS will have in bringing these projects to completion, ATS anticipates the potential of an additional capital investment of $221.6 million over the next five years. Atlantic Generation, Inc. At December 31, 1996, AGI's activities were represented by partnership interests in three cogeneration power projects: Project Fuel Capacity Commercial Ownership Location Type Megawatt (MW) Operation Interest Pedricktown, New Jersey gas 117 1992 50% Vineland, New Jersey gas 46.5 1994 50% Binghamton, New York gas 50 1992 33% Subsidiaries of Tristar Ventures Corporation, a subsidiary of The Columbia Gas System, Inc. have partnership interests in the Pedricktown and Vineland projects. In addition to Tristar Ventures Corporation, Stone & Webster Development Corporation has a one-third partnership interest in the Binghamton project. In December 1996, the Boards of AEE and AEI authorized the restructuring of Binghamton which became effective in January 1997. Under the restructuring, the power purchase agreement with New York State Gas & Electric was sold to a third party and the project debt was retired. As a result of the restructuring, AGI recorded a loss from the sale of the Binghamton facility of $1.6 million, net-of-tax. The Pedricktown facility is hosted by a chemical manufacturer, currently a retail customer of ACE, and provides 116 MW of generating capacity to ACE. The Vineland facility is hosted by a food processor and provides 46.5 MW of capacity and related energy to the City of Vineland under a 25 year contract. AGI anticipates additional capital investments of $46.0 million over the next five years. ATE Investment, Inc. ATE provides financing to affiliates and manages a portfolio of $79.7 million in investments in leveraged leases of three commercial aircraft and two containerships. In August 1996, ATE joined with Safeguard Scientifics, Inc., an unaffiliated company, to create EnerTech Capital Partners, L.P., (EnerTech) an equity limited partnership to make, manage, own and supervise private equity investments in early-to-late stage energy-related growth companies. At December 31, 1996, EnerTech had invested $7.3 million in five such companies. ATE anticipates additional capital investment of $39.6 million over the next five years. Enerval, LLC In 1995, AEE and Cenerprise, a subsidiary of Northern States Power, established Enerval, LLC (Enerval), formerly known as Atlantic CNRG Services, LLC. AEE and Cenerprise each own 50 percent of Enerval. Enerval provides energy management services, including natural gas procurement, transportation and marketing. On February 1, 1996, Enerval acquired the natural gas marketing assets of Interstate Gas Marketing (IGM). IGM, which has offices in Scranton and Pittsburgh, Pennsylvania, markets natural gas to customers in the northeastern United States. Enerval has certain gas transportation agreements, which include obligations for the transportation of specified volumes of gas, or to make payments in lieu thereof. At December 31, 1996, Enerval was committed to approximately $3.4 million in such obligations under generally short-term contracts. For further information regarding AEI's nonutility subsidiaries, refer to Note 6 of the accompanying Notes to Financial Statements and to the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operation herein. Construction and Financing ACE maintains a continuous construction program, principally for electric generation, transmission and distribution facilities. The construction program, including the estimates of construction expenditures, as well as the timing of construction additions, undergoes continuous review. ACE's construction expenditures will depend upon factors such as long-term load, customer growth, the effects of competition and retail wheeling, general economic conditions, the ability of ACE to raise the necessary capital, regulatory and environmental requirements, the availability of capacity and energy from utility and nonutility sources and the Company's return on such investments. Although deferrals in construction timing may result in near-term expenditure reductions, changes in capacity plans and general inflationary price trends could increase ultimate construction costs. Reference is made to "Energy Requirements and Power Supply" herein for information with respect to ACE's estimates of future load growth and capacity plans. The table below presents ACE's estimated cash construction costs for utility plant for the years 1997 through 1999: (Millions of Dollars) 1997 1998 1999 Total Nuclear Generating $ 9,615 $ 5,108 $ 5,677 $20,400 Fossil Steam Generating 8,961 8,750 17,070 34,781 Transmission and Distribution 46,135 45,614 42,844 134,593 General Plant 32,384 26,335 16,113 74,832 Combustion Turbine 2,400 11,175 5,275 18,850 Total Cash Construction Costs $99,495 $96,982 $86,979 $283,456 For additional information regarding construction of a district heating and cooling facility in Atlantic City, New Jersey refer to "Nonutility Subsidiaries" herein. ACE's debt securities are currently rates "A-/A3" by two major rating agencies. Its preferred stock is rated "BBB+/Baa1" and its commercial paper is rated "A-2/P2." One rating agency has recently placed ACE's ratings on Creditwatch with positive implications reflecting the proposed merger between AEI and Delmarva Power & Light Company. See Note 1 of the Notes to Consolidated Financial Statements for further information relating to the proposed merger. No assurances can be given that the ratings of ACE's securities will be maintained or continue at their present levels, or be withdrawn if such credit rating agency should, in its opinion, take such action. Downward revisions or changes in ratings of a company's securities could have an adverse effect on the market price of such securities and could increase a company's cost of capital. Rates ACE's rates for retail electric service are subject to the approval of the BPU. For information concerning changes in base rates and the levelized energy clause (LEC) for the years 1994 through 1996 and certain other proceedings relating to rates, see "Purchased Power" herein and Note 3 of the Company's Notes to Consolidated Financial Statements. A performance standard for ACE's five jointly-owned nuclear units was adopted in 1987 by the BPU, with certain aspects of the performance standards revised, effective January 1, 1990. Under the standard, the composite target capacity factor for such units is 70%, based upon the maximum dependable capacity of the units. The zone of reasonable performance (deadband) is between 65% and 75%. Penalties or rewards are based on graduated percentages of estimated costs of replacement power. Such amount is calculated monthly, utilizing the average PJM monthly billing rate as the cost basis for replacement power, to the boundaries of the deadband, with penalties calculated incrementally in steps. Any penalties incurred are not permitted to be recovered from customers and are required to be charged against income. Adjustments to rates based on the nuclear unit performance standard is done through ACE's annually adjusted LEC. The 1996 composite capacity factor for Peach Bottom and Hope Creek was 83.9%. Salem Units 1 and 2 have been out-of-service since May 16, 1995 and June 7, 1995, respectively. Based on an agreement among ACE, the NJ Division of Ratepayer Advocate and the Staff of the BPU, the performance of the Salem units was not to be included in the calculation of the composite capacity factor for the purpose of assessing a penalty. In addition, no penalty or reward would be imposed on ACE for the years 1995 and 1996 as part of such agreement. On February 27, 1997, the Coalition for Competitive Energy filed an appeal in the Superior Court of New Jersey, Appellate Division. The appeal was based on the BPU's Summary Decision and Order dated December 31, 1996 approving settlements regarding the rate treatment of the Salem Nuclear Generating Station and alleges, among other things, that the BPU's use of a Summary Order was illegal under the Administrative Procedure Act. ACE is unable to predict the outcome of this appeal. For further information concerning this agreement and Board Order and the Salem Station, refer to "Nuclear Generating Station Developments" herein and to Note 3 of the Company's Consolidated Financial Statements. On February 28, 1997, ACE filed a petition with the BPU requesting an increase in LEC revenues of $20 million for the period June 1, 1997 through May 31, 1998. Among other things, the filing includes the recovery of $29.5 million of previously deferred replacement power costs associated with Salem Units 1 and 2 and a deferral of $1.4 million in recoverable costs until ACE's next LEC period. ACE also requested that the BPU approve the proposed rates as provisional, in the event a final decision cannot be rendered by June 1, 1997. ACE cannot predict what action the BPU will take in this matter. Energy Requirements and Power Supply ACE's 1996 kilowatt-hour sales increased by approximately 3.6% over 1995 sales. Residential sales grew 3.2%; commercial sales grew 3.0%; and, industrial sales grew 7.1%. The 1996 Utility System Peak demand of 1,774 MWs occurred on August 23, 1996 and was 13.1% below the previous peak demand recorded on July 10, 1995 of 2,042 MWs. For the five year period beginning in 1997, ACE's estimate of projected compound annual sales growth is 3.5%, and peak load growth (weather adjusted) is 2.8%. Sales growth for the five year forecast period reflects the on-going and anticipated expansion of the Atlantic City casino-hotel and entertainment industries and the associated spin-off effects of stronger labor and housing markets in the region. ACE's energy sales forecast quantifies the expected consumption in ACE's traditional franchise area and does not reflect any potential developments regarding open retail access to competitive energy markets. ACE's forecast is adjusted for the effects of demand-side management programs, customer-initiated energy efficiency improvements and customers taking service under off-tariff rates. ACE has generally been able to provide for the growth of energy requirements through the capacity purchases from other utilities and nonutilities, joint ownership in larger units and construction of additional generating capacity. ACE's net summer installed capacity, at December 31, 1996, consisted of the following: Year(s) Net Station and Primary Unit(s) Capability Location Fuels Installed (MW) Deepwater Salem Co., N.J. Oil/Coal/Gas 1930/ 54.0 1954-1958 166.0 B.L. England Cape May Co., N.J. Coal/Oil 1962-1964/ 284.0 1974 155.0 Keystone Indiana Co., PA. Coal 1967-1968 42.0 (1) Conemaugh Indiana Co., PA. Coal 1970-1971 65.0 (1) Peach Bottom York Co., PA. Nuclear 1974 164.0 (1) Salem Salem Co., N.J. Nuclear 1977-1981 164.0 (1) Hope Creek Salem Co., N.J. Nuclear 1987 52.0 (1) Combustion Turbine Units Oil/Gas 1967-1991 524.0 (various locations) Diesel Units Oil 1961-1970 8.7 Firm Capacity Purchases and Sales-Net 707.0 (2) Total Generating Capability 2,385.7 ========== Notes (1) ACE's share of jointly-owned stations. See Note 5 of AEI's Notes to Consolidated Financial Statements. (2)Primarily consists of 125 MW from thirteen coal-fired units of PP&L and 579 MW from four nonutility suppliers. Certain of ACE's units at the Deepwater and B. L. England Stations and certain combustion turbine units have the capability of using more than one primary fuel type. In such instances, the use of a particular fuel type depends upon relative cost, availability and applicable environmental regulations and requirements. See Note 5 of the accompanying Notes to Financial Statements for additional information regarding capital and operating expenses of ACE's jointly-owned nuclear facilities. Power Pool and Interconnection Agreements ACE is a member of the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM), an integrated power pool which coordinates the bulk power supply of eight electric utility companies in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia, and is interconnected with other major utilities in the northeastern United States. The member utilities coordinate generation/supply planning and own and control the bulk power transmission system in the region. As a member of PJM, ACE is required to plan for reserve capacity based on estimated aggregate PJM requirements allocated to member companies. ACE periodically files its capacity addition plans with PJM which are intended to meet forecast capacity and reserve obligations. ACE is also a party to the Mid-Atlantic Area Coordination Agreement, which provides for coordinated planning of generation and transmission facilities by the companies included in PJM. Further coordination of short-term power supply planning is provided by inter-area agreements with adjacent power pools. PJM currently operates on the basis of reliability of service and operating economy whereby generating units are subject to central dispatch, from order of lowest operating cost to highest cost. In July 1996, ACE, together with other regional mid-Atlantic utilities, filed with the FERC, a restructuring plan designed to establish a new wholesale energy market. The plan proposed to 1) create an independent system operator, a nonprofit corporation with an independent board of directors, to manage the PJM Power Pool's energy market and transmission operation; 2) establish a spot-energy market open to any buyer or seller and provide utilities, nonutility power generators and wholesale energy brokers comparable pool-wide transmission service; 3) provide for bilateral energy arrangements, and 4) allow load-serving entities within the PJM control area to share generating capacity reserves and provide mutual assistance during emergencies. The restructuring plan was designed to meet the FERC requirements of Order 888 to functionally unbundle transmission services. PECO Energy Company (PE), also a member of the PJM, filed a competing proposal to FERC. While both proposals outlined the establishment of an ISO, there were a number of differences between the proposals. FERC failed to accept either proposal as filed, set a deadline of December 31, 1996 for resubmission of the filing and suggested that all parties achieve consensus around certain issues concerning reliability, savings to ratepayers, market access, etc. In compliance with the FERC, ACE filed an interim proposal with PE and other members of the PJM. On February 28, 1997, FERC issued an order approving the implementation of the restructuring proposed by the PJM companies, on an interim basis, with an exception noted in the area of congestion pricing. FERC plans to hold a technical conference on the issue of congestion pricing. Implementation of the interim guidelines is expected to occur by April 1, 1997. A final proposal is to be submitted by May 31, 1997, which will address remaining ISO issues and congestion pricing. Power Purchases and Sales ACE is currently purchasing 125 MW of capacity and energy from PP&L coal-fired sources. By letter dated March 16, 1995, the Company notified PP&L that this capacity and energy sales agreement will be terminated effective March 1998. To replace the PP&L arrangement, the Company has signed a letter of intent with PECO Energy (PE) for the purchase of 125 MWs of capacity and energy for the period beginning March 16, 1998 through May 31, 2000. A second agreement with PE, subject to the approval of the BPU, arranges for the purchase of 175 MWs of capacity and energy beginning in June 1999 through May 2009. ACE also has agreements with certain other electric utilities for the purchase of short- term generating capacity, energy and transmission capacity on an as-needed basis, which are utilized to the extent they are economic and available. Bulk Power Marketing As a result of the developing wholesale bulk power market, in 1996, ACE applied to, and was approved by, the FERC to trade wholesale electric power in the United States. In the course of this business, ACE enters into commitments to buy and sell power. At December 31, 1996, ACE has agreements to purchase from unaffiliated companies energy associated with 1,740 MW of capacity. At December 31, 1996, these purchases result in commitments of approximately $11.4 million through 1997. The duration of each of these contracts does not exceed three months. Capacity Planning The Electric Facilities Need Assessment Act (EFNAA) requires public utilities in the State of New Jersey to obtain a Certificate of Need (CON) prior to constructing any electric power generating unit or combination of units at a single site with a combined capacity of 100 MW or more of any electric generating units added to an existing generating facility which will increase its installed capacity by 25% or by more than 100 MW, whichever is smaller. In addition, New Jersey utilities are required to comply with a stipulation of settlement approved by the BPU in July 1988 the purpose of which is to procure future capacity and energy from qualified cogeneration and small power production facilities through an annual competitive bidding process, based on a long-term capacity plan. The amount to be bid upon is subject to BPU review and will be based upon such factors as a utility's five year projected capacity needs and its current generating capacity, service life extension plans for existing units, new construction, power purchases and commitments from other utilities and nonutility sources. The stipulation of settlement referred to above was due to expire on September 15, 1993. Similarly, the CON was set to expire on January 30, 1994. Since no processes were in place to replace the CON, the New Jersey Department of Environmental Protection (NJDEP) readopted the legislation and extended it through January 28, 1999. ACE, pursuant to the terms of the July 1988 stipulation, filed data with the BPU in September 1996 covering the 15 year period from 1996 through 2010. The filing indicated that ACE did not require additional capacity until 2000 when the need would be met with combined cycle units and/or power purchases. The ongoing outage of the Salem units has reduced ACE's installed generating capacity and has required ACE to secure additional capacity, sufficient to meet PJM reserve requirements. Assuming the return of the Salem units in 1997, ACE's installed capacity and capacity purchase arrangements for 1997-1999 are expected to be sufficient to supply its share of PJM reserve requirements during that period. On an operational basis, ACE expects to be able to continue to meet the demand for electricity on its system through operation of available equipment and by power purchases. However, if periods of unusual demand should coincide with forced outages of equipment, ACE could find it necessary at times to reduce or curtail load in order to safeguard the continued operation of its system. The BPU's Energy Master Plan, Draft Phase II report, recommends that, concurrent with the transition to a competitive retail electric marketplace, the EFNAA be repealed. In addition, the Plan also suggests that in order to provide for an orderly transition to a competitive market, the local distribution utility should be assigned the responsibility of providing basic generation service. This basic generation service will apply to service for any customer 1) who has not notified the distribution company of an alternative supplier and 2) who is dropped by its alternative supplier for any reason, including non-payment. As the 'provider of last resort', ACE will be required to draft a basic generation service plan with greater uncertainty as to how large this customer group will be. See Note 10 of the accompanying Notes to Consolidated Financial Statements herein for additional information. Nonutility Generation Additional sources of capacity for use by ACE are made available by nonutility sources, principally cogenerators. ACE currently has four, BPU-approved power purchase agreements for the purchase of capacity and energy from nonutility sources under the standard offer methodology developed and approved by the BPU in August 1987 and as previously discussed. Project Fuel MW Date of Location Type Provided Commercial Operation Chester, solid Pennsylvania waste 75 September 1991 Pedricktown, New Jersey gas 116 March 1992 Carney's Point, New Jersey coal 188 March 1994 Logan Township, New Jersey coal 200 September 1994 Total 579 Amendments to the agreements between ACE and the sponsors of the Logan and Pedricktown facilities have restructured ACE's payment for capacity and energy reducing the energy component of such payments. The amendment to the agreement between ACE and the sponsors of the Pedricktown facility, which includes an affiliate of ACE, also increased the available capacity of the facility from 106 MW to 116 MW and returned the project's thermal host to ACE as a retail customer effective November 1995. Nuclear Generating Station Developments ACE is a joint owner of the Hope Creek and Salem Nuclear Generating Stations, to the extent of 5% and 7.41%, respectively. The Hope Creek Unit and Salem Units 1 and 2 are located adjacent to each other in Salem County, New Jersey and are operated by PS. ACE is also a joint owner of 7.51% of Peach Bottom Units 2 and 3, which are located in York County, Pennsylvania and are operated by PE. See Note 5 of AEI's Notes to Consolidated Financial Statements for additional information relating to the Company's investment in jointly-owned generating stations. In 1996, nuclear generation provided 15% of ACE's total energy output. The approximate capacity factors (based on maximum dependable capacity ratings) for ACE's jointly-owned units for 1995 and 1996 were as follows: Unit 1996 1995 Salem Unit 1 0.0% 26.0% Salem Unit 2 0.0% 20.8% Peach Bottom Unit 2 79.8% 95.8% Peach Bottom Unit 3 98.2% 88.2% Hope Creek 74.6% 78.2% See "Salem Station" below for additional information on operating performance at Salem. ACE has been advised that the Nuclear Regulatory Commission (NRC) has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment at the Peach Bottom Station may not provide the necessary level of fire protection and has requested licensees to describe short- and long-term measures being taken to address this concern. ACE has been advised that PE has informed the NRC that it has taken short-term corrective actions to address the inadequacies of the Thermo-Lag barriers installed at Peach Bottom and is participating in an industry-coordinated program to provide long-term corrective solutions. By letter dated December 21, 1992, the NRC stated that PE's interim actions were acceptable. PE has advised ACE that PE has been in contact with the NRC regarding PE's long-term measures to address Thermo-Lag fire barrier issues. In 1995, PE completed its engineering re-analysis for Peach Bottom. The re-analysis identified proposed modifications to be performed over the next several years in order to implement the long-term measures addressing the concern over Thermo-Lag use. ACE has been advised that in 1990 General Electric Company (GE) reported that crack indications were discovered near the seam welds in the core shroud assembly in a GE boiling water reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions, including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. Both Peach Bottom Units 2 and 3 and Hope Creek are affected by this issue and both PE and PS are participating in the GE BWR Owners Group to evaluate this issue and develop long-term corrective action. In June 1994, an industry group was formed and subsequently established generic inspection guidelines which were approved by the NRC. PE has advised ACE that Peach Bottom 3 was last examined during its fall 1995 refueling outage and the extent of the cracking identified was determined to be within industry-established guidelines. In a letter to the NRC dated November 3, 1995, PE concluded that there is a substantial margin for each core shroud weld to allow for continued operation of Unit 3. PE has also advised ACE that Peach Bottom 2 was reinspected during its 1996 refueling outage. The examinations disclosed that while additional minor flaw indications were discovered, PE concluded, and the NRC concurred, that neither repair nor modification to the core shroud was necessary prior to restarting the reactor. At the Hope Creek Unit, PS advised ACE that during the spring 1994 refueling outage, PS inspected the shroud of Hope Creek in accordance with GE's recommendations and found no cracks. PS reports that due to the age and materials of the Hope Creek shroud and the historical maintenance of low conductivity water chemistry, Hope Creek has been placed in the lowest susceptibility category under industry-established guidelines. Hope Creek must undergo another shroud inspection during its next refueling outage in 1997, or install a preemptive repair that would maintain the structural integrity of the shroud under all normal and design basis accident conditions for the remaining life of the plant. ACE cannot predict what further action will be taken with regard to these units or what long-term corrective actions, if any, will be identified. In a separate matter, PS has advised that as a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers, which supply water from the suppression pool for emergency cooling of the core and related structures, the NRC issued a Bulletin in May 1996 to operators of BWRs requesting that measure be taken to minimize the potential for clogging. The NRC has proposed three resolution options, with a request that actions be completed by the end of the unit's first refueling outage after January 1997. Alternative resolution options will be subject to NRC approval. PS has advised ACE that PS has responded to the NRC, indicating its intention to comply with the Bulletin, and expects to submit its planned actions and schedules for Hope Creek after the NRC approves a utility resolution guidance document. PE has advised ACE that large capacity passive strainers will be installed at Peach Bottom Units 2 and 3 during their next refueling outages in September 1998 and September 1997, respectively. ACE, PE or PS cannot predict what actions, if any, the NRC may take in this matter. PS has advised ACE that in October 1996, PS, along with other nuclear plant owners, received a request for information regarding the adequacy and availability of each plant's design bases data. The NRC is requiring that information be submitted under oath and affirmation to provide it added confidence and assurance that all nuclear units are operated and maintained within the design bases of the facilities and that any deviations are reconciled in a timely manner. PS advised ACE that PS responded to the NRC's request on February 11, 1997 with a detailed description of ongoing activities and new initiatives to ensure that Salem and Hope Creek are operated and maintained within their design bases. Since the information which was submitted will be used by the NRC to determine follow-up inspection activity or potential enforcement actions, neither ACE, nor PS, can predict at this time what impact the NRC's request will have. ACE has been advised by PS that in August 1996, the NRC conducted an investigation of the Physical Security Program for Salem and Hope Creek. Based on the results of that inspection, apparent violations were identified. On December 11, 1996, PS received a $100,000 civil penalty for two severity level III violations. Three severity level IV violations were received with no civil penalty. PS has advised ACE that PS will not dispute these violations. ACE has been advised that on December 11, 1996, PS received a severity level II violation and an $80,000 civil penalty from the NRC for apparent violations which occurred in 1993 and early 1994, involving alleged discrimination against two employees for their engagement in protected activities in accordance with federal regulations. PS has advised ACE that PS will not dispute this violation. As previously reported, PS, operator of the Salem and Hope Creek Nuclear Generating Stations and PE, operator of the Peach Bottom Atomic Power Station, announced on June 24, 1996 the commissioning of a study to investigate competitive alternatives to the current independent nuclear power plant operations of the two companies. The goal of the study is to determine viable alternatives to permit diversification of financial risks and reduction of costs for both companies in order to increase competitiveness. PE has advised that a preliminary draft of the study indicates opportunities for risk diversification, performance improvement and cost savings. PE indicates further review will take place, the timing of which is unknown. The periodic review and evaluation of nuclear generating station licensees conducted by the NRC is known as the Systematic Assessment of Licensee Performance (SALP). Under the revised SALP process, ratings are assigned in four assessment areas, reduced from seven assessment areas: Operations, Maintenance, Engineering and Plant Support (the Plant Support area includes security, emergency preparedness, radiological controls, fire protection, chemistry and housekeeping). Ratings are assigned from "1" to "3", with "1" being the highest and "3" being the lowest. Salem Station ACE is a 7.41% owner of Salem Nuclear Generating Station (Salem) operated by PS. Salem consists of two 1,106 MW pressurized water nuclear reactors (PWR) representing 164 MWs of ACE's total installed capacity of 2,385.7 MW. The NRC's most recent SALP report for the Salem Station for the period covering June 20, 1993 through November 5, 1994 was issued on January 3, 1995. The NRC assigned ratings of "1" in the functional area of Plant Support, "2" in the area of Engineering and "3" in the areas of Operations and Maintenance. Due to the current outage at Salem, described below, the end of the current SALP period has not yet been determined. As previously reported, Salem 1 and 2 have been out of service since May 16, 1995 and June 7, 1995, respectively. During these outages, ACE has been advised that PS has made significant changes and improvements related to the people, processes and equipment at Salem to improve the long-term reliability of the units. ACE has been advised by PS that Salem Unit 2 is in the final stage of preparation for restart. The reactor has been refueled and reassembled and the reactor coolant pumps have been tested and placed in service. Over 90% of the total work activities have been completed and approximately 80% of the plant systems have been restored. The unit is scheduled to enter Mode 4 in March 1997 which will allow additional testing to be performed in preparation for start-up. During the course of these outages, PS has also been required to address certain generic issues applicable to nuclear power plants, which have also affected the length of the outages. ACE was advised by PS that a Generic Letter from the NRC identified an issue that impacted the Salem Unit 2 startup schedule. This Generic Letter (96-06) requested all nuclear utilities, including PS, to review systems for potential waterhammer events (hydrodynamic stress caused by steam formation in a piping system) and the impact that these events could have on the system's safety function. PS reported that in order to address the concerns of Generic Letter 96-06, modifications were necessary to the containment fan coil units of Salem Units 1 and 2, which provide containment air cooling. As a result of these modifications and the time required for NRC acceptance of PS's proposed resolution of these issues, PS reported that the expected start-up of Salem Unit 2 will be in the second quarter of 1997. PS has advised ACE that Salem Unit 1 is now expected to return to service in the Fall of 1997, after replacement of the unit's four steam generators, which was required in order to correct a generic problem with certain PWRs. All four of the original generators have been removed from the containment structure and two have been shipped offsite for disposal at the Barnwell, South Carolina low-level radioactive waste burial facility. The remaining two will be shipped offsite in the near future. Installation of all four replacement steam generators is scheduled to be complete in March 1997. Salem Unit 1 will also require modifications similar to Salem Unit 2 to respond to Generic Letter 96-06, but PS advises that such modifications are not expected to further delay that unit's return to service. On January 29, 1997, PS advised ACE that the NRC held a public meeting and identified Salem Units 1 and 2 as Category 2 plants placed on the "NRC Watch List". In the press release, the staff of the NRC announced that the decision to place the Salem units on the Watch List was not based on any recent performance problems or decline. In addition, the staff believes that Salem's efforts to achieve needed improvements are correctly targeted and that the NRC is satisfied with the licensee's overall approach. However, the staff noted that Salem should have been placed on the Watch List previously because of Salem's past safety performance. The staff also indicated that the agency increased its attention and resources at Salem commensurate with a Watch List plant. The staff concluded that, notwithstanding the improvements at Salem, it would not have been removed from the Watch List at this time had it been previously identified because it has yet to demonstrate a period of safe performance at power. A Category 2 facility is a plant that is authorized to operate but that the NRC will monitor closely. A plant will remain in this category until the licensee either demonstrates a period of improved performance, or until a further deterioration of performance results in the plant being shutdown until the licensee can demonstrate that adequate programs have been established and implemented to ensure substantial improvement. Restart of the units is subject to completion of the requirements of the restart plan to the satisfaction of PS and the NRC, which encompasses a review and improvement of personnel, process and equipment issues. On January 14, 1997, U.S. Senator Joseph Biden of Delaware wrote to the NRC to request that the full Commission vote on the decision to restart Salem, rather than permit the NRC staff to authorize the restart under applicable NRC rules. By letter to Senator Biden dated February 20, 1997, the NRC advised that it would not require a full commission vote on Salem restart. On February 27, 1996, the Salem co-owners filed a Complaint in United States District Court for the District of New Jersey against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators, under state and federal RICO statutes alleging fraud, negligent misrepresentation and breach of contract. The Westinghouse complaint seeks compensatory and punitive damages. Subsequently, Westinghouse filed a counterclaim of $2.5 million for unpaid work. The litigation is now in the process of discovery and investigation. While ACE cannot predict the outcome of this litigation, the co- owners are aggressively pursuing the claim. ACE has been advised that on October 5, 1995, PS declared an alert at Salem Unit 1. The event involved a problem with the overhead annunciator panel in the Unit 1 control room. PS had chartered a significant event response team (SERT) to investigate the event, determine the root causes and suggest corrective actions. Simultaneously, the NRC formed a special inspection team to investigate the event during the period October 6 through October 18. What actions the NRC might take, if any, cannot be determined at this time. At the time of the event there was no fuel in the reactor, no release of radiation and no danger to the public or on-site personnel. For information concerning 1) the BPU's 1996 investigation into the ongoing Salem outage, 2) capital, operations and maintenance costs associated with Salem Units 1 and 2, and 3) the effects of the Salem outage on operations, see Notes 3 and 10 of the Company's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations, respectively. Hope Creek Station ACE is a 5% owner of Hope Creek Nuclear Generating Station (Hope Creek) which is operated by PS. ACE has been advised that Hope Creek completed its sixth refueling and maintenance outage in March 1996. PS advised ACE that on December 24, 1996, the NRC issued its latest periodic SALP report for Hope Creek for the period between April 23, 1995 to November 9, 1996. The NRC noted that overall performance improved during the SALP period, after a significant decline in performance that occurred early in the period. Further, the NRC noted that PS's actions to address the areas of concern, once identified, were comprehensive and generally effective. Three areas, Operations, Maintenance and Engineering, were each rated Category 2, as they had been in the previous SALP rating. Improvements were noted in these areas with most of the improvement in Operations and Maintenance occurring later in the period. The fourth area, Plant Support, was also rated Category 2, a decline from the previous SALP rating due to problems principally with security, radiation protection and emergency preparedness implementation. Weaknesses in communication contributed to performance issues across the organization. Peach Bottom Station ACE is a 7.51% owner of Peach Bottom Atomic Power Station (Peach Bottom) operated by PE. ACE has been advised that PE successfully completed a scheduled refueling and maintenance outage in November 1996. ACE has also been advised that on January 19, 1996, the NRC issued its SALP report for the Peach Bottom Station for the period covering May 1, 1994 through October 14, 1995. The NRC assigned ratings of "1" in the functional areas of Plant Operations, Maintenance and Plant Support. Engineering received a rating of "2". The NRC found continued improvement in performance during the period. Operator performance continued to be a strength, as well as operations management oversight. Effective engineering management actions to improve the overall self-assessment and system performance were noted, as well as good management oversight activities. Response to emerging issues, equipment problems and event related issues were noted as particularly strong. However, lapses in the quality of technical work and in modification implementation indicated inconsistent performance, and resulted in a repeat rating of "2" for the Engineering area. ACE has been advised that PE will be taking actions to address weaknesses discussed in the SALP Report. An NRC inspection of the implementation of the Peach Bottom Maintenance Rule Program was conducted on August 5 through 9, 1996. During that inspection, an apparent violation of NRC requirements was identified involving the failure to establish adequate performance criteria for the determination of appropriate preventive maintenance. An enforcement conference was held on November 15, 1996 to discuss the apparent violation and for PE to present its plan to respond to the associated issues. On January 3, 1997, the NRC issue the violation, exercising enforcement discretion by not assessing an associated civil penalty. During the subject routine NRC Resident Inspector's inspection for the period of July 7 through September 7, 1996, an apparent violation of NRC requirements was identified involving inadequate engineering analysis of control circuitry and load sequencing of the plant's emergency diesel generators. An enforcement conference was held on December 11, 1996 to discuss the issue and PE's response to it. On December 27, 1996, the NRC issued one violation with no associated civil penalty. Fuel Supply ACE's sources of electrical energy (including power purchases) for the years indicated are shown below: Source 1996 1995 1994 Coal 28% 33% 29% Nuclear 15% 19% 23% Oil/Natural Gas 2% 3% 7% Interchange and Purchased Power 35% 21% 24% Nonutility 20% 24% 17% The prices of all types of fuels used by ACE for the generation of electricity are subject to various factors, such as world markets, labor unrest and actions by governmental authorities, including allocations of fuel supplies, over which ACE has no control. Oil Residual oil and distillate oil for ACE's wholly-owned stations are furnished under two separate contracts with a major fuel supplier. ACE has a contract for the supply of 1.0% sulfur residual oil for both Deepwater and B. L. England Stations and for distillate oil sufficient to supply ACE's combustion turbines. Both contracts expire October 31, 1997. See "Environmental Controls-Air" for information concerning the use of particular fuels at B. L. England Station. On December 31, 1996, the oil supply at Deepwater Station was sufficient to operate Deepwater Unit 1 for 24 days, and the supply at B. L. England Station was sufficient to operate Unit 3 for 42 days. Coal ACE has contracted with one supplier for the purchase of 2.6% sulfur coal for B. L. England Units 1 and 2 through April 30, 1999. On December 31, 1996, the coal inventory at the B. L. England Station was sufficient to operate Units 1 and 2 for 60 days. See "Environmental Controls-Air" herein for additional information relating to B.L. England Station. ACE has contracted with one supplier for the purchase of 1.0% sulfur coal for Deepwater Unit 6/8 through June 30, 2001. On December 31, 1996, the coal inventory at Deepwater Station was sufficient to operate Unit 6/8 for 54 days. The Keystone and Conemaugh Stations, in which ACE has joint ownership interests of 2.47% and 3.83%, respectively, are mine- mouth generating stations located in western Pennsylvania. The owners of the Keystone Station have a contract through 2004, providing for a portion of the annual bituminous coal requirements of the Keystone Station. A combination of long and short term contracts provide for the annual bituminous coal requirements of the Conemaugh Station. To the extent that the requirements of both plants are not covered by these contracts, coal supplies are obtained from local suppliers. As of December 31, 1996, Keystone and Conemaugh had approximately a 24 day supply and a 34 day supply of coal, respectively. Gas ACE is currently capable of firing natural gas in six combustion turbine peaking units and in two conventional steam turbine generating units. ACE has entered into a firm electric service tariff with the local distribution company for the supply of natural gas to its units. The tariff provides for the payment of certain commodity and demand charges. Portions of the gas supply are obtained from the spot market under short term renewable gas supply and transportation contracts with various producers/suppliers and pipelines. Nuclear Fuel As a joint-owner of the Peach Bottom, Salem and Hope Creek generating units, ACE relies upon the respective operating company for arrangements for nuclear fuel supply and management. ACE is responsible for the costs thereof to the extent of its particular ownership interest through an arrangement with a third party. Generally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to uranium concentrate, conversion of the uranium concentrate to uranium hexafluoride, enrichment of uranium hexafluoride gas, conversion of the enriched gas to fuel pellets and fabrication of fuel assemblies. After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), the Federal government has a contractual obligation for transportation and ultimate disposal of the spent fuel. See Note 12 of the accompanying Notes to Consolidated Financial Statements for financing arrangements for nuclear fuel. ACE has been advised by PE, operator of the Peach Bottom units, that it has contracts for uranium concentrates to fully operate Peach Bottom Units 2 and 3 through 2002. ACE has been advised by PS, operator for the Salem and Hope Creek Stations, that it has arrangements which are expected to provide sufficient uranium concentrates to meet the currently projected requirements of the Salem and Hope Creek units fully through the year 2001 and, thereafter, 50% of the requirements through 2003. ACE has been advised that neither PE, nor PS, anticipate any difficulties in obtaining its requirements for uranium concentrates. PE advises that its contracts for uranium concentrates will be allocated to the Peach Bottom units, and other PE nuclear facilities in which ACE has no ownership interest, on an as-needed basis. PE and PS report contracts for the following segments of the nuclear fuel supply cycle with respect each of the joint-owned units through the following years: Nuclear Unit Conversion Enrichment Fabrication Peach Bottom Unit 2 (1) (2) 1999 Peach Bottom Unit 3 (1) (2) 2000 Salem Unit 1 2001 (3) 2004 Salem Unit 2 2001 (3) 2005 Hope Creek 2001 (3) 2000 (1) 100% of conversion services for Peach Bottom through 2001 and at least 60% of the conversion services requirements are covered through 2002. PE does not anticipate any difficulty in obtaining necessary conversion services for Peach Bottom. (2) Contractual commitments for enrichment services for Peach Bottom with the Unites State Enrichment Corporation represent 100% of the enrichment services through 2004. PE does not anticipate any difficulty in obtaining necessary enrichment services for Peach Bottom. (3) Contractual commitments for 100% of enrichments requirements through 1998, approximately 50% through 2002; and approximately 30% through 2004. PS does not anticipate difficulties in obtaining necessary enrichment service for the Salem and Hope Creek units. There are no commercial facilities for the reprocessing of nuclear fuel currently in operation in the United States, nor has the NRC licensed any such facilities. PE currently stores all spent nuclear fuel from its nuclear generating facilities in on- site, spent-fuel storage pools. Spent-fuel racks at Peach Bottom have storage capacity until 2000 for Unit 2 and 2001 for Unit 3. Options for expansion of storage capacity at Peach bottom, including rod consolidation, has been investigated. ACE has been advised by PS that as a result of reracking the two spent-fuel pools at Salem, the spent-fuel storage capability of Salem Units 1 and 2 is estimated to be 2008 and 2012, respectively. The Hope Creek pool is also fully racked and it is conservatively expected to provide storage capacity until 2006. In conformity with the NWPA, PS and PECO, on behalf of the co-owners of the Salem and Hope Creek, and Peach Bottom stations, respectively, have entered into contracts with the U.S. Department of Energy (DOE) for the disposal of spent nuclear fuel from those stations. Under these contracts, the DOE is to take title to the spent fuel at the site, then transport it and provide for its permanent disposal at a cost to utilities based on nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. Under NWPA, the DOE was to begin accepting spent fuel for permanent offsite storage no later than 1998, but it is possible that such storage may be delayed indefinitely. ACE has been advised that the DOE has stated that it would not be able to open a permanent, high-level nuclear waste storage facility until 2015, at the earliest. In July 1996, the Circuit Court for the District of Columbia decided that the DOE has a legal obligation to begin to accept spent fuel in January 1998. The DOE chose not to appeal this ruling. The U.S. Senate passed an amendment to the NWPA that would have required the DOE to construct an interim storage facility which would accept spent nuclear fuel from utilities beginning in 1998 or soon thereafter. The U.S. House of Representatives did not vote on the legislation. The bill has been reintroduced for consideration in 1997. Although progress is being made at the Yucca Mountain site and several communities have expressed interest in providing a temporary storage site, it is unknown when the temporary federal storage facilities or permanent repository will become available. The DOE is exploring options to address delays in the currently projected waste acceptance schedules. The options under consideration include offsetting a portion of the financial burden associated with the costs of continued on-site storage of spent fuel after 1998. Nuclear Decommissioning The Energy Policy Act states, among other things, that utilities with nuclear reactors must pay for the decommissioning and decontamination of the DOE nuclear fuel enrichment facilities. The total costs are estimated to be $150 million per year for 15 years, of which ACE's share is estimated to be $8.5 million. The Act provides that these costs are to be recoverable in the same manner as other fuel costs. ACE has recorded a liability of $5.3 million and a related regulatory asset of $5.7 million for such costs at December 31, 1996. ACE made its first payment related to this liability to the respective operating companies in September 1993 and continues to make payments as required. In ACE's 1993 LEC filing, the BPU approved a stipulation of settlement which included, among other things, the full LEC recovery of this and future assessments. In January 1993, the BPU adopted N.J.A.C. 14:5A which was designed to provide a mechanism for periodic review of the estimated costs of decommissioning nuclear generating stations owned by New Jersey electric utilities. The purpose of this regulation is to insure that adequate funds are available to assure completion of decommissioning activities at the cessation of commercial operation. The regulation established decommissioning trust fund reporting requirements for electric utilities in order to provide the BPU with timely information for its oversight of these funds. N.J.A.C. 14:5A-2.1 requires that all New Jersey electric utilities file with the BPU a nuclear decommissioning cost update by January 1, 1996 and every four years thereafter. On January 3, 1996, PS and ACE jointly filed with the BPU its 1995 Nuclear Decommissioning Cost updates. ACE and PS jointly filed NRC cost estimates for each of their five jointly- owned nuclear units. These cost estimates are based on the NRC's existing generic formula. ACE and PS do not believe that these NRC generic estimates provide an accurate estimate of the cost of decommissioning the nuclear units. Inclusion of these NRC generic estimates should not be interpreted as a validation by ACE and PS of the appropriateness of these estimates for estimating the cost of decommissioning the nuclear units. ACE and PS believe these costs are best estimated with periodic site-specific studies. PS, on behalf of the co-owners of the Salem, Hope Creek and Peach Bottom stations, has engaged an independent engineer to develop this estimate. Site specific studies have been performed and have been filed with the BPU for review. Adjustments to funding amount may be required. ACE is collecting through rates amounts to fund its share of estimated future costs relating to the decommissioning of the five nuclear units in which it has joint-ownership interests. Funding to cover the future costs of decommissioning each of the five nuclear units, as currently authorized by the BPU and provided for in rates, is $6.4 million annually. See Note 10 - Nuclear Plant Decommissioning and Other of the accompanying Notes to Consolidated Financial Statements for information relating to decommissioning of the five nuclear units in which ACE has an ownership interest. Regulation ACE is a public utility organized under the laws of New Jersey and is subject to regulation as such by the BPU, among others, which is also charged with the responsibility for energy planning and coordination within the State of New Jersey. ACE is also subject to regulation by the Pennsylvania Public Utility Commission in limited respects concerning property and operations in Pennsylvania. ACE is also subject, in certain respects, to the jurisdiction of the FERC, and ACE maintains a system of accounts in conformity with the Uniform System of Accounts prescribed for public utilities and licensees subject to the provisions of the Federal Power Act. The construction of generating stations and the availability of generating units for commercial operation are subject to the receipt of necessary authorizations and permits from regulatory agencies and governmental bodies. Standards as to environmental suitability and operating safety are subject to change. Litigation or legislation designed to delay or prevent construction of generating facilities and to limit the use of existing facilities may adversely affect the planned installation and operation of such facilities. No assurance can be given that necessary authorizations and permits will be received or continued in effect, or that standards as to environmental suitability or operating safety will not be changed in a manner to adversely affect the Company, ACE or its operations. Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements, and continuous demonstration to the NRC that plant operations meet applicable requirements. The NRC has the ultimate authority to determine whether any nuclear generating plant may operate. In addition, the Federal Emergency Management Agency has responsibility for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants. As a by-product of nuclear operations, nuclear generating units produce substantial amounts of low-level radioactive waste (LLRW). Such waste is presently accumulated on-site and permanently disposed of at a federally licensed disposal facility. ACE had been advised by both PE and PS that LLRW generated at Peach Bottom, Salem and Hope Creek is shipped to the site located in Barnwell, South Carolina for disposal. Due to the uncertainty of the continued availability of LLRW disposal sites, on-site storage facilities were constructed at Peach Bottom with a five-year storage capacity. PS advises that it also has an on-site LLRW storage facility at Salem also with a five-year storage capacity. PE has advised ACE that PE is pursuing alternative disposal strategies for LLRW generated at Peach Bottom including an aggressive LLRW reduction program. Pennsylvania is the host site for LLRW generators located in Pennsylvania, Delaware, Maryland an West Virginia and is pursuing a permanent disposal site through a volunteer sitting process. PS has advised ACE that New Jersey also plans to host a LLRW disposal site. In March 1983, New Jersey enacted the Public Utility Fault Determination Act which requires that the BPU make a determination of fault with regard to any past or future accident at any electric generating or transmission facility, prior to granting a request by that utility for a rate increase to cover accident-related costs in excess of $10 million. However, the law allows the affected utility to file for non-accident related rate increases during such fault determination hearings and to recover contributions to federally mandated or voluntary cost- sharing plans. The law further allows the BPU to authorize the recovery of certain fault-related repair, cleanup, power replacement or damage costs if substantiated by the evidence presented and if authorized in writing by the BPU. For information regarding the regulation of AEI's subsidiary, ATS, refer to "Nonutility Subsidiaries" herein. For information regarding ACE's nuclear power replacement cost insurance and liability under the Federal Price-Anderson Act, see Note 10 of AEI's Notes to Consolidated Financial Statements, herein. Environmental Matters General ACE is subject to regulation with respect to air and water quality and other environmental matters by various Federal, state and local authorities. Emissions and discharges from ACE's facilities are required to meet established criteria, and numerous permits are required to construct new facilities and to operate new and existing facilities. Additional regulations and requirements are continually being developed by various government agencies. The principal laws, regulations and agencies relating to the protection of the environment which affect ACE's operations are described below. Construction projects and operations of ACE are affected by the National Environmental Policy Act under which all Federal agencies are required to give appropriate consideration to environmental values in major Federal actions significantly affecting the quality of the human environment. The Federal Resource Conservation and Recovery Act of 1976 (RCRA) provides for the identification of hazardous waste and includes standards and procedures that must be followed by all persons that generate, transport, treat, store or dispose of hazardous waste. ACE has filed notifications and plans with the U. S. Environmental Protection Agency (EPA) relating to the generation and treatment of hazardous waste at certain of its facilities and generating stations. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), and RCRA authorize the EPA to bring an enforcement action to compel responsible parties to take investigative and/or cleanup actions at any site that is determined to present an imminent and substantial danger to the public or to the environment because of an actual or threatened release of one or more hazardous substances. The New Jersey Spill Compensation and Control Act (Spill Act) provides similar authority to the NJDEP. Because of the nature of ACE's business, including the production of electricity, various by-products and substances are produced and/or handled which are classified as hazardous under the above laws. ACE generally provides for the disposal and/or processing of such substances through licensed independent contractors. However, the statutory provisions may impose joint and several responsibility without regard to fault on the generators of hazardous substances for certain investigative and/or cleanup costs at the site where these substances were disposed and/or processed. Generally, actions directed at funding such site investigations and/or cleanups include all known allegedly responsible parties. ACE has received requests for information under CERCLA with respect to certain sites. One site, a sanitary landfill comprising approximately 40 acres, is situated in Atlantic County, New Jersey. ACE received a Directive, dated November 7, 1991, from the NJDEP, identifying ACE as one of a number of parties allegedly responsible for the placement of certain hazardous substances, namely, flyash which had been approved as landfill material. An Administrative Consent Order (ACO) has been executed and submitted to the NJDEP by ACE and at least four other identified responsible parties. Site remediation will include a soil cover of the site. ACE has joined with three other parties and will cooperate in implementing the terms of the ACO. Approximately eight additional responsible parties have also been identified by the NJDEP. ACE, together with the other signatories to the ACO, will pursue recovery against those persons who may also pursue recovery against other responsible parties not named in the NJDEP Directive. ACE's contribution to- date for the remediation and clean-up of the Atlantic County site has been approximately $300,000. It is not anticipated that future contributions, if any, will be significant. ACE has been served a Summons and Complaint dated June 30, 1992 in a civil action brought pursuant to Section 107(a) of CERCLA on behalf of the EPA. ACE has been named as one of several defendants in connection with the recovery of costs incurred, and to be incurred, in response to the alleged release of hazardous substances located in Gloucester County, New Jersey. Approximately 70 separate financially solvent entities have been identified as having responsibility for remediation which is now predicted to be in excess of $175 million. Sufficient discovery has been conducted to establish that ACE's contribution to the clean-up and remediation activity will be within the lower tiers of financial participation. Notwithstanding the joint and several liability imposed by law, primary responsibility will be apportioned among others, including Federal and state agencies and private parties. ACE's contribution to-date for the remediation and clean-up of the Gloucester County site has been $105,000. It is not anticipated that future contributions, if any, will be significant. The New Jersey Environmental Clean-up Responsibility Act was supplemented and amended in June 1993 and became the New Jersey Industrial Site Recovery Act. The act provides, among other things, that any business having certain Standard Industrial Classification Code numbers that generates, uses, transports, manufactures, refines, treats, stores, handles or disposes of hazardous substances or hazardous wastes is subject to the requirements of the act upon the closing of operations or a transfer of ownership or operations. As a precondition to such termination or transfer of ownership or operations, the approval of the NJDEP of a negative declaration, a remedial action work plan or a remediation agreement and the establishment of the remediation funding source is required. Various state and Federal legislation has established a comprehensive program for the disclosure of information about hazardous substances in the workplace and the community, and provided a procedure whereby workers and residents can gain access to this information. Implementing the regulations provides for extensive recordkeeping, labeling and training to be accomplished by each employer responsible for the handling of hazardous substances. ACE has implemented the requirements of this legislation to achieve substantial compliance with appropriate schedules. ACE is also subject to the Wetlands Act of 1970, which requires applications to and permits from the NJDEP for conducting regulated activities (including construction and excavation) within the "coastal wetlands," as defined therein. Legislation enacted in 1987 by the State of New Jersey designates certain areas as fresh water wetlands and restricts development in those areas. The New Jersey Coastal Area Facility Review Act (CAFRA) requires applications to and permits from the NJDEP for construction of certain types of facilities within the "coastal area" as defined by CAFRA. Recent amendments to the CAFRA regulations expanded the area under CAFRA control as well as the types of developments subject to CAFRA. The current regulations provide exemptions for the maintenance and repair of existing electrical substations, but are not clear as to whether a CAFRA permit would be required for construction, maintenance and/or repair of transmission lines within the CAFRA area. Public concern continues over the health effects from exposure to electric and magnetic fields (EMF). To date, there are not conclusive scientific studies to support such concerns. The New Jersey Commission on Radiation Protection (CORP) is considering promulgation of regulations which would authorize the NJDEP to review all new power line projects of 100 kilovolts or more. While the promulgation of such regulations may affect the design and location of ACE's existing and future electric power lines and facilities and the cost thereof, current discussions with CORP indicate that such regulations would not significantly impact ACE's operations. ACE's program of Prudent Field Management implements reasonable measures, at modest cost, to limit magnetic field levels in the design and location of new facilities. Such amounts as may be necessary to comply with any new EMF rules cannot be determined at this time and are not included in ACE's 1997-1999 estimated construction expenditures. Air The Federal Clean Air Act, as amended, requires that all states achieve specified primary ambient air quality standards (relating to public health) by December 31, 1982 unless the deadline is extended for certain pollutants for a particular state by appropriate action taken by the EPA, and also requires that states achieve secondary ambient air quality standards (relating to public welfare) under the Clean Air Act within a reasonable time. The Clean Air Act also requires the Administrator of the EPA to promulgate revised new source performance standards for sulfur dioxide, particulates and nitrogen dioxide, mandate the use of the "best technological system of continuous emission reduction" and preclude the use of low sulfur coal as a sole means of achieving compliance with sulfur regulations for new power plants. The Clean Air Act Amendments (CAAA), which provide for penalties in the event of noncompliance, further provide that State Implementation Plans (SIP) contain emission limitations and such other measures as may be necessary, as determined under regulations promulgated by the EPA, to prevent "significant deterioration" of air quality based on regional non-degradation classifications. The NJDEP is using the New Jersey Administrative Code, Title 7, Chapter 27 (NJAC 7:27) as its SIP to achieve compliance with the national ambient air quality standards adopted by EPA under the Clean Air Act. NJAC 7:27 currently provides ambient air quality standards and emission limitations, all of which have EPA approval, for seven pollutants, including sulfur dioxide and particulates. ACE believes that all of its fossil fuel-fired generating units are, in all substantial respects, currently operating in compliance with NJAC 7:27 and the EPA approved SIP. In November 1990, the CAAA was enacted to provide for further restrictions and limitations on sulfur dioxide and other emission sources as a means to reduce acid deposition. Phase I of the legislation mandated compliance with the sulfur dioxide reduction provisions of the legislation by January 1, 1995 by utility power plants emitting sulfur dioxide at a rate of above 2.5 pounds per million BTU. Plants utilizing certain control technologies to meet the Phase I sulfur dioxide reductions could be permitted, subject to EPA approval, to either postpone compliance until 1997 or receive an early reduction bonus allowance for reductions achieved between 1995 and 1997. Phase II of the legislation requires controls by January 1, 2000 on plants emitting sulfur dioxide at a rate above 1.2 pounds per million BTU. ACE's wholly-owned B. L. England Units 1 and 2 and its jointly-owned Conemaugh Units 1 and 2, in which ACE has a 3.83% ownership interest, were affected by Phase I, and all of ACE's other fossil-fueled steam generating units are affected by Phase II. The Keystone Station, in which ACE has a 2.47% ownership interest, is impacted by the sulfur dioxide provisions of Title IV of the CAAA during Phase II. In addition, all of ACE's fossil-fueled steam generating units will be affected by the nitrogen oxide provisions of the CAAA. A portion of the capital costs necessary to continue compliance with the CAAA are included in ACE's current estimate of construction expenditures shown under "Construction and Financing" above. ACE expects that costs associated with compliance would be recoverable through rates, and may be offset, in part, by utilization of certain allowances as permitted by the CAAA. The CAAA requires that reductions in nitrogen oxide (NOx) be made from the emissions of major contributing sources and each state must impose reasonable available control technologies on these major sources. NJDEP regulations adopted in November 1993 require that a compliance plan be filed with the NJDEP. ACE's compliance plan, filed April 22, 1994, and subsequent amendments, have been accepted by the NJDEP. Preliminary capital expenditures are estimated at $8.5 million over the next five years to achieve compliance with Phase II NOx reductions. The necessary emission reductions are based on modeling results and regulatory agency discussions and could result in additional changes to equipment and in methods of operation and fuel, the extent of which has not been fully determined. On April 26, 1991, the NJDEP renewed ACE's expiring Certificates to Operate Control Apparatus or Equipment for the three generating units at B.L. England Station for a period of five years, expiring April 26, 1995. The NJDEP issued the permit renewal in June 1996. The CAAA Title V operating permit, becoming effective in 1997, will supersede the current permitting requirements. On January 23, 1997, the EPA issued Compliance Order 113-97- 001 (Order) for failure to comply with emission monitoring requirements on a combustion turbine unit at the Sherman Avenue Generating Station. The Order carries a potential penalty of $25,000 a day, retroactive to May 30, 1991. ACE has installed and continues to modify the necessary emissions monitoring equipment satisfying the EPA's request for compliance plans. ACE cannot predict the outcome of this matter. Water The Federal Water Pollution Control Act, as amended (the Clean Water Act) provides for the imposition of effluent limitations to regulate the discharge of pollutants, including heat, into the waters of the United States. The Clean Water Act also requires that cooling water intake structures be designed to minimize adverse environmental impact. Under the Clean Water Act, compliance with applicable effluent limitations is to be achieved by a National Pollution Discharge Elimination System (NPDES) permit program to be administered by the EPA or by the state involved if such state establishes a permit program and water quality standards satisfactory to the EPA. Having previously adopted the New Jersey Pollution Discharge Elimination System (NJPDES), NJDEP assumed authority to operate the NJPDES permit program. During 1981, ACE received NJPDES permits for discharges to surface waters for all facilities with existing EPA-issued NPDES permits. During 1986, ACE received draft renewal permits for both B.L.England Station and Deepwater Station for discharges to surface waters as well as groundwater. Most of the contested conditions were resolved with the NJDEP with the issuance of the NJPDES permit renewal effective January 1, 1995. There are no other outstanding issues relative to this permit for B.L.England station. Effective December 2, 1974, the NJDEP adopted new surface water quality standards which, in part, provide guidelines for heat dissipation from any source and which become standards for subsequent Federal permits. These NJDEP guidelines were included in the final EPA permits issued for the B. L. England, Deepwater, Salem, and Hope Creek stations. On receipt of the permits for B. L. England and Deepwater stations, ACE filed with the EPA a request for alternative thermal limitations (variance) in accordance with the provisions of Section 316(a) of the Act. The NJDEP and EPA have subsequently determined that B. L. England Units 1 and 2 are in compliance with applicable thermal water quality standards. The request for a Section 316(a) variance for Deepwater Station has not yet been acted upon and ACE is currently awaiting a draft of the new NJPDES permit. ACE is not able at this time to predict the outcome of the request, but it believes that it has adequately supported the request for such variance. ACE believes that all of its wholly-owned steam electric generating units are, in all substantial respects, currently operating in compliance with all applicable standards and NJPDES permit limitations, except as described herein above. All current surface water discharge permits for B.L. England have been renewed as of January 1, 1995 and ACE has filed for renewal of the ground water discharge permits for B. L. England and surface water discharge permits for Deepwater. The Delaware River Basin Commission (DRBC) has required various electric utilities, as a condition of being permitted to withdraw water from the Delaware River for use in connection with the operation of certain electric generating stations, to provide for a means of replacing water withdrawn from the river during certain periods of low river flow. Such a requirement presently applies to the Salem and Hope Creek Stations. As a result of such requirement, ACE and certain other electric utilities constructed the Merrill Creek Reservoir Project. ACE owns a 4.8% ownership interest in the reservoir project. Although ACE expects that sufficient replacement water would be provided by Merrill Creek during periods of low river flow to permit the full operation of Salem and Hope Creek, such events cannot be assured. Environmental control technology, generally, is in the process of further development and the implementation of such may require, in many instances, balancing of the needs for additional quantities of energy in future years and the need to protect the environment. As a result, ACE cannot estimate the precise effect of existing and potential regulations and legislation upon any of its existing and proposed facilities and operations, or the additional costs of such regulations. ACE's capital expenditures related to compliance with environmental requirements in 1996 amounted to $18 million, and its most recent estimate for such compliance for the years 1997-1999 is $30 million. Such estimates do not include amounts which ACE may be required to expend to comply with Phase II requirements of the CAAA at B.L. England Unit 1 and Keystone Station or the normal costs of compliance with radiation protection. Such additional costs which ACE may incur in affecting compliance with potential regulations and legislation are not included in the estimated construction costs for the period 1997-1999 (see "Construction and Financing"). Future regulatory and legislative developments may require ACE to further modify, supplement or replace equipment and facilities, and may delay or impede the construction and operation of new facilities, at costs which could be substantial. See Note 10 of the accompanying Notes to Consolidated Financial Statements for further information. Executive Officers Information concerning the Executive Officers of the Company and ACE, as of December 31, 1996, is set forth below. Executive Officers are elected by the respective Boards of Directors of the Company and ACE and may be removed from office at any time by a vote of a majority of all the Directors in office. Name (age) Title(s) (effective date of election to current position(s) Jerrold L. Jacobs (57) Chairman and Chief Executive Officer of the Company (7/1/96) and Chairman and Chief Executive Officer of ACE (4/27/96). Michael J. Chesser (48) President and Chief Operating Officer of the Company (7/1/96) and President and Chief Operating Officer of ACE (4/27/95). Director of ACE. Michael J. Barron (47) Vice President and Chief Financial Officer of the Company and Senior Vice President and Chief Financial Officer of ACE (9/15/95). Director of ACE. Frank E. DiCola (49) Vice President, Thermal Systems & Enerval (10/10/96). Robert H. Fiedler (50) Acting Vice President-Distribution of ACE (10/10/96). James E. Franklin II (50) Vice President, Secretary and General Counsel to the Company (4//26/95)and Senior Vice President, Secretary and General Counsel of ACE (4/27/95). Director of ACE. Meredith I. Vice President-Power System of the Harlacher, Jr.(54) Company(4/26/95) and Senior Vice President-Power System of ACE (4/3/95), Director of ACE. Ernest L. Jolly (44) Vice President-Energy Supply for the Company and Acting Senior Vice President-Energy Supply of ACE (10/10/96). Henry K. Levari, Jr. (48) Vice President-External Affairs of the Company and Senior Vice President-External Affairs of ACE (11/13/95), Director of ACE. J. David McCann (45) Vice President-Strategic Customer Support of ACE (4/27/94). Marilyn T. Powell (49) Vice President Marketing and Distribution of the Company and Senior Vice President-Marketing and Distribution of ACE (10/10/96). Director of ACE. Scott B. Ungerer (38) Vice President-Energy Technology of the Company (10/10/96). Louis M. Walters (44) Treasurer of the Company (4/26/95) and Vice President-Treasurer and Assistant Secretary of ACE (1/31/95). Prior to election to the positions above, the following officers held other positions with the Company and ACE (unless otherwise noted) since January 1, 1992: J.L. Jacobs Chairman and Chief Executive Officer of ACE (4/26/95); President and Chief Executive Officer of the Company (4/27/94); Chairman, President and Chief Executive Officer of ACE (4/28/93). M.J. Chesser Senior Vice President of the Company (4/26/95); President and Chief Operating Officer of ACE (4/27/95); Vice President of the Company (2/1/94); Executive Vice President and Chief Operating Officer of ACE (2/1/94); Vice President-Marketing & Gas Operations, Baltimore Gas & Electric Company M.J. Barron Vice President and Treasurer of Maxus Energy Corporation, Dallas, Texas. J.E. Franklin II Secretary and General Counsel to the Company and ACE (2/1/95); General Counsel to the Company and ACE (10/1/94); Partner in the law firm Megargee, Youngblood, Franklin & Corcoran, P.A. M.I. Harlacher, Jr. Vice President of the Company and Senior Vice President-Energy Supply of ACE (4/28/93); Senior Vice President-Utility Operations of ACE (8/9/91). R. H. Fiedler General Manager Customer Operations of ACE (3/13/95); Manager Ocean Region of ACE (11/1/93); Manager Customer Service & Information of ACE (1/4/93); General Manager Administration of ACE (9/7/92) E.L. Jolly Vice President-Human Resources and Transformation of the Company and ACE (1/8/96); Vice President-Atlantic Transformation of ACE (5/23/94); Vice President-External Affairs of ACE (3/1/92). H.K. Levari, Jr. Senior Vice President-Planning and External Affairs of ACE (4/3/95); Vice President- Planning & External Affairs of the Company (4/26/95); Vice President of the Company (4/27/94); Senior Vice President-Customer Operations of ACE (9/16/94); Senior Vice President- Marketing & Customer Operations of ACE (4/28/93). Senior Vice President-Planning and Services of ACE (8/9/91). J. D. McCann Vice President-Power Delivery of ACE (8/9/91). M.T. Powell Vice President-Marketing of the Company and Senior Vice President-Marketing of ACE (11/9/95); Vice President-Marketing of ACE (9/16/94); Director of marketing process, International Business Machines Corporation. S.B. Ungerer Vice President-Enterprise Activities of the Company (4/26/95); Vice President of the Company (1/17/94); Manager, Business Planning Services (1/4/93); Manager, Strategic Business Planning (1/6/92). L.M. Walters Treasurer and Acting Chief Financial Officer (4/26/95); Vice President-Treasurer and Secretary (4/28/94); Vice President-Treasurer and Assistant Secretary (4/28/93); General Manager, Treasury and Finance (8/9/91). ITEM 2 PROPERTIES Under New Jersey law, the State of New Jersey owns in fee simple for the benefit of the public schools all lands now or formerly flowed by the tide up to the mean high-water line, unless it has made a valid conveyance of its interests in such property. In 1981, because of uncertainties raised as to possible claims of State ownership, the New Jersey Constitution was amended to provide that lands formerly tidal-flowed, but which were not then tidal-flowed at any time for a period of 40 years, were not to be subject to State claim unless the State has specifically defined and asserted a claim within one year period ending November 2, 1982. As a result, the State published maps of the eastern (Atlantic) coast of New Jersey depicting claims to portions of many properties, including certain properties owned by the Company. The Company believes it has good title to such properties and will vigorously defend its title, or will obtain such grants from the State as may ultimately be required. The cost to acquire any such grants may be covered by title insurance policies. Assuming that all of such State claims were determined adversely to the Company, they would relate to land, which, together with the improvements thereon, would amount to less than 1% of net utility plant. No maps depicting State Claims to property owned by the Company on the western (Delaware River) side of New Jersey were published within one year period mandated by the Constitutional Amendment. Nevertheless, the Company believes it has obtained all necessary grants from the State for its improved properties along the Delaware River. Reference is made to the Consolidated Financial Statements for information regarding investment in such property by the Company and ACE. Substantially all of ACE's electric plant is subject to the lien of the Mortgage and Deed of Trust under which First Mortgage Bonds of ACE are issued. Reference is made to Item 1 - Business "General" and "Energy Requirements and Power Supply" for information regarding ACE's properties. Information concerning leases is set forth in Note 10 of AEI's Notes to Consolidated Financial Statements incorporated herein by reference. Information regarding electric generating stations is set forth in Item 1, Business-"Energy Requirements and Power Supply." ITEM 3 LEGAL PROCEEDINGS Reference is made to Item 1-Business and the Notes to the Consolidated Financial Statements of the Company (Notes 3 and 10) for information regarding various pending administrative and judicial proceedings involving rate and operating and environmental matters, respectively. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of shareholders was held on January 30, 1997 to approve The Agreement and Plan of merger between AEI and Delmarva. Shareholders voted to approve the merger as well as an incentive compensation plan for the new company created by the merger. See SEC Form 8-K dated January 31, 1997, which is incorporated herein by reference. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange. All of ACE's Common Stock is owned by the Company. At December 31, 1996, there were 48,825 holders of record of the Company's Common Stock. The following table indicates the high and low sale prices for the Company's Common Stock as reported in the Wall Street Journal-Composite Transactions, and dividends paid for the periods indicated: Dividends High Low per Share Common Stock: 1996 First Quarter $20.000 $16.625 $ .385 Second Quarter $18.750 $16.000 $ .385 Third Quarter $18.500 $17.000 $ .385 Fourth Quarter $18.875 $17.000 $ .385 1995 First Quarter $19.000 $17.750 $ .385 Second Quarter $19.625 $17.875 $ .385 Third Quarter $19.875 $18.125 $ .385 Fourth Quarter $20.125 $19.000 $ .385 The funds required to enable the Company to pay dividends on its Common Stock are derived primarily from the dividends paid by ACE on its Common Stock, all of which is held by the Company. Therefore the ability of the Company to pay dividends on its Common Stock will be governed by the ability of ACE to pay dividends on its Common Stock. The rate and timing of future dividends of the Company will depend upon the earnings and financial condition of the Company and its subsidiaries, including ACE, and upon other factors affecting dividend policy not presently determinable. ACE is subject to certain limitations on the payment of dividends to the Company. Whenever full dividends on Preferred Stock have been paid for all past quarter-yearly periods, ACE may pay dividends on its Common Stock from funds legally available for such purpose. Until all cumulative dividends have been paid upon all series of Preferred Stock and until certain required sinking fund redemptions of such Preferred Stock have been made, no dividend or other distribution may be paid or declared on the Common Stock of ACE and no Common Stock of ACE shall be purchased or otherwise acquired for value by ACE. In addition, as long as any Preferred Stock is outstanding, ACE may not pay dividends or make other distributions to the holder of its Common Stock if, after giving effect to such payment or distribution, the capital of ACE represented by its Common Stock, together with its surplus as then stated on its books of account, shall in the aggregate, be less than the involuntary liquidation value of the then outstanding shares of Preferred Stock. ITEM 6 SELECTED FINANCIAL DATA Selected financial data for the Company and ACE for each of the last five years is listed below.
Atlantic Energy, Inc. 1996 1995 1994 1993 1992 (Thousands of Dollars) Operating Revenues $ 980,255 $ 953,137 $ 913,039 $ 865,675 $ 816,825 Net Income $ 58,767 $ 81,768 $ 76,113 $ 95,297 $ 86,210 Earnings per Average Common Share $ 1.12 $ 1.55 $ 1.41 $ 1.80 $ 1.67 Total Assets (Year-end) $2,670,762 $2,617,888 $2,542,385 $2,487,508 $2,219,338 Long Term Debt and Redeemable Preferred Stock (Year-end)(b) $1,051,945 $1,032,103 $ 940,788 $ 952,101 $ 842,236 Capital Lease Obligations (Year-end)(b) $ 39,914 $ 40,886 $ 42,030 $ 45,268 $ 49,303 Common Dividends Declared $ 1.54 $ 1.54 $ 1.54 $ 1.535 $ 1.515
Atlantic City Electric Company 1996 1995 1994 1993 1992 (Thousands of Dollars) Operating Revenues $ 982,492 $ 953,779 $ 913,226 $ 865,799 $ 816,931 Net Income $ 75,017 $ 98,752 $ 93,174 $ 109,026 $ 107,446 Earnings for Common Shareholder (a) $ 65,113 $ 84,125 $ 76,458 $ 91,621 $ 89,634 Total Assets (Year-end) $2,460,741 $2,459,104 $2,418,784 $2,363,584 $2,100,278 Long Term Debt and Redeemable Preferred Stock (Year-end)(b) $ 926,370 $ 951,603 $ 924,788 $ 937,101 $ 817,108 Capital Lease Obligations (Year-end)(b) $ 39,914 $ 40,877 $ 42,030 $ 45,268 $ 49,303 Common Dividends Declared (a) $ 82,162 $ 81,239 $ 83,482 $ 81,347 $ 78,336 (a) Amounts shown as total, rather than on a per-share basis, since ACE is a wholly-owned subsidiary of the Company. (b) Includes current portion.
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Summary Consolidated operating revenues for 1996, 1995 and 1994 were $980.3 million, $953.1 million and $913.0 million, respectively. The increase in 1996 revenues over 1995 reflects an increase in sales and an increase in annual Levelized Energy Clause (LEC) revenues in July 1995 of $37 million and an increase in July 1996 of $27.6 million. These increases were offset in part by a $13.0 million revenue credit recorded in September 1996 as a result of stipulation agreements (See Note 3 to the consolidated financial statements) and a decrease in unbilled revenues. The increase in 1995 revenue over 1994 largely reflects the increase in annual LEC revenues granted in July 1995 and an increase in unbilled revenues. Consolidated earnings per share for 1996 were $1.12 on net income of $58.8 million compared to a $1.55 on net income of $81.8 million in 1995 and $1.41 on net income of $76.1 million in 1994. The 1996 earnings reflect charges resulting from provisions for rate refunds, write-downs of nonutility property, losses from nonutility investments and higher operations and maintenance expenses associated with the continuing outage at the Salem Station. Excluding the 1994 special charges of $.37 cents per share, 1995 earnings per share decreased from 1994 primarily due to reduced sales of energy. The quarterly dividend paid on Common Stock was $.385 per share, or an annual rate of $1.54 per share. Information with respect to Common Stock is as follows: 1996 1995 1994 Dividends Paid Per Share $ 1.54 $ 1.54 $ 1.54 Book Value Per Share $15.00 $15.42 $15.50 Annualized Dividend Yield 9.0% 8.0% 8.7% Return on Average Common Equity 7.4% 9.9% 9.1% Total Return (Dividends paid plus change in share price) (3.0)% 18.0% (11.9)% Market to Book Value 114% 125% 114% Price/Earnings Ratio 15 12 13 Year End Closing Price-NYSE $17.13 $19.25 $17.63 Liquidity and Capital Resources Atlantic Energy, Inc. Atlantic Energy, Inc. (AEI, Company or parent) is the parent of Atlantic City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE) and Atlantic Energy International, Inc. (AEII) which are wholly-owned subsidiaries. The Company's cash flows are dependent on the cash flows of its subsidiaries, primarily ACE. Principal cash inflows of the Company were as follows: 1996 1995 1994 (millions) Dividends from ACE $82.2 $81.2 $83.5 Credit Facility 3.1 34.5 - Dividend Reinvestment and Stock Purchase Plan - - 6.7 AEI has a $75 million revolving credit and term loan facility. The revolver is comprised of a 364-day senior revolving credit facility in the amount of $35 million and a three-year senior revolving credit facility in the amount of $40 million. Interest rates are based on senior debt ratings and on the borrowing option selected by the Company. As of December 31, 1996 and 1995, AEI had $37.6 million and $34.5 million outstanding, respectively, from this credit facility. This facility can be used to fund further reacquisitions of Company Common Stock and for other general corporate purposes. Principal cash outflows of the Company were as follows: 1996 1995 1994 (Millions) Dividends to Shareholders $81.2 $81.2 $83.5 Advances and Capital Contributions to Subsidiaries* (1.4) (6.7) 25.6 Common Stock Reacquisitions - 29.6 3.9 Loans to Subsidiaries (7.5) 7.5 - * Net of repayments The Company has a program to reacquire up to three million shares of the Company's Common Stock outstanding. There is no schedule or specific share price target associated with the reacquisitions. The authorized number of shares is not to be affected. During 1995, the Company reacquired and cancelled 1,625,000 shares for a total cost of $29.6 million with prices ranging from $17.625 to $18.875 per share. At December 31, 1996 and 1995, the Company has reacquired and cancelled a total of 1,846,700 shares of its Common Stock at a cost of $33.5 million. The Company did not reacquire and cancel any shares under this program during 1996. Miscellaneous Receivables on the Consolidated Balance Sheet at December 31, 1996 increased compared to December 31, 1995 primarily due to receivables from amounts advanced to Enerval, LLC to fund operations in the amount of $10.0 million. Agreements between the Company and its subsidiaries provide for allocation of tax liabilities and benefits generated by the respective subsidiaries. Credit support agreements exist between the Company and ATE and AGI. On August 12, 1996, the Boards of Directors of AEI and Delmarva Power & Light Company (DP&L) jointly announced an agreement to merge the companies into a new company named Conectiv, Inc. (Conectiv). Conectiv, a newly formed Delaware corporation, will become the parent of Atlantic Energy's subsidiaries and the parent of DP&L and its subsidiaries. The merger is to be a tax-free, stock-for-stock transaction accounted for as a purchase. Under the terms of the agreement, DP&L shareholders will receive one share of Conectiv's common stock for each share of DP&L common stock held. AEI shareholders will receive 0.75 shares of Conectiv's common stock and 0.125 shares of Conectiv's Class A common stock for each share of AEI common stock held. On January 30, 1997, the merger was approved by the shareholders of both companies. In order for the merger to become effective, approvals are still needed from a number of Federal and state regulatory agencies. The Company expects the regulatory approval process to be completed in late 1997 or early 1998. The total consideration to be paid to the Company's common stockholders, measured by the average daily closing market price of the Company's common stock for the ten trading days following public announcement of the merger, is $948.6 million. The consideration paid plus estimated acquisition costs and liabilities assumed in connection with the merger are expected to exceed the net book value of the Company's net assets by approximately $204.5 million, which will be recorded as goodwill by Conectiv. The goodwill will be amortized over 40 years. Atlantic City Electric Company ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. ACE's service territory encompasses approximately 2,700 square miles within the southern one-third of New Jersey with the majority of customers being residential and commercial. ACE, with its wholly-owned subsidiary that operates certain generating facilities, is the principal subsidiary within the consolidated group. Cash construction expenditures for 1994-1996 amounted to $307.7 million and included expenditures for upgrades to existing transmission and distribution facilities and compliance with provisions of the Clean Air Act Amendments of 1990. ACE's current estimate of cash construction expenditures for 1997-1999 is $283.5 million. These estimated expenditures reflect necessary improvements to generation, transmission and distribu- tion facilities. On an interim basis, ACE finances construction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short term debt, consisting of commercial paper and notes from banks. As of December 31, 1996, ACE had authority to issue $150 million of short term debt, comprised of $100 million of committed lines of credit and $50 million on a when offered basis. At December 31, 1996, ACE had $85.1 million of unused short-term borrowing capacity. Permanent financing by ACE is undertaken through the issuance of long term debt and preferred stock, and from capital contributions by AEI. ACE's nuclear fuel requirements associated with its jointly-owned units have been financed through arrangements with a third party. ACE also utilizes cash for mandatory redemptions of preferred stock and maturities and redemption of long term debt. Optional redemptions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of capital. Redemptions of Preferred Stock for the period were as follows: Shares 1996 1995 1994 Redemption Preferred Stock Price (Series) $8.53 120,000 $101.00 7.52% 100,000 101.88 $8.20 200,000 100.00 $8.25 50,000 104.45 $7.80 460,500 111.00 $8.53 240,000 240,000 100.00 $8.25 5,000 5,000 100.00 Aggregate Amount (000) $98,876* $24,500 $24,500 *includes commissions and premiums Long term debt redeemed, acquired and retired or matured in the period 1994-1996 were as follows: Date Series Principal Redemption Amount Price % (000) February 1996 5-1/8% due 1996 $ 9,980 100.00 February 1996 5-1/4% due 1996 2,267 100.00 October 1995 9-1/4% due 2019 53,857 105.15 October 1995 10-1/2% due 2014 850 101.00 November 1994 7-5/8% due 2005 6,500 100.00 June 1994 10-1/2% due 2014 23,150 102.00 Various 1994 Dates 9-1/4% due 2019 11,910 105.38* * Average price Scheduled maturities and sinking fund requirements for long term debt and preferred stock aggregate $216.5 million for 1997-2001. On or before April 1 of each year, ACE and other New Jersey utilities are required to pay excise taxes to the State of New Jersey. In March 1996, ACE paid $91.7 million funded through the issuance of short term debt with repayment of such debt occurring during the second and third quarters. During 1996 and 1995, ACE made $7.2 million and $19.1 million, respectively, in payments related to its workforce reduction program. Payments in settlement of this obligation are substantially complete. Short term debt at December 31, 1996 increased $34.4 million compared to December 31, 1996 due to funding of $12.3 million for maturing long term debt and debentures and other general corporate funding. A summary of the issue and sale of ACE's long term debt and preferred securities for 1994-1996 is as follows: (millions) 1996 1995 1994 Medium Term Notes - $105 - Pollution Control Bonds - - $55 Cumulative Quarterly Income Preferred Securities $70 - - The proceeds from these financings were used to refund higher cost debt, preferred stock, and for construction purposes. During 1997-1999, ACE may issue up to $175 million in long term debt to be used for construction, refundings and repayment of short term debt. The provisions of ACE's charter, mortgage and debenture agreements can limit, in certain cases, the amount and type of additional financing which may be used. At December 31, 1996, ACE estimates additional funding capacities of $346 million of First Mortgage Bonds, or $333 million of preferred stock, or $196 million of unsecured debt. These amounts are not necessarily additive. On October 1, 1996, Atlantic Capital I, a newly formed grantor trust, issued $70 million of 8.25% Cumulative Quarterly Income Preferred Securities (CQIPS) with a stated liquidation preference of $25 each. Atlantic Capital I, established for the sole purpose of issuing the CQIPS, invested the proceeds in 8.25% Junior Subordinated Deferrable Interest Debentures (Junior Debentures) of ACE. ACE reserves the right to defer payment of interest on the debentures for up to 20 consecutive quarters. During such a deferral period, certain dividend restrictions would apply to ACE's capital stock. The CQIPS and Junior Debentures are scheduled to mature on October 1, 2026, but such maturity may be extended to a date not later than October 1, 2045, if certain conditions are met. Proceeds from the sale of the Junior Debentures were used to fund the redemption and purchase of shares of ACE's preferred stock described above. Atlantic Capital I is a grantor trust of ACE and as such, the transactions of the trust are consolidated into the financial statements of ACE. The Junior Debentures are eliminated in consolidation. Atlantic Energy Enterprises, Inc. AEE is a holding company which is responsible for the management of the investments in the nonutility companies consisting of: Atlantic Generation, Inc. (AGI); Atlantic Southern Properties, Inc. (ASP); ATE Investment, Inc. (ATE); Atlantic Thermal Systems, Inc. (ATS); CoastalComm, Inc. (CCI) and Atlantic Energy Technology, Inc. (AET). Also, AEE has a 50% equity interest in Enerval, LLC, a company which provides energy management services, including natural gas supply, transportation and marketing. As of December 31, 1996, AEE had an equity investment of $3.9 million in the partnership. AEE obtains funds for its investments and operating needs through advances from AEI and notes payable from ATE. Management has developed a five-year business strategy to expand operations and improve its financial performance. AEE's business strategy reflects the potential investment of approximately $307 million over the next five years. Funds for AEE capital investments will be provided through issuance of long term debt and equity investments by AEI. Atlantic Generation, Inc. AGI and its wholly-owned subsidiaries are engaged in the development, acquisition, ownership and operation of cogeneration power projects. AGI's activities through its subsidiaries are primarily represented by partnership interests in cogeneration facilities located in New Jersey and New York. In December 1996 AGI recorded a loss contingency in the amount of $1.6 million, net of tax, for the sale of its cogeneration facility in New York. AGI, through a support agreement with AEI, has entered into an indemnification agreement secured by a $6.0 million letter of credit in connection with the sale of this facility. All conditions of the sale are expected to be complete by the middle of 1997. At December 31, 1996, total investments in these partnerships amounted to $21.8 million. Net cash outlays for capital investments by AGI for 1994-1996 totaled $3.2 million. AGI obtained the funds for its investments through capital contributions from AEI. Atlantic Southern Properties, Inc. ASP owns and manages a 280,000 square-foot commercial office and warehouse facility located in Atlantic County, New Jersey with a net book value of $8.5 million at December 31, 1996 after a write-down of the carrying value in 1996 of $0.8 million, net of tax. The write-down reflects the recognition of the diminished value due to the excess vacancy and a decline in the local commercial real estate market. This investment has been funded by capital contributions from AEI and borrowings under a loan agreement with ATE. ATE Investment, Inc. ATE provides financing to affiliates and manages a portfolio of investments in leveraged leases. ATE has invested $79.7 million in leveraged leases of three commercial aircraft and two containerships. In August 1996, ATE joined with an unaffiliated company to create EnerTech Capital Partners, L.P., an equity limited partnership that will invest in and support a variety of energy related technology growth companies. At December 31, 1996 ATE had invested $7.3 million in this partnership. ATE obtained funds for its business activities and loans to affiliates through capital contributions from AEI and external borrowings. These borrowings include $15 million principal amount of 7.44% Senior Notes due 1999 and a revolving credit and term loan facility of up to $25 million. At December 31, 1996, $18.5 million was outstanding under this facility. ATE's cash flows are provided from lease rental receipts and realization of tax benefits generated by the leveraged leases. ATE has notes receivable, including interest, outstanding with ASP which totaled $10.0 million at December 31, 1996. ATE has established credit arrangements with AEE, of which $14.1 million was a receivable, including interest, from AEE at December 31, 1996. Atlantic Thermal Systems, Inc. ATS and its wholly-owned subsidiaries are engaged in the development and operation of thermal heating and cooling systems. ATS plans to make $125 million in capital expenditures related to district heating and cooling systems to serve the business and casino district in Atlantic City, New Jersey and has invested $29.3 million as of December 31, 1996. Construction for the Midtown Energy Center is expected to be completed by mid-1997. ATS has obtained funds for its project development through a $100 million revolving credit agreement and term loan facility in August 1996. As of December 31, 1996, $42 million was outstanding under this facility. Additional funding for the project is expected from $12.5 million from the proceeds of bonds issued by the New Jersey Economic Development Authority with a remarketed rate of interest of 3.5%. These funds are currently restricted in trust and invested in U.S. Treasury Securities pending resolution of certain conditions. ATS cannot estimate, with any certainty, when or if the conditions attached to the escrow release will be satisfied. ATS has a $10 million revolving credit agreement with ATE. There were no outstanding amounts under the agreement at December 31, 1996. ATS has agreements with three casinos in Atlantic City, New Jersey to operate their heating and cooling systems. As part of these agreements, ATS has paid $18.0 million in license fees for the right to operate and service such systems for a period of 20 years. These fees are recorded on the Consolidated Balance Sheet as License Fees and are being amortized to expense over the life of the contracts. Atlantic Energy International, Inc. In July 1996, AEI formed AEII, to provide utility consulting services and equipment sales to international markets. AEII funds its operating needs from advances from AEI. RESULTS OF OPERATIONS Operating results of AEI as a consolidated group are dependent upon the performance of its subsidiaries, primarily ACE. Since ACE is the principal subsidiary within the consolidated group, the operating results presented in the Consolidated Statement of Income are those of ACE, after elimination of transactions among members of the consolidated group. Results of the nonutility companies are reported in Other Income. Revenues Operating Revenues - Electric increased 2.9% and 4.4% in 1996 and 1995, respectively. Components of the overall changes are shown as follows: 1996 1995 (millions) Base Revenues $ (8.9) $(1.9) Refund Credits (13.0) - Levelized Energy Clause 29.3 49.2 Kilowatt-hour Sales 32.2 (10.0) Unbilled Revenues (17.6) 16.6 Sales for Resale 6.0 (11.9) Other (0.9) (1.9) Total $ 27.1 $40.1 The decrease in Base Revenues for the current year reflect a reduced average realization per kilowatt-hour sold resulting from less favorable summer weather conditions relative to last year and the effects of ACE's BPU approved Off-Tariff Rate Agreements (OTRAs). OTRAs are special reduced rates offered by ACE to at- risk customers which aggregated $3.5 million, or $2.2 million, net of tax. At-risk customers are customers who may choose to leave ACE's energy system because they have alternative energy sources available. The Refund Credits are the result of the October 22, 1996 stipulations for the $13.0 million settlement concerning the outages of the Salem Units and the alleged overrecovery of capacity costs from nonutility generation facilities. See Note 3 of the consolidated financial statements for further details regarding the stipulations. LEC revenues increased in 1996 due to a rate increase of $27.6 million in July 1996 and a $37 million increase in July 1995. Changes in kilowatt-hour sales are discussed under "Billed Sales to Ultimate Utility Customers." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 9.4% and 5.9% in revenues per kilowatt-hour in 1996 and 1995, respectively. The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by, but not yet billed to, ultimate customers at the end of the respective periods, which are affected by weather and economic conditions, and the corresponding price per kilowatt- hour. The changes in Sales for Resale are a function of ACE's energy mix strategy, which in turn is dependent upon ACE's needs for energy, the energy needs of other utilities participating in the regional power pool of which ACE is a member, and the sources and prices of energy available. The increase in the 1996 Sales for Resale reflects an increase in bulk power market sales outside of the regional power pool. The decline in the 1995 Sales for Resale reflects a decrease in the demand of the power pool, the decline in market prices and a reduction in excess energy sources when compared to the previous year. Billed Sales to Ultimate Utility Customers Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions. Energy sales statistics, stated as percentage changes from the previous year, are shown as follows: 1996 1995 Avg Avg# Avg Avg # Customer Class Sales Use of Cust Sales Use of Cust Residential 3.2% 2.4% 0.8% (2.0)% (3.1)% 1.2% Commercial 3.0 2.0 1.0 1.4 (0.1) 1.5 Industrial 7.1 5.5 1.5 (7.4) (9.0) 1.7 Total 3.6 2.8 0.8 (1.4) (2.6) 1.2 In 1996, the growth rate of actual billed sales increased significantly from 1995 due to an increase in the number of billing days and more favorable weather conditions. Unfavorable weather conditions in 1995 reduced sales significantly, compared to the weather conditions in 1996. Sales growth was offset by cooler than normal summer weather conditions in 1996. Casino expansions and construction around Atlantic City, New Jersey were significant contributors to commercial sales growth in 1996. The increases in 1996 Industrial sales were primarily due to the impact of two customers that had previously been supplied by an independent power producer. Costs and Expenses Total Operating Expenses increased 5.4% and 3.6% in 1996 and 1995, respectively. Included in these expenses are the costs of energy, purchased capacity, operations, maintenance, depreciation and taxes. Energy expense reflects costs incurred for energy needed to meet load requirements, various energy supply sources used and operation of the LEC. Changes in costs reflect the varying availability of low-cost generation from ACE-owned and purchased energy sources, and the corresponding unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the Pennsylvania-New Jersey-Maryland Interconnection Power Pool. The cost of energy is recovered from customers primarily through the operation of the LEC. Generally, earnings are not affected by energy costs because these costs are adjusted to match the associated LEC revenues. However, ACE has voluntarily foregone recovery of certain amounts of otherwise recoverable fuel costs through its Southern New Jersey Economic Initiative (SNJEI), thereby reducing earnings through May 1996, as indicated below. Such reduced recoveries are discretionary by ACE, and are influenced by competitive and economic factors. ACE elected not to continue the SNJEI beyond May 1996. Otherwise, in any period, the actual amount of LEC revenue recovered from customers may be greater or less than the actual amount of energy cost incurred in that period. Such respective overrecovery or underrecovery of energy costs is recorded on the Consolidated Balance Sheet as a liability or an asset as appropriate. Amounts from the balance sheet are recognized in the Consolidated Statement of Income within Energy expense during the period in which they are subsequently recovered through the LEC. ACE was underrecovered by $33.5 million and by $31.4 million at December 31, 1996 and 1995, respectively. As a result of implementing the SNJEI, ACE has foregone the recovery of energy costs in LEC rates in the amount of $10.0 million and $28.0 million for the 1995 and 1994 LEC periods, respectively. After tax net income has been reduced by $2.7 million and $12.2 million due to the effects of the initiative for 1996 and 1995, respectively. Energy expense increased 16.3% in 1996 primarily due to the changes in the LEC effective July 17, 1996, permitting ACE to begin recovering over $35.3 million in previously deferred energy costs. Energy expense decreased 9.1% in 1995 primarily due to the increase in underrecovered fuel costs, offset in part by the effects of the SNJEI referred to above. Production related energy costs for 1996 increased 5.3% due to increased sales and decreased 1.9% for 1995 due to reduced generation. Purchased Capacity expense reflects entitlement to generating capacity owned by others. Purchased Capacity expense increased 2.7% and 45.6% in 1996 and 1995, respectively. The increases reflect additional contract capacity supplied by nonutility power producers in each year. Operations expense increased in 1996 by 3.1% and decreased in 1995 by 2.8%. The 1996 increase reflects additional costs associated with Salem Station restart activities offset in part by a credit of the estimated 1995 Nuclear Performance Penalty. The 1995 decrease reflected the benefits of ACE's employee separation programs, offset in part by the aforementioned costs associated with Salem Station. Maintenance expense increased 29.2% in 1996 as a result of additional costs associated with Salem Station restart activities and increased maintenance initiatives. The 1995 decrease of 8.5% was due to cost saving measures employed by ACE. State Excise Taxes expense increased 5.9% in 1995 due to an increase in the tax base used to calculate the tax in comparison to the 1994 tax base. Federal Income Taxes decreased 29.7% in 1996 and increased 37.9% in 1995 as a result of the level of taxable income during those periods. Other-Net within Other Income (Expense) decreased in 1996 due to the net after-tax impacts of the write-down of the carrying value of ASP's commercial property of $0.8 million, the contingency loss for the sale of Binghamton Cogeneration facility of $1.6 million, reduced nonutility earnings and increased income taxes related to other income. Also included is a loss of $1.1 million after-tax from AEE's investment in Enerval, LLC due to a combination of unhedged gas sales agreements and higher spot market prices for gas. Interest on Long Term Debt increased 5.2% in 1995 due to increased amounts of debt outstanding during the year. Other Interest expense increased 88.9% in 1996 and 128.9% in 1995 due primarily to increased short-term debt borrowings. Preferred Securities Dividend Requirements decreased 22.5% and 12.5% in 1996 and 1995, respectively, as a result of mandatory and optional redemptions. Salem Nuclear Generating Station ACE is an owner of 7.41% of Salem Units 1 and 2, which are operated by Public Service Electric & Gas Co. (PS). Salem Units 1 and 2 have been out of service since May 16, 1995 and June 7, 1995, respectively. The Salem units represent 164 megawatts (MWs) of ACE's total installed capacity of 2,385.7 MWs. During these outages, PS has made significant changes and improvements related to the people, processes and equipment at Salem to improve the long-term reliability of the units. Salem Unit 2 is in the final stages of preparation for restart. The reactor has been refueled and reassembled and the reactor coolant pumps have been tested and placed in service. Over 90% of the total work activities have been completed and approximately 80% of the plant systems have been restored. Salem Unit 2 is currently expected to return to service in the second quarter of 1997. Salem Unit 1 is currently expected to return to service in the fall of 1997, after replacement of the unit's four steam generators, which was required in order to correct a generic problem with certain pressurized water reactors. Removal of the old steam generators has been completed and installation of the new steam generators is underway. The estimated cost of purchasing and installing the steam generators is between $150 million and $170 million, of which ACE's share is between $11.1 million and $12.6 million. In addition, the cost of the disposal of the old steam generators could be as much as $20 million, of which ACE's share would be $1.5 million. Effective December 31, 1996, ACE entered into a Stipulation Agreement (Agreement) with PS for the purpose of limiting ACE's exposure to Salem's 1997 operation and maintenance (O&M) expenses. Pursuant to the terms of the Agreement, ACE will pay to PS $10.0 million of O&M expense as a fixed charge payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any additional contribution to 1997 Salem O&M expenses, of which ACE's estimated share would be $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. To the extent ACE derives a savings against 1997 O&M expenditures, those savings will offset replacement power costs incurred due to the unavailability of the Salem Units. As a result of this Agreement, ACE has agreed to dismiss the complaint filed in the Superior Court of New Jersey in March 1996 alleging negligence and breach of contract. On February 27, 1996, the Salem co-owners filed a Complaint in United States District Court for the District of New Jersey against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators, under Federal and state statutes alleging fraud, negligent misrepresentation and breach of contract. The Westinghouse complaint seeks compensatory and punitive damages. On April 30, 1996, Westinghouse filed an answer and a counterclaim of $2.5 million for unpaid work. The litigation is in the process of discovery and investigation. ACE is subject to a performance standard for its five jointly- owned nuclear units. This standard is used by the BPU in determining recovery of replacement energy costs when output from the nuclear units is reduced or not available. Underperformance results in penalties which are not permitted to be recovered from customers and are charged against income. In accordance with the standard, ACE anticipated that it would incur a nuclear performance penalty for 1995 and had recorded a provision for such. According to the Salem outage stipulation agreement as previously discussed in Note 3, the performances of Salem Units 1 and 2 are not included in the calculation of a nuclear performance penalty for the period each unit was taken out of service up to each unit's respective return-to-service date. The parties to the stipulation agreed that for the years 1995 and 1996, there will be no penalty or reward under the nuclear performance standard. ACE had recorded a 1995 performance penalty of $0.8 million, net of tax. This amount has been incorporated into the net amount recorded for the Salem stipulation as discussed in Note 3 to the Consolidated Financial Statements. The outage of each Salem unit causes ACE to incur replacement power costs of approximately $0.7 million per unit per month. ACE's replacement power costs for the current outage for each unit, up to the agreed upon return-to-service dates, will be recoverable in rates in ACE's next LEC proceeding. As discussed above, replacement power costs incurred after the respective agreed upon return-to-service dates for the Salem Units will not be recoverable in rates. Competition Competition is expected to increase for electric energy markets historically served exclusively by regulated utilities. In recent years, changing laws and governmental regulations permitting competition from other utilities and nonregulated energy suppliers have prompted some customers to use self- generation or alternative sources to meet their electric needs. As the electric utility industry transitions from a regulated to a competitive industry, utilities may not be able to recover certain costs. These costs, which are known as "stranded" costs, could result from the shift from cost of service based pricing to market-based pricing and from customers choosing different energy suppliers than ACE. Potential types of stranded costs include 1) above-market costs associated with generation facilities or long term power purchase agreements and 2) regulatory assets, which are expenses deferred and expected to be recovered from customers in the future. In April 1996, the Federal Energy Regulatory Commission issued Order No. 888 "Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Service by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities". The Order is designed to remove impediments to competition in the wholesale bulk power marketplace, to bring more efficient, lower cost power to electricity consumers, and provide an equitable means to transition the industry to the new environment. Under this Order, utilities are required to offer transmission services for wholesale energy transactions to others on a nondiscriminatory basis. Tariffs have been established by ACE for these services, which ACE must also apply to its own wholesale energy transactions. On January 16, 1997, the BPU issued a Draft Phase II of the New Jersey Energy Master Plan (the Plan). In the Plan, the BPU has recommended that retail customers in New Jersey have the ability to choose their electric energy supplier beginning in October 1998 using a phase-in plan that will include all retail customers by April 2001. Customers would be able to sign an agreement with a third-party energy supplier and each electric utility, including ACE, would continue to be responsible for providing distribution service. Price and service quality for such distribution would continue to be regulated by the BPU. Beginning October 1998, costs for electric service, which consist of power generation, transmission, distribution, metering and billing will need to be unbundled. Transmission service would be provided by an Independent System Operator which would be responsible for maintaining a regional power grid that would continue to be regulated by FERC. The Plan states that the BPU is committed to assuring that a fully competitive marketplace exists prior to the ending of its economic regulation of power supply. At a minimum, utility generating assets and functions must be separated and operate at arms length from the transmission, distribution and customer service functions of the electric utility. The BPU reserves final judgment on the issue of requiring divestiture of utility generating assets until detailed analyses of the potential for market power abuses by utilities have been performed. The Plan addresses the issue of "stranded" costs related to the generating capacity currently in utility rates. High costs of construction and operations incurred by the jointly-owned nuclear power plants and the long-term high cost supply contracts with independent power producers are two significant contributing factors. The report proposes recovery of stranded costs over a four to eight year period, through a specific market transition charge which will be a separate component of a customer's bill. Determination of the recoverability of costs will be on a case by case basis with no guarantee for 100% recovery of eligible stranded costs. The Plan provides that the opportunity for full recovery of such eligible costs is contingent upon and may be constrained by the utility meeting a number of conditions, including achievement of a BPU goal of delivering a near term rate reduction to customers of five to ten percent. The Plan states that the independent power contracts must be eligible for stranded cost recovery. The Plan further states that utilities are obligated to take all reasonably available measures to mitigate stranded costs caused by the introduction of retail competition. The Plan further notes that New Jersey is studying the "securitization" of stranded costs as a means of financing these costs at interest rates lower than the utility cost of capital, thereby helping to mitigate the rate impact of stranded cost recovery. Recovery of securitization may occur over a different period of time. The plan also suggest that a cap may be imposed on the level of the charge as a mechanism to achieve the goal of overall rate reduction. The BPU intends to issue final findings and recommendations on the electric utility industry restructuring plan in April 1997. Each electric utility in the State is to file a complete restructuring plan, stranded cost filing and unbundled rate filing no later than July 15, 1997. ACE has not filed for accelerated depreciation of any capital assets or special rate plans applicable to particular classes of customers. However, in 1996 ACE has entered into BPU approved Off-Tariff Rate Agreements (OTRA's) with at-risk customers which provide for special rates for customers who may choose to leave ACE's energy system because they have alternative energy sources available. To date, the aggregate amount of such reduced rate agreements was $2.2 million, net of tax. ACE has significant long term contract commitments to purchase capacity and energy from nonutility sources at above-market costs. Recovery of amounts associated with these contracts is through ACE's LEC, for which rates are subject to approval by the BPU annually. In connection with the BPU's Plan, ACE is uncertain as to the level of stranded costs that may arise or the degree to which these costs will be recovered. If the final restructuring plan requires ACE to recognize amounts as unrecoverable, ACE may be required to write down asset values, and such writedowns could be material. In March 1996, the New Jersey Department of Treasury and the BPU jointly proposed to replace the energy excise tax currently imposed on electric and gas utilities. Under the proposal, utilities would pay a state corporate business tax, a state sales tax of six percent collected on all retail sales of energy services and a state transitional energy facilities assessment tax (TEFA) for a limited number of years. A gradual phase-out of the TEFA is proposed. At the completion of the TEFA phase-out, the total energy tax burden would be reduced by approximately 45%. Statement of Position of the Accounting Standards Board 96-1 "Environmental Remediation Liabilities" (SOP 96-1) is effective for fiscal years that begin after December 15, 1996. SOP 96-1 provides guidance where remediation is required because of the threat of litigation, a claim or an assessment. This Statement does not provide guidance on accounting for pollution control costs as it applies to current operations, costs of future site restoration or closure that are required upon the cessation of operations or sale of facilities or for remediation obligations undertaken at the sole discretion of management. The adoption of SOP 96-1 is not expected to have a material impact on the financial position, results of operations or net cash flows of the Company. Outlook The electric utility industry is undergoing fundamental change through the introduction of competition and customer choice. The timing and scope of regulatory changes currently being proposed in New Jersey will have a significant impact on ACE's economic viability and ability to compete in the energy marketplace. Any legislative initiatives permitting the orderly and efficient transition to competition, through such means as market transition charges, tax reallocation or enabling amendments to existing laws, will serve to insure recovery of prudently incurred investments. In anticipation of heightened competition in energy markets, ACE is pursuing a number of initiatives designed to strengthen its position in the marketplace. The proposed merger and formation of Conectiv provides strategic and operational opportunities to better meet the coming competitive environment. Those opportunities are derived from increased financial strength, improved management, efficiencies of operations, better utilization and coordination of existing and future facilities. The proposed merger is part of a wider trend in the utility industry toward consolidation and strategic partnerships in order to create larger, stronger companies ready for the onset of competition. The receipt of all requisite regulatory approvals to consummate the merger is expected to be obtained by late 1997 or early 1998, but cannot be assured. The cost of ACE's power supply, including the cost of power purchased from independent power producers, along with its retail prices are expected to be critical success factors in a competitive marketplace. ACE is focusing on cost and rate control measures as well as the development of new energy-related products and services. Alternate pricing mechanisms and rate discounts for key at-risk customers will be necessary, and while having a long term economic benefit, will cause detrimental impacts on revenues and income in the near term. New value-added products and services for the retail energy consumer which create customer loyalty and satisfaction will be a keystone of the Company's strategic business focus. AEI's utility business will continue to be affected by regional economic trends and social initiatives, as well as the impacts of abnormal weather and inflation. Such regional economic trends are favorable and include the growth of the Atlantic City gaming industry which appears poised for a "second wave" of development. Ongoing requirements for service reliability, and compliance with existing and new environmental regulations, will cause additional capital investments to be made by ACE. ACE's planned construction budget is $417 million for the five year period beginning in 1997 with an expected reduction in its external cash requirements. ACE's ability to generate cash flows or access the capital markets may be affected by competitive pressures on revenues and income. The operational performance of ACE's jointly-owned nuclear units, as well as significant changes in the costs to decommission those facilities at the end of their useful lives, will continue to be a factor in ACE's financial results. ACE will attempt to mitigate such factors whenever possible. ACE has entered into a performance-based agreement with PS, the operator of the Salem Station to limit its exposure for operations and maintenance expenses in 1997. To the extent that ACE derives a savings in 1997 O&M expenditures, those savings will offset unrecovered replacement power costs incurred as a result of the unavailability of the Salem units. AEI's utility business will continue to be the primary factor influencing the Company's overall financial performance. However, growth in new business ventures such as ATS and enabling strategic alliances like Enerval, LLC, will require the efficient development of entrepreneurial expertise and financial resources to be successful. Inflation Inflation affects the level of operating expenses and also the cost of new utility plant placed in service. Traditionally, the rate making practices that have applied to ACE have involved the use of historical test years and the actual cost of utility plant. However, the ability to recover increased costs through rates, whether resulting from inflation or otherwise, depends upon both market circumstances and the frequency, timing and results of rate case decisions. Other The Private Securities Litigation Reform Act of 1995 (the Act) provides a new "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation providing those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward- looking statements have been and will be made in written documents and oral presentation of AEI and its subsidiaries. Such statements are based on managements beliefs as well as assumptions made by and information currently available to management. When used in AEI and subsidiary documents or oral presentation, the words "anticipate", "estimate", "expect", "objective" and similar expressions are intended to identify such forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: deregulation, and the unbundling of energy supplies and services; an increasingly competitive energy marketplace; sales retention and growth potential in a mature service territory and a need to contain costs; ability to obtain adequate and timely rate relief, cost recovery, including the potential impact of stranded costs, and other necessary regulatory approvals; federal and state regulatory actions; costs of construction; operating restrictions, increased cost and construction delays attributable to environmental regulations; controversies regarding electric and magnetic fields; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; licensing and regulatory approval necessary for nuclear and other operating station; and credit market concerns with these issues. AEI and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by AEI and its subsidiaries prior to the effective date of the Act. ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY The information required by this item is incorporated herein by reference from the following portions of AEI's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to ACE and its subsidiary: Financial Summary, Liquidity and Capital Resources - Atlantic City Electric Company, Results of Operations, Salem Nuclear Generating Station, Competition, Outlook, Inflation and Other. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT-Atlantic Energy, Inc. The management of Atlantic Energy, Inc. and its subsidiaries (the Company) is responsible for the preparation of the consolidated financial statements presented in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported. Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting. In any system of financial reporting controls, inherent limitations exist. Management continually examines the effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified. Management believes that, as of December 31, 1996, the system of internal accounting and financial controls over financial reporting is effective. Management also recognizes its responsibility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. The consolidated financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants. Deloitte & Touche LLP, provides objective, independent audits as to management's discharge of its responsibilities insofar as they relate to the fairness of the financial statements. Their audits are based on procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement. The Company's internal auditing function conducts audits and appraisals of the Company's operations. It evaluates the system of internal accounting, financial and operational controls and compliance with established procedures. Both the external auditors and the internal auditors periodically make recommendations concerning the Company's internal control structure to management and the Audit Committee of the Board of Directors. Management responds to such recommendations as appropriate in the circumstances. None of the recommendations made for the year ended December 31, 1996 represented significant deficiencies in the design or operation of the Company's internal control structure. /s/ J. L. Jacobs /s/ M. J. Barron J. L. Jacobs M. J. Barron Chairman and Vice President and Chief Executive Officer Chief Financial Officer February 7, 1997 REPORT OF THE AUDIT COMMITTEE The Audit Committee of the Board of Directors is comprised solely of independent directors. The members of the Committee are: Matthew Holden, Jr., Kathleen MacDonnell, Bernard J. Morgan and Harold J. Raveche. The Committee held 5 meetings during 1996. The Committee oversees the Company's financial reporting process on behalf of the Board of Directors. In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder ratification, the selection of the Company's independent auditors, Deloitte & Touche LLP. The Committee discussed with the Company's internal auditors and Deloitte & Touche LLP, the overall scope of and specific plans for their respective activities concerning the Company. The Committee meets regularly with the internal and external auditors, without management present, to discuss the results of their activities, the adequacy of the Company's system of accounting, financial and operational controls and the overall quality of the Company's financial reporting. The meetings are designed to facilitate any private communication with the Committee desired by the internal and external auditors. No significant actions by the Committee were required during the year ended December 31, 1996 as a result of any communications conducted. /s/ Matthew Holden, Jr. Matthew Holden, Jr. Chairman, Audit Committee February 7, 1997 INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of Atlantic Energy, Inc.: We have audited the accompanying consolidated balance sheets of Atlantic Energy, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic Energy, Inc. and subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP February 7, 1997 Parsippany, New Jersey Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars, except per share amounts) For the Years Ended December 31, 1996 1995 1994 Operating Revenues-Electric $980,255 $953,137 $913,039 Operating Expenses: Energy 223,091 191,766 210,891 Purchased Capacity 195,699 190,570 130,929 Operations 156,799 152,060 156,409 Employee Separation Costs - - 26,600 Maintenance 44,418 34,379 37,568 Depreciation and Amortization 80,845 78,461 73,344 State Excise Taxes 104,815 102,811 97,072 Federal Income Taxes 32,272 45,876 33,264 Other Taxes 9,888 8,677 10,757 Total Operating Expenses 847,827 804,600 776,834 Operating Income 132,428 148,537 136,205 Other Income and Expense: Allowance for Equity Funds Used During Construction 879 817 3,634 Other-Net 663 8,241 8,678 Total Other Income and Expense 1,542 9,058 12,312 Income Before Interest Charges 133,970 157,595 148,517 Interest Charges: Interest on Long Term Debt 60,029 60,329 57,346 Other Interest Expense 4,818 2,550 1,114 Total Interest Charges 64,847 62,879 58,460 Allowance for Borrowed Funds Used During Construction (976) (1,679) (2,772) Net Interest Charges 63,871 61,200 55,688 Less Preferred Securities Dividend Requirements of Subsidiary 11,332 14,627 16,716 Net Income $ 58,767 $ 81,768 $ 76,113 Average Number of Shares of Common Stock Outstanding(in thousands) 52,702 52,815 54,149 Per Common Share: Earnings $1.12 $1.55 $1.41 Dividends Declared $1.54 $1.54 $1.54 Dividends Paid $1.54 $1.54 $1.54 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) For the Years Ended December 31, 1996 1995 1994 Cash Flows Of Operating Activities: Net Income $ 58,767 $ 81,768 $ 76,113 Unrecovered Purchased Power Costs 16,417 15,721 14,920 Deferred Energy Costs (2,095) (20,435) (3,819) Preferred Securities Dividend of ACE 11,332 14,627 16,716 Depreciation and Amortization 80,845 78,461 73,344 Deferred Income Taxes-Net 6,192 25,946 17,863 Unrecovered State Excise Taxes 9,560 9,560 (40,128) Employee Separation Costs (7,179) (19,112) 26,600 Net Changes Working Capital Components: Accounts Receivable&Unbilled Revenues (5,004) (24,400) 1,840 Accounts Payable 5,651 (5,222) 2,233 Inventory (2,602) 4,960 (12,988) Other 26,372 (18,406) (12,557) Other-Net (3,772) 4,893 (2,457) Net Cash Provided by Operating Activities 194,484 148,361 157,680 Cash Flows Of Investing Activities: Utility Construction Expenditures (86,805) (100,904) (119,961) Leased Nuclear Fuel Material (6,833) (10,446) (10,713) Nonutility Construction Expenditures (25,451) (5,226) (6,807) Other-Net (14,783) (23,794) (10,893) Net Cash Used by Investing Activities (133,872) (140,370) (148,374) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 45,075 168,904 54,572 Retirement/Maturity of Long Term Debt (12,266) (57,489) (42,664) Issuance of Cumulative Quarterly Income Preferred Securities 70,000 - - Increase in Short Term Debt 34,405 21,945 8,600 Proceeds from Common Stock Issued - - 10,289 Repurchase of Common Stock - (29,626) (3,909) Redemption of Preferred Stock-ACE (98,876) (24,500) (24,500) Dividends Declared-ACE Preferred Securities (11,332) (14,627) (16,716) Dividends Declared on Common Stock (81,163) (81,088) (75,829) Proceeds-Capital Lease Obligations 6,833 10,466 10,734 Other-Net (3,701) (1,399) 1,596 Net Cash Used by Financing Activities (51,025) (7,414) (77,827) Net Increase (Decrease) in Cash and Temporary Investments 9,587 577 (68,521) Cash and Temporary Investments: Beginning of year 5,691 5,114 73,635 End of year $ 15,278 $ 5,691 $ 5,114 Supplemental Schedule of Payments: Interest $ 68,551 $ 61,160 $ 62,855 Income taxes $ 28,101 $ 30,769 $ 23,374 Noncash Financing Activities: Common Stock issued under stock plans-net $ - $ 120 $ 7,652 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) December 31, 1996 1995 Assets Electric Utility Plant: In Service: Production $1,212,380 $1,187,169 Transmission 373,358 366,242 Distribution 731,272 691,830 General 191,210 183,935 Total In Service 2,508,220 2,429,176 Less Accumulated Depreciation 871,531 794,479 Utility Plant in Service-Net 1,636,689 1,634,697 Construction Work in Progress 117,188 119,270 Land Held for Future Use 5,604 6,941 Leased Property-Net 39,914 40,878 Electric Utility Plant-Net 1,799,395 1,801,786 Investments and Nonutility Property: Investment in Leveraged Leases 79,687 78,959 Nuclear Decommissioning Trust Fund 71,120 61,802 Nonutility Property and Equipment-Net 46,147 22,743 Other Investments and Funds 53,550 52,780 Total Investments and Nonutility Property 250,504 216,284 Current Assets: Cash and Temporary Investments 15,278 5,691 Accounts Receivable: Utility Service 64,432 66,099 Miscellaneous 32,547 17,477 Allowance for Doubtful Accounts (3,500) (3,300) Unbilled Revenues 33,315 41,515 Fuel (at average cost) 29,682 25,459 Materials and Supplies (at average cost) 23,815 25,434 Working Funds 15,517 14,421 Deferred Energy Costs 33,529 31,434 Prepaid Excise Tax 7,125 10,753 Other 11,354 13,339 Total Current Assets 263,094 248,322 Deferred Debits: Unrecovered Purchased Power Costs 83,400 99,817 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 54,714 64,274 Unamortized Debt Costs 44,423 39,004 Other Regulatory Assets 59,575 54,568 License Fees 17,733 - Other 12,066 7,975 Total Deferred Debits 357,769 351,496 Total Assets $2,670,762 $2,617,888 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) December 31, 1996 1995 Liabilities and Capitalization Capitalization: Common Shareholders' Equity: Common Stock, no par value; 75,000,000 shares authorized; issued and outstanding: 1996 - 52,502,479 ; 1995 - 52,531,878 $ 562,746 $ 563,436 Retained Earnings 227,630 249,741 Unearned Compensation (2,982) (3,008) Total Common Shareholders' Equity 787,394 810,169 Preferred Securities of Atlantic Electric: Not Subject to Mandatory Redemption 30,000 40,000 Subject to Mandatory Redemption 43,950 114,750 Cumulative Quarterly Income Preferred Securities 70,000 - Long Term Debt 829,745 829,856 Total Capitalization (excluding current portion) 1,761,089 1,794,775 Current Liabilities: Preferred Stock Redemption Requirement 10,000 22,250 Capital Lease Obligation-Current Portion 702 659 Long Term Debt-Current Portion 98,250 65,247 Short Term Debt 64,950 30,545 Accounts Payable 66,508 60,858 Taxes Accrued 7,504 3,450 Interest Accrued 20,241 20,315 Dividends Declared 21,701 23,490 Deferred Income Taxes 3,190 2,569 Provision for Rate Refunds 13,000 - Other 24,696 27,383 Total Current Liabilities 330,742 256,766 Deferred Credits and Other Liabilities: Deferred Income Taxes 434,108 425,875 Deferred Investment Tax Credits 46,577 49,112 Capital Lease Obligations 39,212 40,227 Other 59,034 51,133 Total Deferred Credits and Other Liabilities 578,931 566,347 Commitments and Contingencies (Note 10) Total Liabilities and Capitalization $2,670,762 $2,617,888 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Atlantic Energy, Inc. (the Company, AEI or parent) is the parent of Atlantic City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE) and Atlantic Energy International, Inc. (AEII), which are wholly-owned subsidiaries. ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. ACE's service territory encompasses approximately 2,700 square miles within the southern one-third of New Jersey with the majority of customers being residential and commercial. ACE, with its wholly-owned subsidiary that operates certain generating facilities, is the principal subsidiary within the consolidated group. AEE is a holding company which is responsible for the management of the investments in the nonutility companies consisting of: Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP), ATE Investment, Inc. (ATE), Atlantic Thermal Systems, Inc. (ATS), CoastalComm, Inc. (CCI) and Atlantic Energy Technology, Inc. (AET). AGI and its wholly-owned subsidiaries are engaged in the development, acquisition, ownership and operation of cogeneration power projects. AGI's activities, through its subsidiaries, are represented by partnership interests in cogeneration facilities located in New Jersey and New York. ASP owns and manages a commercial office and warehouse facility located in Atlantic County, New Jersey. ATE provides financing management and financing to affiliates and manages a portfolio of investments in leveraged leases for equipment used in the airline and shipping industries. In August 1996, ATE joined with an unaffiliated company to create EnerTech Capital Partners, L.P., an equity limited partnership that will invest in a variety of energy- related technology growth companies. ATS and its wholly-owned subsidiaries are engaged in the development and operation of thermal heating and cooling systems. CCI manages an investment in telecommunication technology. AEE also has a 50% equity interest in Enerval, LLC which provides energy management services, including natural gas supply, transportation and marketing. In July 1996, AEI formed a new subsidiary AEII, to provide utility consulting services and equipment sales to international markets. Pending Merger On August 12, 1996, the Boards of Directors of AEI and Delmarva Power & Light Company (DP&L) jointly announced an agreement to merge the companies into a new company named Conectiv, Inc. (Conectiv). Conectiv, a newly formed Delaware corporation, will become the parent of Atlantic Energy's subsidiaries and the parent of DP&L and its subsidiaries. DP&L is predominately a public utility engaged in electric and gas service. DP&L provides retail and wholesale electric service to customers located in about a 6,000 square mile territory located in Delaware, eastern shore counties in Maryland and the eastern shore area of Virginia. DP&L provides gas service to retail and transportation customers in an area consisting of about 275 square miles in Northern Delaware, including the City of Wilmington. The merger is to be a tax-free, stock-for-stock transaction accounted for as a purchase by Conectiv. Under the terms of the agreement, DP&L shareholders will receive one share of Conectiv's common stock for each share of DP&L common stock held. AEI shareholders will receive 0.75 shares of Conectiv's common stock and 0.125 shares of Conectiv's Class A common stock for each share of AEI common stock held. On January 30, 1997, the merger was approved by the shareholders of both companies. In order for the merger to become effective, approvals are still needed from a number of Federal and state regulatory agencies. The Company expects the regulatory approval process to be completed in late 1997 or early 1998. The total consideration to be paid to the Company's common stockholders, measured by the average daily closing market price of the Company's common stock for the ten trading days following public announcement of the merger, is $948.6 million. The consideration paid plus estimated acquisition costs and liabilities assumed in connection with the merger are expected to exceed the net book value of the Company's net assets by approximately $204.5 million, which will be recorded as goodwill by Conectiv. The goodwill will be amortized over 40 years. Selected information on each company at December 31, 1996 and the year then ended is shown below (in thousands, except for number of customers): AEI DP&L Operating Revenues $ 980,255 $1,094,961 Net Income $ 58,767 $ 116,187 Assets $2,670,762 $2,979,153 Electric Customers 477,611 442,116 Gas Customers - 100,904 Combination of the above amounts would not necessarily be reflective of the amounts that would result from a consolidation of the companies. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. ACE and AEE consolidate their respective subsidiaries. Ownership interests in other entities, between 20% and 50%, where control is not evident, are accounted for using the equity method of accounting. Certain prior year amounts have been reclassified to conform to the current year reporting of these items. Regulation - ACE The accounting policies and rates of service for ACE are subject to the regulations of the New Jersey Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission (FERC). ACE follows generally accepted accounting principles (GAAP) and financial reporting requirements employed by all industries as specified by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). However, accounting for rate regulated industries may depart from GAAP as permitted by Statement of Financial Accounting Standards No. 71 (SFAS No. 71). SFAS No. 71 provides guidance on circumstances where the economic effect of a regulator's decision warrants different applications of GAAP as a result of the rate making process. In setting rates, a regulator may provide recovery of an incurred cost in a year or years other than the year the cost was incurred. As permitted by SFAS No. 71, costs ordered by a regulator to be deferred or capitalized for future recovery are recorded as a regulatory asset because the regulator's rate action provides reasonable assurance of future economic benefits attributable to these costs. In a non-rate regulated industry, such costs are charged to expense in the year incurred. SFAS No. 71 further specifies that a regulatory liability is recorded when a regulator orders a refund to customers of revenues previously collected, or when existing rates provide for recovery of future costs not yet incurred. Such treatment is not afforded to non- rate regulated companies. When collection of regulatory assets or relief of regulatory liabilities is no longer probable, the assets and liabilities are applied to income in the year that the assessment is made. Specific regulatory assets and liabilities that have been recorded are discussed in Note 11. Electric Operating Revenues - ACE Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the year for energy used by customers subsequent to the last bill rendered for the calendar year. Nuclear Fuel - ACE Fuel costs associated with ACE's participation in jointly-owned nuclear generating stations, including spent nuclear fuel disposal costs, are charged to Energy expense based on the units of thermal energy produced. Electric Utility Plant and Depreciation - ACE Property is stated at original cost. Generally, Utility Plant is subject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, are capitalized. Included in certain property additions is an Allowance for Funds Used During Construction (AFDC), which is defined in the applicable regulatory system of accounts as the cost, during the period of construction, of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of 8.25% for all periods. ACE provides for straight-line depreciation based on: transmission and distribution property - estimated remaining life; nuclear property - remaining life of the related plant operating license in existence at the time of the last base rate case; other depreciable property - estimated average service life. The overall composite rate of depreciation was 3.3% for the last three years. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries. Nonutility Property and Equipment Nonutility Property and Equipment includes project development costs and construction work in progress, including capitalized interest, related to the development and construction of thermal heating and cooling systems of ATS. Capitalized interest related to Nonutility expenditures was not material to the financial results of the Company. ASP's commercial site, including the cost of improvements and certain preacquisition costs is stated at fair market value. In 1996 and 1994, management of the Company authorized write-downs of $1.2 million and $2.6 million, respectively, of the carrying value of this commercial site reflecting diminished value due to excess vacancy and the decline in the local commercial real estate market. Nuclear Plant Decommissioning Reserve - ACE A reserve for decommissioning costs is presented as a component of accumulated depreciation and amounted to $70.2 million and $60.9 million at December 31, 1996 and 1995, respectively. The SEC has questioned certain accounting practices employed by the electric utility industry concerning decommissioning costs for nuclear generating facilities. In 1996, the FASB issued a Proposed Statement of Financial Accounting Standard "Accounting for Certain Liabilities Related to Closure or Removal of Long-lived Assets" which would establish accounting standards for certain obligations that are incurred for the closure and removal of long-lived assets. Under the proposed statement, which includes decommissioning costs for nuclear generating facilities, a regulated utility would recognize a regulatory asset or liability for differences, if any, in the timing of recognition of the costs of closure and removal of assets for financial reporting purposes and rate making treatment. To date, the FASB has not issued a final accounting standard. Deferred Energy Costs - ACE As approved by the BPU, ACE has a Levelized Energy Clause (LEC) through which energy and energy-related costs (energy costs) are charged to customers. LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries. Generally, energy costs are recovered through levelized rates over the period of projection, which is usually a 12-month period. In any period, the actual amount of LEC revenues recovered from customers may be greater or less than the recoverable amount of energy costs incurred in that period. Energy expense is adjusted to match the associated LEC revenues. Any underrecovery (an asset representing energy costs incurred that are to be collected from customers) or overrecovery (a liability representing previously collected energy costs to be returned to customers) of costs is deferred on the Consolidated Balance Sheet as Deferred Energy Costs. These deferrals are recognized in the Consolidated Statement of Income as Energy expense during the period in which they are subsequently included in the LEC. Income Taxes Deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different than book income and tax carryforwards. Investment tax credits previously used for income tax purposes have been deferred on the Consolidated Balance Sheet and are recognized in book income over the life of the related property. The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to each of the companies within the consolidated group based on the separate return method. Cash & Temporary Investments AEI and ACE consider all highly liquid investments and debt securities purchased with a maturity of three months or less to be cash equivalents. Earnings Per Common Share This is computed based upon the weighted average number of common shares outstanding during the year. Common stock equivalents exist but are not included in the computation of earnings per share because they are currently antidilutive. Use of Estimates The preparation of financial statements in conformity with GAAP requires management at times to make certain judgments, estimates and assumptions that affect amounts and matters reported at the year end dates and for the annual periods presented. Actual results could differ from those estimates. Any change in the judgments, estimates and assumptions used, which in management's opinion would have a significant effect on the financial statements, will be reported when management becomes aware of such changes. Other Debt premium, discount and expense of ACE are amortized over the life of the related debt. Premiums associated with the 1996 Preferred Stock redemptions are being deferred and amortized over the life of the related Cumulative Quarterly Income Preferred Securities in accordance with BPU approval. In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On January 1, 1996, the Company adopted SFAS No. 121 and there was no material impact on its results of operations. The FASB issued Statement No. 123, "Accounting for Stock-Based Compensation"(SFAS No. 123), effective January 1, 1996. This statement encourages a fair value method to account for stock-based compensation, as an alternative to the intrinsic value currently permitted by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees". The Company is continuing to use the intrinsic value method presented by APB No. 25 to record compensation expense. See Note 4. NOTE 2. INCOME TAXES The components of Federal income tax expense for the years ended December 31 are as follows: (000) 1996 1995 1994 Current $ 27,061 $ 20,483 $ 19,729 Deferred 6,587 25,993 17,414 Investment Tax Credits Recognized on Leveraged Leases (78) (28) - Total Federal Income Tax Expense 33,570 46,448 37,143 Less Amounts in Other Income 1,298 572 3,879 Federal Income Taxes in Operating Expenses $ 32,272 $ 45,876 $ 33,264 A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate for the years ended December 31 follows: 1996 1995 1994 Statutory Federal Income Tax Rate 35% 35% 35% (000) Income Tax Computed at the Statutory Rate $ 36,058 $ 49,995 $ 45,490 Plant Basis Differences 3,096 1,307 (27) Amortization of Investment Tax Credits (2,612) (2,562) (2,534) Tax Adjustments (68) (897) (4,097) Other-Net (2,904) (1,395) (1,689) Total Federal Income Tax Expense $ 33,570 $ 46,448 $ 37,143 Effective Federal Income Tax Rate 33% 33% 29% State income tax expense is not significant. Items comprising deferred tax balances as of December 31 are as follows: (000) 1996 1995 Deferred Tax Liabilities: Plant Basis Differences $326,673 $316,834 Leveraged Leases 76,671 71,180 Unrecovered Purchased Power Costs 22,630 28,209 State Excise Taxes 20,141 22,527 Other 33,192 32,825 Total Deferred Tax Liabilities 479,307 471,575 Deferred Tax Assets: Deferred Investment Tax Credits 25,143 26,511 Employee Separation Costs 526 2,621 Other 16,340 13,999 Total Deferred Tax Assets 42,009 43,131 Total Deferred Taxes-Net $437,298 $428,444 At December 31, 1996 and 1995, deferred tax assets exist for cumulative state income tax net operating loss (NOL's) carryforwards. Valuation allowances of virtually the same amounts have been recorded. The effects of the state NOL's and associated valuation allowances are not material to consolidated results of operations and financial position. At December 31, 1996 unexpired state NOL's amount to approximately $72 million, with expiration dates from 1997 through 2003. As of December 31, 1996, AEI used the balance of its Federal Alternative Minimum Tax credit. This credit was included in the tax effects of the ATE leveraged leases. NOTE 3. RATE MATTERS OF ACE Energy Clause Proceedings Changes in Levelized Energy Clause Rates 1994 - 1996 Amount Amount Date Requested Granted Date Filed (millions) (millions) Effective 2/94 $63.0 $55.0 7/94 4/95 37.0 37.0 7/95 3/96 49.7 27.6 7/96 ACE's LEC is subject to annual review by the BPU. In February 1994, ACE filed a petition with the BPU requesting an increase in LEC revenues of $63 million for the period June 1, 1994 through May 31, 1995. This filing introduced the Southern New Jersey Economic Initiative (SNJEI), an ACE initiative designed to phase in the impact of nonutility purchased power contracts by forgoing the recovery of $28 million in energy costs incurred during the 1994/1995 LEC period. In November 1994, the BPU approved the continuation of a provisional LEC rate increase of $55 million that had been in effect since July 1994. In April 1995, ACE filed a petition with the BPU requesting a $37 million increase in LEC revenues for the period June 1, 1995 through May 31, 1996. ACE reduced the amount requested by $10 million under the SNJEI. ACE also reduced the request by $20.6 million for deferral, without carrying costs, to be recovered in the next LEC period. In March 1996, the BPU approved the continuance of the provisional increase of $37 million that had been in effect since July 1995. On March 29, 1996, ACE submitted to the BPU a request for a $49.7 million increase in annual LEC revenues effective June 1, 1996. The request included the recovery of $20.6 million of LEC costs previously deferred from the 1995 LEC request as well as a proposal to defer $14.7 million of 1996/1997 LEC costs, to be recovered without carrying costs in the next LEC period. A stipulation was reached among ACE, the New Jersey Division of the Ratepayer Advocate (Ratepayer Advocate) and the Staff of the BPU (collectively the parties) and approved by the BPU on July 17, 1996, allowing ACE to implement provisional rates resulting in an increase of annual LEC revenues of $27.6 million. The stipulation provided for hearings to decide the following LEC rate issues: recovery of $27.8 million for the estimated replacement power costs related to the Salem Nuclear Generating Station (Salem) Unit 1 and 2 outages; $1.7 million in deferred replacement power costs associated with a 1994 Salem Unit 1 outage and $1.7 million in New Jersey emission fees. The provisional LEC rates also included the deferral of $6.4 million in 1996/97 LEC costs to be recovered without carrying costs in the next LEC period. On December 19 and December 31, 1996, the BPU issued Orders approving two stipulations reached on October 22, 1996 among the parties settling certain issues concerning the LEC petition. The issue of the $1.7 million in emission fees remains unresolved. See Other Rate Proceedings below and Note 10 for information relating to the return to service of Salem Station. ACE filed a petition with the BPU on February 28, 1997 for a request of $20.0 million for the 1997/1998 LEC period. Other Rate Proceedings The Ratepayer Advocate has previously alleged that ACE, along with other New Jersey electric utility companies, were recovering cogeneration capacity costs concurrently in base rates and LEC rates. ACE and other New Jersey electric utilities have entered into separate stipulations of settlement with respect to this matter. ACE's stipulation of settlement specifies that ACE would provide credits to customers totaling $1.0 million during the months of January and February 1997 based on customers usage between January 1, 1996 and October 31, 1996. All issues raised previously with regard to alleged overrecovery of nonutility capacity costs are deemed closed and resolved. By an Order dated March 14, 1996 the BPU initiated an investigation of the ongoing outage at Salem. ACE has a 7.41% ownership in Salem which is operated by Public Service Electric and Gas Company (PS). By its Order, the BPU declared the base rates associated with ACE's ownership in Salem Unit 1 interim and subject to refund pending a hearing as to whether Salem Unit 1 is currently used and useful. The BPU, in an Order dated June 26, 1996, also declared the base rates associated with ACE's ownership in Salem Unit 2 interim and subject to refund. The BPU voted on July 31, 1996 to include Unit 2 in the hearings originally scheduled for October 1996 to determine if both units were still considered used and useful. On December 31, 1996, the BPU issued an Order approving a stipulation of settlement among the parties relating to the ongoing outage of the Salem Station. Under the terms of the stipulation, ACE provided credits to customers totaling $12.0 million. The credits were made during January and February 1997 and were based on customer usage between January 1, 1996 and October 31, 1996. The stipulation also provided that replacement power costs incurred, up to the agreed upon return-to-service dates (June 30, 1997 for Unit 1 and December 31, 1996 for Unit 2) will be recoverable in the next annual LEC revenue proceeding. Should either unit not return to service by its agreed upon return-to-service date, replacement power costs incurred after such dates will not be recoverable by ACE. In addition, the stipulation provided that the performance of the Salem Units will not be included in the calculation of the BPU Nuclear Performance Standard from the period each unit was taken out of service to each unit's respective return-to-service date. As such, ACE was not subject to a penalty or reward under the Nuclear Performance Standard for 1995 or 1996. Net income reflects a net charge of $7.6 million, net of tax, ACE recorded in 1996 as a result of the stipulations regarding the Provision for Rate Refund discussed above. The net charge consists of a $13 million reduction in revenues, a reduction of $1.3 million in operations expense for amounts previously recorded for the nuclear performance penalty and a Federal income tax benefit of $4.1 million. On January 8, 1997, the BPU approved a stipulation related to its generic proceeding for methods of implementing FASB Statement of Financial Accounting Standard No. 106 - "Employers' Accounting for Post-retirement Benefits Other Than Pensions" (SFAS No. 106). SFAS No. 106 required publicly held companies to change from the practice of accounting for post-retirement benefits such as medical benefits, hospitalization and life insurance (OPEB), on a pay-as-you-go basis to an accrual basis of accounting. For the transition, SFAS No. 106 required that companies recognize an obligation composed of the present value of OPEB obligations for retirees and current employees incurred as of the date of adoption. SFAS No. 71 allowed the recognition of a regulatory asset relating to costs for which rate recovery has been deferred. By an Order dated August 1, 1996, the BPU initiated a generic proceeding to inquire into methods of implementing recovery of SFAS No. 106 expenses through utility rates. Under the terms of a stipulation, ACE will file a petition requesting ratemaking treatment of OPEB expenses in the second quarter of 1997. See Notes 4 and 11 for further information regarding OPEB expenses and the corresponding regulatory asset. NOTE 4. BENEFITS Retirement Benefits - ACE Pension ACE has a noncontributory defined benefit pension plan covering substantially all of its employees and those of its wholly-owned subsidiary. Benefits are based on an employee's years of service and average final pay. ACE's policy is to fund pension costs within the guidelines of the minimum required by the Employee Retirement Income Security Act and the maximum allowable as a tax deduction. Net periodic pension costs include: (000) 1996 1995 1994 Service cost-benefits earned during the period $ 6,870 $ 6,363 $ 6,871 Interest cost on projected benefit obligation 14,569 14,794 15,390 Actual return on plan assets (36,443) (44,067) (860) Other-net 19,123 28,379 (16,885) Net periodic pension costs $ 4,119 $ 5,469 $ 4,516 Of these costs, $3.0 million annually was charged to operating expense in 1996, 1995 and 1994. The remaining costs, which are associated with construction labor, were charged to the cost of new utility plant. Actual return on plan assets and Other-net for 1996 and 1995 primarily reflect the favorable market conditions from the investment of plan assets and expected returns compared with unfavorable market conditions in 1994. A reconciliation of the funded status of the plan as of December 31 is as follows: (000) 1996 1995 Fair value of plan assets $236,000 $212,000 Projected benefit obligation 207,340 213,470 Plan assets in excess of (less than) projected benefit obligation 28,660 (1,470) Unrecognized net transition asset (1,377) (1,550) Unrecognized prior service cost 259 282 Unrecognized net(gain)loss (18,958) 10,006 Prepaid pension cost $ 8,584 $ 7,268 Accumulated benefit obligation: Vested benefits $170,751 $169,044 Nonvested benefits 2,023 3,413 Total $172,774 $172,457 At December 31, 1996, approximately 66% of plan assets were invested in equity securities, 25% in fixed income securities and 9% in other investments. The assumed rates used in determining the actuarial present value of the projected benefit obligation at December 31 were as follows: 1996 1995 1994 Weighted average discount 7.5% 7.0% 8.0% Anticipated increase in compensation 3.5% 3.5% 3.5% Assumed long term rate of return 8.5% 8.5% 8.5% Other Postretirement Benefits ACE and its subsidiary provide certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the companies. Benefits are provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. ACE has a tax-qualified trust to fund these benefits. Net periodic other postretirement benefit costs include: (000) 1996 1995 1994 Service cost-benefits attributed to service during the period $ 2,688 $ 2,891 $ 3,817 Interest cost on accumulated postretirement benefits obligation 7,482 8,107 8,450 Actual return on plan assets (771) (1,437) 100 Amortization of unrecognized transition obligation 2,768 3,893 3,893 Other-net 215 404 (700) Net periodic other postretirement costs $12,382 $13,858 $15,560 These costs were allocated as follows: (millions) 1996 1995 1994 Operating expense $3.6 $3.1 $3.8 New utility plant-associated with construction labor 2.4 2.5 2.0 Regulatory asset 6.4 8.3 9.8 The regulatory asset represents the amount of annual costs in excess of the amount of cost currently recovered in rates. These excess costs are deferred as authorized by an accounting order of the BPU pending future recovery through rates. See Note 3 for additional information. A reconciliation of the funded status of the plan as of December 31 is as follows: (000) 1996 1995 Accumulated benefits obligation: Retirees $ 63,095 $ 64,516 Fully eligible active plan participants 4,038 6,954 Other active plan participants 39,972 33,649 Total accumulated benefits obligation 107,105 105,119 Less fair value of plan assets 18,000 16,500 Accumulated benefits obligation in excess of plan assets 89,105 88,619 Unrecognized net loss (12,207) (15,335) Unamortized unrecognized transition obligation (44,289) (47,057) Accrued other postretirement benefits cost obligation $ 32,609 $ 26,227 At December 31, 1996, approximately 75% of plan assets were invested in fixed income securities and 25% in other investments. The assumed health care costs trend rate for 1997 is 8% and is assumed to evenly decline to an ultimate constant rate of 5% in the year 2001 and thereafter. If the assumed health care costs trend rate was increased by 1% in each future year, the aggregate service and interest costs of the 1996 net periodic benefits cost would increase by $1.3 million, and the accumulated postretirement benefits obligation at December 31, 1996 would increase by $10.8 million. The weighted average discount rate assumed in determining the accumulated benefits obligation was 7.5%, 7% and 7.5% for 1996, 1995 and 1994, respectively. The assumed long term return rate on plan assets was 7% for each of the three year periods. Other Savings and Investment Plans A and B (401(k)) ACE has two 401(k) plans for union and non-union employees that match plan contributions up to 6% of a participating employee's base pay. The rate at which Company contributions are made is 50%. All full and part-time employees are eligible to participate. The cost of the plans for 1996, 1995 and 1994 was $1.9 million, $1.9 million and $2.0 million, respectively. Equity Incentive Plan(EIP) - AEI Eligible participants of the EIP are officers, general managers and nonemployee directors of the Company and its subsidiaries. Under the EIP, nonemployee director participants are entitled to receive a grant of 1,000 shares of restricted stock. Restrictions on these grants expire over a five-year period. Employee participants may be awarded shares of restricted common stock, stock options and other common stock-based awards. Actual awards of restricted shares are based on attainment of certain Company performance criteria within a three-year period. Restrictions lapse upon actual award at the end of the three- year performance period. Shares not awarded are forfeited. Dividends earned on restricted stock issued through the EIP are invested in additional restricted stock under the EIP which is subject to the same award criteria. Restricted stock activity of the EIP, initiated in April 1994, was as follows: Weighted Average Restricted Fair Value Shares Grant Date Issued/Granted 175,712 $20.975 Balance, December 31, 1994 175,712 Issued/Granted 24,435 Forfeited (7,587) Balance, December 31, 1995 192,560 20.697 Issued/Granted 237,782 Forfeited (207,805) Balance, December 31, 1996 222,537 19.160 The 1996 and 1995 restricted shares granted include 13,786 shares and 7,614 shares, respectively, purchased on the open market from reinvestment of dividends on EIP shares outstanding. Compensation expense for the restricted stock has been measured based on the intrinsic value of the stock. The total compensation expense for the years 1996 through 1994 amounted to less than $.7 million and reflect an adjustment for the restricted shares associated with the first three-year period that were not awarded and were forfeited. Stock options granted are nonqualified and are exercisable three years after but within ten years from the date of grant. Stock options are priced at an amount at least equal to 100% of the fair market value of the related common stock at the date of grant. The Company applied APB No. 25 in accounting for its EIP plan. Accordingly, no compensation expense has been recognized for its stock option plan. Fair value compensation cost of the options was determined using the Black-Scholes model with the following assumptions for 1996: dividend yield of 7.9%, an average expected life of 3-7 years, expected volatility of 17.85% and a risk-free interest rate of 5.04%. Option information is as follows: 1996 1995 Weighted Weighted Average Average Exercise Exercise Options Shares Price Shares Price Outstanding beginning of year 166,987 $ 21.125 167,300 $21.125 Granted 207,250 19.296 6,387 21.125 Forfeited (2,800) 21.125 (6,700) 21.125 Outstanding at end of year 371,437 20.105 166,987 21.125 Options exercisable at year end - - Weighted Average Fair Value of Options Granted $1.33 N/A The combined effects of accounting for restricted shares and options under the EIP plans consistent with the fair value disclosure requirements of SFAS No. 123 upon the net income of the Company for 1996 is less than $.2 million and as such is not considered material. NOTE 5. JOINTLY-OWNED GENERATING STATIONS - ACE ACE owns jointly with other utilities several electric production facilities. ACE is responsible for its pro-rata share of the costs of construction, operation and maintenance of each facility. The amounts shown represent ACE's share of each facility at, or for the year ended, December 31, including AFDC as appropriate. Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Coal Nuclear Nuclear Nuclear Company's Share (%/MWs) 2.47/42.3 3.83/65.4 7.51/164.0 7.41/164.0 5.00/52.0 (000) Electric Plant in Service: 1996 $13,275 $34,489 $130,011 $218,603 $240,079 1995 12,719 35,371 128,398 214,306 239,499 Accumulated Depreciation: 1996 $ 3,609 $ 7,333 $ 54,854* $ 79,635* $ 68,286* 1995 3,277 6,445 50,825* 73,088* 60,998* Construction Work in Progress: 1996 $ 300 $ 270 $ 12,992 $ 27,015 $ 1,321 1995 442 873 11,056 11,198 655 Operations and Maintenance Expenses (including fuel): 1996 $ 5,626 $ 7,507 $ 29,337 $ 34,403 $ 10,899 1995 5,143 7,252 29,647 28,306 10,360 1994 5,085 7,211 29,530 27,731 10,471 Working Funds: 1996 $ 44 $ 69 $ 3,833 $ 7,252 $ 3,545 1995 44 69 4,505 5,782 1,919 Generation (MWHr): 1996 311,934 436,289 1,275,371 - 336,872 1995 285,899 451,211 1,232,921 334,572 352,316 1994 257,561 419,313 1,214,776 836,725 355,390 * Excludes Nuclear Decommissioning Reserve. ACE provides financing during the construction period for its share of the jointly-owned facilities and includes its share of direct operations and maintenance expenses in the Consolidated Statement of Income. Additionally, ACE provides an amount of working funds to the operators of the facilities to fund operational needs. The decrease in Salem's generation for 1996 and 1995 is due to both Units 1 and 2 being taken out of service in May and June 1995, respectively, by its operator PS for review and resolution of certain equipment and management issues. Effective December 31, 1996, ACE entered into an agreement with PS in its capacity as operator of Salem for the purpose of limiting ACE's exposure to operation and maintenance expenses to be incurred during calendar year 1997. See Note 10 for further information concerning Salem Nuclear Generating Station. NOTE 6. NONUTILITY COMPANIES Principal assets of each of the subsidiary companies of AEE at December 31, 1996 were: AGI - investments of approximately $21.8 million in cogeneration facilities; ASP - commercial real estate site with a net book value of $8.5 million; ATE - leveraged lease investments of $79.7 million and $7.3 million invested in EnerTech Capital Partners, L.P.; ATS - construction costs in thermal heating and cooling projects of $29.3 million. CCI has $0.5 million invested in telecommunication licenses. Other financial information regarding the subsidiary companies is as follows: Net Worth Net Income (Loss) Company 1996 1995 1996 1995 1994 (000) AGI $21,361 $26,082 $ 979 $2,513 $ 2,959 ASP 561 2,334 (1,773) (841) (1,956) ATE 11,139 9,399 71 (50) 266 ATS 2,498 2,187 311 (213) (327) CCI 544 5,258 (18) - - AGI's results in each year primarily reflect the equity in earnings of cogeneration facilities in which AGI has an ownership interest. AGI's 1996 results reflect the contingency of a $1.6 million net of tax loss from the sale of a cogeneration facility located in New York. ASP's results in each year reflect the vacancy in its commercial site due to generally poor market conditions in commercial real estate. Additionally, 1996 and 1994 include net after tax write-downs of the carrying value of the commercial site of $0.8 million and $1.7 million, respectively. ATE's 1996 and 1995 results reflect changes in interest expense associated with its revolving credit and term loan agreement during each year. ATS's results for the years 1996 and 1995 reflect administrative and general costs for business development and construction of heating and cooling systems. Operating expenses were offset in part by revenues generated from the operation and maintenance of customer heating and cooling facilities in 1996 and 1995. ATS has agreements with three casinos in Atlantic City, New Jersey to operate their heating and cooling systems. As part of these agreements, ATS has paid $18.0 million in license fees for the right to operate and service such systems for a period of 20 years. These fees are recorded on the Consolidated Balance Sheet as License Fees and are being amortized to expense over the life of the contracts. AEI and AEE parent-only operations, excluding equity in the results of subsidiary companies, generally reflect administrative and general expenses for management of their respective subsidiaries. AEI incurred losses of $3.6 million and $1.6 million in 1996 and 1995, respectively. AEI's 1996 results reflect the impact of merger-related costs. AEI's 1996 and 1995 results also reflect interest charges associated with a line of credit established to fund repurchases of common stock and certain affiliate capital needs. AEE incurred losses of $1.7 million and $2.4 million in 1996 and 1995, respectively. AEE 1996 activity reflects an after tax loss of $1.1 million from its equity investment in Enerval, LLC, due to a combination of unhedged gas sales agreements and higher spot market prices for gas. AEII reflects a net loss of $0.6 million in 1996 due to the consulting and administrative costs of developing a new line of business. NOTE 7. CUMULATIVE PREFERRED SECURITIES OF ACE ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, two million shares of No Par Preferred Stock and three million shares of Preference Stock, No Par Value. Information relating to outstanding shares at December 31 is shown in the table below. Current Optional Par 1996 1995 Redemption Series Value Shares (000) Shares (000) Price Not Subject to Mandatory Redemption: 4% $100 77,000 $ 7,700 77,000 $ 7,700 $105.50 4.10% 100 72,000 7,200 72,000 7,200 101.00 4.35% 100 15,000 1,500 15,000 1,500 101.00 4.35% 100 36,000 3,600 36,000 3,600 101.00 4.75% 100 50,000 5,000 50,000 5,000 101.00 5% 100 50,000 5,000 50,000 5,000 100.00 7.52% 100 - - 100,000 10,000 - Total $30,000 $ 40,000 Subject to Mandatory Redemption: $8.25 None - $ - 50,000 $ 5,000 - $8.53 None - - 120,000 12,000 - $8.20 None 300,000 30,000 500,000 50,000 - $7.80 None 239,500 23,950 700,000 70,000 - Total 53,950 137,000 Less portion due within one year 10,000 22,250 Total $43,950 $114,750 Cumulative Quarterly Preferred Income Securities: 8.25% None 2,800,000 $70,000 $ - - Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of ACE. If preferred dividends are in arrears for at least a full year, preferred stockholders have the right to elect a majority of directors to the Board of Directors until all dividends in arrears have been paid. On February 1, 1996, ACE redeemed the remaining 120,000 shares of its $8.53 No Par Preferred Stock at a price of $101.00 per share. On August 1, 1996, ACE redeemed 200,000 shares of its $8.20 No Par Preferred Stock at a price of $100 per share in accordance with its annual sinking fund requirement. Sinking fund provisions require 100,000 shares be redeemed annually on August 1st and, at ACE's option, an additional 100,000 shares may be redeemed on any sinking fund date without premium. On September 16, 1996, ACE redeemed 100,000 shares of its 7.52% Preferred Stock $100 Par Value at a price of $101.88 per share and the remaining 50,000 shares of its $8.25 No Par Preferred Stock at a price of $104.45 per share. On August 29, 1996, a tender offer was initiated for ACE's $7.80 No Par Preferred Stock. Pursuant to the tender offer and subsequent agreements, ACE purchased a total of 460,500 shares at a price of $111.00 per share. In accordance with BPU approval, premiums associated with these redemptions are being deferred and amortized over the life of the 8.25% Cumulative Quarterly Income Preferred Securities. Beginning May 1, 2001, 115,000 shares of the remaining $7.80 No Par Preferred Stock must be redeemed annually through the operation of a sinking fund at a redemption price of $100 per share. ACE has the option to redeem up to an additional 115,000 shares without premium on any annual sinking fund date. Embedded cost of Preferred Securities as of December 31, 1996, 1995 and 1994 was 7.4%, 7.4% and 7.6%, respectively. At December 31, 1996, the minimum annual sinking fund requirements of the Cumulative Preferred Stock Subject to Mandatory Redemption for the next five years are $10 million in each of the years 1997 through 1999 and $11.5 million in 2001. On October 1, 1996, Atlantic Capital I, a newly formed grantor trust, issued $70 million of 8.25% Cumulative Quarterly Income Preferred Securities (CQIPS) with a stated liquidation preference of $25 each. Atlantic Capital I, established for the sole purpose of issuing the CQIPS, invested the proceeds in 8.25% Junior Subordinated Deferrable Interest Debentures (Junior Debentures) of ACE. ACE reserves the right to defer payment of interest on the debentures for up to 20 consecutive quarters. During such a deferral period, certain dividend restrictions would apply to ACE's Common and Preferred stock. The CQIPS and Junior Debentures are scheduled to mature on October 1, 2026, but such maturity may be extended to a date not later than October 1, 2045, if certain conditions are met. Proceeds from the sale of the Junior Debentures were used to fund the redemption and purchase of shares of ACE's preferred stock described above. Atlantic Capital I is a grantor trust of ACE and as such, the transactions of the trust are consolidated into the financial statements of ACE. The Junior Debentures are eliminated in consolidation. NOTE 8. DEBT Maturity December 31, Series Date 1996 1995 (000) 5-1/8% First Mortgage Bonds 2/1/1996 $ - $ 9,980 Medium Term Notes Series B (6.28%) 1998 56,000 56,000 Medium Term Notes Series A (7.52%) 1999 30,000 30,000 Medium Term Notes Series B (6.83%) 2000 46,000 46,000 Medium Term Notes Series C (6.86%) 2001 40,000 40,000 7-1/2% First Mortgage Bonds 4/1/2002 20,000 20,000 Medium Term Notes Series C (7.02%) 2002 30,000 30,000 Medium Term Notes Series B (7.18%) 2003 20,000 20,000 7-3/4% First Mortgage Bonds 6/1/2003 29,976 29,976 Medium Term Notes Series A (7.98%) 2004 30,000 30,000 Medium Term Notes Series B (7.125%) 2004 28,000 28,000 Medium Term Notes Series C (7.15%) 2004 9,000 9,000 Medium Term Notes Series B (6.45%) 2005 40,000 40,000 6-3/8% Pollution Control Series 12/1/2006 2,500 2,500 Medium Term Notes Series C (7.15%) 2007 1,000 1,000 Medium Term Notes Series B (6.76%) 2008 50,000 50,000 Medium Term Notes Series C (7.25%) 2010 1,000 1,000 6-5/8% First Mortgage Bonds 8/1/2013 75,000 75,000 7-3/8% Pollution Control Series A 4/15/2014 18,200 18,200 Medium Term Notes Series C (7.63%) 2014 7,000 7,000 Medium Term Notes Series C (7.68%) 2015 15,000 15,000 Medium Term Notes Series C (7.68%) 2016 2,000 2,000 8-1/4% Pollution Control Series A 7/15/2017 4,400 4,400 6.80% Pollution Control Series A 3/1/2021 38,865 38,865 7% First Mortgage Bonds 9/1/2023 75,000 75,000 5.60% Pollution Control Series A 11/1/2025 4,000 4,000 7% First Mortgage Bonds 8/1/2028 75,000 75,000 6.15% Pollution Control Series A 6/1/2029 23,150 23,150 7.20% Pollution Control Series A 11/1/2029 25,000 25,000 7% Pollution Control Series B 11/1/2029 6,500 6,500 Total 802,591 812,571 Debentures: 5-1/4% 2/1/1996 - 2,267 7-1/4% 5/1/1998 2,600 2,619 Total 2,600 4,886 Amortized Premium and Discount-Net (2,771) (2,854) Total Long Term Debt-ACE 802,420 814,603 Less Portion Due within one year-ACE 175 12,247 Long Term Debt-ACE 802,245 802,356 Long Term Debt-AEI 37,575 34,500 Long Term Debt-ATE 33,500 33,500 Long Term Debt-ATS 54,500 12,500 Less Portion Due within One Year 98,075 53,000 $829,745 $829,856 Medium Term Notes have varying maturity dates and are shown with the weighted average interest rate of the related issues within the year of maturity. Substantially all of ACE's utility plant is subject to the lien of the Mortgage and Deed of Trust dated January 15, 1937, as amended and supplemented, collateralizing ACE's First Mortgage Bonds. ACE ACE had authority to issue $150 million in short term debt, comprised of $100 million of committed lines of credit and $50 million on a when offered basis. At December 31, 1996 ACE had $85.1 million of unused short-term borrowing capacity. ACE's weighted daily average interest rate on short term debt was 5.6% for 1996 and 6.3% for 1995. On February 1, 1996, $9.98 million of 5-1/8% First Mortgage Bonds and $2.267 million of 5-1/4% Debentures of the Company matured. On May 1, 1996, the Company satisfied the sinking fund requirements of $0.1 million for its 7-1/4% Debentures. At December 31, 1996, 1995 and 1994, ACE's embedded cost of long term debt was 7.5%, 7.5% and 7.6%, respectively. AEE Long term debt of ATE includes $15 million of 7.44% Senior Notes due 1999. Also, ATE has a revolving credit and term loan agreement which provides for borrowings of up to $25 million during successive revolving credit and term loan periods through June 1997. There were $18.5 million in borrowings outstanding under this agreement at December 31, 1996 and 1995. Interest rates on borrowings when outstanding are determined by reference to periodic pricing options available under the facility. ATE was charged interest rates ranging from 5.8% to 6.5% on these loans during 1996. In December 1995, ATS through a partnership arrangement, borrowed $12.5 million of proceeds from the sale of special, limited bonds issued by the New Jersey Economic Development Authority due December 1, 2009. The bonds paid an initial rate of 3.7% for the 120 day period ending on April 30, 1996. The bonds were subject to a mandatory tender and were remarketed at fixed rates ranging from 3.5% to 3.6% twice within the year. The borrowed funds are currently restricted in trust and invested in U. S. Treasury Securities. The availability of the borrowed funds for their intended use and the ultimate term of the borrowings are subject to certain conditions. The bonds may be remarketed for additional periods until December 1998, at which time, the bonds must be redeemed if the escrow release conditions are not satisfied. ATS cannot estimate, with any certainty, when or if the conditions attached to the escrow release will be satisfied. In August 1996, ATS established a $100 million revolving credit and term loan facility, of which up to $20 million can be used to establish letters of credit. As of December 31, 1996, $42 million was outstanding under this facility. Interest rates on borrowings are based on senior debt ratings and on the borrowing options selected by ATS. Interest rates on the borrowings outstanding ranged from 5.8% to 6.0% in 1996. This facility will be primarily used for construction of the Midtown Energy Center in Atlantic City, New Jersey which began in November 1996. Aggregate commitment fees on unused credit lines of revolving AEE credit agreements were not significant. AEI Under AEI's $75 million revolving credit and term loan facility, AEI had $37.6 million and $34.5 million outstanding in borrowings at December 31, 1996 and 1995, respectively. Interest rates are based on senior debt ratings and on the borrowing option selected by AEI. Interest on the borrowings outstanding ranged from 5.59% to 8.25% for 1996. This facility, established in September 1995, has been used to fund acquisitions of Company common stock and other general corporate purposes. Commitment fees were not significant. AEI's weighted daily average interest rate on its short term debt was 6.3% for 1995. AEI had no short term debt in 1996. Long Term Debt Maturities and Sinking Fund Requirements ACE AEI ATS ATE TOTAL (000) 1997 $ 175 $37,575 $42,000 $18,500 $98,250 1998 58,575 - 12,500 - 71,075 1999 30,075 - - 15,000 45,075 2000 46,075 - - - 46,075 2001 40,075 - - - 40,075 NOTE 9. COMMON SHAREHOLDERS' EQUITY In addition to public offerings, Common Stock may be issued through the Dividend Reinvestment and Stock Purchase Plan (DRP), ACE benefit plans (ACE plans), the Equity Incentive Plan (EIP) and Employee Stock Purchase Plan (ESPP). The number of shares of Common Stock issued (forfeited), and the number of shares reserved for issuance at December 31, 1996, were as follows: 1996 1995 1994 Reserved DRP - - 699,493 723,975 ACE Plans (28,844) (7,601) (5,046) 177,483 EIP (555) 9,234 175,712 615,609 ESPP - - - 400,000 Total (29,399) 1,633 870,159 The Company has a program to reacquire up to three million shares of the Company's Common Stock outstanding. There is no schedule or specific share price target associated with the reacquisitions. The authorized number of shares is not to be affected. During 1995, the Company reacquired and cancelled 1,625,000 shares for a total cost of $29.6 million with prices ranging from $17.625 to $18.875 per share. At December 31, 1996 and 1995, the Company has reacquired and cancelled 1,846,700 shares of its common stock at a total cost of $33.5 million. The Company did not reacquire and cancel any shares under this program during 1996. In April 1996, the shareholders of AEI approved the ESPP. Under this plan, eligible employees can purchase shares of common stock at a 15% discount. The offering periods begin on August 15 in each of the years 1996-1999 and end August 14 of the following year. The maximum number of shares that shall be issued under this plan shall be 100,000 in each of the offering periods up to a total of 400,000 shares. Pursuant to ACE's certificate of incorporation, ACE is subject to certain limitations on the payment of dividends to the Company, which is the holder of all of ACE's common stock. When full dividends have been paid on the Preferred Stock Securities of ACE for all past quarterly-yearly dividend periods, dividends may be declared and paid by ACE on its common stock, as determined by the Board of Directors of ACE, out of funds legally available for the payment of dividends. NOTE 10. COMMITMENTS AND CONTINGENCIES Construction Program ACE cash construction expenditures for 1997 are estimated to be approximately $99 million. Nonutility capital expenditures for 1997 are estimated to be $67 million. Insurance Programs - ACE Nuclear ACE is a member of certain insurance programs that provide coverage for contamination and property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek stations are insured against property damage losses up to $2.75 billion per site under these programs. In addition, ACE is a member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specific conditions. The insurer for nuclear extra expense insurance provides stated value coverage for replacement power costs incurred in the event of an outage at a nuclear unit resulting from physical damage to the nuclear unit. The stated value coverage is subject to a deductible period of the first 21 weeks of any outage. Limitations of coverage include, but are not limited to, outages 1) not resulting from physical damage to the unit, 2) resulting from any government mandated shutdown of the unit, 3) resulting from any gradual deterioration, corrosion, wear and tear, etc. of the unit, 4) resulting from any intentional acts committed by an insured and 5) resulting from certain war risk conditions. Under the property and replacement power insurance programs, ACE could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. As of December 31, 1996, the maximum amount of retrospective premiums ACE could be assessed for losses during the current policy year was $4.9 million under these programs. The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson Amendments Act of 1988, govern liability and indemnification for nuclear incidents. All nuclear facilities could be assessed, after exhaustion of private insurance, up to $79.275 million each reactor per incident, payable at $10 million per year. Based on its ownership share of nuclear facilities, ACE could be assessed up to an aggregate of $27.6 million per incident. This amount would be payable at an aggregate of $3.48 million per year, per incident. Other ACE's comprehensive general liability insurance provides pollution liability coverage, subject to certain terms and limitations for environmental costs incurred in the event of bodily injury or property damage resulting from the discharge or release of pollutants into or upon the land, atmosphere or water. Limitations of coverage include any pollution liability 1) resulting subsequent to the disposal of such pollutants, 2) resulting from the operation of a storage facility of such pollutants, 3) resulting in the formation of acid rain, 4) caused to property owned by an insured and 5) resulting from any intentional acts committed by an insured. Nuclear Plant Decommissioning - ACE ACE has a trust to fund the future costs of decommissioning each of the five nuclear units in which it has an ownership interest. The current annual funding amount, as authorized by the BPU, totals $6.4 million and is provided for in rates charged to customers. The funding amount is based on estimates of the future cost of decommissioning each of the units, the dates that decommissioning activities are expected to begin and return to be earned by the assets of the fund. The present value of ACE's nuclear decommissioning obligation, based on costs adopted by the BPU in 1991 and restated in 1996 dollars, is $158 million. Decommissioning activities as approved by the BPU were expected to begin in 2006 and continue through 2032. The total estimated value of the trust at December 31, 1996, inclusive of the present value of future funding, based on current annual funding amounts and expected decommissioning dates approved by the BPU, is approximately $137 million, without earnings on or appreciation of the fund assets. In accordance with BPU regulations, updated site-specific studies based on 1995 costs have been performed and submitted to the BPU for review. Any revisions to the amounts to be recognized and recovered in rates as a result of the updated studies are subject to the review and approval of the BPU and cannot be determined at this time. ACE will seek to adjust these estimates and the level of rates collected from customers in future BPU proceedings to reflect changes in decommissioning cost estimates and the expected levels of inflation and interest to be earned by the assets in the trust. Purchased Capacity and Energy Arrangements - ACE ACE arranges with various providers of bulk energy to obtain sufficient supplies of energy to satisfy current and future energy requirements of the company. Arrangements may be for generating capacity and associated energy or for energy only. Terms of the arrangements vary in length to enable ACE to optimally manage its supply portfolio in response to changing near and long term market conditions. At December 31, 1996, ACE has contracted for 707 megawatts (MWs) of purchased capacity with terms remaining of 2 to 28 years and an additional 175 MWs commencing in 1999 for 10 years. Information regarding these arrangements relative to ACE was as follows: 1996 1995 1994 As a % of Capacity (year end) 30% 30% 29% As a % of Generation 55% 52% 48% Capacity charges (millions) $195.7 $190.6 $130.9 Energy charges (millions) $145.1 $135.4 $128.6 Amounts for purchased capacity are shown on the Consolidated Statement of Income as Purchased Capacity. Of these amounts, charges of certain nonutility providers are recoverable through the LEC, which amounted to $165.3 million, $162.7 million and $77.0 million in 1996, 1995 and 1994, respectively. Minimum future payments for purchased capacity and energy under contract for the years 1997 through 2001 are performance driven and cannot be reasonably estimated. Environmental Matters - ACE The provisions of Title IV of the Clean Air Act Amendments of 1990 (CAAA) require, among other things, phased reductions of sulfur dioxide (SO2) emissions by 10 million tons per year, a limit on SO2 emissions nationwide by the year 2000 and reductions in emissions of nitrogen oxides (NOx) by approximately 2 million tons per year. ACE's wholly-owned B.L. England Units 1 and 2 and its jointly-owned Conemaugh Units 1 and 2 are in compliance with Phase I requirements as the result of installation of scrubbers at each station. All of ACE's fossil-fuel steam generating units are affected by Phase II (2000) of the CAAA. A compliance plan for these units currently reflects capital expenditures of approximately $8.5 million in 1997 through 2001. The jointly- owned Keystone Station is impacted by the SO2 and NOx provisions of Title IV of the CAAA during Phase II. The Keystone owners plan to primarily rely on emission allowances to comply with the CAAA through the year 2000. Salem Nuclear Generating Station ACE is an owner of 7.41% of Salem Units 1 and 2, which are operated by PS. Salem Units 1 and 2 have been out of service since May 16, 1995 and June 7, 1995, respectively. The Salem units represent 164 MWs of ACE's total installed capacity of 2,385.7 MWs. During these outages, PS has made significant changes and improvements related to the people, processes and equipment at Salem to improve the long-term reliability of the units. Salem Unit 2 is in the final stages of preparation for restart. The reactor has been refueled and reassembled and the reactor coolant pumps have been tested and placed in service. Over 90% of the total work activities have been completed and approximately 80% of the plant systems have been restored. Salem Unit 2 is currently expected to return to service in the second quarter of 1997. Salem Unit 1 is currently expected to return to service in the fall of 1997, after replacement of the unit's four steam generators, which was required in order to correct a generic problem with certain pressurized water reactors. Removal of the old steam generators has been completed and installation of the new steam generators is underway. The estimated cost of purchasing and installing the steam generators is between $150 million and $170 million, of which ACE's share is between $11.1 million and $12.6 million. In addition, the cost of the disposal of the old steam generators could be as much as $20 million, of which ACE's share would be $1.5 million. Effective December 31, 1996, ACE entered into a Stipulation Agreement (Agreement) with PS for the purpose of limiting ACE's exposure to Salem's 1997 operation and maintenance (O&M) expenses. Pursuant to the terms of the Agreement, ACE will pay to PS $10.0 million of O&M expense as a fixed charge payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any additional contribution to 1997 Salem O&M expenses, of which ACE's estimated share would be $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. To the extent ACE derives a savings against 1997 O&M expenditures, those savings will offset replacement power costs incurred due to the unavailability of the Salem Units. As a result of this Agreement, ACE has agreed to dismiss the complaint filed in the Superior Court of New Jersey in March 1996 alleging negligence and breach of contract. On February 27, 1996, the Salem co-owners filed a Complaint in United States District Court for the District of New Jersey against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators, under Federal and state statutes alleging fraud, negligent misrepresentation and breach of contract. The Westinghouse complaint seeks compensatory and punitive damages. On April 30, 1996, Westinghouse filed an answer and a counterclaim of $2.5 million for unpaid work. The litigation is in the process of discovery and investigation. ACE is subject to a performance standard for its five jointly- owned nuclear units. This standard is used by the BPU in determining recovery of replacement energy costs when output from the nuclear units is reduced or not available. Underperformance results in penalties which are not permitted to be recovered from customers and are charged against income. In accordance with the standard, ACE anticipated that it would incur a nuclear performance penalty for 1995 and had recorded a provision for such. According to the Salem outage stipulation agreement as previously discussed in Note 3, the performance of Salem Units 1 and 2 shall not be included in the calculation of a nuclear performance penalty for the period each unit was taken out of service up to each unit's respective return-to-service date. The parties to the stipulation agreed that for the years 1995 and 1996, there will be no penalty or reward under the nuclear performance standard. ACE had recorded a 1995 performance penalty of $0.8 million, net of tax. This amount has been incorporated into the net amount recorded for the Salem stipulation discussed in Note 3. The outage of each Salem unit causes ACE to incur replacement power costs of approximately $0.7 million per unit per month. ACE's replacement power costs for the current outage for each unit, up to the agreed upon return-to-service dates, will be recoverable in rates in ACE's next LEC proceeding. As discussed above, replacement power costs incurred after the respective agreed upon return-to-service dates for the Salem units will not be recoverable in rates. Competition Competition is expected to increase for electric energy markets historically served exclusively by regulated utilities. In recent years, changing laws and governmental regulations permitting competition from other utilities and nonregulated energy suppliers have prompted some customers to use self- generation or alternative sources to meet their electric needs. As the electric utility industry transitions from a regulated to a competitive industry, utilities may not be able to recover certain costs. These costs, which are known as "stranded" costs, could result from the shift from cost of service based pricing to market based pricing and from customers choosing different energy suppliers than ACE. Potential types of stranded costs include 1) above-market costs associated with generation facilities or long term power purchase agreements and 2) regulatory assets, which are expenses deferred and expected to be recovered from customers in the future. In April 1996, the Federal Energy Regulatory Commission issued Order No. 888 "Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Service by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities". The Order is designed to remove impediments to competition in the wholesale bulk power marketplace, to bring more efficient, lower cost power to electricity consumers, and provide an equitable means to transition the industry to the new environment. Under this Order utilities are required to offer transmission services for wholesale energy transactions to others on a nondiscriminatory basis. Tariffs have been established by ACE for these services, which ACE must also apply to its own wholesale energy transactions. On January 16, 1997, the BPU issued a Draft Phase II of the New Jersey Energy Master Plan (the Plan). In the Plan, the BPU has recommended that retail customers in New Jersey have the ability to choose their electric energy supplier beginning in October 1998 using a phase-in plan that will include all retail customers by April 2001. Customers would be able to sign an agreement with a third-party energy supplier and each electric utility, including ACE, would continue to be responsible for providing distribution service. Price and service quality for such distribution would continue to be regulated by the BPU. Beginning October 1998, costs for electric service, which consist of power generation, transmission, distribution, metering and billing will need to be unbundled. Transmission service would be provided by an Independent System Operator which would be responsible for maintaining a regional power grid that would continue to be regulated by FERC. The Plan states that the BPU is committed to assuring that a fully competitive marketplace exists prior to the ending of its economic regulation of power supply. At a minimum, utility generating assets and functions must be separated and operate at arms length from the transmission, distribution and customer service functions of the electric utility. The BPU reserves final judgment on the issue of requiring divestiture of utility generating assets until detailed analyses of the potential for market power abuses by utilities have been performed. The Plan addresses the issue of "stranded" costs related to the generating capacity currently in utility rates. High costs of construction and operations incurred by the jointly-owned nuclear power plants and the long-term high cost supply contracts with independent power producers are two significant contributing factors. The report proposes recovery of stranded costs over a four to eight year period, through a specific market transition charge which will be a separate component of a customer's bill. Determination of the recoverability of costs will be on a case by case basis with no guarantee for 100% recovery of eligible stranded costs. The Plan provides that the opportunity for full recovery of such eligible costs is contingent upon and may be constrained by the utility meeting a number of conditions, including achievement of a BPU goal of delivering a near term rate reduction to customers of five to ten percent. The Plan states that the independent power contracts must be eligible for stranded cost recovery. The Plan further states that utilities are obligated to take all reasonably available measures to mitigate stranded costs caused by the introduction of retail competition. The Plan further notes that New Jersey is studying the "securitization" of stranded costs as a means of financing these costs at interest rates lower than the utility cost of capital, thereby helping to mitigate the rate impact of stranded cost recovery. Recovery of securitization may occur over a different period of time. The Plan also suggests that a cap may be imposed on the level of the charge as a mechanism to achieve the goal of overall rate reduction. The BPU intends to issue final findings and recommendations on the electric utility industry restructuring Plan in April 1997. Each electric utility in the State is to file a complete restructuring plan, stranded cost filing and unbundled rate filing no later than July 15, 1997. ACE has not filed for accelerated depreciation of any capital assets or special rate plans applicable to particular classes of customers. However, in 1996 ACE entered into BPU approved Off- Tariff Rate Agreements (OTRA's) with at-risk customers which provide for special rates for customers who may choose to leave ACE's energy system because they have alternative energy sources available. To date, the aggregate amount of such reduced rate agreements was $2.2 million, net of tax. ACE has significant long term contract commitments to purchase capacity and energy from nonutility sources at above-market costs. Recovery of amounts associated with these contracts is through ACE's LEC, for which rates are subject to approval by the BPU annually. In connection with the BPU's Plan, ACE is uncertain as to the level of stranded costs that may arise or the degree to which these costs will be recovered. If the final restructuring plan requires ACE to recognize amounts as unrecoverable, ACE may be required to write down asset values, and such writedowns could be material. Other The Energy Policy Act of 1992 permits the Federal government to assess investor-owned electric utilities that have ownership interests in nuclear generating facilities. The assessment funds the decontamination and decommissioning of Federally operated nuclear enrichment facilities. Based on its ownership in five nuclear generating units, ACE has a liability of $5.3 million and $6.0 million at December 31, 1996 and 1995, respectively, for its obligation to be paid over the next 12 years. ACE has an associated regulatory asset of $5.7 million and $6.4 million at December 31, 1996 and 1995, respectively. Amounts are currently being recovered in rates for this liability and the regulatory asset is concurrently being amortized to expense based on the annual assessment billed by the Federal government. In March 1996, the New Jersey Department of Treasury and the BPU jointly proposed to replace the energy excise tax currently imposed on electric and gas utilities. Under the proposal, utilities would pay a state corporate business tax, a state sales tax of six percent collected on all retail sales of energy services and a state transitional energy facilities assessment tax (TEFA) for a limited number of years. A gradual phase-out of the TEFA is proposed. At the completion of the TEFA phase-out, the total energy tax burden would be reduced by approximately 45%. Note 11. REGULATORY ASSETS AND LIABILITIES - ACE Costs incurred by ACE that have been permitted, or are expected to be permitted, by the BPU to be deferred for recovery in rates in more than one year, or for which future recovery is probable, are recorded as regulatory assets. Regulatory assets are amortized to expense over the period of recovery. Total regulatory assets at December 31 are as follows: Remaining Recovery (000) 1996 1995 Period* Recoverable Future Federal Income Taxes $85,858 $85,858 (A) Unrecovered Purchased Power Costs: Capacity Cost 64,658 80,598 4 years Contract Renegotiation Costs 18,742 19,219 18 years Unrecovered State Excise Taxes 54,714 64,274 6 years Unamortized Debt Costs-Refundings 29,878 33,110 1-30 years Deferred Energy Costs(See Note 1) 33,529 31,434 (B) Other Regulatory Assets: Postretirement Benefits Other Than Pensions (See Notes 3&4) 32,609 26,227 (A) Asbestos Removal Costs 9,086 9,356 33 years Decommissioning/Decontaminating Federally-owned Nuclear Units (See Note 10) 5,726 6,404 12 years Other 12,154 12,581 $346,954 $369,061 *From December 31, 1996 (A) Pending future recovery (B) Recovered over annual LEC period Recoverable Future Federal Income Taxes is the amount of revenue expected to be collected from ratepayers for deferred tax costs to be paid in future years. Unrecovered Purchased Power Capacity Costs represent deferrals of prior capacity costs then in excess of levelized revenues associated with a certain long term capacity arrangement. Levelized revenues have since been greater than costs, permitting the deferred costs to be amortized to expense. Contract Renegotiation Costs were incurred through renegotiation of a long term capacity and energy contract with a certain independent power producer. Unrecovered State Excise Taxes represent additional amounts paid as a result of prior legislative changes in the computation of state excise taxes. Unamortized Debt Costs associated with debt reacquired by refundings are amortized over the life of the related new debt. Asbestos Removal Costs were incurred to remove asbestos insulation from a wholly-owned generating station. Included in Other are certain amounts being recovered over a period of one to five years. At December 31, 1996, ACE had a $13 million liability recorded as a result of the credits to customers from the October 22, 1996 Stipulation Agreements (See Note 3). The credits have been made during January and February 1997 and were based on customer usage from January through October 1996. No regulatory liabilities existed at December 31, 1995. NOTE 12. LEASES ACE leases from others various types of property and equipment for use in its operations. Certain of these lease agreements are capital leases consisting of the following at December 31: (000) 1996 1995 Production plant $ 6,642 $ 9,097 Less accumulated amortization 5,005 6,810 Net 1,637 2,287 Nuclear fuel 38,277 38,591 Leased property-net $39,914 $40,878 ACE has a contractual obligation to obtain nuclear fuel for the Salem, Hope Creek and Peach Bottom stations. The asset and related obligation for the leased fuel are reduced as the fuel is burned and are increased as additional fuel purchases are made. No commitments for future payments beyond satisfaction of the outstanding obligation exist. Operating expenses for 1996, 1995 and 1994 include leased nuclear fuel costs of $8.7 million, $11.2 million and $14.1 million, respectively, and rentals and lease payments for all other capital and operating leases of $2.6 million, $3.9 million and $5.3 million, respectively. Future minimum rental payments for all noncancellable lease agreements are less than $2.4 million per year for each of the next 5 years. ATE is the lessor in five leveraged lease transactions consisting of three aircraft and two containerships with total respective costs of approximately $168 million and $76 million. Remaining lease terms for all leases approximate 14 to 15 years. The Company's equity participation in the leases range from 22% to 32%. Funding of the investment in the leveraged lease transactions is comprised of equity participation by ATE and financing provided by third parties as long term debt without recourse to ATE. The lease transactions provide collateral for such third parties, including a security interest in the leased equipment. Net investment in leveraged leases at December 31 was as follows: (000) 1996 1995 Rentals receivable (net of principal and interest on nonrecourse debt) $ 50,898 $ 50,955 Estimated residual values 53,435 53,435 Unearned and deferred income (24,646) (25,431) Investment in leveraged leases 79,687 78,959 Deferred taxes arising from leveraged leases (76,671) (71,064) Net investment in leveraged leases $ 3,016 $ 7,895 Note 13. Financial Instruments A number of items within Current Assets and Current Liabilities on the Consolidated Balance Sheet are considered to be financial instruments because they are cash or are to be settled in cash. Due to their short-term nature, the carrying values of these items approximate their fair market values. Accounts Receivable - Utility Service and Unbilled Revenues are subject to concentration of credit risk because they pertain to utility service conducted within a fixed geographic region. Investments in Leveraged Leases are subject to concentration of credit risk because they are exclusive to a small number of parties within two industries. The Company has recourse to the affected assets under lease. These leased assets are of general use within their respective industries. ACE's long term debt and preferred securities and ATE's long term debt securities are not widely held and generally trade infrequently. The estimated aggregate fair market value of debt securities has been determined based on quoted market prices for the same or similar debt issues or on securities of companies with similar credit quality, coupon rates and maturities. The aggregate fair market value of preferred securities has been determined using market information available from actual trades or of trades of similar instruments of companies with similar credit quality. At December 31 the amounts are as follows: Market Value Long Term Debt and Preferred Securities (in millions) 1996 1995 Carrying Market Carrying Market Value Value Value Value ACE Long Term Debt $802.4 $828.8 $814.6 $851.0 ACE Preferred Stock 74.0 77.1 177.0 172.0 CQIPS 70.0 69.3 - - ATE Long Term Debt 33.5 34.0 33.5 34.5 ATS Long Term Debt 54.5 54.5 12.5 12.5 AEI Long Term Debt 37.6 37.6 34.5 34.5 NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial data, reflecting all adjustments necessary in the opinion of management for a fair presentation of such amounts, are as follows: Dividends Operating Operating Net Earnings Paid Quarter Revenues Income Income Per Share Per Share 1996 (000) (000) (000) 1st $245,325 $ 32,980 $15,535 $ .29 $.385 2nd 225,678 27,685 10,250 .20 .385 3rd 281,965 51,344 32,567 .62 .385 4th 227,287 20,418 415 .01 .385 Annual $980,255 $132,428 $58,767 $1.12 $1.54 1995 1st $218,626 $ 27,584 $ 11,469 $ .21 .385 2nd 206,232 27,771 10,568 .20 .385 3rd 302,685 66,482 48,745 .93 .385 4th 225,594 26,700 10,986 .21 .385 Annual $953,137 $148,537 $81,768 $1.55 $1.54 Third quarter results generally exceed those of other quarters due to increased sales and higher residential rates for ACE. Individual quarters may not add to the total due to rounding. The fourth quarter 1996 Net Income reflects an increase in ACE's electric sales offset in part by the increase in energy expense due to increased sales, recovery of previously deferred energy costs and an increase in operations and maintenance expense related to Salem. During the fourth quarter of 1996 nonutility operations recorded a $1.6 million, net of tax loss contingency for the sale of the Binghamton Cogeneration Facility by AGI, $0.8 million, net of tax write-down of the carrying value of ASP's commercial building and $1.1 million, net of tax loss for AEE's investment in Enerval, LLC. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information for this item concerning Directors of the Company is set forth in the section entitled "Nominees for Election" on page 3 of the Company's Notice of 1997 Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated by reference. The information required by Item 10 of Form 10-K with respect to the executive officers of the Company and the directors of ACE is, pursuant to Instruction 3 to Item 401(b) of Regulation S-K, set forth in Part I of this Form 10-K under the heading "Executive Officers". ITEM 11 EXECUTIVE COMPENSATION Information for this item with respect to the amounts paid to the five most highly compensated executive officers of the Company and ACE, is set forth in the section entitled "Table 1- Summary Compensation Table" on page 14 of the Company's Notice of 1997 Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated herein by reference. The cash compensation paid to 11 executive officers of ACE, as a group, in 1996 was $2,399,052. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item as to compliance with Section 16(a) of the Exchange Act is contained in the section captioned "Stock Ownership of Directors and Officers" on page 6 of the Company's Notice of 1997 Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January 1996, Marilyn T. Powell, Vice President of the Company and Senior Vice President-Marketing and Distribution of ACE was provided a bridge loan for the purpose of establishing a local residence within commuting distance of the Company's principal offices. This bridge loan had been offered as an inducement to the employment of Marilyn T. Powell in order to relocate from the State of Connecticut. Pursuant to an agreement, an interest-free loan in the amount of $185,000 was made, to be repaid six months from the date of the agreement or upon sale of Ms. Powell's primary residence. The loan was repaid in full on May 23, 1996. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibits: See Exhibit Index attached. The following financial information, financial statements and notes to financial statements for the Company and ACE are filed herein: Management's Discussion and Analysis of Financial Condition and Results of Operations; Consolidated Statement of Income for the three years ended December 31, 1996; Consolidated Statement of Cash Flows for the three years ended December 31, 1996; Consolidated Balance Sheet - December 31, 1996 and December 31, 1995; Consolidated Statement of Changes in Common Shareholder's Equity; Notes to Consolidated Financial Statements; Independent Auditors' Report. Reports on Form 8-K: Current Reports on Form 8-K were filed, dated February 23, 1996, May 29, 1996, June 26, 1996, July 25, 1996, August 13, 1996, October 23, 1996, January 6, 1997, January 27, 1997 and January 31, 1997 relating to the shutdown, and subsequent events, of Salem Units 1 and 2, the announcement of the merger agreement between the Company and Delmarva Power & Light Company, the settlement agreement between ACE and PS and the BPU's Draft Phase II of the New Jersey Energy Master Plan. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, who also signed in the capacity indicated. ATLANTIC ENERGY, INC. ATLANTIC CITY ELECTRIC COMPANY Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated. Date: March 14, 1997 By: /s/ J. L. Jacobs J. L. Jacobs Title: Chairman, Chief Executive Officer and Director of Atlantic Energy, Inc. and Chairman, Chief Executive Officer and Director of Atlantic City Electric Company Date: March 14, 1997 By: /s/ M. J. Barron M. J. Barron Title: Vice President and Chief Financial Officer of Atlantic Energy, Inc. and Senior Vice President and Chief Financial Officer of Atlantic City Electric Company DIRECTORS OF ATLANTIC ENERGY, INC.: Gerald A. Hale* Richard B. McGlynn* Matthew Holden, Jr.* Bernard J. Morgan* Cyrus H. Holley* Harold J. Raveche* Kathleen MacDonnell* A MAJORITY OF DIRECTORS OF ATLANTIC CITY ELECTRIC COMPANY: Michael J. Chesser* James E. Franklin II* Meredith I. Harlacher, Jr.* Henry K. Levari, Jr.* M. T. Powell * Date: March 14, 1997 *By: /s/ M. J. Barron M. J. Barron Attorney-in-Fact EXHIBIT INDEX 3a Restated Certificate of Incorporation of Atlantic Energy, Inc. (File No. 1-9760, Form 10-Q for quarter ended September 30, 1987-Exhibit 4(a)); Certificate of Amendment to restated Certificate of Incorporation of Atlantic Energy, Inc. dated April 15, 1992. File No. 33-53511, Form S-8 dated May 6, 1994-Exhibit No. 3(ii). 3b By-Laws of Atlantic Energy, Inc. as amended July 13, 1995 (File No. 1-9760, Form 10-Q for the quarter ended June 30, 1995 - - Exhibit 3b(1). 3c Agreement of Merger between Atlantic City Electric Company and South Jersey Power & Light Company filed June 30, 1949, and Amendments through May 3, 1991 (File No. 2-71312-Exhibit No. 3(a); File No. 1-3559, Form 10-Q for quarter ended June 30, 1982- Exhibit No. 3(b); Form 10-Q for quarter ended March 31, 1985- Exhibit No. 3(a); Form 10-Q for quarter ended March 31, 1987- Exhibit No. 3(a): Form 8-K dated October 12, 1988-Exhibit No. 3(a); Form 10-K for fiscal year ended December 31, 1990-Exhibit No. 3c; and Form 10-Q for quarter ended September 30, 1991- Exhibit No. 3c). 3d By-Laws of Atlantic City Electric Company, as amended April 24, 1989 (File No. 1-3559, Form 10-Q for the quarter ended September 31, 1989-Exhibit No. 3). 4b Mortgage and Deed of Trust, dated January 15, 1937, between Atlantic City Electric Company and The Bank of New York (formerly Irving Trust Company) and Supplemental Indentures through November 1, 1994 (File No. 2-66280-Exhibit No. 2(b); File No. 1- 3559, Form 10-K for year ended December 31, 1980-Exhibit No. 4(d); Form 10-Q for quarter ended June 30, 1981-Exhibit No. 4(a); Form 10-K for year ended December 31, 1983-Exhibit No. 4(d); Form 10-Q for quarter ended March 31, 1984-Exhibit No. 4(a); Form 10-Q for quarter ended June 30, 1984-Exhibit 4(a); Form 10-Q for quarter ended September 30, 1985-Exhibit 4; Form 10-Q for quarter ended March 31, 1986-Exhibit No. 4; Form 10-K for year ended December 31, 1987-Exhibit No. 4(d); Form 10-Q for quarter ended September 30, 1989-Exhibit No. 4(a); Form 10-K for year ended December 31, 1990-Exhibit No. 4(c); File No. 33-49279-Exhibit No. 4(b); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1993 - Exhibits 4(a) & 4(b); Form 10-K for the year ended December 31, 1993 - Exhibit 4c(i); File no. 1-3559, Form 10-Q for the quarter ended June 30, 1994 - Exhibit 4(a); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1994 - Exhibit 4(a); Form 10-K for year ended December 31, 1994-Exhibit 4(c)(1). 4e Agreement dated as of February 1, 1966, between Atlantic City Electric Company and Fidelity Union Trust Company and Supplement dated as of May 1, 1968. (File No. 1-3559, Form 8-K dated March 7, 1966-Exhibit 13(b)(2); Form 8-K dated June 6, 1968- Exhibit No. 13(b)(1)). 4f(1) Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No.1-9760, Form 10-K for year ended December 31, 1988- Exhibit No. 4g(1)). 4f(2) Support Agreement dated as of May 24, 1988 between Atlantic Energy, Inc. and ATE Investment, Inc. (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 4g(2)). 4f(3) Letter Agreement dated as of May 24, 1988 between Atlantic Energy, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 4g(3)). 4f(4) Amendment No. 1 dated as of February 22, 1989 to Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for the fiscal year ended December 31, 1988). 4f(5) Amendment No. 2 dated as of June 1, 1991, to Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for year ended December 31, 1991-Exhibit No. 4f(5)). 4f(6) Revolving Credit Agreements dated as of September 28, 1995 by and among Atlantic Energy, Inc., The Bank of New York, as agent, and Lender party thereto (File No. 1-9760, Form 10-K for year ended December 31, 1995-Exhibit 4f(6)). 4f(7) Amended and Restated Trust Agreement, dated as of October 1, 1996, by and among Atlantic City Electric Company, as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware) as Delaware Trustee and the Administrative Trustees Named Therein, filed herewith. 4f(8) Junior Subordinated Indenture, dated as of October 1, 1996, by and between Atlantic City Electric Company and The Bank of New York, as Trustee, filed herewith. 4f(9) Guarantee Agreement, dated as of October 1, 1996, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee, filed herewith. 10a(1) Atlantic Energy, Inc. Directors Deferred Compensation Plan revised as of February 4, 1988 (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 10a(1)). Amendment to the Deferred Compensation Plan for Directors effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit No. 10a(2)). 10a(2) Deferred Compensation Plan for Employees of Atlantic Energy, Inc. and Participating Subsidiaries (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 10a(2)). Amendment to Deferred Compensation Plan for Employees of Atlantic Energy, Inc. and Participating Subsidiaries effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit No. 10a(4)). 10a(3) Supplemental Executive Retirement Plan for Officers of Atlantic City Electric Company, as amended effective March 1, 1990 (File No. 1-9760, Form 10-K for year ended December 31, 1989-Exhibit No. 10a(4)). 10a(4) Supplemental Executive Retirement Plan - II for Officers of Atlantic City Electric effective September 8, 1995 (File No. 1-9760, Form 10-K for year ended December 31, 1995- Exhibit No. 10a(5)1). 10a(5) Description of amendment to Supplemental Executive Retirement Plan effective December 10, 1992 (File No. 2-9760, Form 10-K for year ended December 31, 1992-Exhibit 10a(3)). Supplemental Executive Retirement Plan for Officers of Atlantic City Electric Company, amendment No. 1995-1 (File No. 1-9760, Form 10-K for year ended December 31, 1995-Exhibit 10a(6)1). 10a(6) Copy of Atlantic Electric Excess Benefit Retirement Income Program, as amended, effective as of August 2, 1990 (File No. 1-3559, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(6)). Amendment to the Excess Benefit Retirement Income Program effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit 10a(6)). Atlantic City Electric Company Excess Benefit Retirement Income Program, Amendment No. 1995-1 (File No. 1-9760, Form 10-K for year ended December 31, 1995-Exhibit 10a(10)1). 10a(7) Atlantic Energy, Inc. Retirement Plan for Directors, as amended effective November 13, 1991 (File No. 1-9760, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(9)). Atlantic Energy, Inc. Retirement Plan for Directors, Amendment No. 1995-1 (File No. 1-9760, Form 10-K for year ended December 31, 1995-Exhibit 10a(14)1). 10a(8) Copy of Atlantic Energy, Inc. Restricted Stock Plan for Non-employee Directors, effective January 1, 1991 (File No. 1- 9760, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(10)). 10a(9) Agreement dated August 10, 1995 between Atlantic Energy, Inc. and Jerrold L. Jacobs, as supplemented (File No. 1-9760, Form 10-K for year ended December 31, 1995-Exhibit 10a(16)1). 10a(10) Agreement dated August 10, 1995 between Atlantic Energy, Inc. and Meredith I. Harlacher, Jr. as supplemented (File No. 1-9760, Form 10-K for year ended December 31, 1995 - Exhibit 10a(17)1). 10a(11) Agreement dated August 10, 1995 between Atlantic Energy, Inc. and Michael J. Chesser, as amended (File No. 1-9760, Form 10-K for year ended December 31, 1995- Exhibit 10a(20)1). 10a(12) Atlantic Energy, Inc. Equity Incentive Plan (File No. 33-53511, Form S-8 filed May 6, 1994-Exhibit 10.) 10a(13) Employment Agreement dated September 15, 1995 between Atlantic Energy, Inc. and Michael J. Barron, as supplemented, filed herewith. 10a(14) Employment Agreement dated August 10, 1995 between Atlantic Energy, Inc. and James E. Franklin II, as supplemented, filed herewith. Agreements in substantially the same form have been entered into with the following other executive officers of the Company: Scott Ungerer, Ernest L. Jolly, H. K. Levari, Jr., Louis M. Walters and Frank E. DiCola. 10b(1) Agreement as to ownership as tenants in common of the Salem Nuclear Generating Station Units 1, 2, and 3, dated November 24, 1971, and of Supplements, dated as of September 1, 1975, and as of January 26, 1977 (File No. 2-43137-Exhibit No. 5(p); File No. 2-60966-Exhibit No. 5(m); and File No. 2-58430- Exhibit No. 5(o)). 10b(2) Agreement as to ownership as tenants in common of the Peach Bottom Atomic Power Station Units 2 and 3, dated November 24, 1971 and of Supplements dated as of September 1, 1975 and as of January 26, 1977 (File No. 2-43137-Exhibit No. 5(o); File No. 2-60966-Exhibit No. 5(j); File No. 2-58430-Exhibit No. 5(m)). 10b(3) Owners Agreement, dated April 28, 1977 between Atlantic City Electric Company and Public Service Electric & Gas Company for the Hope Creek Generating Station Units No. 1 and 2 (File No. 2-60966-Exhibit No. 5(v)). 10b(3-1) Amendment to Owners Agreement for Hope Creek Generating Station, dated as of December 23, 1981, between Atlantic City Electric Company and Public Service Electric & Gas Company (File No. 1-3559, Form 10-K for year ended December 31, 1983-Exhibit No. 10b(3-2)). 10b(4) Pennsylvania-New Jersey-Maryland Interconnection Agreement, dated September 26, 1956 between Public Service Electric & Gas Company, Philadelphia Electric Company, Pennsylvania Power & Light Company, Baltimore Gas & Electric Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, Potomac Electric Power Company and supplemental agreements through June 15, 1977 (File No. 1-3559, Form 10-K for year ended December 31, 1981- Exhibit No. 10(p)). 10b(5) Pennsylvania-New Jersey-Maryland Interconnection Supplemental Agreement, dated March 26, 1981, between Public Service Electric & Gas Company, Philadelphia Electric Company, Pennsylvania Power & Light Company, Baltimore Gas & Electric Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, Potomac Electric Power Company, Atlantic City Electric Company and Delmarva Power & Light Company (File No. 1-3559, Form 10-Q for quarter ended March 31, 1981-Exhibit No. 20b). 12 Computation of Ratios of Earnings to Fixed Charges, filed herewith. 21 Subsidiaries of the Registrants, filed herewith. 24 Independent Auditors' Consent, filed herewith. 25a Powers of Attorney for Atlantic Energy, Inc. dated as of March 13, 1997, filed herewith. 25b Powers of Attorney for Atlantic City Electric Company dated as of March 10, 1997, filed herewith. 27 Financial Data Schedules for Atlantic Energy, Inc. and Atlantic City Electric Company for periods ended December 31, 1996. INDEPENDENT AUDITORS' REPORT To Atlantic City Electric Company: We have audited the accompanying consolidated balance sheets of Atlantic City Electric Company and subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in common shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic City Electric Company and subsidiary at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP February 7, 1997 Parsippany, New Jersey REPORT OF MANAGEMENT-Atlantic City Electric Company The management of Atlantic City Electric Co. and its subsidiary (the Company) is responsible for the preparation of the consolidated financial statements presented in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported. Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting. In any system of financial reporting controls, inherent limitations exist. Management continually examines the effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified. Management believes that, as of December 31, 1996, the system of internal accounting and financial controls over financial reporting is effective. Management also recognizes its responsibility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. The consolidated financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants. Deloitte & Touche LLP, provides objective, independent audits as to management's discharge of its responsibilities insofar as they relate to the fairness of the financial statements. Their audits are based on procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement. The Company's internal auditing function conducts audits and appraisals of the Company's operations. It evaluates the system of internal accounting, financial and operational controls and compliance with established procedures. Both the external auditors and the internal auditors periodically make recommendations concerning the Company's internal control structure to management and the Audit Committee of the Board of Directors. Management responds to such recommendations as appropriate in the circumstances. None of the recommendations made for the year ended December 31, 1996 represented significant deficiencies in the design or operation of the Company's internal control structure. /s/ M. J. Chesser M. J. Chesser President and Chief Operating Officer /s/ M. J. Barron M. J. Barron Senior Vice President and Chief Financial Officer February 7, 1997 Atlantic City Electric Company and Subsidiary CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) For the Years Ended December 31, 1996 1995 1994 Operating Revenues-Electric $982,492 $953,779 $913,226 Operating Expenses: Energy 223,091 191,766 210,891 Purchased Capacity 195,699 190,570 130,929 Operations 156,891 152,277 157,047 Employee Separation Costs - - 26,600 Maintenance 44,462 34,414 37,662 Depreciation and Amortization 80,845 78,461 73,344 State Excise Taxes 104,815 102,811 97,072 Federal Income Taxes 32,272 45,876 33,264 Other Taxes 9,888 8,677 10,757 Total Operating Expenses 847,963 804,852 777,566 Operating Income 134,529 148,927 135,660 Other Income and Expense: Allowance for Equity Funds Used During Construction 879 817 3,634 Other-Net 4,908 10,208 9,568 Total Other Income and Expense 5,787 11,025 13,202 Income Before Interest Charges 140,316 159,952 148,862 Interest Charges: Interest on Long Term Debt 60,029 60,329 57,346 Other Interest Expense 4,818 2,550 1,114 Total Interest Charges 64,847 62,879 58,460 Allowance for Borrowed Funds Used During Construction (976) (1,679) (2,772) Net Interest Charges 63,871 61,200 55,688 Less Cumulative Quarterly Income Preferred Securities Dividend of Trust 1,428 - - Net Income $ 75,017 $ 98,752 $ 93,174 Earnings for Common Stock: Net Income $ 75,017 $ 98,752 $ 93,174 Less Preferred Stock Dividend Requirements 9,904 14,627 16,716 Income Available for Common Stock $ 65,113 $ 84,125 $ 76,458 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic City Electric Company and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) For the Years Ended December 31, 1996 1995 1994 Cash Flows Of Operating Activities: Net Income $ 75,017 $ 98,752 $ 93,174 Unrecovered Purchased Power Costs 16,417 15,721 14,920 Deferred Energy Costs (2,095) (20,435) (3,819) Cumulative Quarterly Income Preferred Securities Dividends of Trust 1,428 - - Depreciation and Amortization 80,845 78,461 73,344 Deferred Income Taxes-Net 1,448 15,694 6,116 Unrecovered State Excise Taxes 9,560 9,560 (40,128) Changes-Net Working Capital Components: Accounts Receivable and Unbilled Revenues 5,795 (22,565) 337 Accounts Payable 2,814 (4,801) 1,813 Inventory (2,523) 4,960 (12,988) Other 14,125 (8,890) (11,726) Employee Separation Costs (7,179) (19,112) 26,600 Other-Net 17,020 10,318 3,935 Net Cash Provided by Operating Activities 212,672 157,663 151,578 Cash Flows Of Investing Activities: Construction Expenditures (86,805) (100,904) (119,961) Leased Nuclear Fuel Material (6,833) (10,446) (10,713) Plant Removal Costs (2,109) (4,525) (8,000) Other-Net (15,707) 892 799 Net Cash Used by Investing Activities (111,454) (114,983) (137,875) Cash Flows Of Financing Activities: Issuance of Cumulative Income Preferred Securities 70,000 - - Proceeds from Long Term Debt - 104,404 53,572 Retirement and Maturity of Long Term Debt (12,266) (57,489) (42,664) Increase in Short Term Debt 34,405 21,945 8,600 Proceeds from Nuclear Fuel Capital Lease Obligations 6,833 10,446 10,713 Redemption of Preferred Stock (98,876) (24,500) (24,500) Dividends Declared on Capital Stock (92,066) (95,866) (100,198) Dividends on Cumulative Quarterly Income Preferred Securities of Trust (1,428) - - Capital Contributions from Parent(net) (567) (223) 22,389 Other-Net (3,313) (869) 1,601 Net Cash Used by Financing Activities (97,278) (42,152) (70,487) Net Increase (Decrease) in Cash and Temporary Investments 3,940 528 (56,784) Cash and Temporary Investments: beginning of year 3,987 3,459 60,243 end of year $ 7,927 $ 3,987 $ 3,459 Supplemental Schedule of Payments: Interest $ 65,269 $ 58,274 $ 61,035 Federal income taxes $ 36,937 $ 31,999 $ 32,254 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic City Electric Company and Subsidiary CONSOLIDATED BALANCE SHEET (Thousands of Dollars) December 31, 1996 1995 Assets Electric Utility Plant: In Service: Production $1,212,380 $1,187,169 Transmission 373,358 366,242 Distribution 731,272 691,830 General 191,210 183,935 Total In Service 2,508,220 2,429,176 Less Accumulated Depreciation 871,531 794,479 Utility Plant in Service-Net 1,636,689 1,634,697 Construction Work in Progress 117,188 119,270 Land Held for Future Use 5,604 6,941 Leased Property-Net 39,914 40,878 Electric Utility Plant-Net 1,799,395 1,801,786 Investments and Nonutility Property: Nuclear Decommissioning Trust Fund 71,120 61,802 Other 9,750 2,077 Total Investments and Nonutility Property 80,870 63,879 Current Assets: Cash and Temporary Investments 7,927 3,987 Accounts Receivable: Utility Service 64,432 66,099 Miscellaneous 21,650 17,379 Allowance for Doubtful Accounts (3,500) (3,300) Unbilled Revenues 33,315 41,515 Fuel (at average cost) 29,603 25,459 Materials and Supplies (at average cost) 23,815 25,434 Working Funds 15,517 14,420 Deferred Energy Costs 33,529 31,434 Prepaid Excise Tax 7,125 10,753 Other Prepayments 10,089 10,249 Total Current Assets 243,502 243,429 Deferred Debits: Unrecovered Purchased Power Costs 83,400 99,817 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 54,714 64,274 Unamortized Debt Costs 43,579 38,924 Other Regulatory Assets 59,575 54,568 Other 9,848 6,569 Total Deferred Debits 336,974 350,010 Total Assets $2,460,741 $2,459,104 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic City Electric Company and Subsidiary CONSOLIDATED BALANCE SHEET (Thousands of Dollars) December 31, 1996 1995 Liabilities and Capitalization Capitalization: Common Shareholder's Equity: Common Stock $ 54,963 $ 54,963 Premium on Capital Stock 231,081 231,081 Contributed Capital 259,078 259,645 Capital Stock Expense (1,645) (2,131) Retained Earnings 234,948 252,484 Total Common Shareholder's Equity 778,425 796,042 Preferred Securities: Not Subject to Mandatory Redemption 30,000 40,000 Subject to Mandatory Redemption 43,950 114,750 Cumulative Quarterly Income Preferred Securities of Trust 70,000 - Long Term Debt 802,245 802,356 Total Capitalization(excluding current portion) 1,724,620 1,753,148 Current Liabilities: Preferred Stock Redemption Requirement 10,000 22,250 Capital Lease Obligations-Current 702 650 Long Term Debt-Current 175 12,247 Short Term Debt 64,950 30,545 Accounts Payable 63,644 60,831 Federal Income Taxes Payable-Affiliate 7,398 11,574 Other Taxes Accrued 7,494 3,382 Interest Accrued 19,619 19,961 Dividends Declared 21,701 23,490 Deferred Income Taxes 3,190 2,569 Provision for Rate Refunds 13,000 - Other 22,980 24,958 Total Current Liabilities 234,853 212,457 Deferred Credits and Other Liabilities: Deferred Income Taxes 357,580 354,218 Deferred Investment Tax Credits 46,577 49,112 Capital Lease Obligations 39,212 40,227 Other 57,899 49,942 Total Deferred Credits and Other Liabilities 501,268 493,499 Commitments and Contingencies (Note 10) Total Liabilities and Capitalization $2,460,741 $2,459,104 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDER'S EQUITY (Thousands of Dollars) Premium On Capital Common Capital Contrib. Stock Retained Stock Stock Capital Expense Earnings Balance, December 31, 1993 $54,963 $231,081 $237,479 $(2,470) $256,961 Net Income 93,174 Capital stock expense 170 (170) Capital contrib. from parent (net) 22,389 Less dividends declared: Preferred (16,716) Common (83,482) Balance, December 31, 1994 54,963 231,081 259,868 (2,300) 249,767 Net Income 98,752 Capital stock expense 169 (169) Capital contrib. from parent (net) (223) Less dividends declared: Preferred (14,627) Common (81,239) Balance, December 31, 1995 54,963 231,081 259,645 (2,131) 252,484 Net Income 75,017 Capital Stock expense 486 (486) Capital Contributions from parent (net) (567) Less dividends declared: Preferred (9,904) Common (82,163) Balance $54,963 $231,081 $259,078 (1,645) $234,948 December 31, 1996 As of December 31, 1996, the Company had 25 million authorized shares of Common Stock at $3 par value. Shares outstanding at December 31, 1996, 1995 and 1994 were 18,320,937. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements Except as modified below, Notes 1 through 14, excluding Note 6 and Note 9, to the Consolidated Financial Statements of Atlantic Energy Inc. (AEI) are incorporated herein by reference insofar as they relate to Atlantic City Electric Company (ACE) and its subsidiary: Note 1. Principles of Consolidation The consolidated financial statements include the accounts of ACE and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year reporting of these items. Related Party Transactions - ACE has a contract for a total of 116 megawatts of capacity and related energy from a cogeneration facility that is 50% owned by a wholly-owned subsidiary of Atlantic Energy Enterprises, Inc.(AEE). Capacity costs totaled $27.8 million in 1996, $23.8 million in 1995 and $23.0 million in 1994. ACE sells electricity to subsidiaries of AEE. The electric sales totaled $2.2 million for 1996, $0.6 million for 1995 and $0.2 million for 1994. ACE also rents office space from a wholly-owned subsidiary of AEE which amounts are not significant. The amounts receivable from affiliates were not significant at December 31, 1996 and 1995. Note 2. Income Taxes The components of Federal income tax expense for the years ended December 31 are as follows: (000) 1996 1995 1994 Current $ 35,510 $ 32,457 $ 30,013 Deferred 1,448 15,694 6,116 Total Federal Income Tax Expense 36,958 48,151 36,129 Less Amounts in Other Income 4,686 2,275 2,865 Federal Income Taxes in Operating Expenses $ 32,272 $ 45,876 $ 33,264 A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate for the years ended December 31 follows: 1996 1995 1994 Statutory Federal Income Tax Rate 35% 35% 35% (000) Income Tax Computed at the Statutory Rate $39,191 $51,417 $ 45,256 Plant Basis Differences 3,096 1,307 (27) Amortization of Investment Tax Credits (2,534) (2,534) (2,534) Tax Adjustments - - (4,874) Other-Net (2,795) (2,039) (1,692) Total Federal Income Tax Expense $36,958 $48,151 $ 36,129 Effective Federal Income Tax Rate 33% 33% 28% Items comprising deferred tax balances as of December 31 are as follows: (000) 1996 1995 Deferred Tax Liabilities: Plant Basis Differences $326,673 $316,834 Unrecovered Purchased Power Costs 22,630 28,209 State Excise Taxes 20,141 22,527 Other 29,344 29,519 Total Deferred Tax Liabilities 398,788 397,089 Deferred Tax Assets: Deferred Investment Tax Credits 25,143 26,511 Employee Separation Costs 526 2,621 Other 12,349 11,170 Total Deferred Tax Assets 38,018 40,302 Total Deferred Taxes-Net $360,770 $356,787 Note 14. Quarterly Financial Results (Unaudited). Quarterly financial data of ACE, reflecting all adjustments necessary in the opinion of management for all fair presentation of such amounts, are as follows: ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY Operating Operating Net Earnings for Quarter Revenues Income Income Common Stock 1996 (000) (000) (000) (000) 1st $245,472 $33,075 $19,316 $16,307 2nd 226,035 28,007 13,464 10,455 3rd 282,577 51,929 35,611 33,154 4th 228,408 21,518 6,627 5,197 Annual $982,492 $134,529 $75,017 $65,113 1995 1st $218,666 $27,565 $15,779 $11,992 2nd 206,246 27,755 15,111 11,324 3rd 303,031 67,026 52,666 48,879 4th 225,836 26,581 15,195 11,930 Annual $953,779 $148,927 $98,752 $84,125 Individual quarters may not add to the total due to rounding. Third quarter results generally exceed those of other quarters due to increased sales and higher residential rates for ACE. The fourth quarter 1996 Net Income reflects an increase in ACE's electric sales offset in part by the increase in energy expense due to the increased sales, recovery of previously deferred energy costs and an increase in operations and maintenance expense related to Salem. EX-12 2 Exhibit 12 Atlantic City Electric Company SEC Registration Method Ratio of Earnings to Fix Charges Years Ended December 31, 1991 1992 1993 Net Income $ 107,428 $ 107,446 $ 109,026 Federal Income Taxes Current $ 37,759 $ 33,661 $ 29,680 Deferred 3,957 16,064 18,747 Investment Tax Credits-net (2,537) (2,534) (2,534) Total Taxes $ 39,179 $ 47,191 $ 45,893 Fixed Charges Interest on long term debt $ 49,081 $ 50,719 $ 56,279 Amortization of debt expense, discount & premium, net 2,520 2,565 3,106 Interest on short term debt 1,946 1,579 1,421 Other interest expense 1,179 1,099 212 Interest factors associated with rentals 5,551 4,177 3,884 Total Fixed Charges $ 60,277 $ 60,139 $ 64,902 Earnings before income taxes and fixed charges (a) $ 205,279 $ 213,716 $ 218,950 Ratios of earnings to Fixed Charges 3.41 3.55 3.37 (a) Excludes the amount of capitalized interest associated with fixed charges. Atlantic City Electric Company SEC Registration Method Ratio of Earnings to Fix Charges Years Ended December 31, 1994 1995 1996 Net Income $ 93,174 $ 98,752 $ 75,017 Federal Income Taxes Current $ 30,014 $ 32,458 $ 35,510 Deferred 8,650 18,230 3,982 Investment Tax Credits-net (2,534) (2,534) (2,534) Total Taxes $ 36,130 $ 48,154 $ 36,958 Fixed Charges Interest on long term debt $ 53,747 $ 56,547 $ 56,111 Amortization of debt expense, discount & premium, net 3,599 3,782 3,918 Interest on short term debt 1,778 3,081 4,597 Other interest expense (664) (531) 1,649 Interest factors associated with rentals 4,148 4,364 4,019 Total Fixed Charges $ 62,608 $ 67,243 $ 70,294 Earnings before income taxes and fixed charges (a) $ 190,884 $ 212,777 $ 181,178 Ratios of earnings to Fixed Charges 3.05 3.16 2.58 (a) Excludes the amount of capitalized interest associated with fixed charges. EX-21 3 Exhibit 21 Subsidiaries of the Registrants Subsidiaries of Atlantic Energy, Inc.: State of Date of Company Name Incorporation Incorporation Atlantic City Electric Company New Jersey 4/28/24 Atlantic Energy International, Inc. Delaware 7/6/96 Atlantic Energy Enterprises, Inc. New Jersey 1/3/95 Subsidiaries of Atlantic City Electric Company: State of Date of Company Name Incorporation Incorporation Deepwater Operating Company New Jersey 12/17/29 Atlantic Capital I Delaware 6/20/96 (Grantor Trust) EX-24 4 Exhibit 24 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration No. 33-49683 of Atlantic Energy, Inc. on Form S-3 and Registration Nos. 33-53511, 333-11683, and 333-07745 of Atlantic Energy, Inc. on Form S-8 and Registration Statement No. 333-06625 of Atlantic City Electric Company and Atlantic Capital 1 on Form S-3 and Registration No. 333-18843 of Conectiv, Inc. on Form S-4 of our reports dated February 7, 1997 appearing in this Annual Report of Form 10-K of Atlantic Energy, Inc. and Atlantic City Electric Company for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Parsippany, New Jersey March 14, 1997 EX-25 5 EXHIBIT 25(a) ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. Holden, Jr. M. Holden, Jr. ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ G. A. Hale G. A. Hale ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for her and in her name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in her name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as her own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ K. MacDonnell K. MacDonnell ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ B. J. Morgan B. J. Morgan ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ H. J. Raveche H. J. Raveche ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ R. B. McGlynn R. B. McGlynn ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ C. H. Holley C. H. Holley ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. J. Chesser M. J. Chesser ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ J. L. Jacobs J. L. Jacobs EX-25 6 EXHIBIT 25(b) ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ J. L. Jacobs J. L. Jacobs ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. J. Chesser M. J. Chesser ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ J. E. Franklin II J. E. Franklin II ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. I. Harlacher, Jr. M. I. Harlacher, Jr. ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ H. K. Levari, Jr. H. K. Levari, Jr. ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. J. Barron M. J. Barron ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, M. J. BARRON AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for her and in her name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1996 and any and all amendments thereto, and execute and deliver for the undersigned and in her name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as her own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 13th day of March, 1997. /s/ M. T. Powell M. T. Powell EX-27 7
UT 0000008192 ATLANTIC CITY ELECTRIC COMPANY YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 1,799,395 80,870 243,502 336,974 0 2,460,741 54,963 488,514 234,948 778,425 43,950 30,000 802,245 64,950 0 0 175 10,000 39,212 702 691,082 2,460,741 982,492 32,272 815,691 847,963 134,529 5,787 140,316 63,871 75,017 9,904 65,113 82,162 0 212,672 0 0
EX-27 8
UT 0000806393 ATLANTIC ENERGY INC YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 1,799,395 250,504 263,094 357,769 0 2,670,762 562,746 0 224,648 787,394 43,950 30,000 829,745 64,950 0 0 98,250 10,000 39,212 702 766,559 2,670,762 980,255 32,272 815,555 847,827 132,428 1,542 133,970 63,871 58,767 0 58,767 81,163 0 194,484 1.12 1.12
EX-99 9 Exhibit4f(7) ================================================================= AMENDED AND RESTATED TRUST AGREEMENT among ATLANTIC CITY ELECTRIC COMPANY, as Depositor, The Bank of New York, as Property Trustee and The Bank of New York (Delaware) as Delaware Trustee and THE ADMINISTRATIVE TRUSTEES NAMED HEREIN Dated as of October 1, 1996 ATLANTIC CAPITAL I ================================================================= TABLE OF CONTENTS Page ARTICLE I DEFINED TERMS . . . . . . . . . . . . . . 1 SECTION 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE II ESTABLISHMENT OF THE TRUST . . . . . . . . . . . 11 SECTION 2.1. Name. . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.2. Office of the Delaware Trustee; Principal Place of Business . . . . . . . . . . . . . . . . . . 11 SECTION 2.3. Initial Contribution of Trust Property; Organizational Expenses. . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.4. Issuance of the Preferred Securities. . . . . . . . . . . . . . . . . 11 SECTION 2.5. Issuance of Common Securities; Subscription and Purchase of Debentures. . . . . . . . . . . . . . 12 SECTION 2.6. Declaration of Trust. . . . . . . . . . . . . . . . . . 12 SECTION 2.7. Authorization to Enter into Certain Transactions. . . . . . . . . . . . . . . . . . . . . . 13 SECTION 2.8. Assets of Trust . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.9. Title to Trust Property . . . . . . . . . . . . . . . . 17 ARTICLE III PAYMENT ACCOUNT. . . . . . . . . . . . . . 17 SECTION 3.1. Payment Account . . . . . . . . . . . . . . . . . . . . 17 ARTICLE IV DISTRIBUTIONS; REDEMPTION . . . . . . . . . . . 18 SECTION 4.1. Distributions . . . . . . . . . . . . . . . . . . . . . 18 SECTION 4.2. Redemption. . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 4.3. Subordination of Common Securities. . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4.4. Payment Procedures. . . . . . . . . . . . . . . . . . . 21 SECTION 4.5. Tax Returns and Reports . . . . . . . . . . . . . . . . 21 SECTION 4.6. Payment of Taxes, Duties, Etc. of the Trust . . . . . . 22 SECTION 4.7. Payments under Indenture. . . . . . . . . . . . . . . . 22 ARTICLE V TRUST SECURITIES CERTIFICATES . . . . . . . . . . 22 SECTION 5.1. Initial Ownership . . . . . . . . . . . . . . . . . . . 22 SECTION 5.2. The Trust Securities Certificates. . . . . . . . . . . . . . . . . . . . . 22 SECTION 5.3. Execution and Delivery of Trust Securities Certificates. . . . . . . . . . . . . . . . . . . . . 23 SECTION 5.4. Registration of Transfer and Exchange of Preferred Securities Certificates. . . . . . . . . . . . . . . . . . . . . 23 SECTION 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates. . . . . . . . . . . . . . . . . . . . . 24 SECTION 5.6. Persons Deemed Securityholders . . . . . . . . . . . . . . . . . . . 24 SECTION 5.7. Access to List of Securityholders' Names and Addresses . . . . . . . . . . . . . . . . . . . . 25 SECTION 5.8. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 5.9. Appointment of Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 5.10. Ownership of Common Securities by Depositor . . . . . 26 SECTION 5.11. Book-Entry Preferred Securities Certificates; Common Securities Certificate . . . . . . . . . . . . . 26 SECTION 5.12. Notices to Clearing Agency. . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.13. Definitive Preferred Securities Certificates. . . . . . . . . . . . . . . . . . . . 28 SECTION 5.14. Rights of Securityholders . . . . . . . . . . . . . . . . . . 28 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING . . . . . . . 29 SECTION 6.1. Limitations on Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 6.2. Notice of Meetings. . . . . . . . . . . . . . . . . . . 30 SECTION 6.3. Meetings of Preferred Securityholders . . . . . . . . . . . . . . . . . . . 30 SECTION 6.4. Voting Rights . . . . . . . . . . . . . . . . . . . . . 31 SECTION 6.5. Proxies, etc. . . . . . . . . . . . . . . . . . . . . . 31 SECTION 6.6. Securityholder Action by Written Consent . . . . . . . . . . . . . . . . . . . 31 SECTION 6.7. Record Date for Voting and Other Purposes . . . . . . . 31 SECTION 6.8. Acts of Securityholders . . . . . . . . . . . . . . . . 32 SECTION 6.9. Inspection of Records . . . . . . . . . . . . . . . . . 33 ARTICLE VII. . . . . . . . . . . . . . . 33 REPRESENTATIONS AND WARRANTIES OF THE PROPERTY TRUSTEE AND THE DELAWARE TRUSTEE. . . . . . . . . . 33 SECTION 7.1. Property Trustee. . . . . . . . . . . . . . . . . . . 33 SECTION 7.2. Delaware Trustee. . . . . . . . . . . . . . . . . . . . 34 SECTION 7.3. Representations and Warranties of Depositor . . . . . . 34 ARTICLE VIII THE TRUSTEES. . . . . . . . . . . . . . . 35 SECTION 8.1. Certain Duties and Responsibilities. . . . . . . . . . . . . . . . . . . 35 SECTION 8.2. Certain Notices.. . . . . . . . . . . . . . . . . . . . 36 SECTION 8.3. Certain Rights of Property Trustee. . . . . . . . . . . . . . . . . . . 37 SECTION 8.4. Not Responsible for Recitals or Issuance of Securities . . . . . . . . . . . . . . . . . . . . 39 SECTION 8.5. May Hold Securities . . . . . . . . . . . . . . . . . . 40 SECTION 8.6. Compensation; Indemnity; Fees. . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 8.7. Corporate Property Trustee Required; Eligibility of Trustees . . . . . . . . . . . . . . . 41 SECTION 8.8. Conflicting Interests . . . . . . . . . . . . . . . . . 41 SECTION 8.9. Co-Trustees and Separate Trustee . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 8.10. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . 43 SECTION 8.11. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . 44 SECTION 8.12. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . 45 SECTION 8.13. Preferential Collection of Claims Against Depositor or Trust. . . . . . . . . . . . . . . . . 45 SECTION 8.14. Reports by Property Trustee . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 8.15. Reports to the Property Trustee . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 8.16. Evidence of Compliance with Conditions Precedent . . . . . . . . . . . . . . . . . . . . . 46 SECTION 8.17. Number of Trustees. . . . . . . . . . . . . . . . . . 46 SECTION 8.18. Delegation of Power . . . . . . . . . . . . . . . . . 47 ARTICLE IX TERMINATION, LIQUIDATION AND MERGER. . . . . . . . . 47 SECTION 9.1. Termination Upon Expiration Date . . . . . . . . . . . . . . . . . . . 47 SECTION 9.2. Early Termination . . . . . . . . . . . . . . . . . . . 47 SECTION 9.3. Termination . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 9.4. Liquidation . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of the Trust . . . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE X MISCELLANEOUS PROVISIONS. . . . . . . . . . . . 50 SECTION 10.1. Limitation of Rights of Securityholders . . . . . . . . . . . . . . . . . . 50 SECTION 10.2. Amendment . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 10.3. Separability. . . . . . . . . . . . . . . . . . . . . 52 SECTION 10.4. GOVERNING LAW.. . . . . . . . . . . . . . . . . . . . 52 SECTION 10.5. Payments Due on Non-Business Day. . . . . . . . . . . . . . . . . . 52 SECTION 10.6. Successors. . . . . . . . . . . . . . . . . . . . . . 52 SECTION 10.7. Headings. . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.8. Reports, Notices and Demands . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.9. Agreement Not to Petition. . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.10. Trust Indenture Act; Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . 54 SECTION 10.12. Counterparts. . . . . . . . . . . . . . . . . . . . . 55 Exhibit A Certificate of Trust Exhibit B Form of Certificate Depository Agreement Exhibit C Form of Common Securities Certificate Exhibit D Form of Expense Agreement Exhibit E Form of Preferred Securities AMENDED AND RESTATED TRUST AGREEMENT, dated as of October 1, 1996, among (i) Atlantic City Electric Company, a New Jersey corporation (including any successors or assigns, the "Depositor"), (ii) The Bank of New York, a New York banking corporation duly organized and existing under the laws of the State of New York, as property trustee (in such capacity, the "Property Trustee" and, in its separate corporate capacity and not in its capacity as Property Trustee, the "Bank"), (iii) The Bank of New York (Delaware), as Delaware trustee (the "Delaware Trustee"), (iv) Robert K. Marshall, an individual, and Stephanie M. Scola, an individual, each of whose address is c/o Atlantic City Electric Company, 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130 (each, an "Administrative Trustee" and, collectively, the "Administrative Trustees" and, collectively with the Property Trustee and Delaware Trustee, the "Trustees") and (v) the several Holders, as hereinafter defined. W I T N E S S E T H : WHEREAS, the Depositor and the Delaware Trustee have heretofore duly declared and established a business trust pursuant to the Delaware Business Trust Act by the entering into of that certain Trust Agreement, dated as of June 20, 1996 (the "Original Trust Agreement"), and by the execution and filing by the Delaware Trustee with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on June 20, 1996, attached as Exhibit A (the "Certificate of Trust"); and WHEREAS, the Depositor and the Delaware Trustee desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities by the Trust to the Depositor, (ii) the issuance and sale of the Preferred Securities by the Trust pursuant to the Underwriting Agreement, (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in the Debentures and (iv) the appointment of the Property Trustee and the Administrative Trustees; NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Securityholders, hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: ARTICLE I DEFINED TERMS SECTION 1.1. Definitions. For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "Act" has the meaning specified in Section 6.8. "Additional Amount" means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of Additional Interest (as defined in the Indenture) paid by the Depositor on a Like Amount of Debentures for such period. "Additional Sums" has the meaning specified in Section 10.5 of the Indenture. "Administrative Trustee" means each of Robert K. Marshall and Stephanie M. Scola, each solely in such person's capacity as Administrative Trustee of the Trust formed and continued hereunder and not in such person's individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor trustee appointed as herein provided. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Bank" has the meaning specified in the preamble to this Trust Agreement. "Bankruptcy Event" means, with respect to any Person: (a) the entry of a decree or order by a court having jurisdiction in the premises judging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of such Person or of any substantial part of its property or ordering the winding-up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or similar official) of such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt, or the taking of corporate action by such Person in furtherance of any such action. "Bankruptcy Laws" has the meaning specified in Section 10.9. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Depositor to have been duly adopted by the Depositor's Board of Directors, or such committee of the Board of Directors or officers of the Company to which authority to act on behalf of the Board of Directors has been delegated, and to be in full force and effect on the date of such certification, and delivered to the Trustees. "Book-Entry Preferred Securities Certificates" means a beneficial interest in the Preferred Securities Certificates, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 5.11. "Business Day" means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed, or (c) a day on which the Property Trustee's Corporate Trust Office or the Corporate Trust Office of the Debenture Trustee is closed for business. "Certificate Depository Agreement" means the agreement among the Trust, the Depositor and The Depository Trust Company, as the initial Clearing Agency, dated as of the Closing Date, relating to the Trust Securities Certificates, substantially in the form attached as Exhibit B, as the same may be amended and supplemented from time to time. "Certificate of Trust" has the meaning specified in the recitals hereof. "Clearing Agency" means an organization registered as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person who maintains an account with and for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the date of execution and delivery of this Trust Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Common Securities Certificate" means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit C. "Corporate Trust Office" means the principal office of the Property Trustee located in New York, New York, which at the date hereof is 101 Barclay Street, New York, New York 10286. "Debenture Event of Default" means an "Event of Default" as defined in the Indenture. "Debenture Redemption Date" means, with respect to any Debentures to be redeemed under the Indenture, the date fixed for redemption under the Indenture. "Debenture Tax Event" means a "Tax Event" as defined in the Indenture. "Debenture Trustee" means The Bank of New York, a New York banking corporation, as trustee under the Indenture. "Debentures" means the aggregate principal amount of the Depositor's 8.25% Junior Subordinated Deferrable Interest Debentures, issued pursuant to the Indenture. "Definitive Preferred Securities Certificates" means either or both (as the context requires) of (a) Preferred Securities Certificates issued as Book-Entry Preferred Securities Certificates as provided in Section 5.11(a) and (b) Preferred Securities Certificates issued in certificated, fully registered form as provided in Section 5.13. "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. 3801, et seq., as it may be amended from time to time. "Delaware Trustee" means the commercial bank or trust company identified as the "Delaware Trustee" in the preamble to this Trust Agreement solely in its capacity as Delaware Trustee of the Trust formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor trustee appointed as herein provided. "Depositor" has the meaning specified in the preamble to this Trust Agreement. "Distribution Date" has the meaning specified in Section 4.1(a). "Distributions" means amounts payable in respect of the Trust Securities as provided in Section 4.1. "Early Termination Event" has the meaning specified in Section 9.2. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty a default in the performance of which or the breach of which is dealt with in clause (b) or (c) above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the defaulting Trustee or Trustees by the Holders of at least 25% in aggregate liquidation preference of the Outstanding Preferred Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Trust. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expense Agreement" means the Agreement as to Expenses and Liabilities between the Depositor and the Trust, substantially in the form attached as Exhibit D, as amended from time to time. "Expiration Date" has the meaning specified in Section 9.1. "Guarantee" means the Guarantee Agreement executed and delivered by the Depositor and The Bank of New York, as trustee, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the holders of the Preferred Securities, as amended from time to time. "Indenture" means the Junior Subordinated Indenture, dated as of October 1, 1996, between the Depositor and the Debenture Trustee, as trustee, as amended or supplemented from time to time. "Investment Company Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a recognized national tax and securities practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), the Trust is or will be considered an "investment company" that is required to be registered under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Preferred Securities under this Trust Agreement. "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Like Amount" means (a) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Debentures to be contemporaneously redeemed in accordance with the Indenture the proceeds of which will be used to pay the Redemption Price of such Trust Securities and (b) with respect to a distribution of Debentures to Holders of Trust Securities in connection with a dissolution or liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Debentures are distributed. "Liquidation Amount" means the stated amount of $25 per Trust Security. "Liquidation Date" means the date on which Debentures are to be distributed to Holders of Trust Securities in connection with a termination and liquidation of the Trust pursuant to Section 9.4(a). "Liquidation Distribution" has the meaning specified in Section 9.4(d). "1940 Act" means the Investment Company Act of 1940, as amended. "Officers' Certificate" means a certificate signed by the Chairman and Chief Executive Officer, President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 8.16 shall be the principal executive, financial or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Trust, the Property Trustee, or the Depositor or General Counsel of the Depositor, and who shall be reasonably acceptable to the Property Trustee. "Original Trust Agreement" has the meaning specified in the recitals to this Trust Agreement. "Outstanding", when used with respect to Preferred Securities, means, as of the date of determination, all Preferred Securities theretofore executed and delivered under this Trust Agreement, except: (a) Preferred Securities theretofore cancelled by the Property Trustee or delivered to the Property Trustee for cancellation; (b) Preferred Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent for the Holders of such Preferred Securities; provided that, if such Preferred Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Preferred Securities which have been paid or in exchange for or in lieu of which other Preferred Securities have been executed and delivered pursuant to this Trust Agreement, including pursuant to Sections 5.4, 5.5, 5.11 and 5.13; provided, however, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (a) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded and (b) the foregoing shall not apply at any time when all of the outstanding Preferred Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right so to act with respect to such Preferred Securities and that the pledgee is not the Depositor or any Affiliate of the Depositor. "Owner" means each Person who is the beneficial owner of a Book-Entry Preferred Securities Certificate as reflected in the records of the Clearing Agency or, if a Clearing Agency Participant is not the beneficial owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly, in accordance with the rules of such Clearing Agency). "Paying Agent" means any paying agent or co-paying agent appointed pursuant to Section 5.9 and shall initially be the Bank. "Payment Account" means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee with the Bank in its trust department for the benefit of the Securityholders in which all amounts paid in respect of the Debentures will be held and from which the Property Trustee or Paying Agent in accordance with Section 5.9 shall make payments to the Securityholders in accordance with Sections 4.1 and 4.2. "Person" means any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Preferred Securities Certificate" means a certificate evidencing ownership of Preferred Securities, substantially in the form attached as Exhibit E. "Property Trustee" means the commercial bank or trust company identified as the "Property Trustee" in the preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust heretofore created and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as herein provided. "Redemption Date" means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture Redemption Date and the Stated Maturity of the Debentures (as defined in the Indenture) shall be a Redemption Date for a Like Amount of Trust Securities. "Redemption Price" means, with respect to Redemption Date of any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to such Redemption Date, plus the related amount of the premium, if any, paid by the Depositor upon the concurrent redemption of a Like Amount of Debentures, allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities. "Registrar" shall mean the registrar for the Preferred Securities appointed by Depositor to Section 5.4 and shall be initially The Bank of New York. "Relevant Trustee" shall have the meaning specified in Section 8.10. "Responsible Officer," when used with respect to the Property Trustee means an officer of the Property Trustee assigned by the Property Trustee to administer its corporate trust matters. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 5.4. "Securityholder" or "Holder" means a Person in whose name a Trust Security or Securities is registered in the Securities Register; any such Person shall be deemed to be a beneficial owner within the meaning of the Delaware Business Trust Act. "Special Event" means either a Tax Event or an Investment Company Event. "Tax Event" means the receipt by the Trust of an Opinion of Counsel, rendered by a law firm having a national tax and securities practice, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is adopted or which pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under this Trust Agreement, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Depositor on the Debentures is not, or within 90 days after the date of such Opinion of Counsel, will not be, deductible by the Depositor, in whole or in part, for United States federal income tax purposes or (iii) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. "Transfer Agent" shall mean one or more transfer agents for the Preferred Securities appointed by the Depositor pursuant to Section 5.4 and shall be initially The Bank of New York. "Trust" means the Delaware business trust heretofore created and continued hereby and identified on the cover page to this Trust Agreement. "Trust Agreement" means this Amended and Restated Trust Agreement, as the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including all exhibits hereto, including, for all purposes of this Amended and Restated Trust Agreement and any such modification, amendment or supplement, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Payment Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held by the Property Trustee or the Trust pursuant to the terms of this Trust Agreement. "Trust Security" means any one of the Common Securities or the Preferred Securities. "Trust Securities Certificate" means any one of the Common Securities Certificates or the Preferred Securities Certificates. "Trustees" means, collectively, the Property Trustee, the Delaware Trustee and the Administrative Trustees. "Underwriting Agreement" means the Underwriting Agreement, dated September 26, 1996, among the Trust, the Depositor and the Underwriters named therein. ARTICLE II ESTABLISHMENT OF THE TRUST SECTION 2.1. Name. The Trust heretofore created and continued hereby shall be known as "Atlantic Capital I," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees engage in the transactions contemplated hereby, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. SECTION 2.2. Office of the Delaware Trustee; Principal Place of Business. The address of the Delaware Trustee in the State of Delaware is c/o The Bank of New York (Delaware), White Clay Center, Route 273 Newark, Delaware, 19711, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Securityholders and the Depositor. The principal executive office of the Trust is c/o Atlantic City Electric Company, 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130. SECTION 2.3. Initial Contribution of Trust Property; Organizational Expenses. The Property Trustee acknowledges receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. SECTION 2.4. Issuance of the Preferred Securities. On September 26, 1996 the Depositor, on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Underwriting Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to the Underwriters named in the Underwriting Agreement Preferred Securities Certificates, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of 2,800,000 Preferred Securities having an aggregate Liquidation Amount of $70,000,000, against receipt of the aggregate purchase price of such Preferred Securities of $70,000,000, which amount the Trust shall promptly deliver or direct to be delivered to the Depositor. SECTION 2.5. Issuance of Common Securities; Subscription and Purchase of Debentures. On the Closing Date, an Administrative Trustee, on behalf of the Trust, (i) shall execute and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, evidencing 86,598 Common Securities having an aggregate Liquidation Amount of $2,164,950 against payment therefor of $2,164,950, and (ii) shall subscribe to and purchase from the Depositor Debentures, registered in the name of the Property Trustee on behalf of the Trust, in an aggregate principal amount of $72,164,950 against payment therefor of $72,164,950. SECTION 2.6. Declaration of Trust; Appointment of Property Trustee and Administrative Trustees. The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities and use the proceeds from such sale to acquire the Debentures and (b) to engage in those activities necessary, convenient or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties to the extent set forth herein, and the Trustees hereby accept such appointment. The Property Trustee hereby declares that it will hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein and in accordance with applicable law with respect to accomplishing the purposes of the Trust. Anything in this Trust Agreement to the contrary notwithstanding, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the Trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Business Trust Act. SECTION 2.7. Authorization to Enter into Certain Transactions. (a) The Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section, Article VIII and in accordance with the following provisions (i) and (ii), the Administrative Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the following: (i) As among the Trustees, each Administrative Trustee shall have the power and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Expense Agreement the Certificate Depository Agreement and, such agreements as may be necessary or desirable in connection with the consummation of the Underwriting Agreement, and such other agreements as may be necessary or desirable in connection with the purposes and function of the Trust; (C) to qualify the Trust to do business in any jurisdiction as may be necessary or desirable; (D) the collection of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (E) assisting in the registration of the Preferred Securities under the Securities Act of 1933, as amended, and under state securities or blue sky laws, and the qualification of this Trust Agreement as a trust indenture under the Trust Indenture Act; (F) assisting in the listing of the Preferred Securities upon such national securities exchange, the Nasdaq National Market or such other interdealer quotation system or self-regulatory organization as shall be determined by the Depositor and the registration of the Preferred Securities under the Exchange Act and the preparation and filing of all periodic and other reports and other documents pursuant to the foregoing; (G) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (H) the appointment of a Paying Agent, authenticating agent and a Registrar in accordance with this Trust Agreement; (I) registering transfer of the Trust Securities in accordance with this Trust Agreement; (J) to the extent provided in this Trust Agreement, the winding-up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (K) unless otherwise determined by the Depositor, the Property Trustee or the Administrative Trustees, or as otherwise required by the Delaware Business Trust Act or the Trust Indenture Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrative Trustees) any documents that the Administrative Trustees have the power to execute pursuant to this Trust Agreement; and (L) the taking of any action incidental to the foregoing as the Administrative Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following ministerial matters: (A) the establishment of the Payment Account; (B) the receipt of the Debentures; (C) the deposit of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (D) the distribution of amounts owed to the Securityholders in respect of the Trust Securities in accordance with the terms of this Trust Agreement; (E) subject to the applicable provisions of this Trust Agreement, the exercise of all of the rights, powers and privileges of a holder of the Debentures, which the Property Trustee, in its sole discretion, deems necessary or advisable to exercise under the circumstances; (F) the sending of notices of default and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding-up of the affairs of and liquidation of the Trust and the execution of the certificate of cancellation to be prepared and filed by the Administrative Trustees with the Secretary of State of the State of Delaware; (I) subject to the applicable provisions of this Trust Agreement, after an Event of Default the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder); (J) registering transfers of the Trust Securities in accordance with this Trust Agreement; and (K) except as otherwise provided in this Section 2.7(a)(ii), the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 2.7(a)(i) or of the Depositor set forth in Section 2.7(c). (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests herein, including to Securityholders, except as expressly provided herein or in the Guarantee, (iii) take any action that would cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a Lien on any of the Trust Property. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects): (i) the preparation and filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on the appropriate form in relation to the Preferred Securities and the Debentures, including any amendments thereto; (ii) the determination of the states in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and the doing of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advice to the Trustees of actions they must take on behalf of the Trust, and the preparation for execution and filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such states; (iii) the preparation for filing by the Trust and execution on behalf of the Trust of an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing upon notice of issuance of any Preferred Securities file or cause the Administrative Trustees to file thereafter with such exchange such notifications and documents as may be necessary from time to time to maintain such listing; (iv) the preparation for filing by the Trust with the Commission and the execution on behalf of the Trust of a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b) or 12(g) of the Exchange Act, including any amendments thereto; (v) the negotiation of the terms of, and the execution and delivery of, the Underwriting Agreement providing for the sale of the Preferred Securities and such other agreements as may be necessary or desirable in connection with the consummation thereof; and (vi) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be deemed to be an "investment company" required to be registered under the 1940 Act, or taxed as other than a grantor trust for United States federal income tax purposes and so that the Debentures will be treated as indebtedness of the Depositor for United States federal income tax purposes. In this connection, subject to the provisions of Section 10.2, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law, the Certificate of Trust as amended or restated from time to time or this Trust Agreement, that each of the Depositor and the Administrative Trustees determines in their discretion to be necessary or desirable for such purposes, as long as such action does not adversely affect in any material respect the interests of the holders of the Preferred Securities. SECTION 2.8. Assets of Trust. The assets of the Trust shall consist of the Trust Property. SECTION 2.9. Title to Trust Property. Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Securityholders in accordance with this Trust Agreement. ARTICLE III PAYMENT ACCOUNT SECTION 3.1. Payment Account. (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments or proceeds with respect to, the Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof. ARTICLE IV DISTRIBUTIONS; REDEMPTION SECTION 4.1. Distributions. (a) Distributions on the Trust Securities shall be cumulative, and will accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accrue from the Closing Date, and, except in the event that the Depositor exercises its right to defer the payment of interest on the Debentures pursuant to Section 3.1 of the Indenture, shall be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on December 31, 1996. Distributions on the Trust Securities will accumulate from the Closing Date. If any date on which a Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, payment of such Distribution shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date (each date on which distributions are payable in accordance with this Section 4.1(a), a "Distribution Date"). (b) The Trust Securities represent undivided beneficial interests in the Trust Property, and, the Distributions on the Trust Securities shall be payable at a rate of 8.25% per annum of the Liquidation Amount of the Trust Securities. The amount of Distributions payable on December 31, 1996 will be computed on the basis of 89 days in a 360-day year. The amount of Distributions payable for any full quarterly period thereafter shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of Distributions for any partial period shall be computed on the basis of the actual number of days elapsed in a 360-day year of twelve 30-day months. The amount of Distributions payable for any period shall include the Additional Amounts, if any. (c) Distributions on the Trust Securities shall be made by the Property Trustee from the Payment Account and shall be deemed payable on each Distribution Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Distributions. (d) Distributions on the Trust Securities with respect to a Distribution Date (other than a Redemption Date) shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to such Distribution Date; provided, however, that in the event that the Preferred Securities do not remain in book-entry-only form, the relevant record date shall be the date 15 days prior to such Distribution Date. SECTION 4.2. Redemption. (a) On each Debenture Redemption Date and on the Stated Maturity of the Debentures (as defined in the Indenture), the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Security Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the total Liquidation Amount of the particular Trust Securities to be redeemed; and (v) that on the Redemption Date the Redemption Price will become due and payable upon each such Trust Security to be redeemed and that distributions thereon will cease to accrue on and after said date. (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption or payment at stated maturity of Debentures. Redemptions of the Trust Securities shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption Date, subject to Section 4.2(c), the Property Trustee shall, so long as the Preferred Securities are in book-entry-only form, irrevocably deposit with the Clearing Agency for the Preferred Securities funds sufficient to pay the applicable Redemption Price and shall give such Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the holders thereof. If the Preferred Securities are no longer in book-entry-only form, the Property Trustee, subject to Section 4.2(c), shall irrevocably deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and shall give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders thereof upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon such Redemption Date, all rights of Securityholders holding Trust Securities so called for redemption will cease, except the right of such Securityholders to receive the Redemption Price and any Distribution payable on or prior to the Redemption Date, but without interest thereon, and such Trust Securities will cease to be outstanding. In the event that any Redemption Date is not a Business Day, then payment of the Redemption Price payable on such date shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities will continue to accrue, at the then applicable rate, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. Notwithstanding anything herein to the contrary, if the Redemption Date is a Distribution Date, the Distribution payable on such Distribution Date shall be payable to the Holder entitled to the payment of the Redemption Price upon presentation and surrender of the related Trust Security. (e) Subject to Section 4.3(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated on a pro rata basis (based on Liquidation Amounts) among the Common Securities and the Preferred Securities. The particular Preferred Securities to be redeemed shall be selected on a pro rata basis (based upon Liquidation Amounts) not more than 60 days prior to the Redemption Date by the Property Trustee from the Outstanding Preferred Securities not previously called for redemption, by such method (including, without limitation, by lot) as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $25 or an integral multiple of $25 in excess thereof) of the Liquidation Amount of Preferred Securities of a denomination larger than $25. The Property Trustee shall promptly notify the Transfer Agent and Registrar in writing of the Preferred Securities selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the Liquidation Amount of Preferred Securities that has been or is to be redeemed. SECTION 4.3. Subordination of Common Securities. (a) Payment of Distributions (including Additional Amounts, if applicable) on, and the Redemption Price of, the Trust Securities, as applicable, shall be made, subject to Section 4.2(e), pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date or Redemption Date any Event of Default resulting from a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or the Redemption Price of, Preferred Securities then due and payable. (b) In the case of the occurrence of any Event of Default resulting from a Debenture Event of Default, the Holder of Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement until the effect of all such Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until any such Event of Default under this Trust Agreement with respect to the Preferred Securities has been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Preferred Securities and not the Holder of the Common Securities, and only the Holders of the Preferred Securities will have the right to direct the Property Trustee to act on their behalf. SECTION 4.4. Payment Procedures. Payments of Distributions (including Additional Amounts, if applicable) in respect of the Preferred Securities shall be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register or, if the Preferred Securities are held by a Clearing Agency, such Distributions shall be made to the Clearing Agency in immediately available funds, which shall credit the relevant Persons' accounts at such Clearing Agency on the applicable distribution dates. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Common Security Holder. SECTION 4.5. Tax Returns and Reports. The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and file all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, the Administrative Trustees shall (a) prepare and file (or cause to be prepared and filed) the appropriate Internal Revenue Service form required to be filed in respect of the Trust in each taxable year of the Trust and (b) prepare and furnish (or cause to be prepared and furnished) to each Securityholder the appropriate Internal Revenue Service form required to be furnished to such Securityholder or the information required to be provided on such form. The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns and reports promptly after such filing or furnishing. The Trustees shall comply with United States federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. SECTION 4.6. Payment of Taxes, Duties, Etc. of the Trust. Upon receipt under the Debentures of Additional Sums, the Property Trustee shall promptly pay any taxes, duties or governmental charges of whatsoever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority which the Property Trustee is directed in writing to pay by the Administrative Trustees. SECTION 4.7. Payments under Indenture. The Holders of Common Securities will be subrogated to the rights of any Holder of Preferred Securities (and any Owner with respect thereto) to the extent of any payment to such Holder (and Owner) pursuant to Section 5.8 of the Indenture. ARTICLE V TRUST SECURITIES CERTIFICATES SECTION 5.1. Initial Ownership. Upon the creation of the Trust and the contribution by the Depositor pursuant to Section 2.3 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. SECTION 5.2. The Trust Securities Certificates. The Preferred Securities Certificates shall be issued in minimum denominations of $25 Liquidation Amount and integral multiples of $25 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $25 Liquidation Amount and integral multiples thereof. Subject to Section 2.4 relating to the original issuance of the Preferred Securities Certificate registered in the name of the nominee of the Depositary Trust Company, the Trust Securities Certificates shall be executed on behalf of the Trust by the manual or facsimile signature of at least one Administrative Trustee and, if executed on behalf of the Trust by facsimile signature, countersigned by a Transfer Agent or its agent. Trust Securities Certificates bearing the manual signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust and, if executed on behalf of the Trust by facsimile signature, countersigned by a Transfer Agent or its agent, shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 5.4, 5.11 and 5.13. Depositor agrees to indemnify, defend and hold each Transfer Agent harmless against any and all costs and liabilities incurred without negligence arising out of or in connection with any such countersigning by it. SECTION 5.3. Execution and Delivery of Trust Securities Certificates. On the Closing Date, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 2.4 and 2.5, to be executed on behalf of the Trust and in the case of Preferred Securities executed by facsimile signature, countersigned by a Transfer Agent or its agent, and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president, any executive vice president, senior vice president or any vice president, treasurer or assistant treasurer or controller without further corporate action by the Depositor, in authorized denominations. SECTION 5.4. Registration of Transfer and Exchange of Preferred Securities Certificates. The Depositor shall keep or cause to be kept, at the office or agency maintained pursuant to Section 5.8, a register or registers for the purpose of registering Trust Securities Certificates and transfers and exchanges of Preferred Securities Certificates (the "Securities Register") in which, one or more the transfer agents (the each a "Transfer Agent") and registrars designated by the Depositor (each a "Registrar"), subject to such reasonable regulations as it may prescribe, shall provide for, respectively, the transfer and registration of Preferred Securities Certificates and Common Securities Certificates (subject to Section 5.10 in the case of the Common Securities Certificates) and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Bank shall be the initial Registrar. Upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 5.8, the Administrative Trustees or any one of them shall execute on behalf of the Trust by manual or facsimile signature and, if executed by on behalf of the Trust by facsimile signature, cause a Transfer Agent or its agent to countersign, and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount dated the date of execution by such Administrative Trustee or Trustees. The Trust shall not be required (i) to register or cause to be registered the transfer or exchange of any Preferred Security during a period beginning at the opening of business 15 days before the day of the mailing of the relevant notice of redemption and ending of the close of business on the day of mailing of such notice of redemption or (ii) to register or cause to be registered the transfer or exchange of any Preferred Securities selected for redemption in whole or in part, except, in the case of any Preferred Security to be redeemed in part, any portion thereof not to be redeemed. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations of the same class and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificates to be exchanged at the office or agency maintained pursuant to Section 5.8. Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Property Trustee, the Transfer Agent and the Registrar duly executed by the Holder or his attorney duly authorized in writing. Each Preferred Securities Certificate surrendered for registration of transfer or exchange shall be cancelled and subsequently disposed of by the Property Trustee in accordance with its customary practice. No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but a Transfer Agent may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates. SECTION 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates. If (a) any mutilated Trust Securities Certificate shall be surrendered to a Transfer Agent, or if a Transfer Agent shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate and (b) there shall be delivered to such Transfer Agent and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute by manual or facsimile signature and, if executed on behalf of the Trust by facsimile signature, such certificate shall be countersigned by a Transfer Agent, and the Administrative Trustees, or any one of them on behalf of the Trust shall make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section, the Administrative Trustees or the Transfer Agent may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. SECTION 5.6. Persons Deemed Securityholders. The Administrative Trustees, the Property Trustee, each Transfer Agent and each Registrar shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving distributions and for all other purposes whatsoever, and neither the Trustees nor any Transfer Agent or Registrar shall be bound by any notice to the contrary. SECTION 5.7. Access to List of Securityholders' Names and Addresses. The Administrative Trustees or the Depositor shall furnish or cause to be furnished (a) to the Property Trustee, semi-annually on or before January 15 and July 15 in each year and (b) to the Property Trustee, promptly after receipt by any Administrative Trustee or the Depositor of a request therefor from the Property Trustee in order to enable the Property Trustee to discharge its obligations under this Trust Agreement, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Securityholders as of the most recent Record Date in each case to the extent such information is in the possession or control of the Administrative Trustees or the Depositor and is not identical to a previously supplied list or has not otherwise been received by the Property Trustee in its capacity as Securities Registrar. The rights of Securityholders to communicate with other Securityholders with respect to their rights under this Trust Agreement or under the Trust Securities, and the corresponding rights of the Trustee shall be as provided in the Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities Certificate, and each Owner shall be deemed to have agreed not to hold the Depositor, the Property Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. SECTION 5.8. Maintenance of Office or Agency. The Administrative Trustees shall maintain an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate the Bank, 101 Barclay Street, New York, New York 10286, as the office for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor, the Property Trustee, the Transfer Agent, the Registrar and to the Securityholders of any change in the location of the Securities Register or any such office or agency. SECTION 5.9. Appointment of Paying Agent. The Paying Agent shall make distributions to Securityholders from the Payment Account and shall report the amounts of such distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the distributions referred to above. The Property Trustee shall be entitled to rely upon a certificate of the Paying Agent stating in effect the amount of such funds so to be withdrawn and that same are to be applied by the Paying Agent in accordance with this Section 5.9. The Administrative Trustees may revoke such power and remove the Paying Agent if the Administrative Trustees determine in their sole discretion that the Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. The Paying Agent shall initially be the Bank. The Paying Agent may choose any co-paying that is acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In the event that the Bank shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor that is acceptable to the Property Trustee and the Depositor to act as Paying Agent (which shall be a bank or trust company). The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon resignation or removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 8.1, 8.3 and 8.6 shall apply to the Bank also in its role as Paying Agent, for so long as the Bank shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder, and any Paying Agent shall be bound by the requirements with respect to paying agents of securities issued pursuant to the Trust Indenture Act. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. SECTION 5.10. Ownership of Common Securities by Depositor. On the Closing Date, the Depositor shall acquire and retain beneficial and record ownership of the Common Securities. To the fullest extent permitted by law, other than a transfer in connection with a consolidation or merger of the Depositor into another corporation, or any conveyance, transfer or lease by the Depositor of its properties and assets substantially as an entirety to any Person, pursuant to Section 8.1 of the Indenture, any attempted transfer of the Common Securities shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE". SECTION 5.11. Book-Entry Preferred Securities Certificates; Common Securities Certificate. (a) The Preferred Securities Certificates, upon original issuance, will be issued in the form of a typewritten Preferred Securities Certificate or Certificates representing Book-Entry Preferred Securities Certificates, to be delivered to The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Trust. Such Preferred Securities Certificate or Certificates shall initially be registered on the Securities Register in the name of Cede & Co., the nominee of the initial Clearing Agency, and no beneficial owner will receive a Definitive Preferred Securities Certificate representing such beneficial owner's interest in such Preferred Securities, except as provided in Section 5.13. Unless and until Definitive Preferred Securities Certificates have been issued to beneficial owners pursuant to Section 5.13: (i) the provisions of this Section 5.11(a) shall be in full force and effect; (ii) the Transfer Agent, Registrar and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Trust Agreement relating to the Book-Entry Preferred Securities Certificates (including the payment of the Liquidation Amount of and Distributions on the Book-Entry Preferred Securities and the giving of instructions or directions to Owners of Book-Entry Preferred Securities) as the sole Holder of Book-Entry Preferred Securities and shall have no obligations to the Owners thereof; (iii) to the extent that the provisions of this Section 5.11 conflict with any other provisions of this Trust Agreement, the provisions of this Section 5.11 shall control; and (iv) the rights of the Owners of the Book-Entry Preferred Securities Certificates shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Certificate Depository Agreement, unless and until Definitive Preferred Securities Certificates are issued pursuant to Section 5.13, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments on the Preferred Securities to such Clearing Agency Participants. In the event that, in accordance with the procedures of The Depository Trust Company, the Property Trustee receives from The Depository Trust Company an omnibus proxy in connection with any vote solicited of the Holders of Preferred Securities, the Property Trustee shall deliver such omnibus proxy to the Administrative Trustees who shall be solely responsible for soliciting votes from the Owners and in otherwise coordinating with and complying with such procedures in respect of any such solicitation. (b) A single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate, which may be typewritten. SECTION 5.12. Notices to Clearing Agency. To the extent that a notice or other communication to the Owners is required under this Trust Agreement, unless and until Definitive Preferred Securities Certificates shall have been issued to Owners pursuant to Section 5.13, the Trustees shall give all such notices and communications specified herein to be given to Owners to the Clearing Agency, and shall have no obligations to the Owners. SECTION 5.13. Definitive Preferred Securities Certificates. If (a) the Depositor advises the Trustees in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to the Preferred Securities Certificates, and the Depositor is unable to locate a qualified successor, (b) the Depositor at its option advises the Trustees in writing that it elects to terminate the book-entry system through the Clearing Agency, or (c) after the occurrence of a Debenture Event of Default, Owners of Preferred Securities Certificates representing beneficial interests aggregating at least a majority of the Liquidation Amount advise the Property Trustee in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interest of the Owners of Preferred Securities Certificates, then the Property Trustee shall notify the Administrative Trustees, and then the Administrative Trustees shall notify the Clearing Agency and the Clearing Agency shall notify all Owners of Preferred Securities Certificates and the other Trustees of the occurrence of any such event and of the availability of the Definitive Preferred Securities Certificates to Owners of such class or classes, as applicable, requesting the same. Upon surrender to the Property Trustee of the typewritten Preferred Securities Certificate or Certificates representing the Book-Entry Preferred Securities Certificates by the Clearing Agency, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Preferred Securities Certificates in accordance with the instructions of the Clearing Agency. The Administrative Trustees shall be responsible for obtaining any lists of Owners necessary to effect any exchange of Definitive Preferred Securities Certificates for Book-Entry Preferred Securities Certificates hereunder and for otherwise satisfying any related requirements of the Clearing Agency. Neither the Securities Registrar nor the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the Holders of the Definitive Preferred Securities Certificates as Securityholders. The Definitive Preferred Securities Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees, as evidenced by the execution thereof by the Administrative Trustees or any one of them. SECTION 5.14. Rights of Securityholders. (a) The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 2.9, and the Securityholders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement. The Trust Securities shall have no preemptive or similar rights and when issued and delivered to Securityholders against payment of the purchase price therefor will be fully paid and nonassessable by the Trust. The Holders of the Trust Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (b) For so long as any Preferred Securities remain Outstanding, if, upon a Debenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of at least 25% in Liquidation Amount of the Preferred Securities then Outstanding shall have such right by a notice in writing to the Depositor and the Debenture Trustee; and upon any such declaration such principal amount of and the accrued interest on all of the Debentures shall become immediately due and payable, provided that the payment of principal and interest on such Debentures shall remain subordinated to the extent provided in the Indenture. (c) For so long as any Preferred Securities remain Outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement, upon a Debenture Event of Default specified in Section 5.1(1) or 5.1(2) of the Indenture, any Holder of Preferred Securities shall have the right to institute a proceeding directly against the Depositor for enforcement of payment to such Holder of the principal amount of or interest on the Debentures having a principal amount equal to the Liquidation Amount of the Preferred Securities of such Holder (a "Direct Action"). In connection with such Direct Action, the Holders of the Common Securities will be subrogated to the rights of any Holder of the Preferred Securities to the extent of any payment made by the Depositor to such Holder of Preferred Securities in such Direct Action. Except as set forth in this Section 5.14(c), the Holders of Preferred Securities will not be able to exercise directly any other rights or remedy available to the holders of the Debentures or, except as set forth in Section 5.14(b), assert directly any other rights in respect of the Debentures. The Depositor may not amend the Indenture to remove the right of Direct Action without the prior written consent of the Holders of all Preferred Securities. ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING SECTION 6.1. Limitations on Voting Rights. (a) Except as provided in this Section, in Sections 5.14, 8.10 and 10.2 and in the Indenture and as otherwise required by law, no Holder of Preferred Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Debentures, (ii) waive any past default which is waiveable under Section 5.13 of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of all Outstanding Preferred Securities; provided, however, that where a consent under the Indenture would require the consent of each Holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Preferred Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of Preferred Securities, except pursuant to a subsequent Vote of the Holders of Preferred Securities. The Property Trustee shall notify all Holders of the Preferred Securities of any notice of default received from the Debenture Trustee with respect to the Debentures. In addition to obtaining the foregoing approvals of the Holders of the Preferred Securities, prior to taking any of the foregoing actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that the Trust will not be classified as other than a grantor trust for United States federal income tax purposes on account of such action. SECTION 6.2. Notice of Meetings. Notice of all meetings of the Preferred Securityholders, stating the time, place and purpose of the meeting, shall be given by the Administrative Trustees pursuant to Section 10.8 to each Preferred Securityholder of record, at his registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. SECTION 6.3. Meetings of Preferred Securityholders. No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Securityholders to vote on any matter upon the written request of the Preferred Securityholders of record of 25% of the Preferred Securities (based upon their Liquidation Amount) and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Preferred Securityholders to vote on any matters as to which Preferred Securityholders are entitled to vote. Preferred Securityholders of record of 50% of the Outstanding Preferred Securities (based upon their Liquidation Amount), present in person or by proxy, shall constitute a quorum at any meeting of Securityholders. If a quorum is present at a meeting, an affirmative vote by the Preferred Securityholders of record present, in person or by proxy, holding more than a majority of the Preferred Securities (based upon their Liquidation Amount) held by the Preferred Securityholders of record present, either in person or by proxy, at such meeting shall constitute the action of the Securityholders, unless this Trust Agreement requires a greater number of affirmative votes. SECTION 6.4. Voting Rights. Securityholders shall be entitled to one vote for each $25 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. SECTION 6.5. Proxies, etc. At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Securityholders of record shall be entitled to vote. When Trust Securities are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise or, if earlier, until eleven months after it is sent, and the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution. SECTION 6.6. Securityholder Action by Written Consent. Any action which may be taken by Securityholders at a meeting may be taken without a meeting if Securityholders holding more than a majority of all Outstanding Trust Securities (based upon their Liquidation Amount) entitled to vote in respect of such action (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing. SECTION 6.7. Record Date for Voting and Other Purposes. For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of a distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. SECTION 6.8. Acts of Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders or Owners may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders or Owners in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders or Owners signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 8.1) conclusive in favor of the Trustees, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. The ownership of Preferred Securities shall be proved by the Securities Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such liquidation amount. If any dispute shall arise between the Securityholders and the Administrative Trustees or among such Securityholders or Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, consent, waiver or other Act of such Securityholder or Trustee under this Article VI, then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter. A Securityholder may institute a legal proceeding directly against the Depositor under the Guarantee to enforce its rights under the Guarantee without first instituting a legal proceeding against the Guarantee Trustee (as defined in the Guarantee), the Trust or any person or entity. SECTION 6.9. Inspection of Records Subject to Section 5.7 concerning access to the list of Securityholders, upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by Securityholders during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII REPRESENTATIONS AND WARRANTIES OF THE PROPERTY TRUSTEE AND THE DELAWARE TRUSTEE SECTION 7.1. Property Trustee. The Property Trustee hereby represents and warrants for the benefit of the Depositor and the Securityholders that: (a) the Property Trustee is a banking corporation or trust company duly organized, validly existing and in good standing under the laws of the State of New York; (b) the Property Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Property Trustee and constitutes the valid and legally binding agreement of the Property Trustee enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the execution, delivery and performance by the Property Trustee of this Trust Agreement will not violate, conflict with or constitute a breach of the Property Trustee's charter or by-laws; and (e) neither the authorization, execution or delivery by the Property Trustee of this Trust Agreement nor the consummation of any of the transactions by the Property Trustee contemplated herein require the consent or approval of, the giving of notice to the registration with or the taking of any other action, under any existing Federal or New York law governing the banking or trust powers of the Property Trustee with respect to any governmental authority or agency. SECTION 7.2. Delaware Trustee. The Delaware Trustee represents and warrants for the benefit of the Depositor and the Securityholders that: (a) the Delaware Trustee is a banking corporation or trust company duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) the Delaware Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Delaware Trustee and constitutes the valid and legally binding agreement of the Delaware Trustee enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the execution, delivery and performance by the Delaware Trustee of this Trust Agreement will not violate the Delaware Trustee's charter or by-laws; and (e) neither the authorization, execution or delivery by the Delaware Trustee of this Trust Agreement nor the consummation of any of the transactions by the Delaware Trustee contemplated herein require the consent or approval of, the giving of notice to, the registration with or the taking of any other action, under any existing Federal or Delaware law governing the banking or trust powers of the Delaware Trustee, with respect to any governmental authority or agency. SECTION 7.3. Representations and Warranties of Depositor. The Depositor hereby represents and warrants for the benefit of the Securityholders that: (a) the Trust Securities Certificates issued at each Time of Delivery on behalf of the Trust have been duly authorized and will have been duly and validly executed, issued and delivered by the Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Securityholders will be, as of such date, entitled to the benefits of this Trust Agreement; and (b) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Bank, the Property Trustee or the Delaware Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII THE TRUSTEES SECTION 8.1. Certain Duties and Responsibilities (a) The duties and responsibilities of the Trustees shall be as restricted to those set forth in the express provisions of this Trust Agreement and, in the case of the Property Trustee, as provided in the Trust Indenture Act, and no implied covenants or obligations shall be read into this Trust Agreement against any of the Trustees. Notwithstanding the foregoing, no provision of this Trust Agreement shall require any of the Trustees to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Notwithstanding anything contained in this Trust Agreement to the contrary, the duties and responsibilities of the Property Trustee under this Trust Agreement shall be subject to the protections, exculpations and limitations on liability afforded to the Property Trustee under the provisions of the Trust Indenture Act, the Delaware Business Trust Act and, to the extent applicable, Rule 3a-7 under the 1940 Act, or any successor rule thereunder. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of Section 8.1. Nothing in this Trust Agreement shall be construed to release the Delaware Trustee or any Administrative Trustee from liability for its own grossly negligent action, its own grossly negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, a Trustee has duties (including fiduciary duties) and liabilities thereto to the Trust or the Securityholders, such Trustee shall not be liable to the Trust or to any Securityholder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Property Trustee, the Delaware Trustee and the Administrative Trustees otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the Depositor and the Securityholders to replace such other duties and liabilities of the Administrative Trustees. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Securityholder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.1(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) All duties and responsibilities of the Property Trust contained in this Trust Agreement are subject to the following: (i) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Payment Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement, the Trust Indenture Act, the Delaware Business Trust Act and, to the extent applicable, Rule 3a-7 under the Investment Company Act; (ii) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Trust Property or the payment of any taxes or assessments levied thereon or in connection therewith; (iii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Depositor, and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.1 and except to the extent otherwise required by law; and (iv) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of the Administrative Trustees or the Depositor. SECTION 8.2. Certain Notices. Within five Business Days after the occurrence of any Event of Default actually known to the Property Trustee, the Property Trustee shall transmit, in the manner and to the extent provided in Section 10.8, notice of such Event of Default to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. Within five Business Days after the receipt of notice of the Depositor's exercise of its right to defer the payment of interest on the Debentures pursuant to the Indenture, the Administrative Trustee shall transmit, in the manner and to the extent provided in Section 10.9, notice of such exercise to the Securityholders and the Property Trustee, unless such exercise shall have been revoked. SECTION 8.3. Certain Rights of Property Trustee. Subject to the provisions of Section 8.1: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action or (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds the same ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Preferred Securityholders are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall be entitled to deliver a notice to the Depositor requesting written instructions of the Depositor as to the course of action to be taken and the Property Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within ten Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than two Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officers' Certificate; (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be proved or established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate which, upon receipt of such Request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Property Trustee may consult with counsel of its choice (which counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses (including attorney fees and expenses) and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Property Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Depositor, personally or by agent or attorney; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; provided that the Property Trustee shall be responsible for its own negligence or recklessness with respect to selection of any agent or attorney appointed by it hereunder; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder the Property Trustee (i) may request instructions from the Holders of the Trust Securities which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under the terms of the Trust Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in acting in accordance with such instructions; (k) the Property Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or it by this Trust Agreement; (l) the Property Trustee shall not be charged with knowledge of any default or Event of Default with respect to the Trust Securities or default or Debenture Event of Default with respect to the Debentures unless either (1) a Responsible Officer of the Property Trustee shall have actual knowledge of any such default, Event of Default or Debenture Event of Default or (2) written notice of any such default, Event of Default or Debenture Event of Default shall have been given to the Property Trustee by the Depositor, the Administrative Trustee or by any Holder of the Trust Securities; (m) the Property Trustee shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Property Trustee reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from the Distributions to Holders of Trust Securities might properly be paid; (n) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 8.4. Not Responsible for Recitals or Issuance of Securities The recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust, and the Trustees do not assume any responsibility for their correctness. The Trustee make no representations as to the value or condition of the property of the Trust, or any part thereof, or as to the title of the Trust thereto, or as to the security afforded thereby or hereby, or as to the validity of genuineness of any securities at any time pledged and deposited with any trustees hereunder, or as to the validity or sufficiency of this Trust Agreement or the Trust Securities. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Debentures. SECTION 8.5. May Hold Securities. Except as provided in the definition of the term "Outstanding" in Article I, any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, subject to Sections 8.8 and 8.13, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. SECTION 8.6. Compensation; Indemnity; Fees. The Depositor agrees: (a) to pay to the Trustees from time to time reasonable compensation for all services rendered by them hereunder as agreed to in writing from time to time by the Depositor and such Trustees (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify each of the Trustees or any predecessor Trustee for, and to hold the Trustees harmless against, any loss, damage, claims, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance of the trust created by, or the administration of, this Trust Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Depositor under this Section, each of the trustees shall have a lien prior to the Trust Securities upon all property and funds held or collected by such Trustee as such, except funds held in trust for the payment of Distributions on the Trust Securities. When a Trustee incurs expenses or renders services after an Event of Default which occurs as a consequence of a Debenture Event of Default specified in Section 5.1(4) or (5) of the Indenture, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Reform Act of 1978 or a successor statute. SECTION 8.7. Corporate Property Trustee Required; Eligibility of Trustees (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity with its principal place of business in the State of Delaware and that otherwise meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. SECTION 8.8. Conflicting Interests. If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Trust Agreement. SECTION 8.9. Co-Trustees and Separate Trustee. Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor and the Administrative Trustees, by agreed action of the majority of such Trustees, shall have power to appoint, and upon the written request of the Administrative Trustees, the Depositor shall for such purpose join with the Administrative Trustees in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Depositor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section shall either be (i) a natural person who is at least 21 years of age and a resident of the United States or (ii) a legal entity with its principal place of business in the United States that shall act through one or more persons authorized to bind such entity. Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged and delivered by the Depositor. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: (a) The Trust Securities shall be executed and delivered and all rights, powers, duties and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder, shall be exercised, solely by such Trustees and not by such co-trustee or separate trustee. (b) The rights, powers, duties and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or separate trustee. (c) Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case a Debenture Event of Default has occurred and is continuing, the Property Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section. (d) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee or any other trustee hereunder. (e) The Property Trustee shall not be liable by reason of any act of a co-trustee or separate trustee. (f) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. SECTION 8.10. Resignation and Removal; Appointment of Successor. No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 8.11. Subject to the immediately preceding paragraph, the Relevant Trustee may resign at any time with respect to the Trust Securities by giving written notice thereof to the Securityholders. If the instrument of acceptance by the successor Trustee required by Section 8.11 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the Relevant Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by Act of the Common Securityholder. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Preferred Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Common Securityholder at any time. If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees with respect to the Trust Securities and the Trust, and the successor Trustee shall comply with the applicable requirements of Section 8.11. If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when a Debenture Event of Default shall have occurred and be continuing, the Preferred Securityholders, by Act of the Securityholders of a majority in Liquidation Amount of the Preferred Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees with respect to the Trust Securities and the Trust, and such successor Trustee shall comply with the applicable requirements of Section 8.11. If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when a Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the Administrative Trustee, shall promptly appoint a successor Administrative Trustee or Administrative Trustees with respect to the Trust Securities and the Trust, and such successor Administrative Trustee or Administrative Trustees shall comply with the applicable requirements of Section 8.11. If no successor Relevant Trustee with respect to the Trust Securities shall have been so appointed by the Common Securityholder or the Preferred Securityholders and accepted appointment in the manner required by Section 8.11, any Securityholder who has been a Securityholder of Trust Securities for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. The retiring Relevant Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Securityholders in the manner provided in Section 10.8 and shall give notice to the Depositor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Property Trustee. Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Depositor, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of remaining Administrative Trustees if there are at least two of them or (b) otherwise by the Depositor (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees set forth in Section 8.7). SECTION 8.11. Acceptance of Appointment by Successor. In case of the appointment hereunder of a successor Trustee such successor Trustee so appointed shall execute, acknowledge and deliver to the Trust and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Depositor or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and if the Property Trustee is the resigning Trustee shall duly assign, transfer and deliver to the successor Trustee all property and money held by such retiring Property Trustee hereunder. In case of the appointment hereunder of a successor Relevant Trustee with respect to the Trust Securities and the Trust, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Trust Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust and (b) shall add to or change any of the provisions of this Trust Agreement as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees of the same trust and that each such Relevant Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Relevant Trustee and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. Upon request of any such successor Relevant Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Relevant Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be. No successor Relevant Trustee shall accept its appointment unless at the time of such acceptance such successor Relevant Trustee shall be qualified and eligible under this Article. SECTION 8.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Property Trustee or the Delaware Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Relevant Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 8.13. Preferential Collection of Claims Against Depositor or Trust. If and when the Property Trustee or the Delaware Trustee shall be or become a creditor of the Depositor or the Trust (or any other obligor upon the Debentures or the Trust Securities), the Property Trustee or the Delaware Trustee, as the case may be, shall be subject to and shall take all actions necessary in order to comply with the provisions of the Trust Indenture Act regarding the collection of claims against the Depositor or Trust (or any such other obligor). SECTION 8.14. Reports by Property Trustee. (a) The Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the time and in the manner provided pursuant thereto. Such of those reports as are required to be transmitted by the Property Trustee pursuant to Section 313(a) of the Trust Indenture Act shall be so transmitted within 60 days after July 1 of each year, commencing July 1, 1997. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Property Trustee with each stock exchange upon which the Trust Securities are listed, with the Commission and with the Depositor. The Depositor will notify the Property Trustee when any Trust Securities are listed on any stock exchange. SECTION 8.15. Reports to the Property Trustee. The Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 8.16. Evidence of Compliance with Conditions Precedent. Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers' Certificate. SECTION 8.17. Number of Trustees. (a) The number of Trustees shall be four, provided that the Holder of all of the Common Securities by written instrument may increase or decrease the number of Administrative Trustees. The Property Trustee and the Delaware Trustee may be the same person. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 8.10. (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.10, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. SECTION 8.18. Delegation of Power. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 2.7(a), including any registration statement or amendment thereto filed with the Commission, or making any other governmental filing. (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. ARTICLE IX TERMINATION, LIQUIDATION AND MERGER SECTION 9.1. Termination Upon Expiration Date. Unless earlier terminated, the Trust shall automatically terminate on October 1, 2051 (the "Expiration Date"), following the distribution of the Trust Property in accordance with Section 9.4. SECTION 9.2. Early Termination. The first to occur of any of the following events is an "Early Termination Event": (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor; (b) the written direction to the Property Trustee from the Depositor at any time (which direction is optional and wholly within the discretion of the Depositor) to terminate the Trust and distribute the Debentures in exchange for the Preferred Securities; (c) the redemption of all of the Trust Securities in connection with the redemption of all of the Debentures; and (d) the entry of an order for dissolution of the Trust by a court of competent jurisdiction. SECTION 9.3. Termination. The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders upon the liquidation of the Trust pursuant to Section 9.4, or upon the redemption of all of the Trust Securities pursuant to Section 4.2, of all amounts required to be distributed hereunder upon the final payment of the Trust Securities; (b) the payment of any expenses owed by the Trust; and (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Securityholders. SECTION 9.4. Liquidation. (a) If an Early Termination Event specified in clause (a), (b) or (d) of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction or the making of reasonable provisions for the payment of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Debentures, subject to Section 9.4(d). Notice of liquidation shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the Liquidation Date; (ii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and any Trust Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Debentures; and (iii) provide such information with respect to the mechanics by which Holders may exchange Trust Securities Certificates for Debentures, or if Section 9.4(d) applies receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. (b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the liquidation of the Trust and distribution of the Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) certificates representing a Like Amount of Debentures will be issued to holders of Trust Securities Certificates, upon surrender of such certificates to the Administrative Trustees or their agent for exchange, (iii) the Depositor shall use its reasonable efforts to have the Debentures listed on the New York Stock Exchange or on such other stock exchange, interdealer quotation system or self-regulatory organization as the Preferred Securities are then listed or traded, (iv) any Trust Securities Certificates not so surrendered for exchange will be deemed to represent a Like Amount of Debentures, accruing interest at the rate provided for in the Debentures from the last Distribution Date on which a Distribution was made on such Trust Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to holders of Trust Securities Certificates with respect to such Debentures), and (v) all rights of Securityholders holding Trust Securities will cease, except the right of such Securityholders to receive Debentures upon surrender of Trust Securities Certificates. (d) In the event that, notwithstanding the other provisions of this Section 9.4, whether because of an order for dissolution entered by a court of competent jurisdiction or otherwise, distribution of the Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be dissolved, wound-up or terminated, by the Property Trustee in such manner as the Property Trustee determines. In such event, on the date of the dissolution, winding-up or other termination of the Trust, Securityholders will be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If, upon any such dissolution, winding-up or termination, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination pro rata (determined as aforesaid) with Holders of Preferred Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities. SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of the Trust. The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other body, except pursuant to this Section 9.5. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Delaware Trustee, the Property Trustee or the holders of the Preferred Securities, the Trust may merge with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any state; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Preferred Securities or (b) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Depositor expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Debentures, (iii) the Successor Securities are listed or traded, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Preferred Securities are then listed or traded, if any, (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Preferred Securities (including any Successor Securities) in any material respect, (vi) such successor entity has a purpose identical to that of the Trust, (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel to the effect that (a) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Preferred Securities (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an investment company under the 1940 Act, (viii) the Depositor owns all of the Common Securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee and (ix) such successor entity expressly assumes all of the obligations of the Trust with respect to the Trustees. Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100% in Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge with or into, be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1. Limitation of Rights of Securityholders. The death or incapacity of any person having an interest, beneficial or otherwise, in a Trust Security shall not operate to terminate this Trust Agreement, nor entitle the legal representatives or heirs of such person or any Securityholder for such person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding-up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. SECTION 10.2. Amendment. (a) This Trust Agreement may be amended from time to time by the Trustees and the Depositor, without the consent of any Securityholders, (i) to cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, which shall not be inconsistent with the other provisions of this Trust Agreement, or (ii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an investment company under the 1940 Act; provided, however, that such action shall not adversely affect in any material respect the interests of any Securityholder, and any amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders. (b) Except as provided in Section 10.2(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor with (i) the consent of Securityholders representing not less than a majority (based upon Liquidation Amounts) of the Trust Securities then Outstanding and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status of an investment company under the 1940 Act. (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder (such consent being obtained in accordance with Section 6.3 or 6.6 hereof), this Trust Agreement may not be amended to (i) change the amount or timing of any Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a Securityholder to institute suit for the enforcement of any such payment on or after such date; notwithstanding any other provision herein, without the unanimous consent of the Securityholders (such consent being obtained in accordance with Section 6.3 or 6.6 hereof), this paragraph (c) of this Section 10.2 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to fail or cease to qualify for the exemption from status of an investment company under the 1940 Act or fail or cease to be classified as a grantor trust for United States federal income tax purposes. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. (g) Neither the Property Trustee nor the Delaware Trustee shall be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee is entitled to receive an Opinion of Counsel and Officers' Certificate a conclusive evidence that any amendment to this Trust Agreement executed pursuant to Section 10.3 is authorized or permitted by, and conforms to, the terms of this Section 10.3, has been duly authorized by and lawfully executed and delivered on behalf of the other requisite parties, and that it is proper for the Property Trustee under the provisions of this Section 10.3 to join in the execution thereof. SECTION 10.3. Separability. In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.4. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. SECTION 10.5. Payments Due on Non-Business Day. If the date fixed for any payment on any Trust Security shall be a day that is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day that is a Business Day (except as otherwise provided in Sections 4.1(a) and 4.2(d)), with the same force and effect as though made on the date fixed for such payment, and no interest shall accrue thereon for the period after such date. SECTION 10.6. Successors. This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or the Relevant Trustee, including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. SECTION 10.7. Headings. The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. SECTION 10.8. Reports, Notices and Demands. Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor may be given or served in writing by deposit thereof, first-class postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Preferred Securityholder, to such Preferred Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Common Securityholder or the Depositor, to Atlantic City Electric Company, 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130, Attention: Treasurer, facsimile no.: (609) 645-4132. Any notice to Preferred Securityholders shall also be given to such owners as have, within two years preceding the giving of such notice, filed their names and addresses with the Property Trustee for that purpose. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the Property Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the Trust) as follows: (a) with respect to the Property Trustee to The Bank of New York, 101 Barclay Street, New York, New York 10286, Attention: Corporate Trust Department; (b) with respect to the Delaware Trustee, to The Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware 19711 with a copy to the Property Trustee at the address set forth in clause (a); and (c) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked "Attention: Administrative Trustees of Atlantic Capital I." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. SECTION 10.9. Agreement Not to Petition. Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, insolvency, reorganization or other similar law (including, without limitation, the United States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation of this Section 10.9, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor, it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom and such other defenses, if any, as counsel for the Trustee or the Trust may assert. The provisions of this Section 10.9 shall survive the termination of this Trust Agreement. SECTION 10.10. Trust Indenture Act; Conflict with Trust Indenture Act. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required or deemed to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with another provision hereof which is required or deemed to be included in this Trust Agreement by any of the provisions of the Trust Indenture Act, such required or deemed provision shall control. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 10.11. ACCEPTANCE OF TERMS OF TRUST AGREEMENT,GUARANTEE AND INDENTURE. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. SECTION 10.12. Counterparts. This Trust Agreement may contain more than one counterpart of the signature page and this Trust Agreement may be executed by the affixing of the signature of each of the Trustees of one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. ATLANTIC CITY ELECTRIC COMPANY By: /s/ L.M. Walters L.M. Walters Vice President, Treasurer and Assistant Secretary THE BANK OF NEW YORK as Property Trustee By: /s/ Lucille Firrincieli Lucille Firrincieli Assistant Vice President THE BANK OF NEW YORK (DELAWARE) as Delaware Trustee By: /s/ Joseph G. Ernst Joseph G. Ernst Assistant Vice President By: /s/ Robert K. Marshall Robert K. Marshall as Administrative Trustee By: /s/ Stephanie M. Scola Stephanie M. Scola as Administrative Trustee EXHIBIT A CERTIFICATE OF TRUST OF ATLANTIC CAPITAL I THIS Certificate of Trust of Atlantic Capital I (the "Trust"), dated as of June 20, 1996, is being duly executed and filed by The Bank of New York (Delaware), a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.). 1. Name. The name of the business trust created hereby is Atlantic Capital I. 2. Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware are The Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware 19711. 3. Effective Date. This Certificate of Trust shall be effective upon filing with the Secretary of State. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above written. THE BANK OF NEW YORK (DELAWARE), as trustee By Name: Title: EXHIBIT B September 30, 1996 The Depository Trust Company, 55 Water Street, 49th Floor, New York, New York 10041-0099 Attention: General Counsel's Office Re: Atlantic Capital I 8.25% Cumulative Quarterly Income Preferred Securities CUSIP 048272 20 7 Ladies and Gentlemen: The purpose of this letter is to set forth certain matters relating to the issuance and deposit with The Depository Trust Company ("DTC") of the Atlantic Capital I 8.25% Cumulative Quarterly Income Preferred Securities (the "Preferred Securities"), of Atlantic Capital I, a Delaware business trust (the "Issuer"), created pursuant to a Trust Agreement between Atlantic City Electric Company ("the Company") and The Bank of New York (Delaware), as Trustee, as amended and restated etc. The payment of distributions on the Preferred Securities and payments due upon liquidation of the Issuer or redemption of the Preferred Securities, to the extent the Issuer has funds available for the payment thereof, are guaranteed by the Company to the extent set forth in a Guarantee Agreement dated as of October 1, 1996 entered into by the Company and The Bank of New York, as guarantee trustee with respect to the Preferred Securities. The Company and the Issuer propose to sell the Preferred Securities to certain Underwriters (the "Underwriters") pursuant to an Underwriting Agreement dated September 26, 1996 by and among the Underwriters, the Issuer and the Company, and the Underwriters wish to take delivery of the Preferred Securities through DTC. The Bank of New York is acting as transfer agent and registrar with respect to the Preferred Securities (the "Transfer Agent and Registrar"). To induce DTC to accept the Preferred Securities as eligible for deposit at DTC, and to act in accordance with DTC's rules with respect to the Preferred Securities, the Issuer, the Transfer Agent and Registrar and DTC agree among each other as follows: 1. Prior to the closing of the sale of the Preferred Securities to the Underwriters, which is expected to occur on or about October 1, 1996, there shall be deposited with, or held by the Transfer Agent and Registrar as custodian for, DTC one or more global certificates (individually and collectively, the "Global Certificate") registered in the name of DTC's nominee, Cede & Co., representing an aggregate of 2,800,000 Preferred Securities and bearing the following legend: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. 2. The Amended and Restated Trust Agreement of the Issuer provides for the voting by holders (with no provision for revocation of consents or votes by subsequent holders) of the Preferred Securities under certain limited circumstances. The Issuer shall establish a record date for such purposes and shall, to the extent possible, give DTC notice of such record date not less than 15 calendar days in advance of such record date. 3. In the event of a stock split, conversion, recapitalization, reorganization or any other similar transaction resulting in the cancellation of all or any part of the Preferred Securities outstanding, the Issuer or the Transfer Agent and Registrar shall send DTC a notice of such event as soon as possible but, at least 5 business days prior to the effective date of such event. 4. In the event of distribution on, or an offering or issuance of rights with respect to, the Preferred Securities outstanding, the Issuer or the Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount of and conditions, if any, applicable to the payment of any such distribution or any such offering or issuance of rights; (b) any applicable expiration or deadline date, or any date by which any action on the part of the holders of Preferred Securities is required; and (c) the date any required notice is to be mailed by or on behalf of the Issuer to holders of Preferred Securities or published by or on behalf of the Issuer (whether by mail or publication, the "Publication Date"). Such notice shall be sent to DTC by a secure means (e.g., legible telecopy, registered or certified mail, overnight delivery) in a timely manner designed to assure that such notice is in DTC's possession no later than the close of business on the business day before the Publication Date. The Issuer or the Transfer Agent and Registrar will forward such notice either in a separate secure transmission for each CUSIP number or in a secure transmission of multiple CUSIP numbers (if applicable) that includes a manifest or list of each CUSIP number submitted in that transmission. (The party sending such notice shall have a method to verify subsequently the use of such means and the timeliness Of such notice.) The Publication Date shall be not less than 30 calendar days nor more than 60 calendar days prior to the payment of any such distribution or any such offering or issuance of rights with respect to the Preferred Securities. After establishing the amount of payment to be made on the Preferred Securities, the Issuer or the Transfer Agent and Registrar will notify DTC's Dividend Department of such payment 5 business days prior to payment date. Notices to DTC's Dividend Department by telecopy shall be sent to (212) 709-1723. Such notices by mail or by any other means shall be sent to: Manager, Announcements Dividend Department The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004-2695 The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt of such telecopy by telephoning the Dividend Department at (212) 709-1270. 5. In the event of a redemption by the Issuer of the Preferred Securities, notice specifying the terms of the redemption and the Publication Date of such notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC not less than 30 calendar days prior to such event by a secure means in the manner set forth in paragraph 4. Such redemption notice shall be sent to DTC's Call Notification Department at (516) 227-4164 or (516) 227-4190, and receipt of such notice shall be confirmed by telephoning (516) 227-4070. Notice by mail or by any other means shall be sent to: Call Notification Department The Depository Trust Company 711 Stewart Avenue Garden City, New York 11530-4719 6. In the event of any invitation to tender the Preferred Securities, notice specifying the terms of the tender and the Publication Date of such notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC by a secure means and in a timely manner as described in paragraph 4. Notices to DTC pursuant to this paragraph and notices of other corporate actions (including mandatory tenders, exchanges and capital changes), shall be sent, unless notification to another department is expressly provided for herein, by telecopy to DTC's Reorganization Department at (212) 709-1093 or (212) 709-1094 and receipt of such notice shall be confirmed by telephoning (212) 709-6884, or by mail or any other means to: Manager, Reorganization Department Reorganization Window The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004-2695 7. All notices and payment advices sent to DTC shall contain the CUSIP number or numbers of the Preferred Securities and the accompanying designation of the Preferred Securities, which, as of the date of this letter, is "Atlantic Capital I 8.25% Cumulative Quarterly Income Preferred Securities". 8. Distribution payments or other cash payments with respect to the Preferred Securities shall be governed by DTC's current Principal and Income Payments Rider, a copy of which is attached hereto as Annex I. For purposes of this letter, the term "Agent" used in Annex I shall be deemed to refer to The Bank of New York. 9. DTC may direct the Issuer and the Transfer Agent and Registrar to use any other telecopy number or address of DTC as the number or address to which notices or payments may be sent. 10. In the event of a conversion, redemption, or any other similar transaction (e.g., tender made and accepted in response to the Issuer's or the Transfer Agent and Registrar's invitation) necessitating a reduction in the aggregate number of Preferred Securities outstanding evidenced by the Global Certificate, DTC, in its discretion: (a) may request the Issuer or the Transfer Agent and Registrar to issue and countersign a new Global Certificate; or (b) may make an appropriate notation on the Global Certificate indicating the date and amount of such reduction. 11. DTC may discontinue its services as a securities depositary with respect to the Preferred Securities at any time by giving reasonable prior written notice to the Issuer and the Transfer Agent and Registrar (at which time DTC will confirm with the Issuer or the Transfer Agent and Registrar the aggregate number of Preferred Securities deposited with it) and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Issuer may determine to make alternative arrangements for book-entry settlement for the Preferred Securities, make available one or more separate global certificates evidencing Preferred Securities to any Participant having Preferred Securities credited to its DTC account, or issue definitive Preferred Securities to the beneficial holders thereof, and in any such case, DTC agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar and to return the Global Certificate, duly endorsed for transfer as directed by the Issuer or the Transfer Agent and Registrar, together with any other documents of transfer reasonably requested by the Issuer or the Transfer Agent and Registrar. 12. In the event that the Issuer determines that beneficial owners of Preferred Securities shall be able to obtain definitive Preferred Securities, the Issuer or the Transfer Agent and Registrar shall notify DTC of the availability of certificates. In such event, the Issuer or the Transfer Agent and Registrar shall issue, transfer and exchange certificates in appropriate amounts, as required by DTC and others, and DTC agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar and to return the Global Certificate, duly endorsed for transfer as directed by the Issuer or the Transfer Agent and Registrar, together with any other documents of transfer reasonably requested by the Issuer or the Transfer Agent and Registrar. 13. This letter may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Nothing herein shall be deemed to require the Transfer Agent and Registrar to advance funds on behalf of Atlantic Capital I. Very truly yours, ATLANTIC CAPITAL I (As Issuer) By: Administrative Trustee THE BANK OF NEW YORK (As Transfer Agent and Registrar) By Name: Title: RECEIVED AND ACCEPTED: THE DEPOSITORY TRUST COMPANY By__________________________ Authorized Officer EXHIBIT C THIS CERTIFICATE IS NOT TRANSFERABLE Certificate Number Number of Common Securities C-1 Certificate Evidencing Common Securities of Atlantic Capital I 8.25% Common Securities (liquidation amount $25 per Common Security) Atlantic Capital I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Atlantic City Electric Company (the "Holder") is the registered owner of ____________________ ____________________ (________) common securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the 8.25% Common Securities (liquidation amount $25 per Common Security) (the "Common Securities"). In accordance with Section 5.10 of the Trust Agreement (as defined below) the Common Securities are not transferable and any attempted transfer hereof shall be void. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of October 1, 1996, among Atlantic City Electric Company, a New Jersey corporation, The Bank of New York, a New York banking corporation, as trustee, The Bank of New York (Delaware), a Delaware banking corporation, as trustee, Robert K. Marshall, an individual, as trustee, and Stephanie M. Scola, an individual, as trustee, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of the Common Securities as set forth therein. The Trust will furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this ______ day of ______, ____. ATLANTIC CAPITAL I By Name: Administrative Trustee EXHIBIT D AGREEMENT AS TO EXPENSES AND LIABILITIES AGREEMENT dated as of October 1, 1996, between Atlantic City Electric Company, a New Jersey corporation ("the Company"), and Atlantic Capital I, a Delaware business trust (the "Trust"). WHEREAS, the Trust intends to issue its Common Securities (the "Common Securities") to and receive 8.25% Junior Subordinated Deferrable Interest Debentures ("Debentures") from the Company and to issue and sell to the public 8.25% Cumulative Quarterly Income Preferred Securities (the "Preferred Securities") with such powers, preferences and special rights and restrictions as are set forth in the Amended and Restated Trust Agreement of the Trust dated as of October 1, 1996, as the same may be amended from time to time (the "Trust Agreement"); WHEREAS, The Company will directly or indirectly own all of the Common Securities of Trust and will issue the Debentures to the Trust; NOW, THEREFORE, in consideration of the purchase by each holder of the Preferred Securities, which purchase the Company hereby agrees shall benefit the Company and which purchase the Company acknowledges will be made in reliance upon the execution and delivery of this Agreement, the Company and Trust hereby agree as follows: ARTICLE I Section 1.1. Guarantee by the Company. Subject to the terms and conditions hereof, the Company hereby irrevocably and unconditionally guarantees to each person or entity to whom the Trust is now or hereafter becomes indebted or liable (the "Beneficiaries") the full payment, when and as due, of any and all Obligations (as hereinafter defined) to such Beneficiaries. As used herein, "Obligations" means any costs, expenses or liabilities of the Trust, other than obligations of the Trust to pay to holders of any Preferred Securities or other similar interests in the Trust the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the case may be. This Agreement is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. SECTION 1.2. Term of Agreement. This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made of all amounts payable to all holders of all the Preferred Securities (whether upon redemption, liquidation, exchange or otherwise) and (b) the date on which there are no Beneficiaries remaining; provided, however, that this Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time any holder of Preferred Securities or any Beneficiary must restore payment of any sums paid under the Preferred Securities, under any Obligation, under the Guarantee Agreement dated the date hereof by the Company and The Bank of New York as guarantee trustee or under this Agreement for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. Section 1.3. Waiver of Notice. The Company hereby waives notice of acceptance of this Agreement and of any Obligation to which it applies or may apply, and the Company hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 1.4. No Impairment. The obligations, covenants, agreements and duties of the Company under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Trust of all or any portion of the Obligations or for the performance of any other obligation under, arising out of, or in connection with, the Obligations; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries with respect to the Obligations or any action on the part of the Trust granting indulgence or extension of any kind; or (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust. There shall be no obligation of the Beneficiaries to give notice to, or obtain the consent of, the Company with respect to the happening of any of the foregoing. Section 1.5. Enforcement. A Beneficiary may enforce this Agreement directly against the Company and the Company waives any right or remedy to require that any action be brought against the Trust or any other person or entity before proceeding against the Company. Section 1.6. Subrogation. The Company shall be subrogated to all (if any) rights of the Trust in respect of any amounts paid to the Beneficiaries by the Company under this Agreement; provided, however, that the Company shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Agreement. ARTICLE II Section 2.1. Binding Effect. All guarantees and agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Company and shall inure to the benefit of the Beneficiaries. Section 2.2. Amendment. So long as there remains any Beneficiary or any Preferred Securities are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. Section 2.3. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor by facsimile transmission (confirmed by mail) or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed): Atlantic Capital I c/o The Bank of New York 101 Barclay Street - 21W New York, New York 10286 Attention: Corporate Trust Department Facsimile No.: (212) 815-5915 Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township New Jersey 08234-4130 Facsimile No.: (609) 645-4132 Attention: Treasurer Section 2.4. Applicable Law. This agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. THIS AGREEMENT is executed as of the day and year first above written. ATLANTIC CITY ELECTRIC COMPANY By:_________________________ Name: Title: ATLANTIC CAPITAL I By:_________________________ Name: Administrative Trustee EXHIBIT E IF THE PREFERRED SECURITY IS TO BE A GLOBAL CERTIFICATE INSERT - This Preferred Security is a Global Certificate within the meaning of the Trust Agreement hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depository") or a nominee of the Depository. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Trust Agreement and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances. Unless this Preferred Security is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York) to Atlantic Capital I or its agent for registration of transfer, exchange or payment, and any Preferred Security issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co. or to such other entities as is requested by an authorized representative of The Depository Trust Company, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Certificate Number Number of Preferred Securities P- CUSIP NO. 048272 20 7 Certificate Evidencing Preferred Securities of Atlantic Capital I 8.25% Cumulative Quarterly Income Preferred Securities (liquidation preference $25 per Preferred Security) Atlantic Capital I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that ____________________ (the "Holder") is the registered owner of ______ (______) preferred securities of the Trust representing an undivided beneficial interest in the assets of the Trust and designated the Atlantic Capital I 8.25% Cumulative Quarterly Income Preferred Securities (liquidation preference $25 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 5.4 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of October 1, 1996, among Atlantic City Electric Company, a New Jersey corporation (the "Company"), The Bank of New York, a New York banking corporation, as trustee, The Bank of New York (Delaware), a Delaware banking corporation, as trustee, Robert K. Marshall, an individual, as trustee, and Stephanie M. Scola, an individual, as trustee, as the same may be amended from time to time (the "Trust Agreement"), including the designation of the terms of Preferred Securities as set forth therein. The payment of distributions on the Preferred Securities is deferrable and the Preferred Securities may be redeemed as more fully set forth in the Trust Agreement. The Holder is entitled to the benefits of the Guarantee Agreement entered into by the Company and The Bank of New York, as guarantee trustee, dated as of October 1, 1996 (the "Guarantee"), to the extent provided therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business or registered office. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this ___________ day of ______, ____, 1996. ATLANTIC CAPITAL I By:______________________________ Name: Administrative Trustee ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security to: - ----------------------------------------------------------------- - ----------------------------------------------------------------- - ----------------------------------------------------------------- (Insert assignee's social security or tax identification number) - ----------------------------------------------------------------- - ----------------------------------------------------------------- - ----------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - ----------------------------------------------------------------- - ----------------------------------------------------------------- - ----------------------------------------------------------------- agent to transfer this Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date:_____________ Signature:___________________________ (Sign exactly as your name appears on the other side of this Preferred Security Certificate) Signature(s) Guaranteed: - ------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-99.1 10 Exhibit 4f(8) ATLANTIC CITY ELECTRIC COMPANY to THE BANK OF NEW YORK Trustee JUNIOR SUBORDINATED INDENTURE Dated as of October 1, 1996 8.25% Junior Subordinated Deferrable Interest Debentures TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION. . . . .1 SECTION 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . .1 SECTION 1.2. Compliance Certificates and Opinions. . . . . . . . . . . . . . . . . . . . .9 SECTION 1.3. Forms of Documents Delivered to Trustee . . . . . . . .9 SECTION 1.4. Acts of Holders.. . . . . . . . . . . . . . . . . . . 10 SECTION 1.5. Notices, Etc., to Trustee and Company . . . . . . . . . . . . . . . . 11 SECTION 1.6. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 1.7. Conflict With Trust Indenture Act . . . . . . . . . . . . . . . . . . . 12 SECTION 1.8. Effect of Headings and Table of Contents. . . . . . . 12 SECTION 1.9. Successors and Assigns. . . . . . . . . . . . . . . . 12 SECTION 1.10. Separability Clause . . . . . . . . . . . . . . . . . 12 SECTION 1.11. Benefits of Indenture . . . . . . . . . . . . . . . . 12 SECTION 1.12. Governing Law.. . . . . . . . . . . . . . . . . . . . 12 SECTION 1.13. Non-Business Days . . . . . . . . . . . . . . . . . . 12 ARTICLE II SECURITY FORMS . . . . . . . . . . . . . . 13 SECTION 2.1. Forms Generally . . . . . . . . . . . . . . . . . . . 13 SECTION 2.2. Form of Face of Security. . . . . . . . . . . . . . . 13 SECTION 2.3. Form of Reverse of Security. . . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.4. Additional Provisions Required in Global Security. . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.5. Form of Trustee's Certificate of Authentication. . . . . . . . . . . . . . . . . . . 20 ARTICLE III THE SECURITIES . . . . . . . . . . . . . . 20 SECTION 3.1. Title and Terms . . . . . . . . . . . . . . . . . . . 20 SECTION 3.2. Denominations . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.3. Execution, Authentication, Delivery and Dating. . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 3.4. Temporary Securities. . . . . . . . . . . . . . . . . 23 SECTION 3.5. Registration, Transfer and Exchange. . . . . . . . . . . . . . . . . . . . 24 SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.7. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . . . . 26 SECTION 3.8. Persons Deemed Owners . . . . . . . . . . . . . . . . 27 SECTION 3.9. Cancellation. . . . . . . . . . . . . . . . . . . . . 27 SECTION 3.10. Computation of Interest . . . . . . . . . . . . . . . 27 SECTION 3.11. Right of Set-Off. . . . . . . . . . . . . . . . . . . 28 SECTION 3.12. Agreed Tax Treatment. . . . . . . . . . . . . . . . . 28 SECTION 3.13. Change or Extension of Stated Maturity; Adjustment of Stated Maturity Upon an Exchange . . . . . . . . 28 SECTION 3.14. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . 28 ARTICLE IV SATISFACTION AND DISCHARGE . . . . . . . . . . . 29 SECTION 4.1. Satisfaction and Discharge of Indenture. . . . . . . . . . . . . . . 29 SECTION 4.2. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE V REMEDIES. . . . . . . . . . . . . . . . 30 SECTION 5.1. Events of Default . . . . . . . . . . . . . . . . . . 30 SECTION 5.2. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . 33 SECTION 5.4. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities . . . . . . . . . . . . . . . . . . . 34 SECTION 5.6. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.7. Limitation on Suits . . . . . . . . . . . . . . . . . 35 SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . 36 SECTION 5.9. Restoration of Rights and Remedies. . . . . . . . . . 36 SECTION 5.10. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.11. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.12. Control by Holders. . . . . . . . . . . . . . . . . . 37 SECTION 5.13. Waiver of Past Defaults . . . . . . . . . . . . . . . 37 SECTION 5.14. Undertaking for Costs . . . . . . . . . . . . . . . . 38 SECTION 5.15. Waiver of Usury, Stay or Extension Laws . . . . . . . 38 ARTICLE VI THE TRUSTEE . . . . . . . . . . . . . . . 39 SECTION 6.1 Certain Duties and Responsibilities . . . . . . . . . 39 SECTION 6.2. Notice of Defaults. . . . . . . . . . . . . . . . . . 40 SECTION 6.3. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.4. Not Responsible for Recitals or Issuance of Securities . . . . . . . . . . . . . . . . . . . 41 SECTION 6.5. May Hold Securities . . . . . . . . . . . . . . . . . 41 SECTION 6.6. Money Held in Trust . . . . . . . . . . . . . . . . . 41 SECTION 6.7. Compensation and Reimbursement. . . . . . . . . . . . 41 SECTION 6.8. Disqualification; Conflicting Interests . . . . . . . 42 SECTION 6.9. Corporate Trustee Required; Eligibility . . . . . . . 42 SECTION 6.10. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.11. Acceptance of Appointment by Successor. . . . . . . . 44 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . 45 SECTION 6.13. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY . . . . . 45 SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . 45 SECTION 7.2. Preservation of Information, Communications to Holders. . . . . . . . . . . . . . . . . . . . . 46 SECTION 7.3. Reports by Trustee. . . . . . . . . . . . . . . . . . 46 SECTION 7.4. Reports by Company. . . . . . . . . . . . . . . . . . 46 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. . . . . 47 SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms.. . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 8.2. Successor Person Substituted.. . . . . . . . . . . . . . . . . . . . 48 ARTICLE IX SUPPLEMENTAL INDENTURES. . . . . . . . . . . . 48 SECTION 9.1. Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 9.2. Supplemental Indentures with Consent of Holders.. . . . . . . . . . . . . . . . . . . . . . 49 SECTION 9.3. Execution of Supplemental Indentures. . . . . . . . . 50 SECTION 9.4. Effect of Supplemental Indentures.. . . . . . . . . . 50 SECTION 9.5. Conformity with Trust Indenture Act.. . . . . . . . . 51 SECTION 9.6. Reference in Securities to Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . 51 ARTICLE X COVENANTS . . . . . . . . . . . . . . . 51 SECTION 10.1. Payment of Principal, Premium and Interest. . . . . . 51 SECTION 10.2. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 10.3. Money for Security Payments to be Held in Trust.. . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 10.4. Statement as to Compliance. . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.5. Additional Sums.. . . . . . . . . . . . . . . . . . . 53 SECTION 10.6. Additional Covenants. . . . . . . . . . . . . . . . . 54 ARTICLE XI REDEMPTION OF SECURITIES. . . . . . . . . . . . 54 SECTION 11.1. Company's Rights of Redemption. . . . . . . . . . . . . . . . . . . . . 54 SECTION 11.2. Applicability of This Article.. . . . . . . . . . . . . . . . . . . . . . 55 SECTION 11.3. Election to Redeem; Notice to Trustee.. . . . . . . . 55 SECTION 11.4. Selection of Securities to be Redeemed. . . . . . . . 55 SECTION 11.5. Notice of Redemption. . . . . . . . . . . . . . . . . 56 SECTION 11.6. Deposit of Redemption Price.. . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 11.7. Payment of Securities Called for Redemption.. . . . . 57 ARTICLE XII SUBORDINATION OF SECURITIES. . . . . . . . . . . 57 SECTION 12.1. Securities Subordinate to Senior Debt.. . . . . . . . 57 SECTION 12.2. Payment Over of Proceeds Upon Dissolution, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 12.3. Prior Payment to Senior Debt Upon Acceleration of Securities. . . . . . . . . . . . . . . . . . . 59 SECTION 12.4. No Payment When Senior Debt in Default. . . . . . . . 59 SECTION 12.5. Payment Permitted If No Default.. . . . . . . . . . . . . . . . . . . . . . 60 SECTION 12.6. Subrogation to Rights of Holders of Senior Debt. . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 12.7. Provisions Solely to Define Relative Rights.. . . . . 60 SECTION 12.8. Trustee to Effectuate Subordination.. . . . . . . . . 61 SECTION 12.9. No Waiver of Subordination Provisions.. . . . . . . . 61 SECTION 12.10. Notice to Trustee.. . . . . . . . . . . . . . . . . . 61 SECTION 12.11. Reliance on Judicial Order or Certificate of Liquidating Agent. . . . . . . . . . . . . . . . 62 SECTION 12.12. Trustee Not Fiduciary for Holders of Senior Debt. . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 12.13. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights. . . . . . . . . . 62 SECTION 12.14. Article Applicable to Paying Agents.. . . . . . . . . 62 Annex A Form of Trust Agreement Annex B Form of Amended and Restated Trust Agreement Annex C Form of Guarantee Agreement JUNIOR SUBORDINATED INDENTURE, dated as of October 1, 1996 between ATLANTIC CITY ELECTRIC COMPANY, a New Jersey corporation (hereinafter called the "Company") having its principal office at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234, and THE BANK OF NEW YORK, a New York banking corporation, as Trustee (hereinafter called the "Trustee") having its principal corporate trust office at 101 Barclay Street, New York, New York 10286. RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its 8.25% Junior Subordinated Deferrable Interest Debentures (hereinafter called the "Securities") of substantially the tenor hereinafter provided, to evidence loans made to the Company of the proceeds from the issuance by Atlantic Capital I, a Delaware statutory business trust ("Atlantic Capital I") of its 8.25% Cumulative Quarterly Income Preferred Securities (the "Preferred Securities") and common securities of Atlantic Capital I (the "Common Securities" and, collectively with the Preferred Securities, the "Trust Securities"), and to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of any series thereof, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles which are generally accepted at the date or time of such computation; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act", when used with respect to any Holder, has the meaning specified in Section 1.4. "Additional Interest" means the interest, if any, that shall accrue on any interest on the Securities the payment of which has not been made (due to deferral of the payment of interest during an Extension Period or due to default in the payment thereof) on the applicable Interest Payment Date and which shall accrue at the Interest Rate and which shall be payable to the extent permitted by law (whether or not so stated). "Additional Sums" has the meaning specified in Section 10.5. "Additional Taxes" means the sum of any additional taxes, duties and other governmental charges to which Atlantic Capital I has become subject from time to time as a result of a Tax Event. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; provided, however, that an Affiliate of the Company shall not be deemed to include Atlantic Capital I. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Atlantic Capital I" has the meaning specified in the first recital of this Indenture. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means either the board of directors of the Company or any committee of that board duly authorized to act hereunder. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors, or such committee of the Board of Directors or officers of the Company to which authority to act on behalf of the Board of Directors has been delegated, and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed or (iii) a day on which the Corporate Trust Office of the Trustee, or, with respect to Securities which at the time of determination are registered in the Securities Register in the name of Atlantic Capital I, the principal office of the Property Trustee, is closed for business. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Common Securities" has the meaning specified in the first recital of this Indenture. "Common Stock" means the common stock of the Company. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Guarantee" means the guarantee by the Company of distributions on the Preferred Securities to the extent provided in the Guarantee Agreement, substantially in the form attached hereto as Annex C, as amended from time to time. "Company Request" and "Company Order" mean, respectively, the written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Controller, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which at the date hereof is 101 Barclay Street, New York, New York 10286. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Debt" means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every obligation of the type referred to in clauses (i) through (v) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise. "Defaulted Interest" has the meaning specified in Section 3.7. "Depositary" means, with respect to the Securities issuable or issued in whole or in part in the form of one or more Global Securities, the Person designated as Depositary by the Company pursuant to Section 3.1 (or any successor thereto). "Dollar" means the currency of the United States of America that, as at the time of payment, is legal tender for the payment of public and private debts. "Event of Default" has the meaning specified in Article Five. "Extension Period" has the meaning specified in Section 3.1. "Foreign Currency" means any currency issued by the government of one or more countries other than the United States of America or by any recognized confederation or association of such governments. "Global Security" means a Security in the form prescribed in Section 2.4 issued to the Depositary or its nominee and registered in the name of such Depositary or its nominee. "Government Obligations" means securities which are (i) direct obligations of the United States of America or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed by the United States of America and which, in either case, are full faith and credit obligations of the United States of America and are not callable or redeemable at the option of the issuer thereof and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt. "Holder" means a Person in whose name a Security is registered in the Securities Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate" means the rate of interest specified or determined as specified in the Security as being the rate of interest payable on the Security. "Investment Company Event" means the receipt by Atlantic Capital I of an Opinion of Counsel, rendered by a law firm having a recognized national tax and securities practice, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), Atlantic Capital I is or will be considered an "investment company" that is required to be registered under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Preferred Securities. "Junior Subordinated Payment" has the meaning specified in Section 12.2. "Lien" means any mortgage, pledge, lien, security interest or other encumbrance. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "1940 Act" means the Investment Company Act of 1940, as amended. "Officers' Certificate" means a certificate signed by the Chairman and Chief Executive Officer, President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including General Counsel of the Company. "Outstanding" means, when used in reference to Securities, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (A Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (B Securities for whose payment money or Government Obligations in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent in trust for the Holders of such Securities; and (C Securities in substitution for or in lieu of which other Securities have been authenticated and delivered or which have been paid pursuant to Section 3.6, unless proof satisfactory to the Trustee is presented that any such Securities are held by Holders in whose hands such Securities are valid, binding and legal obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. Upon the written request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by the Company to be owned or held by or for the account of the Company, or any other obligor on the Securities or any Affiliate of the Company or such obligor, and, subject to the provisions of Section 6.1, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. "Paying Agent" means the Trustee or any Person authorized by the Company to pay the principal of (any premium, if any) or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment" means the place or places where the principal of (and premium, if any) and interest on the Securities are payable pursuant to Section 3.1 or 3.11. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any security authenticated and delivered under Section 3.6 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Preferred Securities" has the meaning specified in the first recital of this Indenture. "Proceeding" has the meaning specified in Section 12.2. "Property Trustee" means The Bank of New York, solely in its capacity as Property Trustee of Atlantic Capital I under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as therein provided. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the Business Day next preceding such Interest Payment Date; provided, however, that in the event that the Securities are distributed to holders of Preferred Securities pursuant to a liquidation of the Trust in accordance with Section 9.04 of the Trust Agreement and that at any time thereafter Securities no longer remain in book-entry-only form, the Regular Record Date shall be the date (whether or not a Business Day) which is the fifteenth day of the month in which occurs the relevant Interest Payment Date. "Responsible Officer" when used with respect to the Trustee means any officer of the Trustee assigned by the Trustee from time to time to administer its corporate trust matters. "Securities" has the meaning specified in the Recitals to this instrument. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 3.5. "Senior Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of this Indenture or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Securities or to other Debt which is pari passu with, or subordinated to, the Securities, provided, however, that Senior Debt shall not be deemed to include (a) any Debt of the Company which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Company, (b) any Debt of the Company to any of its Subsidiaries, (c) Debt to any employee of the Company, (d) any liability for taxes, (e) Debt or other monetary obligations to trade creditors created or assumed by the Company or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services and (f) the Securities. "Special Event" means a Tax Event or an Investment Company Event. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.7. "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified pursuant to the terms of the Security as the date on which the principal of such Security or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Tax Event" means the receipt by Atlantic Capital I of an Opinion of Counsel, rendered by a law firm having a recognized national tax and securities practice, to the effect that, as a result of any amendment to, change in or announced proposed change in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is adopted or which pronouncement or decision is announced on or after the date of issuance of the Preferred Securities, there is more than an insubstantial risk that (i) Atlantic Capital I is, or will be within 90 days of the date of such Opinion of Counsel, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date of such Opinion of Counsel, will not be, deductible, in whole or in part, for United States federal income tax purposes or (iii) Atlantic Capital I is, or will be within 90 days of the date of such Opinion of Counsel, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Trust Agreement" means the Trust Agreement in the form attached hereto as Annex A, as amended and restated by the Amended and Restated Trust Agreement substantially in the form attached hereto as Annex B as amended from time to time. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C. 77aaa-77bbb), as amended and as in effect on the date as of this Indenture, except as provided in Section 9.5. "Trust Securities" has the meaning specified in the first recital of this Indenture. "Vice President" when used with respect to the Company, means any duly appointed or elected vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 1.2. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent (including covenants, compliance with which constitutes a condition precedent), if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent (including covenants compliance with which constitute a condition precedent), if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than the certificates provided pursuant to Section 10.4) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.3. Forms of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.4. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given to or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments is or are delivered to the Trustee, and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.1) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a person acting in other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. (c) The fact and date of the execution by any person of any such instrument or writing, or the authority of the person executing the same, may also be proved in any other manner which the Trustee deems sufficient and in accordance with such reasonable rules as the Trustee may determine. (d) The ownership of Securities shall be proved by the Securities Register. (e) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (f) The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to take any action under this Indenture by vote or consent. Except as otherwise provided herein, such record date shall be the later of 30 days prior to the first solicitation of such consent or vote or the date of the most recent list of Securityholders furnished to the Trustee pursuant to Section 7.1 prior to such solicitation. If a record date is fixed, those persons who were Securityholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to take such action by vote or consent or to revoke any vote or consent previously given, whether or not such persons continue to be Holders after such record date, provided, however, that unless such vote or consent is obtained from the Holders (or their duly designated proxies) of the requisite principal amount of Outstanding Securities prior to the date which is the 120th day after such record date, any such vote or consent previously given shall automatically and without further action by any Holder be canceled and of no further effect. SECTION 1.5. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose (except as otherwise provided in Section 5.1 hereof) hereunder if in writing and mailed, first class, postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 1.6. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Securities Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 1.7. Conflict With Trust Indenture Act. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture Act through operation of Section 318(c) thereof, such imposed duties shall control. SECTION 1.8. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.9. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.10. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent and their successors and assigns, the holders of Senior Debt and the Holders of the Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York. SECTION 1.13. Non-Business Days. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or the Securities) payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day (except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day), in each case with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity of principal (and no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity of principal, as the case may be, until such next succeeding Business Day). ARTICLE II SECURITY FORMS SECTION 2.1. Forms Generally. The Securities and the Trustee's certificates of authentication thereon shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with applicable tax laws or the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods, if required by any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self-regulatory organization on which the Securities may be listed or traded, on a steel engraved border or steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self- regulatory organization on which the Securities may be listed or traded, or otherwise may be typewritten all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 2.2. Form of Face of Security [IF THE SECURITY IS TO BE A GLOBAL SECURITY - This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depository") or a nominee of the Depository. This Security is exchangeable for Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Indenture and no transfer of this Security (other than a transfer of this Security as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances. Unless this Security is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York) to Atlantic City Electric Company or its agent for registration of transfer, exchange or payment, and any Security issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.] ATLANTIC CITY ELECTRIC COMPANY 8.25% Junior Subordinated Deferrable Interest Debentures No. $ CUSIP ATLANTIC CITY ELECTRIC COMPANY, a corporation organized and existing under the laws of New Jersey (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the principal sum of Dollars on October 1, 2026; provided, that the Company may (i) change the maturity date upon the occurrence of an exchange of the Securities for the Trust Securities subject to certain conditions set forth in Section 3.13 of the Indenture, which changed maturity date shall in no case be earlier than October 1, 2001 or later than October 1, 2045 and/or (ii) extend the maturity date subject to certain conditions specified in Section 3.13 of the Indenture, which extended maturity date shall in no case be later than October 1, 2045. The Company further promises to pay interest on said principal sum from October 1, 1996 or from the most recent interest payment date (each such date, an "Interest Payment Date") on which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year, commencing December 31, 1996, at the rate of 8.25% per annum, until the principal hereof shall have become due and payable, plus Additional Interest, if any, until the principal hereof is paid or duly provided for or made available for payment and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the rate of 8.25% per annum, compounded quarterly. The amount of interest payable on December 31, 1996 shall be computed on the basis of 89 days in a 360-day year. The amount of interest payable on any Interest Payment Date thereafter shall be computed on the basis of a 360- day year of twelve 30-day months. In the event that any date on which interest is payable on this Security is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date the payment was originally payable. A "Business Day" shall mean any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (iii) a day on which the Corporate Trust Office of the Trustee or the principal office of the Property Trustee under the Trust Agreement (as defined herein), is closed for business. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date (other than a Redemption Date or the maturity date) will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date (if the Securities are distributed to holders of Preferred Securities pursuant to a liquidation of the Trust in accordance with Section 9.4 of the Trust Agreement and at any time thereafter any such Securities no longer remain in book-entry- only form, the Regular Record Date shall be the date (whether or not a business day) which is the fifteenth day of the month in which occurs the relevant Interest Payment Date). Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. So long as no Event of Default under the Indenture has occurred and is continuing, the Company shall have the right at any time during the term of this Security, from time to time, to defer the payment of interest on such Security for up to 20 consecutive quarters with respect to each deferral period (each an "Extension Period"), during which Extension Periods the Company shall have the right to make full or partial payments of interest on any Interest Payment Date, and at the end of which the Company shall pay all interest then accrued and unpaid (together with Additional Interest thereon to the extent permitted by applicable law); provided that during any such Extension Period, the Company will not, and will not permit any Subsidiary of the Company to (i) declare or pay any dividends or distributions or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's outstanding capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt security that ranks pari passu with or junior in interest to this Security or make any guarantee payments with respect to the foregoing (other than (a) dividends or distributions in Common Stock of the Company, and (b) payments under the Company Guarantee). Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that no Extension Period shall exceed 20 consecutive quarters or extend beyond the Maturity of this Security. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may elect to begin a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period except at the end thereof. The Company shall give the Holder of this Security and the Trustee notice of its election to begin or continue an Extension Period at least one Business Day prior to the earlier of (i) the date the Distributions on the Preferred Securities are payable or (ii) the date Atlantic Capital I is required to give notice to any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self-regulatory organization or to holders of such Preferred Securities of the record date applicable to such Distributions or the date such Distributions are payable, but in any event not less than one Business Day prior to such record date. Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made (i) by check mailed to the address of the Person entitled thereto as such address shall appear in the Securities Register or (ii) by wire transfer in immediately available funds at such place and to such account as may be designated by the Person entitled thereto as specified in the Securities Register at the relevant Record Date. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payments to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. Each Holder hereof, by his acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. ATLANTIC CITY ELECTRIC COMPANY By: Name: Title: Attest: Name: Title: Dated: This is one of the Securities referred to in the within mentioned Indenture. THE BANK OF NEW YORK as Trustee By: Authorized Signatory SECTION 2.3. Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company designated as its 8.25% Junior Subordinated Deferrable Interest Debentures (herein called the "Securities"), limited in aggregate principal amount to $72,164,950, issued and to be issued under a Junior Subordinated Indenture, dated as of October 1, 1996 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All terms used in this Security that are defined in the Indenture or in the Amended and Restated Trust Agreement, dated as of October 1, 1996 (the "Trust Agreement"), of Atlantic Capital I among Atlantic City Electric Company, as Depositor, and the Trustees named therein, shall have the meanings assigned to them in the Indenture or the Trust Agreement, as the case may be. On or after October 1, 2001, the Company may at any time, at its option, subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to 100% of the principal amount thereof plus the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. If a Special Event shall occur and be continuing, the Company may, at its option, redeem this Security within 90 days of the occurrence of such Special Event, in whole but not in part, subject to the provisions of Section 11.7 and the other provisions of Article XI of the Indenture. The redemption price for this Security if so redeemed shall be equal to 100% of the principal amount thereof plus accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default, as defined in the Indenture, shall occur and be continuing, the principal of the Securities may be declared due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for satisfaction, discharge and defeasance at any time of the entire indebtedness of this Security upon compliance by the Company with certain conditions set forth in the Indenture. The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series to be affected by such supplemental indenture. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities at the time Outstanding, on behalf of the Holders of all Securities, to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, if an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), provided that, if upon an Event of Default, the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities fail to declare the principal of all the Securities to be immediately due and payable, the holders of at least 25% in aggregate liquidation amount of Preferred Securities then outstanding shall have such right by a notice in writing to the Company and the Trustee; and upon any such declaration such principal amount (or specified amount) of and the accrued interest (including any Additional Interest) on all the Securities shall become immediately due and payable, provided that the payment of principal and interest (including any Additional Interest) on such Securities shall remain subordinated to the extent provided in Article Twelve of the Indenture. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the City of New York maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of such series of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. The Company and, by its acceptance of this Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that for United States federal, state and local tax purposes it is intended that this Security constitute indebtedness. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SECTION 2.4. Additional Provisions Required in Global Security. Any Global Security issued hereunder shall, in addition to the provisions contained in Sections 2.2 and 2.3 bear a legend in substantially the following form: "This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Security is exchangeable for Securities registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture and may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary." SECTION 2.5. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. as Trustee By: Authorized Signatory ARTICLE III THE SECURITIES SECTION 3.1. Title and Terms. The principal amount of the Securities Outstanding (together with any accrued and unpaid interest (including any Additional Interest, to the extent permitted by law) thereon) shall be payable in a single installment on October 1, 2026; provided, that the Company may (i) change the maturity date upon the occurrence of an exchange of the Securities for the Preferred Securities subject to certain conditions set forth in Section 3.13, which changed maturity date shall in no case be earlier than October 1, 2001 or later than October 1, 2045 and (ii) extend the maturity date subject to certain conditions specified in Section 3.13, which extended maturity date shall in no case be later than October 1, 2045. The rate of interest on each Security shall be 8.25% per annum, accruing from October 1, 1996 and, subject to the next paragraph, interest shall be payable, quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year (each such date, an "Interest Payment Date"), commencing December 31, 1996. The rate of any Additional Interest that shall accrue on each Security shall be at the same rate per annum. The amount of interest payable on December 31, 1996 shall be computed on the basis of 89 days in a 360-day year. The amount of interest payable for any period thereafter shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on a Security is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. The interest installment so payable (other than interest payable on a Redemption Date or the maturity date), and punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment, which, if such Security is a Global Security issued to the Depositary, shall be the close of business on the Business Day next preceding such Interest Payment Date. The interest so payable on any Security which is not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self-regulatory organization on which the Securities may be listed, and upon such notice as may be required by such exchange or other self-regulatory organization, all as more fully provided in Section 3.7. So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time during the term of the Securities, from time to time, to defer the payment of interest on the Securities for up to 20 consecutive quarters with respect to each deferred period (each, an "Extension Period"), during which Extension Periods the Company shall have the right to make full or partial payments of interest on any Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Securities (together with Additional Interest thereon at the annual rate of 8.25%, compounded quarterly, to the extent permitted by applicable law), provided, that during any such Extension Period, the Company will not, and will not permit any Subsidiary of the Company to (i) declare or pay any dividends or distributions or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's outstanding capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt security that ranks pari passu with or junior in interest to the Securities or make any guarantee payments with respect to the foregoing (other than (a) dividends or distributions in Common Stock of the Company, and (b) payments under the Company Guarantee. Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that no Extension Period shall exceed 20 consecutive quarters or extend beyond the Maturity of the Securities. Upon termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may elect to begin a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company shall give the Holders of the Securities and the Property Trustee, the Administrative Trustees and the Trustee notice of its election to begin or continue any such Extension Period at least one Business Day prior to the earlier of (i) the date the Distributions on the Preferred Securities are payable or (ii) the date Atlantic Capital I is required to give notice to any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self-regulatory organization or to holders of such Preferred Securities of the record date applicable to such Distributions or the date such Distributions are payable, but in any event not less than one Business Day prior to such record date. The Trustee shall promptly give notice of the Company's election to begin or continue any such Extension Period to the holders of the outstanding Preferred Securities. The Place of Payment where the Securities may be presented or surrendered for payment, where the Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and the Indenture may be served shall be the Corporate Trust Office of the Trustee. At any time on or after October 1, 2001, the Company may, at its option, subject to the terms and conditions of Article Eleven of the Indenture, redeem the Securities in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to 100% of the principal amount thereof plus the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. If a Special Event shall occur and be continuing, the Company may, at its option, redeem the Securities within 90 days of the occurrence of such Special Event, in whole but not in part, subject to the provisions of Article Eleven of the Indenture. The redemption price for any Security so redeemed shall be equal to 100% of the principal amount thereof plus accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. At any time, the Company may terminate Atlantic Capital I and cause the Securities to be distributed to Holders of the Trust Securities in liquidation of Atlantic Capital I. Principal and interest on the Securities shall be payable in Dollars. The Trustee shall initially serve as Securities Registrar and Paying Agent. The Company has no obligation to redeem or purchase any Securities pursuant to any sinking fund or analogous requirement or upon the happening of a specified event or at the option of a Holder thereof. SECTION 3.2. Denominations. The Securities shall be in registered form without coupons and shall be issuable in denominations of $25 and any integral multiple thereof. SECTION 3.3. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its President or one of its Vice Presidents under its corporate seal reproduced or impressed thereon and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by the manual signature of one of its authorized officers or signatories, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 3.4. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company in a Place of Payment without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 3.5. Registration, Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. Such register is herein sometimes referred to as the "Securities Register." The Trustee is hereby appointed "Securities Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at the office or agency of the Company in a Place of Payment designated for that purpose the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations, of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations, of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Every Security presented or surrendered for transfer or exchange shall (if so required by the Company or the Securities Registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to a Holder for any transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities. Notwithstanding any of the foregoing, any Global Security shall be exchangeable pursuant to this Section 3.5 for Securities registered in the names of Persons other than the Depositary for such Security or its nominee only if (i) such Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or if at any time such Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, (ii) the Company executes and delivers to the Trustee a Company Order that such Global Security shall be so exchangeable or (iii) there shall have occurred and be continuing an Event of Default with respect to the Securities of such series. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for definitive certificates registered in such names as such Depositary shall direct. Notwithstanding any other provision in this Indenture, a Global Security may not be transferred except as a whole by the Depositary with respect to such Global Security to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary. Neither the Company nor the Trustee shall be required (a) to issue, transfer or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption of Securities pursuant to Article Eleven and ending at the close of business on the day of mailing of said notice of redemption or (b) to transfer or exchange any Security so selected for redemption in whole or in part, except, in the case of any Security to be redeemed in part, any portion thereof not to be redeemed. SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee together with such security or indemnity as may be required by the Company or the Trustee to save each of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount, Security, and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security, and (ii) such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.7. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date, shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, except that interest payable on the Stated Maturity or the Redemption Date of a Security shall be paid to the Person to whom principal is paid. The initial payment of interest on any Security which is issued between a Regular Record Date and the related Interest Payment Date shall be payable as provided in such Security. Any interest on any Security which is payable, but is not timely paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest"), shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities in respect of which interest is in default (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class, postage prepaid, to each Holder at the address of such Holder as it appears in the Securities Register not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange, the Nasdaq National Market or other applicable interdealer quotation system or self-regulatory organization on which the Securities in respect of which interest is in default may be listed or traded and, upon such notice as may be required by such exchange or other self-regulatory organization (or by the Trustee if the Securities are not listed or traded), if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 3.8. Persons Deemed Owners. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Section 3.7) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.9. Cancellation. All Securities surrendered for payment, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and Securities surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities shall be disposed of as directed by a Company Order; provided, however, that the Trustee shall not be required to destroy the certificate or certificates representing any of such canceled Securities. SECTION 3.10. Computation of Interest. Interest on the Securities for any period shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.11. Right of Set-Off. With respect to Securities which at the time of determination are registered in the Securities Register in the name of Atlantic Capital I (or the Property Trustee), notwithstanding anything to the contrary in this Indenture, the Company shall have the right to set-off any payment it is otherwise required to make hereunder in respect of such Securities to the extent the Company has theretofore made, or is concurrently on the date of such payment making, a payment under the Company Guarantee. SECTION 3.12. Agreed Tax Treatment. Each Security issued hereunder shall provide that the Company and, by its acceptance of a Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, such Security agree that for United States federal, state and local tax purposes it is intended that such Security constitute indebtedness. SECTION 3.13. Change or Extension of Stated Maturity; Adjustment of Stated Maturity Upon an Exchange. The Company shall have the right to (a) change the Stated Maturity of principal of the Securities upon the liquidation of Atlantic Capital I and the exchange of such Securities for the Preferred Securities pursuant to Section 9.4 of the Trust Agreement and (b) extend the Stated Maturity of principal of the Securities provided that at the time of any election of such right to extend the Stated Maturity is made and at the time of such extension (i) the Company is not in bankruptcy, otherwise insolvent or in liquidation, (ii) the Company is not in default in the payment of any interest or principal on the Securities of such series and no deferred interest payments thereon have accrued, (iii) Atlantic Capital I is not in arrears on payments of Distributions on its Preferred Securities and no deferred Distributions thereon are accumulated, (iv) the Securities are rated not less than BBB by Standard & Poor's or Baa3 by Moody's Investors Service, Inc. or the equivalent by any other nationally recognized statistical rating organization and (v) the extended Stated Maturity is no later than the 49th anniversary of the date of the initial issuance of the Preferred Securities; and provided, further, that, if the Company exercises its right to liquidate Atlantic Capital I and exchange the Securities for the Preferred Securities as specified in clause (a) above, any changed Stated Maturity of the Securities shall be (A) no earlier than the date five years after the initial issuance of the Preferred Securities and (B) no later than the date 30 years (plus an extended term of up to an additional 19 years if the above-referenced conditions are satisfied) after the date of the initial issuance of the Preferred Securities. If the Company elects to change or extend the Stated Maturity of the Securities in accordance herewith, the Company shall give notice to Holders of the Securities, the Property Trustee, Atlantic Capital I and the Trustee of such change or extension at least 90 days before the Stated Maturity. SECTION 3.14. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.1. Satisfaction and Discharge of Indenture. If at any time: (a) the Company shall have delivered to the Trustee for cancellation all Securities of a series theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 3.6 and Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereupon repaid to the Company or discharged from such trust, as provided in Section 10.3); or (b) the Company shall deposit or cause to be deposited with the Trustee as trust funds (i) the entire amount in monies or Government Obligations or (ii) a combination of monies and Government Obligations, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay at maturity or upon redemption under arrangements satisfactory to the Trustee for the giving of notice of redemption, all Securities not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to their date of maturity or date fixed for redemption, as the case may be, and if such deposit shall be made prior to the stated maturity date of the Securities, the Company shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel each to the effect that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, an Opinion of Counsel to the effect that the holders of Securities will not recognize gain, loss or income for federal income tax purposes as a result of the satisfaction and discharge of this Indenture and such holders will be subject to federal income taxation on the same amounts and in the same manner and at the same times as if such satisfaction and discharge had not occurred, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall thereupon cease to be of further effect except for the provisions of Sections 3.5, 3.6, 6.10 and 10.2 which shall survive until the date of maturity or redemption date, as the case may be, and Sections 6.7 and 10.3 which shall survive to such date and thereafter, and the Trustee, on demand of the Company and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture with respect to such series. SECTION 4.2. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.3, all money or Government Obligations deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for the payment of which such money or obligations have been deposited with or received by the Trustee; provided, however, such moneys or Government Obligations need not be segregated from other funds except to the extent required by law. ARTICLE V REMEDIES SECTION 5.1. Events of Default. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security, including any Additional Interest in respect thereof, when it becomes due and payable, and continuance of such default for a period of 30 days (subject to the deferral of any due date in the case of an Extension Period); or (2) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity, provided, however, that an extension of the maturity of the Securities in accordance with the terms of the Indenture shall not constitute an Event of Default; or (3) default in the performance, or breach, in any material respect, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in the performance of which or the breach of which is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied; or (4) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (5) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt, or the taking of corporate action by the Company in furtherance of any such action. SECTION 5.2. Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), provided that, in the case of Securities registered in the Securities Register in the name of Atlantic Capital I (or the Property Trustee), if, upon an Event of Default, the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities fail to declare the principal of all the Securities to be immediately due and payable, the holders of at least 25% in aggregate liquidation amount of the Preferred Securities then outstanding shall have such right by a notice in writing to the Company and the Trustee; and upon any such declaration such principal amount (or specified amount) of and the accrued interest (including any Additional Interest) on all the Securities shall become immediately due and payable, provided that the payment of principal and interest (including any Additional Interest) on such Securities shall remain subordinated to the extent provided in Article Thirteen. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue installments of interest (including any Additional Interest, to the extent permitted by law) on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, and (C) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of Securities which has become due solely by such acceleration, have been cured or waived as provided in Section 5.13. The holders of a majority in aggregate outstanding principal amount of the Securities may waive any past default, except a default in the payment of principal or interest (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Trustee) or a default in respect of a covenant or provision which under this Indenture cannot be modified or amended without the consent of the holder of each outstanding Security and, in the case of Securities registered in the Securities Register in the name of Atlantic Capital I (or the Property Trustee), should the holder of such Securities fail to annul such declaration and waive such default, the holders of a majority in aggregate liquidation preference of the Preferred Securities shall have such right. No such rescission shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, with respect to Securities all or part of which are represented by a Global Security, a record date shall be established for determining Holders of Outstanding Securities entitled to join in such notice, which record date shall be at the close of business on the day the Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day which is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice which has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 5.2. SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (1) default is made in the payment of any installment of interest (including any Additional Interest) on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (and premium, if any, on) any Security at the Maturity thereof. The Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal, (and premium, if any) and interest (including any Additional Interest, to the extent permitted by law); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.4. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, (a) the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal (and premium, if any) or interest (including any Additional Interest)) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest (including any Additional Interest) owing and unpaid in respect to the Securities and to file such other papers or documents as may be necessary or advisable and to take any and all actions as are authorized under the Trust Indenture Act in order to have the claims of the Trustee and any predecessor to the Trustee under Section 6.7 and of the Holders allowed in any such judicial proceedings; and (ii) and in particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same in accordance with Section 5.6; and (b) any custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee for distribution in accordance with Section 5.6, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it and any predecessor Trustee under Section 6.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee and their agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 5.6. Application of Money Collected. Any money or property collected or to be applied by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money or property on account of principal (or premium, if any) or interest (including any Additional Interest), upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee and any predecessor Trustee under Section 6.7; SECOND: To the payment of the amounts then due and unpaid upon Securities for principal (and premium, if any) and interest (including any Additional Interest), in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest (including any Additional Interest), respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 5.7. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a receiver, assignee, trustee, liquidator, sequestrator (or other similar official) or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing itself of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Securities, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all Holders. SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right which is absolute and unconditional to receive payment of the principal of (and premium, if any) and (subject to Section 3.7) interest (including any Additional Interest, to the extent permitted by law) on such Security on the respective Stated Maturities (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. In the case of Securities which at the time of determination are registered in the Securities Register in the name of Atlantic Capital I (or the Property Trustee), any holder of the Preferred Securities shall have the right set forth in the preceding sentence to institute a proceeding directly for enforcement of payment of the principal of (and premium, if any) and (subject to Section 3.7) interest (including any Additional Interest) on any Security to such holder of the principal amount of or interest on the Securities having a principal amount equal to the aggregate liquidation preference of the Preferred Securities held of record by such Holder. SECTION 5.9. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise provided in the last paragraph of Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. Delay or Omission Not Waiver. Except as otherwise provided in the last paragraph of Section 3.6, no delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that: (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) subject to the provisions of Section 6.1, the Trustee shall have the right to decline to follow such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would be unjustly prejudicial to the Holders not joining in any such direction or would involve the Trustee in personal liability. Upon receipt by the Trustee of any written notice directing the time, method or place of conducting any such proceeding or exercising any such trust or power, with respect to Securities all or part of which are represented by a Global Security, a record date shall be established for determining Holders of Outstanding Securities entitled to join in such notice, which record date shall be at the close of business on the day the Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless the Holders of a majority in principal amount of the Outstanding Securities shall have joined in such notice prior to the day which is 90 days after such record date, such notice shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new notice identical to a notice which has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 5.12. SECTION 5.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default: (1) in the payment of the principal of (or premium, if any) or interest (including any Additional Interest) on any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest (including any Additional Interest) on any Security on or after the respective Stated Maturities expressed in such Securities (or in the case of redemption on or after the Redemption Date). SECTION 5.15. Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI THE TRUSTEE SECTION 6.1. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.2. Notice of Defaults. Within 90 days after a Responsible Officer of the Trustee obtains actual knowledge of the occurrence of any default hereunder, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Securities Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest (including any Additional Interest) on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Holders; and provided, further, that, in the case of any default of the character specified in Section 5.1(3), no such notice to Holders of Securities shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 6.3. Certain Rights of Trustee. Subject to the provisions of Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, Security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, indenture, Security or other paper or document, but the Trustee in its discretion may make such inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 6.4. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of the Securities or the proceeds thereof. SECTION 6.5. May Hold Securities. The Trustee, any Paying Agent, Securities Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.8 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Securities Registrar or such other agent. SECTION 6.6. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 6.7. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder in such amounts as the Company and the Trustee shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense (including the reasonable compensation and the expenses and disbursements of its agents and counsel) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust or the performance of its duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. This indemnification shall survive the termination of this Agreement. To secure the Company's payment obligations in this Section, the Company and the Holders agree that the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee. Such lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 5.1(4) or (5) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Reform Act of 1978 or a successor statute. SECTION 6.8. Disqualification; Conflicting Interests. The Trustee shall be subject to the provisions of Section 310(b) of the Trust Indenture Act. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the second to last paragraph of Section 310(b) of the Trust Indenture Act. SECTION 6.9. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be (a) a corporation organized and doing business under the laws of the United States of America or of any State, Territory or the District of Columbia, authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal, state, territorial or District of Columbia authority, or (b) a corporation or other Person organized and doing business under the laws of a foreign government that is permitted to act as Trustee pursuant to a rule, regulation or order of the Commission, authorized under such laws to exercise corporate trust powers, and subject to supervision or examination by authority of such foreign government or a political subdivision thereof substantially equivalent to supervision or examination applicable to United States institutional trustees, in either case having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by federal or state authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then, for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at anytime the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Neither the Company nor any Person directly or indirectly controlling, controlled by or under common control with the Company shall serve as Trustee for the Securities. SECTION 6.10. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 6.8 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.9 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, acting under authority of a Board Resolution, may remove the Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, subject to Section 5.14, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Securities Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. Acceptance of Appointment by Successor. (a) Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder subject nevertheless to its lien provided for in Section 6.7. (b) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all rights, powers and trusts referred to in paragraph (a) of this Section. (c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated, and in case any Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor Trustee or in the name of such successor Trustee, and in all cases the certificate of authentication shall have the full force which it is provided anywhere in the Securities or in this Indenture that the certificate of the Trustee shall have. SECTION 6.13. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company(or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after January 15 and July 15, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such January 1 and July 1, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, excluding from any such list names and addresses received by the Trustee in its capacity as Securities Registrar. SECTION 7.2. Preservation of Information, Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Securities Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders made pursuant to the Trust Indenture Act, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the Trust Indenture Act, or any successor section of such Act. SECTION 7.3. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act, at the times and in the manner provided pursuant thereto. (b) Reports so required to be transmitted at stated intervals of not more than 12 months shall be dated as of July 1 in each calendar year and shall be transmitted no later than 60 days after each such July 1, commencing with the first July 1 after the first issuance of Securities under this Indenture. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange or self-regulatory organization upon which the Securities are listed or traded and also with the Commission. The Company will notify the Trustee whenever the Securities are listed or traded on any stock exchange or self-regulatory organization. SECTION 7.4. Reports by Company. The Company shall file with the Trustee and with the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided in the Trust Indenture Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is required to be filed with the Commission. Notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company shall continue to file with the Commission and provide the Trustee with the annual reports and the information, documents and other reports which are specified in Sections 13 and 15(d) of the Securities Exchange Act of 1934. The Company also shall comply with the other provisions of Trust Indenture Act Section 314(a). ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and existing under the laws of the United States of America or any State or the District of Columbia, and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest (including any Additional Interest) on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; (3) for so long as Securities registered on the Securities Register in the name of Atlantic Capital I (or the Property Trustee) are outstanding, such consolidation, merger, conveyance, transfer or lease is permitted under the Trust Agreement, and the Company Guarantee and does not give rise to any breach or violation of the Trust Agreement or the Company Guarantee; (4) any such lease shall provide that it will remain in effect so long as any Securities are Outstanding; and (5) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and any such supplemental indenture complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with; and the Trustee, subject to Section 6.1, may rely upon such Officers' Certificate and Opinion of Counsel as conclusive evidence that such transaction complies with this Section 8.1. SECTION 8.2. Successor Person Substituted. Upon any consolidation or merger by the Company with or into any other Person, or any conveyance, transfer or lease by the Company of its properties and assets substantially as an entirety to any Person in accordance with Section 8.1, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; and in the event of any such conveyance, transfer or lease the Company shall be discharged from all obligations and covenants under the Indenture and the Securities and may be dissolved and liquidated. Such successor Person may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication pursuant to such provisions and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Trustee on its behalf for the purpose pursuant to such provisions. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form may be made in the Securities thereafter to be issued as may be appropriate. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.1. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities contained; or (2) to convey, transfer, assign, mortgage or pledge any property to or with the Trustee or to surrender any right or power herein conferred upon the Company; or (3) to add to the covenants of the Company for the benefit of the Holders of Securities or to surrender any right or power herein conferred upon the Company; or (4) to add any additional Events of Default; or (5) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this clause shall not materially adversely affect the interest of the Holders of Securities or, for so long as any of the Preferred Securities shall remain outstanding, the holders of such Preferred Securities; or (6) to comply with the requirements of the Commission in order to maintain the qualification of this Indenture under the Trust Indenture Act. SECTION 9.2. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) except to the extent permitted by Section 3.13 change the Stated Maturity of the principal of, or any instalment of interest (including any Additional Interest) on, any Security, or reduce the principal amount thereof or the rate of interest thereon or reduce any premium payable upon the redemption thereof, or change any Place of Payment where, or the coin or currency in which, any Security or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date thereof), or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, Section 5.13 or Section 10.5, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security affected thereby; or (4) modify the provisions in Article XII of this Indenture with respect to the subordination of Outstanding Securities in a manner adverse to the Holders thereof; provided that, so long as any of the Preferred Securities remains outstanding, no such amendment shall be made that adversely affects the holders of such Preferred Securities in any material respect, and no termination of this Indenture shall occur, and no waiver of any Event of Default or compliance with any covenant under this Indenture shall be effective, without the prior consent of the holders of at least a majority of the aggregate liquidation preference of such Preferred Securities then outstanding unless and until the principal (and premium, if any) of the Securities and all accrued and unpaid interest (including any Additional Interest) thereon have been paid in full; and provided, further that, so long as any of the Preferred Securities remains outstanding, no amendment shall be made to Section 5.8 under this Indenture without the prior consent of the holders of each Preferred Security then outstanding unless and until the principal (and premium, if any) of the Securities and all accrued and unpaid interest (including any Additional Interest) thereon have been paid in full. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.3. Execution of Supplemental Indentures. In executing or accepting the additional trusts created by any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, and that all conditions precedent provided for in this Indenture with respect to such execution and acceptance (including any covenants compliance with which constitutes a condition precedent) have been complied with. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.4. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.5. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 9.6. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company (as evidenced by an Officers' Certificate), to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE X COVENANTS SECTION 10.1. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 10.2. Maintenance of Office or Agency. The Company will maintain in each Place of Payment an office or agency where Securities may be presented or surrendered for payment and an office or agency where Securities may be surrendered for transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company initially appoints the Trustee, acting through its Corporate Trust Office, as its agent for said purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain such office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all of such purposes, and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities for such purposes. The Company will give prompt written notice to the Trustee of any such designation and any change in the location of any such office or agency. SECTION 10.3. Money for Security Payments to be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to 10:00 a.m. New York City time on each due date of the principal of or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal and premium (if any) or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest; (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (4) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums or Government Obligations held in trust by such Paying Agent, such sums or Government Obligations to be held by the Trustee upon the same trusts as those upon which such sums or Government Obligations were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money or Government Obligations. Any money or Government Obligations deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be paid on Company Request to the Company, or (if then held by the Company) shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money or Government Obligations, and all liability of the Company as trustee thereof, shall thereupon cease. SECTION 10.4. Statement as to Compliance. The Company shall deliver to the Trustee, within 120 days after the end of each calendar year of the Company ending after the date hereof, an Officers' Certificate which need not comply with Section 1.2, executed by the principal executive officer, the principal financial officer or the principal accounting officer of the Company, as to such officer's knowledge of the Company's compliance with all conditions and covenants under this Indenture, such compliance to be determined without regard to any period of grace or requirement of notice under this Indenture. SECTION 10.5. Additional Sums. Except as otherwise specified as contemplated by Section 3.1, in the event that (i) Atlantic Capital I (or the Property Trustee) is the Holder of all of the Outstanding Securities, (ii) a Tax Event in respect of such Atlantic Capital I shall have occurred and be continuing and (iii) the Company shall not have (x) redeemed the Securities pursuant to Section 11.7 hereof or (y) terminated Atlantic Capital I pursuant to Section 9.2(b) of the Trust Agreement, the Company shall pay Atlantic Capital I (and its permitted successors or assigns under the Trust Agreement) for so long as Atlantic Capital I (or its permitted successor or assignee) is the Holder of any Securities, such additional amounts as may be necessary in order that the amount of distributions (including any Additional Amounts (as defined in the Trust Agreement)) then due and payable by Atlantic Capital I on the related Preferred Securities and Common Securities that at any time remain outstanding in accordance with the terms thereof shall not be reduced as a result of any Additional Taxes (the "Additional Sums"). Whenever in this Indenture or the Securities there is a reference in any context to the payment of principal of or interest on the Securities, such reference shall be deemed to include the payments of the Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made, provided, however, that the extension of an interest payment period pursuant to Section 3.1 or the Securities shall not extend the payment of any Additional Sums that may be due and payable during such interest payment period. SECTION 10.6. Additional Covenants. The Company covenants and agrees with Atlantic Capital I that it will not, and it will not permit any Subsidiary of the Company to, (a) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of the Company's capital stock, or (b) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior to the Securities or make any guarantee payments with respect to the foregoing (other than (a) dividends or distributions in Common Stock of the Company, and (b) payments under the Company Guarantee), if at such time (i) there shall have occurred any event of which the Company has actual knowledge that (a) with the giving of notice or the lapse of time or both, would constitute an Event of Default hereunder and (b) in respect of which the Company shall not have taken reasonable steps to cure, (ii) the Company shall be in default with respect to its payment of any obligations under the Company Guarantee or (iii) the Company shall have given notice of its election to begin an Extension Period as provided herein and shall not have rescinded such notice, or such period, or any extension thereof, shall be continuing. The Company also covenants with Atlantic Capital I (i) to maintain directly or indirectly 100% ownership of the Common Securities of Atlantic Capital I; provided, however, that any permitted successor of the Company hereunder may succeed to the Company's ownership of such Common Securities, (ii) not to voluntarily terminate, wind-up or liquidate Atlantic Capital I, except (a) in connection with a distribution of the Securities to the holders of Preferred Securities in liquidation of Atlantic Capital I or (b) in connection with certain mergers, consolidations or amalgamations permitted by the Trust Agreement and (iii) to use its reasonable efforts, consistent with the terms and provisions of the Trust Agreement, to cause Atlantic Capital I to remain classified as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes. ARTICLE XI REDEMPTION OF SECURITIES SECTION 11.1. Company's Rights of Redemption. (a) Unless otherwise specified as contemplated by Section 3.1 with respect to the Securities and notwithstanding any additional redemption rights that may be so specified, the Company may, at its option, redeem the Securities after their date of issuance in whole at any time or in part from time to time, subject to the provisions of this clause (a) and the other provisions of this Article Eleven. Unless otherwise specified as contemplated by Section 3.1, the redemption price for any Security so redeemed pursuant to this clause (a) shall be equal to 100% of the principal amount of such Securities plus any accrued and unpaid interest, including any Additional Interest, to the date fixed for redemption. The Company shall not redeem the Securities in part unless all accrued and unpaid interest (including any Additional Interest) has been paid in full on all Securities Outstanding for all interest periods terminating on or prior to the date fixed for redemption. (b) In the case of Securities in respect of which Atlantic Capital I (or the Property Trustee) is the Holder, except as otherwise specified as contemplated by Section 3.1, if a Special Event shall occur and be continuing, the Company may, at its option, redeem such Securities within 90 days of the occurrence of such Special Event, in whole but not in part, subject to the provisions of this clause (b) and the other provisions of this Article XI. The redemption price for any Security so redeemed pursuant to this clause (b) shall be equal to 100% of the principal amount of such Securities then Outstanding plus accrued and unpaid interest, including any Additional Interest, to the date fixed for redemption. SECTION 11.2. Applicability of This Article. Redemption of Securities at the election of the Company, as permitted by Section 11.1, shall be made in accordance with the terms of the Securities, Section 3.1 and this Article; provided, however, that if any provision of any such form of Security shall conflict with any provision of this Article, the provision of the form of Security shall govern. Each Security shall be subject to partial redemption only in the amount of $25 or integral multiples thereof. SECTION 11.3. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be established by or pursuant to authority of the Board of Directors as evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all of the Securities, the Company shall, not less than 30 nor more than 60 days prior to the date fixed for redemption (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such date and of the principal amount of Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities, the Company shall furnish the Trustee with an Officers' Certificate and an Opinion of Independent Counsel evidencing compliance with such restriction. SECTION 11.4. Selection of Securities to be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination for such Security or integral multiples thereof. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption and the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. If the Company shall so direct, Securities registered in the name of the Company, any Affiliate or any Subsidiary thereof shall not be included in the Securities selected for redemption. SECTION 11.5. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not later than the thirtieth day, and not earlier than the sixtieth day, prior to the date fixed for redemption, to each Holder of Securities to be redeemed, at the address of such Holder as it appears in the Securities Register. Each notice of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the particular Securities to be redeemed; (d) that on the Redemption Date, the Redemption Price will become due and payable upon each such Security or portion thereof, and that interest thereon, if any, shall cease to accrue on and after said date; and (e) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company and shall not be irrevocable. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, a failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. SECTION 11.6. Deposit of Redemption Price. Prior to 10:00 a.m. New York City time on the Redemption Date specified in the notice of redemption given as provided in Section 11.5, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date all the Securities so called for redemption at the applicable Redemption Price. SECTION 11.7. Payment of Securities Called for Redemption. If any notice of redemption has been given as provided in Section 11.5, the Securities or portion of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Redemption Price. On presentation and surrender of such Securities at a place of payment in said notice specified, the said securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price. Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of the same series, of authorized denominations, in aggregate principal amount equal to the unredeemed portion of the Security so presented. If a Global Security is so surrendered, such new Security will also be a new Global Security. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and premium, if any, on such Security shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. ARTICLE XII SUBORDINATION OF SECURITIES SECTION 12.1. Securities Subordinate to Senior Debt. The Company covenants and agrees, and each Holder of a Security, by its acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the payment of the principal of (and premium, if any) and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all amounts then due and payable in respect of all Senior Debt. SECTION 12.2. Payment Over of Proceeds Upon Dissolution, Etc. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company (each such event, if any, herein sometimes referred to as a "Proceeding"), then the holders of Senior Debt shall be entitled to receive payment in full of principal of (and premium, if any) and interest, if any, on such Senior Debt, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, before the Holders of the Securities are entitled to receive or retain any payment or distribution of any kind or character, whether in cash, property or securities (including any payment or distribution which may be payable or deliverable by reason of the payment of any other Debt of the Company subordinated to the payment of the Securities, such payment or distribution being hereinafter referred to as a "Junior Subordinated Payment"), on account of principal of (or premium, if any) or interest (including any Additional Interest) on the Securities or on account of the purchase or other acquisition of Securities by the Company or any Subsidiary and to that end the holders of Senior Debt shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, including any Junior Subordinated Payment, which may be payable or deliverable in respect of the Securities in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, including any Junior Subordinated Payment, before all Senior Debt is paid in full or payment thereof is provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, and if such fact shall, at or prior to the time of such payment or distribution, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Debt remaining unpaid, to the extent necessary to pay all Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. For purposes of this Article only, the words "any payment or distribution of any kind or character, whether in cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which securities are subordinated in right of payment to all then outstanding Senior Debt to substantially the same extent as the Securities are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale of all or substantially all of its properties and assets as an entirety to another Person or the liquidation or dissolution of the Company following the sale of all or substantially all of its properties and assets as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a Proceeding for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by sale such properties and assets as an entirety, as the case may be, shall, as a part of such consolidation, merger, or sale comply with the conditions set forth in Article Eight. SECTION 12.3. Prior Payment to Senior Debt Upon Acceleration of Securities. In the event that any Securities are declared due and payable before their Maturity, then and in such event the holders of the Senior Debt outstanding at the time such Securities so become due and payable shall be entitled to receive payment in full of all amounts due on or in respect of such Senior Debt (including any amounts due upon acceleration), or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character, whether in cash, properties or securities (including any Junior Subordinated Payment) by the Company on account of the principal of (or premium, if any) or interest (including any Additional Interest) on the Securities or on account of the purchase or other acquisition of Securities by the Company or any Subsidiary. In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any payment with respect to which Section 12.2 would be applicable. SECTION 12.4. No Payment When Senior Debt in Default. (a) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Senior Debt, or in the event that any event of default with respect to any Senior Debt shall have occurred and be continuing and shall have resulted in such Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (b) in the event any judicial proceeding shall be pending with respect to any such default in payment or such event or default, then no payment or distribution of any kind or character, whether in cash, properties or securities (including any Junior Subordinated Payment) shall be made by the Company on account of principal of (or premium, if any) or interest (including any Additional Interest), if any, on the Securities or on account of the purchase or other acquisition of Securities by the Company or any Subsidiary. In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any payment with respect to which Section 12.2 would be applicable. SECTION 12.5. Payment Permitted If No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any Proceeding referred to in Section 12.2 or under the conditions described in Sections 12.3 and 12.4, from making payments at any time of principal of (and premium, if any) or interest on the Securities, or (b) the application by the Trustee of any money or Government Obligations deposited with it hereunder to the payment of or on account of the principal of (and premium, if any) or interest (including any Additional Interest) on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge that such payment would have been prohibited by the provisions of this Article. SECTION 12.6. Subrogation to Rights of Holders of Senior Debt. Subject to the payment in full of all Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt pursuant to the provisions of this Article (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to Senior Debt of the Company to substantially the same extent as the Securities are subordinated to the Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Senior Debt) to the rights of the holders of such Senior Debt to receive payments and distributions of cash, property and securities applicable to the Senior Debt until the principal of (and premium, if any) and interest on the Securities shall be paid in full. For purposes of such subrogation or assignment, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Debt by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt. SECTION 12.7. Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as between the Company and the Holders of the Securities, the obligations of the Company, which are absolute and unconditional, to pay to the Holders of the Securities the principal of (and premium, if any) and interest (including any Additional Interest) on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than their rights in relation to the holders of Senior Debt; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture including, without limitation, filing and voting claims in any Proceeding, subject to the rights, if any, under this Article of the holders of Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 12.8. Trustee to Effectuate Subordination. Each Holder of a Security by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Article and appoints the Trustee his or her attorney-in-fact for any and all such purposes. SECTION 12.9. No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. SECTION 12.10. Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Debt or from any trustee, agent or representative therefor (whether or not the facts contained in such notice are true); provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two Business Days prior to the date upon which by the terms hereof any monies may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest (including any Additional Interest) on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. SECTION 12.11. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Article Six, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 12.12. Trustee Not Fiduciary for Holders of Senior Debt. The Trustee, in its capacity as trustee under this Indenture, shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt shall be entitled by virtue of this Article or otherwise. SECTION 12.13. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Debt which may at any time be held by it, to the same extent as any other holder of Senior Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article XII shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 6.7. SECTION 12.14. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee. * * * * This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. ATLANTIC CITY ELECTRIC COMPANY By: /s/ L.M. Walters L.M. Walters Vice President, Treasurer and Secretary [SEAL] Attest: /s/ James E. Franklin, II James E. Franklin, II Senior Vice President, General Counsel and Secretary THE BANK OF NEW YORK as Trustee By: /s/ Lucille Firrincieli Lucille Firrincieli Assistant Vice President [SEAL] Attest: /s/ N. Gill State of New Jersey : : ss. County of Atlantic : On the 1st day of October, 1996 before me personally came L.M. Walters, to me known, who being duly sworn, did depose and say that he is Vice President, Treasurer and Assistant Secretary of Atlantic City Electric Company, one of the corporations described in and which executed the foregoing instrument; that the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. _____________________________ Notary Public My Commission Expires: State of New York : : ss. County of New York : On the 1st day of October, 1996 before me personally came Lucille Firrincieli, to me known, who being duly sworn, did depose and say that she is Assistant Vice President of The Bank of New York, a New York banking corporation, described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that she signed her name thereto by like authority. ______________________________ Notary Public My Commission Expires: EX-99.2 11 Exhibit 4f(9) - ----------------------------------------------------------------- GUARANTEE AGREEMENT Between Atlantic City Electric Company (as Guarantor) and The Bank of New York (as Trustee) dated as of October 1, 1996 ----------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . 1 SECTION 1.1. Definitions. . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II TRUST INDENTURE ACT. . . . . . . . . . . . . 5 SECTION 2.1. Trust Indenture Act; Application. . . . . . . . . . 5 SECTION 2.2. List of Holders. . . . . . . . . . . . . . . . . . . 5 SECTION 2.3. Reports by the Guarantee Trustee.. . . . . . . . . . 5 SECTION 2.4. Periodic Reports to Guarantee Trustee. . . . . . . . 5 SECTION 2.5. Evidence of Compliance with Conditions Precedent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.6. Events of Default; Waiver. . . . . . . . . . . . . . 6 SECTION 2.7. Event of Default; Notice.. . . . . . . . . . . . . . 6 SECTION 2.8. Conflicting Interests. . . . . . . . . . . . . . . . 6 ARTICLE III POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE . . . . . 7 SECTION 3.1. Powers and Duties of the Guarantee Trustee.. . . . . 7 SECTION 3.2. Certain Rights of Guarantee Trustee. . . . . . . . . 9 ARTICLE IV GUARANTEE TRUSTEE . . . . . . . . . . . . . 11 SECTION 4.1. Guarantee Trustee; Eligibility. . . . . . . . . . . 11 SECTION 4.2. Compensation and Reimbursement.. . . . . . . . . . . 11 SECTION 4.3. Appointment, Removal and Resignation of the Guarantee Trustee. . . . . . . . . . . . . . . . . . 12 ARTICLE V GUARANTEE . . . . . . . . . . . . . . . 13 SECTION 5.1. Guarantee. . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.2. Waiver of Notice and Demand. . . . . . . . . . . . . 13 SECTION 5.3. Obligations Not Affected. . . . . . . . . . . . . . 13 SECTION 5.4. Rights of Holders. . . . . . . . . . . . . . . . . . 14 SECTION 5.5. Guarantee of Payment. . . . . . . . . . . . . . . . 15 SECTION 5.6. Subrogation. . . . . . . . . . . . . . . . . . . . . 15 SECTION 5.7. Independent Obligations. . . . . . . . . . . . . . . 15 ARTICLE VI COVENANTS AND SUBORDINATION. . . . . . . . . . . 15 SECTION 6.1. Subordination. . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII TERMINATION. . . . . . . . . . . . . . . 16 SECTION 7.1. Termination. . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . 16 SECTION 8.1. Successors and Assigns. . . . . . . . . . . . . . . 16 SECTION 8.2. Amendments. . . . . . . . . . . . . . . . . . . . . 16 SECTION 8.3. Notices. . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 8.4. Benefit. . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 8.5. Interpretation. . . . . . . . . . . . . . . . . . . 18 SECTION 8.6. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . 18 GUARANTEE AGREEMENT This GUARANTEE AGREEMENT ("Guarantee Agreement"), dated as of October 1, 1996, is executed and delivered by Atlantic City Electric Company, a New Jersey corporation (the "Guarantor"), and The Bank of New York, a New York banking corporation organized under the laws of the State of New York, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of Atlantic Capital I, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"), dated as of October 1, 1996 among the Issuer Trustees named therein, the Guarantor, as Depositor, and the Holders (as therein defined) from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing 2,800,000 of its 8.25% Cumulative Quarterly Income Preferred Securities (liquidation preference $25 per preferred security) (the "Preferred Securities") representing preferred undivided beneficial interests in the assets of the Issuer and having the terms set forth in the Trust Agreement; WHEREAS, the Preferred Securities will be issued by the Issuer and the proceeds thereof, together with the proceeds from the issuance of the Issuer's Common Securities (as defined below), will be used to purchase the Debentures (as defined in the Trust Agreement) of the Guarantor which will be deposited with The Bank of New York, as Property Trustee under the Trust Agreement, as trust assets; and WHEREAS, as incentive for the Holders to purchase Preferred Securities the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Holders (as defined herein) of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the benefit of the Holders from time to time of the Preferred Securities. ARTICLE I DEFINITIONS SECTION 1.1. Definitions. As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings. Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Trust Agreement as in effect on the date hereof. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, provided, however, that an Affiliate of the Guarantor shall not be deemed to include the Issuer. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Common Securities" means the securities representing common undivided beneficial interests in the assets of the Issuer. "Debt" means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every obligation of the type referred to in clauses (i) through (v) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Guarantee Agreement; provided, however, that, except with respect to a default in payment of any Guarantee Payments, the Guarantor shall have received notice of default and shall not have cured such default within 60 days after receipt of such notice. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) required to be paid on the Preferred Securities, to the extent the Issuer shall have funds on hand available therefor at such time, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price"), with respect to the Preferred Securities called for redemption by the Issuer to the extent the Issuer shall have funds on hand available therefor at such time, and (iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of the Issuer, unless Debentures are distributed to the Holders in exchange for all of the Preferred Securities, the lesser of (a) the aggregate of the liquidation preference of $25 per Preferred Security plus accumulated and unpaid Distributions on the Preferred Securities to the date of payment to the extent the Issuer shall have funds on hand available to make such payment at such time and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means The Bank of New York, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee Agreement and thereafter means each such Successor Guarantee Trustee. "Holder" means any holder, as registered on the books and records of the Issuer, of any Preferred Securities; provided, however, that in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor, the Guarantee Trustee or any Affiliate of the Guarantor or the Guarantee Trustee. "Indenture" means the Junior Subordinated Indenture dated as of October 1, 1996, as supplemented and amended between the Guarantor and the Bank of New York, as trustee. "List of Holders" has the meaning specified in Section 2.2(a). "Majority in liquidation preference of the Securities" means, except as provided by the Trust Indenture Act, a vote by the Holder(s), voting separately as a class, of more than 50% of the liquidation preference of all then outstanding Preferred Securities issued by the Issuer. "Officers' Certificate" means, with respect to any Person, a certificate signed by the Chairman and Chief Executive Officer, President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary of such Person, and delivered to the Guarantee Trustee. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Responsible Officer" means, with respect to the Guarantee Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Trust Officer or Assistant Trust Officer or any other officer of the Corporate Trust Department of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Senior Debt" means the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of this Guarantee or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Guarantee or to other Debt which is pari passu with, or subordinated to, the Guarantee; provided, however, that Senior Debt shall not be deemed to include (a) any Debt of the Guarantor which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Guarantor, (b) any Debt of the Guarantor to any of its Subsidiaries, (c) Debt to any employee of the Guarantor, (d) any liability for taxes, (e) Debt or other monetary obligations to trade creditors created or assumed by the Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services and (f) Debt issued under the Indenture and (g) the Guarantee. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. ARTICLE II TRUST INDENTURE ACT SECTION 2.1. Trust Indenture Act; Application. (a) This Guarantee Agreement is subject to the provisions of the Trust Indenture Act that are required or deemed to be part of this Guarantee Agreement and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Guarantee Agreement limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2. List of Holders. (a) The Guarantor shall furnish or cause to be furnished to the Guarantee Trustee (i) semiannually, on or before January 15 and July 15 of each year, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") as of a date not more than 15 days prior to the delivery thereof, and (ii) at such other times as the Guarantee Trustee may request in writing, within 30 days after the receipt by the Guarantor of any such request, a List of Holders as of a date not more than 15 days prior to the time such list is furnished; provided that, the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Guarantee Trustee by the Guarantor. The Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Guarantee Trustee shall comply with its obligations under Section 311(a) of the Trust Indenture Act (subject to the provisions of Section 311(b) of the Trust Indenture Act) and Section 312(b) of the Trust Indenture Act. SECTION 2.3. Reports by the Guarantee Trustee. Not later than July 15 of each year, commencing July 15, 1997, the Guarantee Trustee shall provide to the Holders such reports as are required by Section 313(a) of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313(a) of the Trust Indenture Act. The Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4. Periodic Reports to Guarantee Trustee. The Guarantor shall provide to the Guarantee Trustee, the Securities and Exchange Commission and the Holders such documents, reports and information, if any, as required by Section 314 of the Trust Indenture Act and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5. Evidence of Compliance with Conditions Precedent. The Guarantor shall provide to the Guarantee Trustee such evidence of compliance with such conditions precedent, if any, provided for in this Guarantee Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6. Events of Default; Waiver. The Holders of a Majority in liquidation preference of the Preferred Securities may, by vote on behalf of all of the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent therefrom. SECTION 2.7. Event of Default; Notice. (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders, notices of all Events of Default known to the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, except in the case of a default in the payment of a Guarantee Payment, the Guarantee Trustee shall be protected in withholding such notice if and so long as the Board of Directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer charged with the administration of the Trust Agreement shall have obtained written notice, of such Event of Default. SECTION 2.8. Conflicting Interests. The Trust Agreement shall be deemed to be specifically described in this Guarantee Agreement for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE SECTION 3.1. Powers and Duties of the Guarantee Trustee. (a) This Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of the Holders, and the Guarantee Trustee shall not transfer this Guarantee Agreement to any Person except a Holder exercising his or her rights pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its appointment hereunder, and such vesting (and, as to the Guarantee Trustee cessation of holding) of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default has occurred and is continuing, the Guarantee Trustee may in its discretion proceed to protect and enforce its rights and other rights of the Holders by such appropriate judicial proceedings as it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Guaranty Agreement or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform such duties and only such duties as are specifically set forth in this Guarantee Agreement, and no implied covenants shall be read into this Guarantee Agreement against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6), the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee Agreement, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee Agreement, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee Agreement; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee Agreement; but in the case of any such certificates or opinions that by any provision hereof or of the Trust Indenture Act are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee Agreement; (ii the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation preference of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; (iv no provision of this Guarantee Agreement shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Guarantee Agreement or adequate indemnity against such risk or liability is not reasonably assured to it; and (v) whether or not therein expressly so provided, every provision of this Guarantee Agreement relating to the conduct or affecting the liability of or affording protection to the Guarantee Trustee shall be subject to the provisions of this Section. SECTION 3.2. Certain Rights of Guarantee Trustee. (a) Subject to the provisions of Section 3.1: (i The Guarantee Trustee may rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii Any direction or act of the Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate of the Guarantor unless otherwise prescribed herein. (iii Whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate of the Guarantor which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor. (iv The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any re-recording, re-filing or registration thereof). (v The Guarantee Trustee may consult with legal counsel, and the written advice or opinion of such legal counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or opinion. Such legal counsel may be legal counsel to the Guarantor or any of its Affiliates and may be one of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction. (vi The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such adequate security and indemnity as would satisfy a reasonable person in the position of the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement. (vii The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. (ix Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders, and the signature of the Preferred Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee Agreement, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action. (x Whenever in the administration of this Guarantee Agreement the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (C) shall be protected in acting in accordance with such instructions. (xi) the Guarantee Trustee shall not be charged with knowledge of any Event of Default unless either (1) a Responsible Officer of the Trustee shall have actual knowledge of the Event of Default or (2) written notice of such Event of Default shall have been given to the Guarantee Trustee by the Guarantor, any other obligor on the Preferred Securities or by any Holder of the Preferred Securities. (b) No provision of this Guarantee Agreement shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty to act in accordance with such power and authority. ARTICLE IV GUARANTEE TRUSTEE SECTION 4.1. Guarantee Trustee; Eligibility. (a) There shall at all times be a Guarantee Trustee which shall: (i not be an Affiliate of the Guarantor; and (ii be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000, and shall be a corporation meeting the requirements of Section 310(c) of the Trust Indenture Act. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority, then, for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.3. (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2. Compensation and Reimbursement. The Guarantor agrees: (a) to pay the Guarantee Trustee from time to time such reasonable compensation as the Guarantor and the Guarantee Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Guarantee Trustee in accordance with the provisions of this Guarantee (including the reasonable compensation and expenses of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify each of the Guarantee Trustee and any predecessor Guarantee Trustee for, and to hold it harmless from and against, any and all loss, damage, claim, liability or expense, including taxes (other than taxes based upon the income of the Guarantee Trustee) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance of the trust created by, or the administration of, this Guarantee Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Guarantor under this Section, the Guarantee Trustee shall have a lien prior to the Preferred Securities upon all the property and funds held or collected by the Guarantee Trustee as such, except funds held in trust for the payment of principal of, and premium (if any) or interest on, particular obligations of the Guarantor under this Guarantee Agreement. The provisions of this Section shall survive the termination of this Guarantee Agreement. SECTION 4.3. Appointment, Removal and Resignation of the Guarantee Trustee. (a) Subject to Section 4.3(b), unless an Event of Default shall have occurred and be continuing, the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed hereunder shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.3 within 60 days after delivery to the Guarantor of an instrument of resignation, the resigning Guarantee Trustee may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. (e) The Guarantor shall give notice of each resignation and each removal of the Guarantee Trustee and each appointment of a successor Guarantee Trustee to all Holders in the manner provided in Section 8.3 hereof. Each notice shall include the name of the successor Guarantee Trustee and the address of its Corporate Trust Office. ARTICLE V GUARANTEE SECTION 5.1. Guarantee. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim which the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Guarantee Trustee, Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Debentures as so provided in the Indenture), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4. Rights of Holders. The Guarantor expressly acknowledges that: (i) this Guarantee Agreement will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (ii) if an Event of Default has occurred and is continuing, the Guarantee Trustee has the right to enforce this Guarantee Agreement on behalf of the Holders; (iii) the Holders of a Majority in liquidation preference of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee Agreement or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (iv) any Holder may institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Guarantee Trustee, the Issuer or any other Person. SECTION 5.5. Guarantee of Payment. This Guarantee Agreement creates a guarantee of payment and not of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer) or upon distribution of Debentures to Holders as provided in the Trust Agreement. SECTION 5.6. Subrogation. The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by the Issuer pursuant to Section 5.1; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7. Independent Obligations. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI COVENANTS AND SUBORDINATION SECTION 6.1. Subordination. This Guarantee Agreement will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all general liabilities of the Guarantor. Nothing in this Section 6.1 shall apply to claims of, or payments to, the Guarantee Trustee under or pursuant to Section 4.2 hereof. ARTICLE VII TERMINATION SECTION 7.1. Termination. This Guarantee Agreement shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Preferred Securities, (ii) the distribution of Debentures to the Holders in exchange for all of the Preferred Securities or (iii) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Preferred Securities or under this Guarantee Agreement. ARTICLE VIII MISCELLANEOUS SECTION 8.1. Successors and Assigns. This Guarantee Agreement may be amended only by an instrument in writing entered into by the Guarantor and the Guarantee Trustee. All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Guarantor's obligations hereunder, the Guarantor shall not assign its obligations hereunder. Nothing herein contained shall be deemed to require the Guarantee Trustee to enter into any amendment of this Guarantee Agreement. SECTION 8.2. Amendments. Except with respect to any changes which do not adversely affect the rights of the Holders in any material respect (in which case no consent of the Holders will be required), this Guarantee Agreement may only be amended with the prior approval of the Holders of not less than a Majority in liquidation preference of all the outstanding Preferred Securities. The provisions of Article VI of the Trust Agreement concerning meetings of the Holders shall apply to the giving of such approval. SECTION 8.3. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows: (a) if given to the Guarantor, to the address set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantor may give notice of to the Holders: Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 Facsimile No.: (609) 645-4132 Attention: Treasurer with a copy to: Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08324-4130 Facsimile No.: (609) 645-4132 Attention: General Counsel (b) if given to the Issuer, in care of the Guarantee Trustee, at the Issuer's (and the Guarantee Trustee's) address set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantee Trustee on behalf of the Issuer may give notice to the Holders: Atlantic Capital I c/o Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 Facsimile No: (609) 645-4132 Attention: Treasurer with a copy to: The Bank of New York 101 Barclay Street New York, New York 10286 Facsimile No.: (212) 815-5999 Attention: Corporate Trust Department (c) if given to any Holder, at the address set forth on the books and records of the Issuer. All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 8.4. Benefit. This Guarantee Agreement is solely for the benefit of the Holders and, subject to Section 3.1(a), is not separately transferable from the Preferred Securities. SECTION 8.5. Interpretation. In this Guarantee Agreement, unless the context otherwise requires: (a) capitalized terms used in this Guarantee Agreement but not defined in the preamble hereto have the respective meanings assigned to them in Section 1.1; (b) a term defined anywhere in this Guarantee Agreement has the same meaning throughout; (c) all references to "the Guarantee Agreement" or "this Guarantee Agreement" are to this Guarantee Agreement as modified, supplemented or amended from time to time; (d) all references in this Guarantee Agreement to Articles and Sections are to Articles and Sections of this Guarantee Agreement unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Guarantee Agreement unless otherwise defined in this Guarantee Agreement or unless the context otherwise requires; (f) a reference to the singular includes the plural and vice versa; and (g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders. SECTION 8.6. GOVERNING LAW. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. THIS GUARANTEE AGREEMENT is executed as of the day and year first above written. ATLANTIC CITY ELECTRIC COMPANY By: /s/ L.M. Walters L.M. Walters Vice President, Treasurer and Assistant Secretary THE BANK OF NEW YORK, as Guarantee Trustee By: /s/ Lucille Firrincieli Lucille Firrincieli Assistant Vice President EX-99.3 12 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into this 10th day of August, 1995 by and between Atlantic Energy, Inc., a New Jersey corporation (the "Company"), and James E. Franklin, II (the "Executive"). In consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof (the "Effective Date") and shall continue until the second anniversary of the Effective Date (the "Employment Period"); provided, however, that the Employment Period shall be automatically renewed for two years unless either party shall send the other written notice of its intention to terminate the agreement at the end of such Employment Period one year prior to the end of such Employment Period; and, provided, further, that upon the occurrence of a Change of Control, the Employment Period shall become three years and shall commence on the date of the Change of Control, and shall thereafter be automatically renewed for two years unless either party shall send the other written notice of its intention to terminate the agreement one year prior to the end of the then current Employment Period. 2. Place of Employment. The Executive's services during the term of this Agreement shall be performed primarily at the principal offices of the Company in Egg Harbor Township, New Jersey. The Executive shall be furnished with a suitable office and such other facilities and services as he may reasonably require in performing his obligations under this Agreement. 3. Employment Obligations. (a) Position and Duties. The Company hereby agrees to employ the Executive as its Vice President, Secretary and General Counsel, as the Senior Vice President, Secretary and General Counsel of Atlantic City Electric Company ("Electric"), and as the Secretary of Atlantic Energy Enterprises, Inc. for the Employment Period. The Executive shall exercise his reasonable best efforts in furtherance of, and shall devote substantially all of his working time and attention to the affairs of the Company and its affiliates, and shall perform such duties and services as may reasonably be assigned to him by, and shall report directly to the Chief Executive Officer and the Board of Directors of the Company (the "Board"). (b) Business Time. From and after the Effective Date, the Executive agrees to devote his full business time during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees on which he served prior to the Effective Date, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date which is not in violation of any Company policy shall not be deemed to interfere with the performance of the Executive's services to the Company. In addition, the Executive may commence service as a director of other corporations or organizations after the Effective Date upon approval by the Board which, in the judgment of the Board, will not present any conflict of interest with the Company or any subsidiary or affiliate thereof, and which would not affect the performance of Executive's duties pursuant to this Agreement, which approval shall not be unreasonably withheld; provided, however, that the Executive shall neither (a) become an officer or director of (i) another entity which has or will have the status of a public utility under the Federal Power Act, or any successor act, (ii) any bank, trust company, banking association or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or (iii) any company supplying electrical equipment to the Company, nor (b) accept any such position and commence the performance of any duties or services in such capacity (an "Interlock"), unless the Executive shall have first (x) furnished the Board with at least thirty (30) days prior written notice of his intention to create such Interlock and (y) secured, if the Board shall request that such action be taken, any necessary authorization for such Interlock, in form and substance satisfactory to the Board, from the Federal Energy Regulatory Commission, or successor regulatory agency, pursuant to Section 305(b) of the Federal Power Act, or any supplement or amendment thereto. 4. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary ("Base Salary") at an annual rate at least equal to the annual salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The Base Salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. Once increased, any reference to Base Salary herein shall be a reference to such increased amount. Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall have the opportunity to receive an annual bonus ("Annual Bonus Opportunity"), based on the achievement of target levels of performance. Without limiting the generality of the foregoing, following any Change of Control (as defined hereinafter), the amount actually payable to the Executive as an annual bonus shall not be less than an amount equal to the higher of the bonus paid to the Executive for the most recently completed fiscal year of the Company or the target bonus for the then current fiscal year (the "Minimum Bonus Amount"). Any amount payable in respect of the Annual Bonus Opportunity or the Minimum Bonus Amount shall be paid no later than sixty (60) days after the close of the fiscal year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs and Equity Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs and equity programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated executive officers of the Company and its affiliated companies at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, supplemental retirement or excess benefit (collectively, the "Supplemental Retirement Benefits"), deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with and provides the same level and quality of coverage as the Executive's participation in such plans immediately prior to the Effective Date (except for the Medical Executive Reimbursement Plan (the "MERP"), it being understood that the MERP shall be terminated as of September 30, 1995), or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated executive officers of the Company and its affiliated companies at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect from time to time; provided; however, that in no event shall such policies and procedures after the occurrence of a Change of Control be less favorable to the Executive than immediately prior to a Change of Control. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Change of Control date to the Executive, if such policies and procedures are more favorable to the Executive than those in effect immediately prior to the Change of Control date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated executive officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"); provided, however, that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect im- mediately prior to the Effective Date, or if later, the Change of Control. 5. Termination. (a) Death, Permanent Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, Permanent Disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), except that a six month period shall be substituted for the twelve month period provided for therein) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time); provided, however, any termination by the Executive pursuant to Section 5(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 5(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) willful and continuous failure by Executive to perform his duties under this Agreement (other than resulting from incapacity due to physical or mental illness),(ii) the Executive's conviction or plea of nolo contendere to a felony; (iii) the Executive's willful engagement in misconduct in connection with employment which results in material damage to the Company's business or reputation; or (iv) material breach of Executive's duties hereunder which result in material damage to the Company's business or reputation, in each of (ii) through (iv) above, upon 30 days written notice to the Executive, the opportunity for the Executive to be heard by the Board and the good faith determination by at least two-thirds of the Company's non-employee directors that Cause exists; provided, however, that after the occurrence of a Change of Control (as hereinafter defined), "Cause" shall be limited to (ii) through (iv) above. (d) Good Reason. During the Employment Period, Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive: (i (A) the assignment to the Executive of any duties inconsistent with the Executive's position, authority or responsibilities as contemplated by Section 3 of this Agreement, or (B) any other adverse change in such position, including titles, authority or responsibilities; (ii reduction of Executives's base salary or bonus opportunities, or any other material breach by the Company of this Agreement; (iii the Company's requiring the Executive to be based at any office or location more than 25 miles from that location at which he performed his services specified under the provisions of Section 2 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b) upon the occurrence of a Change of Control; provided, however, the successor has had actual written notice of the existence of this Agreement and its terms and an opportunity to assume the Company's responsibilities under this Agreement during a period of 10 business days after receipt of such notice. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(f). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For purposes of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. On or as soon practicable following the Date of Termination, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. 6. Obligations of the Company upon Termination. (a) Death, Permanent Disability or Retirement. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death, Permanent Disability or voluntary retirement this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay or provide to the Executive or the Executive's legal representative under this Agreement the following amounts either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (i the Executive's full Base Salary through the Date of Termination (the "Earned Salary"); (ii the Supplemental Retirement Benefits and the amount otherwise payable to or in respect of the Executive under the Company's otherwise applicable long-term incentive compensation and equity plans and programs (the "Incentive and Equity Amounts") it being understood that, in the event of death or disability, any applicable performance targets thereunder (to the extent not already determined as of the Termination Date) shall be deemed to have been met for the applicable performance period and that payments thereunder shall be pro-rated as of the Date of Termination; and in the event of a termination by reason of retirement, then the Supplemental Retirement Benefits and the Incentive and Equity Amounts, the Incentive and Equity Amounts being calculated and payable in accordance with the terms of the underlying plans and payable to the Executive when awards are payable to all other participants in such plans in accordance with the terms thereof, but prorated through the date of such retirement; and (iii an amount (the "Pro-Rated Bonus") equal to the product of (x) times (y), minus (z): (x) the Minimum Bonus Amount; (y) a fraction, the numerator of which is the number of days in the then current calendar year which have elapsed as of the Date of Termination, and the denominator of which is 365; (z) if Executive's termination occurs in the same calendar year as the Change of Control, an amount equal to the amount paid to the Executive under the Company's applicable bonus plan (the "Actual Bonus Payment") (iv) all vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"). Any Earned Salary, Accrued Obligations and Pro-Rated Bonus shall be paid in cash in a single lump sum as soon as practicable ( but in no event more than 20 days) following the Date of Termination. Any Incentive and Equity Amounts and Supplemental Retirement Benefits accrued by the Executive shall be payable in accordance with the terms of the underlying plans. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive the Earned Salary and the Accrued Obligations (including, but not limited to, the Incentive and Equity Amounts and Supplemental Retirement Benefits, each in accordance with the terms of the underlying plan) in cash in a single lump sum as soon as practicable (but in no event more than 20 days following) the Date of Termination, or in accordance with the terms of the underlying plan. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (A) Prior to the Occurrence of a Change of Control. (i Payments. If, prior to a Change of Control, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts, either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (A) the Executive's Earned Salary; (B) a cash amount (the "Pre-Change Severance Amount") equal to two multiplied by the sum of (1) the Executive's annual Base Salary; plus (2) the Minimum Bonus Amount. (C) the Pro-Rated Bonus; (D) the Incentive and Equity Amounts; (E) the Supplemental Retirement Benefits, it being understood that upon the occurrence of a termination under this Section 6(c)(A), Executive's vested interest in such benefits shall accelerate; and (F) the Accrued Obligations. Any Earned Salary, Pre-Change Severance Amount, Accrued Obligations and Pro-Rated Bonus shall be paid in cash in a single lump sum as soon as practicable (but in no event more than 20 days) following the Date of Termination. The Supplemental Retirement Benefits and Incentive and Equity Amounts shall be payable in accordance with the terms of the underlying plans. (ii Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or the Executive terminates employment for Good Reason prior to the occurrence of a Change of Control: (A) the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (i) the second anniversary of the Date of Termination or, (ii) the date on which the Executive is covered under any comparable plans of a subsequent employer (the "End Date"), to continue participation (including, but not limited to, vesting and accruals) in all of the Company's employee and executive pension, welfare and fringe benefit plans, it being understood that for purposes of the calculation of Supplemental Retirement Benefits, Final Annual Compensation (as defined in the underlying plans) shall be equal to Final Annual Compensation as of the Date of Termination (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date; (B) the Executive (or, in the event of the Executive's death during such period, the Executive's beneficiary or estate) shall have the right to exercise any outstanding options to purchase shares of Common Stock of the Company then exercisable by the Executive or which would become exercisable in accordance with the applicable option agreement and the applicable equity incentive plan of the Company (such agreements and plans referred to collectively as the "Equity Documents") for the period of time permitted in accordance with the generally applicable terms of the governing Equity Documents) after the Date of Termination; and (C) for purposes of the Benefit Plans and the Equity Documents, the Executive will be deemed to have terminated employment under mutually satisfactory conditions. (B) After the Occurrence of a Change of Control. (i Payments. If, following a Change of Control, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts, either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; and (2) the Minimum Bonus Amount; (C) the Pro-Rated Bonus; (D) the Incentive and Equity Amounts, all of which shall be fully accelerated and deemed earned, and all applicable performance targets thereunder shall be deemed to have been met upon the occurrence of a Change of Control; (E) the Supplemental Retirement Benefits, which shall be determined based on the granting of service credit for a period of three years and, after such credit has been granted, shall be computed based upon the deemed age of the Executive at the end of such three year period, it being understood that upon the occurrence of a Change of Control, Executive's vested interest in such benefits shall accelerate and that for purposes of the calculation of Supplemental Retirement Benefits, Final Annual Compensation (as defined in the underlying plans) shall be equal to Final Annual Compensation as of the Date of Termination; and (F) the Accrued Obligations. Any Earned Salary, Severance Amount, Accrued Obligations, and Pro-Rated Bonus shall be paid in cash, or in the case of the Incentive and Equity Amounts, in kind if so provided under the relevant plan, in a single lump sum as soon as practicable (but in no event more than 20 days) following the Date of Termination. The Supplemental Retirement Benefits shall be payable in accordance with the terms of the underlying plans (after giving effect to the acceleration and granting of service credit provided for herein) and the elections of the Executive thereunder. (ii) Continuation of Benefits. If, during the Employment Period and after the occurrence of a Change of Control, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason: (A) the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (i) the third anniversary of the Date of Termination, or (ii) the date on which the Executive is covered under any comparable plans of a subsequent employer, (the "End Date"), to continue participation (including, but not limited to, vesting and accruals) in all of the Company's employee and executive pension, welfare and fringe benefit plans, excluding the Supplemental Retirement Benefits (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date; (B) the Executive (or, in the event of the Executive's death during such period, the Executive's beneficiary or estate) shall have the right to exercise any outstanding options to purchase shares of Common Stock of the Company then exercisable by the Executive or which would become exercisable in accordance with the applicable Equity Documents for the period of time permitted in accordance with the generally applicable terms of the governing Equity Documents, after the Date of Termination; and (C) for purposes of the Benefit Plans and the Equity Documents, the Executive will be deemed to have terminated employment under mutually satisfactory conditions. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 6(d), the amounts payable to the Executive pursuant to this Section 6 following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 6(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. (i In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 6(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income, employment or other tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 6(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 28OG of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 28OG(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 28OG(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 28OG of the Code. (iii For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service (the "Service") to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined, such that the net amount retained by the Executive with respect to the Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income, employment or other tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. The Company agrees to reimburse the Executive for reasonable fees and expenses in connection with any audit or assessment by the Service if a claim ("Claim") by the Service arises out of, or results from the treatment by the Service of any payments made by the Company as parachute payments and for the cost of preparing the Executive's income tax returns for the year in which any payment by the Company may be characterized as a parachute payment. The Executive shall notify the Company in writing of any such Claim as soon as practicable but in no event later than ten (10) business days after the Executive is informed of such Claim and shall cooperate with the Company in good faith to effectively contest the Claim. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such Claim and the Executive agrees to prosecute such contest as the Company shall determine. Notwithstanding the foregoing, if the Company forgoes further prosecution of such contest, the Executive may elect to continue such prosecution; provided, however, that in no event shall the Company be liable for the fees and expenses in connection with such further prosecution. (v The Tax Reimbursement Payment (or portion thereof) provided for in Section 6(e)(i) above shall be paid to the Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Re- imbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274 (b)(2)(B) of the Code). 7. Definitions. (a) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred: (i when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; or (ii when, during any period of 24 consecutive months during the Employment Period, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who is not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two- thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section; or (iii) upon the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. For purposes of this Section 7, if any of the above occur with respect to Electric while the Executive is employed by Electric, "Company" shall include Electric. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the employment of the Executive shall, unless the Company and the Executive shall otherwise mutually agree, be deemed to have terminated, at the date of giving such purported Notice of Termination, by mutual consent of the Company and the Executive and, except as provided in the last preceding sentence, the Executive shall be entitled to receive only his Earned Salary and the Accrued Obligations. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form reasonably acceptable to the Company. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall (i) be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 and (ii) have no further obligation to make any payments to the Executive hereunder following any material violation of the covenants and obligations contained in this Section 11. These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In connection with the foregoing provisions of this Section 11, the Executive represents that his economic means and circumstances are such that such provisions will not prevent him from providing for himself and his family on a basis satisfactory to him. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Effect of this Agreement on Existing Employment Agreements. Any other agreements between the Executive and the Company or any of its Subsidiaries relating to Executive's employment by any such entity shall be automatically superseded upon the occurrence of the Effective Date, including, but not limited to, that certain Employment Agreement between the parties dated as of October 1, 1994. (b) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, applied without reference to principles of conflict of laws. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the City of Atlantic City, New Jersey or in the City of Philadelphia, Pennsylvania and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (d) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (e) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (f) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Atlantic Energy, Inc. 6801 Black Horse Pike Pleasantville, New Jersey 08232 Attention: Secretary with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, York, NY 10019 Attention: Alvin H. Brown, Esq. or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (g) Tax Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (i) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. ATTEST: Atlantic Energy, Inc. By:/s/ J. Micahel Galvin, Jr. Secretary J. Michael Galvin, Jr. (Seal) Title: Chairman, Personnel & Benefits Committee By:/s/ J. L. Jacobs J. L. Jacobs Title: President & Chief Executive Officer EXECUTIVE: /s/ James E. Franklin II James E. Franklin II SUPPLEMENT TO EMPLOYMENT AGREEMENT BETWEEN ATLANTIC ENERGY, INC. and JAMES E. FRANKLIN II Dated August 10, 1995 THIS AGREEMENT SUPPLEMENT is entered into this 10th day of August, 1995 by and between ATLANTIC ENERGY, INC., a New Jersey corporation (the "Company") and JAMES E. FRANKLIN II (the "Executive") and is a supplement to that Employment Agreement dated the same date hereof (the "Employment Agreement"). In consideration of the mutual promises and covenants herein contained and as contained in the Employment Agreement, the adequacy and sufficiency of which is deemed by the parties to be fair and reasonable and to constitute due consideration, the Company and the Executive hereby agree as follows: 1. Capitalized Terms. Capitalized terms, when used herein, shall have the same meaning as in the Employment Agreement. 2. Agreement Not To Compete. The Executive hereby represents, covenants and warrants to the Company that, for a period of one (1) year following the Date of Termination Executive shall not undertake any activity, employment, task or assignment, whether through ownership, employment, consulting arrangement or otherwise, with any person or entity engaged in any business activity in competition with the Company or any of its subsidiaries or affiliates. This covenant not to compete is limited to the geographic area which, as of the date of this Agreement Supplement, comprises the Pennsylvania-New Jersey-Maryland Interconnection area and is also intended to include the southeastern portion of the State of New York which lies south of the northern most boundary line of the Commonwealth of Pennsylvania. It is the intent of this covenant not to compete that the Executive will not, during the one year period following Date of Termination and within the geographical limits hereinabove described, directly or indirectly engage, participate or make any financial investments in, or become employed by or render (whether or not for compensation) any consulting, advisory or other services to or for the benefit of any person, firm or corporation, or otherwise engage in any business activity which directly or indirectly competes with any of the business operations or activities in which the Company or any of its subsidiaries or affiliates is engaged as of the Date of Termination, nor any business in which the Company or any of its subsidiaries or affiliates is actively engaged in pursuing or developing as of the Date of Termination. Nothing contained herein is intended to restrict the Executive from making any investments in any corporation, partnership or other business enterprise whose outstanding capital stock or other equity interests are listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, provided that such investment (i) represents less than five percent (5%) of the aggregate outstanding capital stock or other equity interests of such corporation, partnership or business enterprise and (ii) does not otherwise provide Executive or any affiliate of Executive with the right or power (whether or not exercised) to influence, direct or cause the direction of the management policies and/or affairs of any such business or enterprise which is or might directly or indirectly compete with any business, operations or activities of the Company or any of its subsidiaries and affiliates. IN WITNESS WHEREOF, intending to be legally bound the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. ATTEST: ATLANTIC ENERGY, INC. (Seal) _____________________ BY:/s/ J. Michael Galvin, Jr. J. Michael Galvin, Jr. Chairman, Personnel & Benefits Committee BY:/s/ J. L. Jacobs J. L. Jacobs President & Chief Executive Officer EXECUTIVE: /s/ James E. Franklin II James E. Franklin II EX-99.4 13 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into this 15th day of September, 1995 by and between Atlantic Energy, Inc., a New Jersey corporation (the "Company"), and Michael J. Barron (the "Executive"). In consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof (the "Effective Date") and shall continue until the second anniversary of the Effective Date (the "Employment Period"); provided, however, that the Employment Period shall be automatically renewed for two years unless either party shall send the other written notice of its intention to terminate the agreement at the end of such Employment Period one year prior to the end of such Employment Period; and, provided, further, that upon the occurrence of a Change of Control, the Employment Period shall become three years and shall commence on the date of the Change of Control, and shall thereafter be automatically renewed for two years unless either party shall send the other written notice of its intention to terminate the agreement one year prior to the end of the then current Employment Period. 2. Place of Employment. The Executive's services during the term of this Agreement shall be performed primarily at the principal offices of the Company in Egg Harbor Township, New Jersey. The Executive shall be furnished with a suitable office and such other facilities and services as he may reasonably require in performing his obligations under this Agreement. 3. Employment Obligations. (a) Position and Duties. The Company hereby agrees to employ the Executive as Vice President and Chief Financial Officer and as Senior Vice President and Chief Financial Officer of Atlantic City Electric Company ("Electric") for the Employment Period. The Executive shall exercise his reasonable best efforts in furtherance of, and shall devote substantially all of his working time and attention to the affairs of the Company and its affiliates, and shall perform such duties and services as may reasonably be assigned to him by, and shall report directly to the Chief Executive Officer and the Board of Directors of the Company (the "Board"). (b) Business Time. From and after the Effective Date, the Executive agrees to devote his full business time during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees on which he served prior to the Effective Date, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date which is not in violation of any Company policy shall not be deemed to interfere with the performance of the Executive's services to the Company. In addition, the Executive may commence service as a director of other corporations or organizations after the Effective Date upon approval by the Board which, in the judgment of the Board, will not present any conflict of interest with the Company or any subsidiary or affiliate thereof, and which would not affect the performance of Executive's duties pursuant to this Agreement, which approval shall not be unreasonably withheld; provided, however, that the Executive shall neither (a) become an officer or director of (i) another entity which has or will have the status of a public utility under the Federal Power Act, or any successor act, (ii) any bank, trust company, banking association or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or (iii) any company supplying electrical equipment to the Company, nor (b) accept any such position and commence the performance of any duties or services in such capacity (an "Interlock"), unless the Executive shall have first (x) furnished the Board with at least thirty (30) days prior written notice of his intention to create such Interlock and (y) secured, if the Board shall request that such action be taken, any necessary authorization for such Interlock, in form and substance satisfactory to the Board, from the Federal Energy Regulatory Commission, or successor regulatory agency, pursuant to Section 305(b) of the Federal Power Act, or any supplement or amendment thereto. 4. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary ("Base Salary") at an annual rate at least equal to the annual salary paid to the Executive by the Company and any of its affiliated companies on the Effective Date. The Base Salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. Once increased, any reference to Base Salary herein shall be a reference to such increased amount. Neither the Base Salary nor any increase in Base Salary after the Ef- fective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. Commencing January 1, 1996, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall have the opportunity to receive an annual bonus ("Annual Bonus Opportunity"), based on the achievement of target levels of performance. Without limiting the generality of the foregoing, following any Change of Control (as defined hereinafter), the amount actually payable to the Executive as an annual bonus shall not be less than an amount equal to the higher of the bonus paid to the Executive for the most recently completed fiscal year of the Company or the target bonus for the then current fiscal year (the "Minimum Bonus Amount"). Any amount payable in respect of the Annual Bonus Opportunity or the Minimum Bonus Amount shall be paid no later than sixty (60) days after the close of the fiscal year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs and Equity Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs and equity programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated executive officers of the Company and its affiliated companies at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, supplemental retirement or excess benefit (it being understood that Executive's participation in the Supplemental Retirement or Excess Benefit Plans shall be limited to participation in the Supplemental Excess Retirement Plan II) (collectively, the "Supplemental Retirement Benefits"), deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with and provides the same level and quality of coverage as the Executive's participation in such plans immediately prior to the Effective Date (except for the Medical Executive Reimbursement Plan (the "MERP"), it being understood that Executive shall not participate in the MERP), or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated executive officers of the Company and its affiliated companies at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect from time to time; provided; however, that in no event shall such policies and procedures after the occurrence of a Change of Control be less favorable to the Executive than immediately prior to a Change of Control. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Change of Control date to the Executive, if such policies and procedures are more favorable to the Executive than those in effect immediately prior to the Change of Control date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated executive officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"); provided, however, that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect im- mediately prior to the Effective Date, or if later, the Change of Control. 5. Termination. (a) Death, Permanent Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, Permanent Disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), except that a six month period shall be substituted for the twelve month period provided for therein) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time); provided, however, any termination by the Executive pursuant to Section 5(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 5(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) willful and continuous failure by Executive to perform his duties under this Agreement (other than resulting from incapacity due to physical or mental illness),(ii) the Executive's conviction or plea of nolo contendere to a felony; (iii) the Executive's willful engagement in misconduct in connection with employment which results in material damage to the Company's business or reputation; or (iv) material breach of Executive's duties hereunder which result in material damage to the Company's business or reputation, in each of (ii) through (iv) above, upon 30 days written notice to the Executive, the opportunity for the Executive to be heard by the Board and the good faith determination by at least two-thirds of the Company's non-employee directors that Cause exists; provided, however, that after the occurrence of a Change of Control (as hereinafter defined), "Cause" shall be limited to (ii) through (iv) above. (d) Good Reason. During the Employment Period, Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive: (i (A) the assignment to the Executive of any duties inconsistent with the Executive's position, authority or responsibilities as contemplated by Section 3 of this Agreement, or (B) any other adverse change in such position, including titles, authority or responsibilities; (ii reduction of Executives's base salary or bonus opportunities, or any other material breach by the Company of this Agreement; (iii the Company's requiring the Executive to be based at any office or location more than 25 miles from that location at which he performed his services specified under the provisions of Section 2 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b) upon the occurrence of a Change of Control; provided, however, the successor has had actual written notice of the existence of this Agreement and its terms and an opportunity to assume the Company's responsibilities under this Agreement during a period of 10 business days after receipt of such notice. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(f). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 180 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For purposes of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. On or as soon practicable following the Date of Termination, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. 6. Obligations of the Company upon Termination. (a) Death, Permanent Disability or Retirement. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death, Permanent Disability or voluntary retirement this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay or provide to the Executive or the Executive's legal representative under this Agreement the following amounts either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (i the Executive's full Base Salary through the Date of Termination (the "Earned Salary"); (ii the Supplemental Retirement Benefits and the amount otherwise payable to or in respect of the Executive under the Company's otherwise applicable long-term incentive compensation and equity plans and programs (the "Incentive and Equity Amounts") it being understood that, in the event of death or disability, any applicable performance targets thereunder (to the extent not already determined as of the Termination Date) shall be deemed to have been met for the applicable performance period and that payments thereunder shall be pro-rated as of the Date of Termination; and in the event of a termination by reason of retirement, then the Supplemental Retirement Benefits and the Incentive and Equity Amounts, the Incentive and Equity Amounts being calculated and payable in accordance with the terms of the underlying plans and payable to the Executive when awards are payable to all other participants in such plans in accordance with the terms thereof, but prorated through the date of such retirement; and (iii an amount (the "Pro-Rated Bonus") equal to the product of (x) times (y), minus (z): (x) the Minimum Bonus Amount; (y) a fraction, the numerator of which is the number of days in the then current calendar year which have elapsed as of the Date of Termination, and the denominator of which is 365; (z) if Executive's termination occurs in the same calendar year as the Change of Control, an amount equal to the amount paid to the Executive under the Company's applicable bonus plan (the "Actual Bonus Payment") (iv) all vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"). Any Earned Salary, Accrued Obligations and Pro-Rated Bonus shall be paid in cash in a single lump sum as soon as practicable ( but in no event more than 20 days) following the Date of Termination. Any Incentive and Equity Amounts and Supplemental Retirement Benefits accrued by the Executive shall be payable in accordance with the terms of the underlying plans. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive the Earned Salary and the Accrued Obligations (including, but not limited to, the Incentive and Equity Amounts and Supplemental Retirement Benefits, each in accordance with the terms of the underlying plan) in cash in a single lump sum as soon as practicable (but in no event more than 20 days following) the Date of Termination, or in accordance with the terms of the underlying plan. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (A) Prior to the Occurrence of a Change of Control. (i Payments. If, prior to a Change of Control, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts, either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (A) the Executive's Earned Salary; (B) a cash amount (the "Pre-Change Severance Amount") equal to two multiplied by the sum of (1) the Executive's annual Base Salary; plus (2) the Minimum Bonus Amount. (C) the Pro-Rated Bonus; (D) the Incentive and Equity Amounts; (E) the Supplemental Retirement Benefits, it being understood that upon the occurrence of a termination under this Section 6(c)(A), Executive's interest in such benefits shall accelerate to the five year vesting level if Executive has not reached the fifth year of service. Otherwise, there shall be no acceleration; and (F) the Accrued Obligations. Any Earned Salary, Pre-Change Severance Amount, Accrued Obligations and Pro-Rated Bonus shall be paid in cash in a single lump sum as soon as practicable (but in no event more than 20 days) following the Date of Termination. The Supplemental Retirement Benefits and Incentive and Equity Amounts shall be payable in accordance with the terms of the underlying plans. (ii Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or the Executive terminates employment for Good Reason prior to the occurrence of a Change of Control: (A) the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (i) the second anniversary of the Date of Termination or, (ii) the date on which the Executive is covered under any comparable plans of a subsequent employer (the "End Date"), to continue participation (including, but not limited to, vesting and accruals) in all of the Company's employee and executive pension, welfare and fringe benefit plans, it being understood that for purposes of the calculation of Supplemental Retirement Benefits, Final Annual Compensation (as defined in the underlying plans) shall be equal to Final Annual Compensation as of the Date of Termination, and Final Average Compensation shall be determined in accordance with the underlying plan definition (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date; (B) the Executive (or, in the event of the Executive's death during such period, the Executive's beneficiary or estate) shall have the right to exercise any outstanding options to purchase shares of Common Stock of the Company then exercisable by the Executive or which would become exercisable in accordance with the applicable option agreement and the applicable equity incentive plan of the Company (such agreements and plans referred to collectively as the "Equity Documents") for the period of time permitted in accordance with the generally applicable terms of the governing Equity Documents) after the Date of Termination; and (C) for purposes of the Benefit Plans and the Equity Documents, the Executive will be deemed to have terminated employment under mutually satisfactory conditions. (B) After the Occurrence of a Change of Control. (i Payments. If, following a Change of Control, the Company terminates the Executive's employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts, either in a lump sum or in such other form of payment as is provided or elected by the Executive under the operative plan: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; and (2) the Minimum Bonus Amount; (C) the Pro-Rated Bonus; (D) the Incentive and Equity Amounts, all of which shall be fully accelerated and deemed earned, and all applicable performance targets thereunder shall be deemed to have been met upon the occurrence of a Change of Control; (E) the Supplemental Retirement Benefits, which shall be determined based on the granting of service credit for a period of three years and, after such credit has been granted, shall be computed based upon the deemed age of the Executive at the end of such three year period, it being understood that upon the occurrence of a Change of Control, Executive's interest in such benefits shall accelerate to the five year vesting level if, after giving credit for the three years of service, the five year vesting level has not been achieved; and that for purposes of the calculation of Supplemental Retirement Benefits, Final Annual Compensation (as defined in the underlying plans) shall be equal to Final Annual Compensation as of the Date of Termination and Final Average Compensation shall be computed in the manner defined in the underlying plans; and (F) the Accrued Obligations. Any Earned Salary, Severance Amount, Accrued Obligations, and Pro-Rated Bonus shall be paid in cash, or in the case of the Incentive and Equity Amounts, in kind if so provided under the relevant plan, in a single lump sum as soon as practicable (but in no event more than 20 days) following the Date of Termination. The Supplemental Retirement Benefits shall be payable in accordance with the terms of the underlying plans (after giving effect to the acceleration and granting of service credit provided for herein) and the elections of the Executive thereunder. (ii) Continuation of Benefits. If, during the Employment Period and after the occurrence of a Change of Control, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason: (A) the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (i) the third anniversary of the Date of Termination, or (ii) the date on which the Executive is covered under any comparable plans of a subsequent employer, (the "End Date"), to continue participation (including, but not limited to, vesting and accruals) in all of the Company's employee and executive pension, welfare and fringe benefit plans, excluding the Supplemental Retirement Benefits (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date; (B) the Executive (or, in the event of the Executive's death during such period, the Executive's beneficiary or estate) shall have the right to exercise any outstanding options to purchase shares of Common Stock of the Company then exercisable by the Executive or which would become exercisable in accordance with the applicable Equity Documents for the period of time permitted in accordance with the generally applicable terms of the governing Equity Documents, after the Date of Termination; and (C) for purposes of the Benefit Plans and the Equity Documents, the Executive will be deemed to have terminated employment under mutually satisfactory conditions. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 6(d), the amounts payable to the Executive pursuant to this Section 6 following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 6(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. (i In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 6(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income, employment or other tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 6(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 28OG of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 28OG(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 28OG(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 28OG of the Code. (iii For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service (the "Service") to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined, such that the net amount retained by the Executive with respect to the Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income, employment or other tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. The Company agrees to reimburse the Executive for reasonable fees and expenses in connection with any audit or assessment by the Service if a claim ("Claim") by the Service arises out of, or results from the treatment by the Service of any payments made by the Company as parachute payments and for the cost of preparing the Executive's income tax returns for the year in which any payment by the Company may be characterized as a parachute payment. The Executive shall notify the Company in writing of any such Claim as soon as practicable but in no event later than ten (10) business days after the Executive is informed of such Claim and shall cooperate with the Company in good faith to effectively contest the Claim. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such Claim and the Executive agrees to prosecute such contest as the Company shall determine. Notwithstanding the foregoing, if the Company forgoes further prosecution of such contest, the Executive may elect to continue such prosecution; provided, however, that in no event shall the Company be liable for the fees and expenses in connection with such further prosecution. (v The Tax Reimbursement Payment (or portion thereof) provided for in Section 6(e)(i) above shall be paid to the Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Re- imbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274 (b)(2)(B) of the Code). 7. Definitions. (a) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred: (i when any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; or (ii when, during any period of 24 consecutive months during the Employment Period, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who is not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two- thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section; or (iii) upon the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. For purposes of this Section 7, if any of the above occur with respect to Electric while the Executive is employed by Electric, "Company" shall include Electric. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the employment of the Executive shall, unless the Company and the Executive shall otherwise mutually agree, be deemed to have terminated, at the date of giving such purported Notice of Termination, by mutual consent of the Company and the Executive and, except as provided in the last preceding sentence, the Executive shall be entitled to receive only his Earned Salary and the Accrued Obligations. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form reasonably acceptable to the Company. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall (i) be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 and (ii) have no further obligation to make any payments to the Executive hereunder following any material violation of the covenants and obligations contained in this Section 11. These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In connection with the foregoing provisions of this Section 11, the Executive represents that his economic means and circumstances are such that such provisions will not prevent him from providing for himself and his family on a basis satisfactory to him. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Effect of this Agreement on Existing Employment Agreements. Any other agreements between the Executive and the Company or any of its Subsidiaries relating to Executive's employment by any such entity shall be automatically superseded upon the occurrence of the Effective Date. (b) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, applied without reference to principles of conflict of laws. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the City of Atlantic City, New Jersey or in the City of Philadelphia, Pennsylvania and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (d) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (e) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (f) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: Atlantic Energy, Inc. 6801 Black Horse Pike Pleasantville, New Jersey 08232 Attention: Secretary with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, York, NY 10019 Attention: Alvin H. Brown, Esq. or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (g) Tax Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (h) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (i) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. ATTEST: Atlantic Energy, Inc. By: /s/ J. Micahel Galvin, Jr. Secretary J. Michael Galvin, Jr. (Seal) Title: Chairman, Personnel & Benefits Committee By: /s/ J. L. Jacobs J. L. Jacobs Title: President & Chief Executive Officer EXECUTIVE: /s/ Michael J. Barron Michael J. Barron SUPPLEMENT TO EMPLOYMENT AGREEMENT BETWEEN ATLANTIC ENERGY, INC. and MICHAEL J. BARRON Dated September 15, 1995 THIS AGREEMENT SUPPLEMENT is entered into this 15th day of September, 1995 by and between ATLANTIC ENERGY, INC., a New Jersey corporation (the "Company") and MICHAEL J. BARRON (the "Executive") and is a supplement to that Employment Agreement dated the same date hereof (the "Employment Agreement"). In consideration of the mutual promises and covenants herein contained and as contained in the Employment Agreement, the adequacy and sufficiency of which is deemed by the parties to be fair and reasonable and to constitute due consideration, the Company and the Executive hereby agree as follows: 1. Capitalized Terms. Capitalized terms, when used herein, shall have the same meaning as in the Employment Agreement. 2. Agreement Not To Compete. The Executive hereby represents, covenants and warrants to the Company that, for a period of one (1) year following the Date of Termination Executive shall not undertake any activity, employment, task or assignment, whether through ownership, employment, consulting arrangement or otherwise, with any person or entity engaged in any business activity in competition with the Company or any of its subsidiaries or affiliates. This covenant not to compete is limited to the geographic area which, as of the date of this Agreement Supplement, comprises the Pennsylvania-New Jersey-Maryland Interconnection area and is also intended to include the southeastern portion of the State of New York which lies south of the northern most boundary line of the Commonwealth of Pennsylvania. It is the intent of this covenant not to compete that the Executive will not, during the one year period following Date of Termination and within the geographical limits hereinabove described, directly or indirectly engage, participate or make any financial investments in, or become employed by or render (whether or not for compensation) any consulting, advisory or other services to or for the benefit of any person, firm or corporation, or otherwise engage in any business activity which directly or indirectly competes with any of the business operations or activities in which the Company or any of its subsidiaries or affiliates is engaged as of the Date of Termination, nor any business in which the Company or any of its subsidiaries or affiliates is actively engaged in pursuing or developing as of the Date of Termination. Nothing contained herein is intended to restrict the Executive from making any investments in any corporation, partnership or other business enterprise whose outstanding capital stock or other equity interests are listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, provided that such investment (i) represents less than five percent (5%) of the aggregate outstanding capital stock or other equity interests of such corporation, partnership or business enterprise and (ii) does not otherwise provide Executive or any affiliate of Executive with the right or power (whether or not exercised) to influence, direct or cause the direction of the management policies and/or affairs of any such business or enterprise which is or might directly or indirectly compete with any business, operations or activities of the Company or any of its subsidiaries and affiliates. IN WITNESS WHEREOF, intending to be legally bound the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. ATTEST: ATLANTIC ENERGY, INC. (Seal) ____________________________ BY:/s/ J. Michael Galvin, Jr. J. Michael Galvin, Jr. Chairman, Personnel & Benefits Committee BY: /s/ J. L. Jacobs J. L. Jacobs President & Chief Executive Officer EXECUTIVE: /s/ Michael J. Barron Michael J. Barron -----END PRIVACY-ENHANCED MESSAGE-----