-----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, KXOqIRP+KmMZnhTU4a9CUgDdepUf/4M4hyDjMox1Wij0+3IW87gvyjwYmcbcxSak XGPdN2cBkg9if2ndr8IyhA== 0001036050-01-500063.txt : 20010409 0001036050-01-500063.hdr.sgml : 20010409 ACCESSION NUMBER: 0001036050-01-500063 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K405 SEC ACT: SEC FILE NUMBER: 001-03559 FILM NUMBER: 1589950 BUSINESS ADDRESS: STREET 1: 800 KING STREET STREET 2: PO BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 BUSINESS PHONE: 6096454100 MAIL ADDRESS: STREET 1: 800 KING STREET STREET 2: PO BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 10-K405 1 d10k405.txt FORM 10-K FOR ATLANTIC CITY ELECTRIC COMPANY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-3559 ---------------- ATLANTIC CITY ELECTRIC COMPANY (Exact name of registrant as specified in its charter) New Jersey 21-0398280 (State of Incorporation) (I.R.S. Employer Identification No.) 800 King Street, PO Box 231 Wilmington, Delaware 19899 (Address of principal executive offices) Registrant's telephone number (302) 429-3069 ---------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ----------------------- 8.25% Cumulative Quarterly Income Preferred New York Stock Exchange Securities, liquidation preference $25 per preferred security issued by Atlantic Capital I 7 3/8% Cumulative Trust Preferred Capital New York Stock Exchange Securities, liquidation preference $25 per preferred security issued by Atlantic Capital II
Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the registrant (1) has filed all reports re- quired 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 reg- istrant 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 state- ments incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] All 18,320,937 issued and outstanding shares of Atlantic City Electric Com- pany common stock, $3 per share par value, are owned by Conectiv. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ----- PART I Item 1. Business Overview............................................................... I-1 Business Segments...................................................... I-2 Contribution of Combustion Turbines to Conectiv........................ I-2 Agreements for the Sale of Electric Generating Plants.................. I-2 Electric Utility Industry Restructuring................................ I-3 Basic Generation Service............................................... I-3 Capacity............................................................... I-3 Electric Generating Plants............................................ I-4 Purchased Power....................................................... I-4 Supplying Forecasted Peak Loads....................................... I-4 PJM Interconnection L.L.C.............................................. I-4 Nuclear Power Plants................................................... I-5 Fuel Supply for Electric Generation.................................... I-5 Coal.................................................................. I-6 Oil................................................................... I-6 Gas................................................................... I-6 Nuclear............................................................... I-6 Electric Energy Adjustment Clause...................................... I-6 Retail Electric Rates.................................................. I-7 New Jersey Electric System Reliability Standards....................... I-7 New Jersey Demand Side Management...................................... I-7 Affiliated Transactions................................................ I-7 Federal Decontamination & Decommissioning Fund......................... I-7 Capital Spending and Financing Program................................. I-8 Environmental Matters.................................................. I-8 Air Quality Regulations............................................... I-8 Water Quality Regulations............................................. I-9 Hazardous Substances.................................................. I-9 Executive Officers..................................................... I-10 Item 2. Properties...................................................... I-11 Item 3. Legal Proceedings............................................... I-11 Item 4. Submission of Matters to a Vote of Security Holders............. I-11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................................ II-1 Item 6. Selected Financial Data......................................... II-2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. II-3 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... II-13 Item 8. Financial Statements and Supplementary Data..................... II-14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................... II-43 PART III Item 10. Directors and Executive Officers of the Registrant............. III-1
Item 11. Executive Compensation......................................... III-2 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................. III-7 Item 13. Certain Relationships and Related Transactions................. III-7 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K...................................................................... IV-1 Signatures.............................................................. IV-4
PART I ITEM 1. BUSINESS Overview Atlantic City Electric Company (ACE) is a regulated public electric utility and a subsidiary of Conectiv, which is a Delaware corporation and a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries. ACE was organized under the laws of New Jer- sey on April 28, 1924, by merger and consolidation of several utility compa- nies. Effective March 1, 1998, Atlantic Energy, Inc. (Atlantic) and Delmarva Power & Light Company (DPL) consummated a series of merger transactions (the Merger) by which ACE and DPL became wholly-owned subsidiaries of Conectiv. At- lantic owned ACE prior to the Merger. For additional information about the Merger, refer to Note 4 to the Consolidated Financial Statements included in Item 8 of Part II. On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statu- tory and regulatory approvals and approval by the stockholders of Conectiv and Pepco. As a public electric utility, ACE supplies and delivers electricity to its customers. These businesses, which are discussed below, are weather sensitive and seasonal because sales of electricity are usually higher during the summer months due to air conditioning usage. ACE delivers electricity to approxi- mately 501,000 customers through its transmission and distribution systems and also supplies electricity to most of its delivery customers. ACE's regulated service area covers about 2,700 square miles within the southern one-third of New Jersey and has a population of approximately 0.9 million. ACE supplies electricity to customers within its service area with power purchased from other suppliers and electricity generated by its power plants. A transition to market pricing and terms of service for supplying electricity in ACE's regulated service area began in 1999. All of ACE's electricity deliv- ery customers could elect to choose an alternative electricity supplier, be- ginning August 1, 1999. ACE's electric retail utility business is subject to regulation by the New Jersey Board of Public Utilities (NJBPU), including rates charged to electric customers. The Federal Energy Regulatory Commission (FERC) also has regulatory authority over certain aspects of ACE's electric utility business. In 2000, the regulated retail electricity delivery and supply businesses provided about 87% of ACE's operating revenues and most of ACE's earnings. In 2000, ACE's regulated electric retail revenues were earned from the following customer classes: residential--50.4%; commercial--37.9%; industrial--9.7%; and other-- 2.0%. Effective August 1, 1999, ACE's combustion turbines (502 megawatts of elec- tric generating capacity) and the Deepwater plant (185 megawatts of electric generating capacity) were deregulated and the output of these plants was sold in markets not subject to price regulation. On July 1, 2000, ACE contributed the combustion turbines to Conectiv, as discussed under "Contribution of Com- bustion Turbines to Conectiv." The Deepwater plant is subject to an agreement for sale as discussed under "Agreements for the Sale of Electric Generating Plants." Conectiv's service company, Conectiv Resource Partners, Inc. (CRP), provides a variety of support services to Conectiv subsidiaries. The costs of CRP are directly assigned and allocated to the Conectiv subsidiaries using CRP's serv- ices. As of December 31, 2000, ACE had 660 employees, of which 498 were repre- sented by a labor organization. I-1 Business Segments For other information concerning ACE's business segments, see Note 23 to ACE's 2000 Consolidated Financial Statements included in Item 8 of Part II. Contribution of Combustion Turbines to Conectiv Effective July 1, 2000, ACE contributed at book value its combustion tur- bines (502 megawatts (MW) of capacity) and related transmission equipment, in- ventories, and liabilities to a wholly-owned subsidiary (Conectiv Atlantic Generation, LLC, or CAG). ACE then contributed CAG to Conectiv in conjunction with the formation of an energy-holding company by Conectiv, which is engaged in non-regulated electricity production and sales, and energy trading and mar- keting. This transaction caused an $86 million decrease in property, plant and equipment and an $83 million decrease in common stockholder's equity. Agreements for the Sale of Electric Generating Plants ACE has entered into agreements for the sale of its ownership interests in non-strategic baseload nuclear and fossil fuel-fired electric generating plants. As of December 31, 2000, all of the electric generating plants of ACE were subject to sales agreements and the plants had a net book value of $132.1 million and an aggregate capacity of 1,122.7 MW. These electric generating plants held for sale include the following: (i) The ownership interests of ACE in nuclear electric generating plants: (a) The agreed upon selling price is $11 million plus the net book value of ACE's interests in nuclear fuel as of the closing date; (b) As of December 31, 2000, the capacity and the net book value of ACE's interests in these plants were 383 MW and $14.5 million, respec- tively. (ii) The ownership interests of ACE in certain wholly and jointly owned fossil fuel-fired electric generating units: (a) The agreed upon selling price is $178 million, before certain ad- justments and selling expenses; (b) As of December 31, 2000, the capacity and the net book value of ACE's interests in these electric generating units were 739.7 MW and $117.6 million, respectively. As of December 31, 1999, ACE had ownership interests in electric generating plants representing 1,624.7 MW of electric generating capacity. The 502 MW de- crease in electric generating capacity from 1999 to 2000 resulted from the contribution of the combustion turbines to Conectiv, effective July 1, 2000. After the sales of the electric generating plants of ACE are completed, the principal remaining businesses of ACE will be the transmission and distribu- tion of electricity. ACE's exit from the business of electricity production is expected to cause a decrease in ACE's earnings capacity. Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL, which is also selling its electric generating plants, would occur simultaneously. Appeals related to the NJBPU's final order con- cerning restructuring the electricity supply business of Public Service Elec- tric and Gas Company (PSE&G) and recent electricity shortages and price in- creases in California have resulted in delays in the issuance of required reg- ulatory approvals, the NJBPU's final order concerning restructuring the elec- tricity supply business of ACE, and the closings of the sales of the electric generating units. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Superior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G restructuring. Management currently expects the sales of ACE's nuclear and fossil fuel-fired electric generating plants to take I-2 place during 2001. However, management cannot predict the timing of the issu- ance of required NJBPU approvals, the timing or outcome of appeals, if any, of such approvals, the effect of any of the foregoing on the ability of ACE to consummate the sales of various electric generating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. For additional information, see "Agreements for the Sales of Electric Gener- ating Plants" within Management's Discussion and Analysis of Financial Condi- tion and Results of Operations (MD&A), included in Item 7 of Part II, and Note 11 to the Consolidated Financial Statements included in Item 8 of Part II. Electric Utility Industry Restructuring As discussed below, ACE's electric utility business was restructured during 1999 pursuant to enactment of New Jersey's Electric Discount and Energy Compe- tition Act (New Jersey Act) and a Summary Order the NJBPU issued to ACE. All customers in ACE's service area could choose an alternative electricity sup- plier beginning August 1, 1999. ACE supplies electricity to customers in its service area with power pur- chased from other suppliers and electricity generated by its power plants. The transition to market pricing and terms of service for supplying electricity to customers in ACE's service area began with enactment of the New Jersey Act on February 9, 1999 which provided customers of New Jersey electric utilities with a choice of electricity suppliers beginning August 1, 1999. On July 15, 1999 the NJBPU issued to ACE a Summary Order which provided for decreases in electric customer rates, the opportunity to recover stranded costs, securitization of ACE's stranded costs, and the regulatory treatment of any gain or loss arising from the divestiture of electric power plants. For infor- mation about restructuring the electricity supply business of ACE, see Notes 1, 6, 7, 8 and 14 to the Consolidated Financial Statements, included in Item 8 of Part II, and "Electric Utility Industry Restructuring" within the MD&A in- cluded in Item 7 of Part II. Basic Generation Service Through July 31, 2002, under New Jersey's Basic Generation Service (BGS), ACE is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier. ACE supplies the BGS load requirement with purchased power and the output generated by certain units to be sold. ACE's customer rates are designed to recover the costs of providing BGS service, in- cluding above-market portions of long-term purchased power contracts. As a re- sult, ACE recognizes revenues for BGS service equal to the related costs in- curred. Any difference between such revenues and costs results in a related adjustment to "Deferred energy supply costs." ACE had a regulatory liability of $34.7 million as of December 31, 2000 and $46.4 million as of December 31, 1999 for over-recovered energy supply costs. ACE's customer rates are to be adjusted for any deferred balance remaining after the initial four-year tran- sition period ends July 31, 2003. ACE's recovery of BGS supply costs is sub- ject to review by the NJBPU. For additional information concerning the source of electricity supplied for BGS, see "Supplying Forecasted Peak Loads" below. Capacity Capacity is the capability to produce electric power from owned electric generating units and differs from the electric energy markets, which trade the actual energy being generated. Capacity may also be purchased through third- party contracts. As discussed below, the PJM Interconnection, L.L.C. (PJM) power pool operates a centralized capacity market, which allows PJM member companies such as Conectiv to buy or sell capacity as needed for the electric utility operations of Conectiv subsidiaries. As a member of the PJM, Conectiv is obligated to maintain capacity levels based on its allocated share of esti- mated aggregate PJM capacity requirements, including the portion attributable to ACE. More capacity will need to be purchased after the electric generating units subject to sales agreements are sold. I-3 Electric Generating Plants The capacity provided by the electric generating plants of ACE as of Decem- ber 31, 2000 is summarized in the chart below. As discussed above, all of the electric generating plants of ACE are subject to agreements for sale. The net generating capacity available for operations at any time may be less than the total net installed generating capacity due to generating units being out of service for inspection, maintenance, repairs, or unforeseen circumstances.
MW of Type of Electric Generating Plant Capacity --------------------------------- -------- Coal-fired.......................................................... 471 Oil-fired........................................................... 241 Combustion turbines................................................. 22 Nuclear............................................................. 380 Diesel.............................................................. 9 ----- Electric Generating Capacity........................................ 1,123 =====
Purchased Power As discussed in Note 19 to the Consolidated Financial Statements included in Item 8 of Part II, as of December 31, 2000, ACE had long-term purchased power contracts, which provided 724 MW of capacity and the related energy. These long-term purchased power contracts include 524 MW of capacity and energy pur- chased from non-utility generators (NUGs), at prices which generally are above market prices. ACE purchases electricity from the NUGs as a result of legisla- tion enacted in 1978 which requires electric utilities to purchase such power. ACE recovers the costs of these contracts through rates charged to customers for BGS. Supplying Forecasted Peak Loads Management currently forecasts a peak load of 2,074 MW in 2001 for ACE's BGS. ACE intends to manage its BGS supply requirement through the use of a port- folio approach, including the use of competitive bidding. Approximately 50% of ACE's forecasted 2001 BGS load requirement will be supplied from a combination of existing bilateral long-term power purchases and electricity generated by plants of ACE. The balance of the supply is expected to be provided through additional bilateral contracts and the spot market. PJM Interconnection, L.L.C Pursuant to Conectiv's PJM membership, the generation and transmission fa- cilities of ACE are operated on an integrated basis with other electricity suppliers in Pennsylvania, New Jersey, Maryland, and the District of Columbia, and are interconnected with other major utilities in the eastern half of the United States. This power pool improves the reliability and operating econo- mies of the systems in the group and provides capital economies by permitting shared reserve requirements. The PJM's installed capacity as of December 31, 2000, was 58,701 MW. The PJM's peak demand during 2000 was 49,430 MW on August 9, which resulted in a summer reserve margin of 18.4% (based on installed ca- pacity of 58,524 MW on that date). The PJM operates a centralized capacity credit market, enabling participants to procure or sell surplus capacity to meet reliability obligations within the PJM region. The PJM Operating Agreement allows bids to sell electricity (energy) re- ceived from generation located within the PJM control area. Transactions that are bid into the PJM pool are capped at $1,000 per megawatt hour. All power providers are paid the locational marginal price (LMP) set through power prov- iders' bids. The LMP will be higher in congested areas reflecting the price bids of those higher cost generating units that are I-4 dispatched to supply demand and alleviate the transmission constraint. Fur- thermore, in the event that all available generation within the PJM control area is insufficient to satisfy demand, the PJM may institute emergency pur- chases from adjoining regions. The cost of such emergency purchases is not subject to any PJM price cap. There are a number of factors that distinguish the PJM market from Califor- nia, and make the types of problems recently experienced there less likely. The most prominent difference is the extent to which there is adequate gener- ating capacity to meet demand in the region. The PJM's reserve margin is 18 percent, which is considerably higher than the reserve margin in California. The two markets have also operated differently. Considerable price risk for California utilities resulted from requirements to sell a significant portion of their generation assets and, until recently, buy their energy from the spot market (longer-term forward contracts were not permitted). In contrast, PJM utilities have not been required to divest of their generation assets and have been permitted to lock in prices through long-term contracts, and to mitigate risk with use of other hedging instruments. Finally, California is highly de- pendent on gas-fired and hydro electric generation, both of which are highly dependent on weather. In contrast, PJM has a more diverse fuel mix, including a substantial base of coal and nuclear generators. Nuclear Power Plants ACE owns 5% of Hope Creek Nuclear Generating Station (Hope Creek), which has 1,031 MW of capacity, 7.41% of Salem, which has 2,212 MW of capacity excluding the on-site combustion turbine, and 7.51% of Peach Bottom, which has 2,186 MW of capacity. 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 PSE&G. Peach Bottom Units 2 and 3 are located in York County, Pennsylvania, and are oper- ated by PECO Energy Company (PECO). As discussed above under "Agreements for the Sale of Electric Generating Plants," the agreements for the sale of ACE's interests in the nuclear plants (164 MW in Peach Bottom, 167 MW in Salem, and 52 MW in Hope Creek) provide for (a) a sales price of approximately $11 million plus the net book value of the interests of ACE in nuclear fuel on-hand as of the closing date and (b) the transfer of ACE's nuclear decommissioning funds and related obligation for decommissioning the plants to the purchasers upon completion of the sales. The net book value of ACE's ownership interests in the nuclear plants subject to agreements for sale was $14.5 million as of December 31, 2000. The operation of nuclear generating units is regulated by the Nuclear Regu- latory Commission (NRC). Such regulation requires that all aspects of plant operations be conducted in accordance with NRC safety and environmental re- quirements and that continuous demonstrations be made to the NRC that plant operations meet applicable requirements. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate. For information concerning funding ACE's share of the estimated future cost of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear reactors, see Note 13 to the Consolidated Financial Statements included in Item 8 of Part II. Fuel Supply for Electric Generation The electric generating capacity of ACE by fuel type is shown above under "Electric Generating Plants." To facilitate the purchase of adequate amounts of fuel, ACE contracts with various suppliers of coal, oil, and natural gas on both a long- and short-term basis. Prices under oil and natural gas contracts are generally determined by market-based indices. ACE's obligations for coal and oil supply contracts related to the fossil fuel-fired electric generating units to be sold are expected to be assumed by NRG Energy, Inc., the party which has agreed to purchase the fossil fuel-fired plants. Under the sales agreements for ACE's interests in nuclear generating units, ACE will receive I-5 proceeds for the book value of the nuclear fuel inventories, which are ex- pected to be used to liquidate ACE's obligations for the lease of the nuclear fuel inventories. Management does not anticipate any difficulty in obtaining adequate amounts of fuel for ACE's electric generating plants. Coal During 2000, the coal for ACE's coal-fired units was purchased under con- tracts expiring in 2002 (representing 80% of 2000 coal requirements) and on the spot market (representing 20% of 2000 coal requirements). During 2001, management expects that approximately 75% of coal requirements will be pur- chased under supply contracts and the other 25% purchased on the spot market. Oil All of the oil used by ACE's oil-fired electric generating units is pur- chased on a spot basis. Gas The 19 MW combustion turbine located at Deepwater uses natural gas as a pri- mary fuel source and the units at the Deepwater station, which use coal and oil as primary fuels, use natural gas as a secondary fuel. Natural gas for the combustion turbine and the Deepwater station is primarily purchased from a lo- cal gas distribution company on a semi-firm basis and is also purchased from other suppliers such as marketers, producers, and utilities. Natural gas is delivered through the interstate pipeline system under a mix of long-term firm, short-term firm, and interruptible contracts. Nuclear PSE&G has informed ACE that it has several long-term contracts with uranium ore operators, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek. ACE has also been ad- vised by PECO that it has contracts similar to PSE&G's contracts to satisfy the fuel requirements of Peach Bottom. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek, and Peach Bottom. After spent fuel is removed from a nuclear reactor, it is placed in tempo- rary storage for cooling in a spent fuel pool at the nuclear station site. Un- der the Nuclear Waste Policy Act of 1982 (NWPA), the federal government en- tered into contracts with utilities operating nuclear power plants for trans- portation and ultimate disposal of spent nuclear fuel and high level radioac- tive waste. However, no permanent government-owned and operated repositories are in service or under construction. The United States Department of Energy has stated that it would not be able to open a permanent, high level nuclear waste storage facility until 2010, at the earliest. Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent nuclear fuel storage installations located at or away from reactor sites for at least 30 years beyond the licensed life for operation (which may include the term of a revised or renewed license). PSE&G has advised ACE that adequate spent fuel storage capacity is estimated to be available through 2011 for Salem Unit 1, 2015 for Salem Unit 2, and 2007 for Hope Creek. PECO has advised ACE that it has constructed an on-site dry storage facility at Peach Bottom which provides adequate storage capacity through the end of the current licenses for the two Peach Bottom units. Electric Energy Adjustment Clause Through July 31, 1999, ACE's tariffs for its electric customers included en- ergy adjustments for fuel costs, purchased energy costs, and capacity pur- chased from non-utility electricity suppliers. Effective August 1, 1999, through various components of regulated rates, the rates charged to ACE's BGS customers for electricity supply, I-6 include ACE's fuel costs, purchased energy costs, and capacity purchased from non-utility electricity suppliers. For additional information, see "Basic Gen- eration Service" above. Retail Electric Rates In its Summary Order, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999 and an additional 2% rate reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual revenues by approximately $50 million. The additional 2% rate reduction required by January 1, 2001 was implemented through two separate 1% rate reductions effective January 1, 2000 and 2001, respectively. Each of the 1% rate reductions reduces annual revenues by ap- proximately $10 million, or $20 million in total. The final rate reduction, which is required by August 1, 2002, is expected to reduce revenues by an ad- ditional $30 million, which would result in a cumulative rate reduction of $100 million since August 1, 1999. For additional information concerning the impact of electric utility indus- try restructuring on customer rates, see Note 7 to the Consolidated Financial Statements included in Item 8 of Part II. New Jersey Electric System Reliability Standards In November 1999, the NJBPU began a general review of the reliability of the electric systems of ACE and all other New Jersey utilities. The NJBPU began its review as a result of electric service outages which occurred during an extended period of hot and humid weather in July 1999. On November 28, 2000, the NJBPU approved interim reliability standards which are in effect through 2002 and are designed to reduce outage frequency and duration, as well as im- prove maintenance and inspection of electric facilities. Final reliability standards are expected to be adopted in late-2002, after the NJBPU reviews data submitted by the utilities. Expenditures of approximately $5 million are expected by ACE during 2001 in order to comply. The NJBPU could fine utilities up to $50,000 per violation of the rule requirements. New Jersey Demand Side Management The NJBPU adopted rules in 1991 to encourage utilities to offer demand side management (DSM) and conservation services. The New Jersey Act requires the continuation of these energy efficiency programs and the initiation of renew- able energy programs, the costs of which are to be recovered through a soci- etal benefits charge to electric and gas customers of New Jersey public utili- ties. On June 9, 1999, the NJBPU initiated the Comprehensive Resource Analysis (CRA) proceeding causing a comprehensive resource analysis of energy programs to be undertaken including the re-evaluation of existing DSM programs and the incorporation of new energy efficiency and renewable energy programs. A key issue in the CRA proceeding is the determination of the appropriate level of funding for energy efficiency and renewable energy programs on a statewide ba- sis. Hearings have been conducted and a record has been established to permit the NJBPU to render decisions for each New Jersey utility in lieu of settle- ments, if necessary. A decision by the NJBPU is expected in 2001. Affiliated Transactions On March 15, 2000, the NJBPU adopted Interim Affiliate Relations, Fair Com- petition and Accounting Standards and Related Reporting Requirements (Interim Standards). These Interim Standards will remain in effect for no longer than 18 months, until final standards are issued by the NJBPU. A compliance audit of these interim standards was conducted during 2000 and a final order is pending by the NJBPU. Federal Decontamination & Decommissioning Fund The Energy Policy Act of 1992 provided for creation of a Decontamination & Decommissioning (D&D) Fund to pay for the future clean-up of DOE gaseous dif- fusion enrichment facilities. Domestic utilities and the I-7 federal government are required to make payments to the D&D Fund. The liabil- ity accrued for ACE's D&D Fund liability was $5.1 million as of December 31, 2000. The terms of agreements for the sale of ACE's interests in the nuclear power plants provide for the buyers of the plants to assume the amount of this liability which exists at the time the sale is completed. Capital Spending and Financing Program For financial information concerning ACE's capital spending and financing program, refer to "Liquidity and Capital Resources" in the MD&A included in Item 7 of Part II and Notes 16 and 17 to the Consolidated Financial State- ments, included in Item 8 of Part II. ACE's ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends under the Securities and Exchange Commission (SEC) Methods for 2000-1996 are shown below.
Year Ended December 31, ------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method)... 2.03 2.57 1.66 2.84 2.59 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (SEC Method)..................... 1.95 2.44 1.55 2.58 2.16
For purposes of computing the above ratios, earnings, including Allowance For Funds Used During Construction, are income before extraordinary item plus income taxes and fixed charges. Fixed charges include gross interest expense, the estimated interest component of rentals, and dividends on preferred secu- rities of a subsidiary trust. For the ratio of earnings to fixed charges and preferred dividends, preferred stock dividends represent preferred stock divi- dend requirements multiplied by the ratio that pre-tax income bears to net in- come. Environmental Matters ACE is subject to various federal, regional, state, and local environmental regulations, including air and water quality control, oil pollution control, solid and hazardous waste disposal, and limitation on land use. Permits are required for construction projects and the operation of existing facilities. ACE has incurred, and expects to continue to incur, capital expenditures and operating costs because of environmental considerations and requirements. In- cluded in ACE's forecasted capital requirements are construction expenditures for compliance with environmental regulations, which are estimated to be $1 million in 2001. ACE has a continuing program to assure compliance with the environmental standards adopted by various regulatory authorities. Air Quality Regulations The federal Clean Air Act required utilities and other industries to signif- icantly reduce emissions of air pollutants such as sulfur dioxide (SO\\2\\) and oxides of nitrogen (NOx) by the year 2000. All wholly or jointly owned electric generating units of ACE are in compliance with these requirements. The electric generating plants of ACE have complied with Title I of the Clean Air Act, the ozone non-attainment provisions, which require states to promulgate Reasonably Available Control Technology (RACT) regulations for ex- isting sources located within ozone non-attainment areas or within the North- east Ozone Transport Region (NOTR). Additional "post-RACT" NOx emission regu- lations are being pursued by states in the NOTR. In 2000, the electric gener- ating plants of ACE complied with post-RACT requirements. In addition to the above requirements, the United States Environmental Protection Agency (USEPA) has proposed summer seasonal NOx controls commensurate with reductions of up to 85% below baseline years by the year 2003 for a 22-state region, including New Jersey. Since the State of New Jersey will require a greater percent re- duction I-8 than that required by the USEPA, the ACE facilities will most likely achieve compliance with the USEPA requirement by 2003. The estimated cost to comply is approximately $5-$8 million over the next five years. In July 1997, the USEPA adopted new federal air quality standards for par- ticulate matter and ozone. The new particulate matter standard addresses fine particulate matter. Attainment of the fine particulate matter standard may re- quire reductions in NOx and SO\\2\\. However, under the time schedule an- nounced by the USEPA, particulate matter non-attainment areas will not be des- ignated until 2002 and control measures to meet this standard will not be identified until 2005. The USEPA requested data from a number of electric utilities regarding older coal-fired units in order to determine compliance with the regulations for the Prevention of Significant Deterioration of Air Quality (PSD). A number of set- tlements have been announced throughout the utility industry. On February 23, 2000, ACE received a request for data from the USEPA and the New Jersey De- partment of Environmental Protection (NJDEP) on coal-fired operations at the Deepwater and B.L. England electric generating stations. Data was submitted, as requested by the USEPA throughout 2000. At this time it is not possible to predict the impact of this request, if any, on Deepwater or B.L. England oper- ations. Water Quality Regulations 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. National Pollution Discharge Elimination System (NPDES) permits issued by state environmental regulatory agencies specify effluent limita- tions, monitoring requirements, and special conditions with which facilities discharging waste-waters must comply. To ensure that water quality is main- tained, permits are issued for a term of five years and are modified as neces- sary to reflect requirements of new or revised regulations or changes in fa- cility operations. ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits issued by the NJDEP for the Deepwater and B.L. England power stations. The NJPDES permit for the Deepwater Station expired in 1991. The permit has been administratively extended and the plant continues to operate under the condi- tions of the existing permit while negotiations are underway for permit renew- al. The NJPDES permit for the B.L. England station expired in December 1999, but has been administratively extended and the plant continues to operate un- der the conditions of the existing permit until a renewal permit is issued by NJDEP. Hazardous Substances The nature of the electric business results in the production or handling of various by-products and substances, which may contain substances defined as hazardous under federal or state statutes. The disposal of hazardous sub- stances can result in costs to clean up facilities found to be contaminated due to past disposal practices. Federal and state statutes authorize govern- mental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. ACE's exposure is minimized by adherence to environmental standards for ACE-owned facilities and through a waste dis- posal contractor screening and audit process. ACE had accrued a current liability of $1.0 million as of December 31, 2000 and 1999 for clean-up and other potential costs related to federal and state superfund sites. ACE does not expect such future costs to have a material ef- fect on its financial position or results of operations. For additional infor- mation, see Note 22 to the Consolidated Financial Statements included in Item 8 of Part II. I-9 Executive Officers The names, ages, and positions of all of the executive officers of ACE as of December 31, 2000, are listed below, along with their business experiences during the past five years. Officers of ACE are elected annually by ACE's Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. Executive Officers of ACE (As of December 31, 2000)
Business Experience During Past 5 Name, Age and Position Years ---------------------- --------------------------------- Joseph M. Rigby, 44..................... Elected 2000 as Senior Vice President President of Conectiv and President of Atlantic City Electric Company. 1999, Vice President, Electric Delivery, Conectiv. 1998, Vice President, Gas Delivery, Conectiv. 1997, Vice President, Merger Integration Team, Conectiv. 1996, Director of Human Resources, Atlantic Energy, Inc. John C. van Roden, 51................... Elected 2000 as Senior Vice President Chief Financial Officer and Chief Financial Officer of Conectiv and Chief Financial Officer of Atlantic City Electric Company. Elected 1998 as Senior Vice President and Chief Financial Officer of Conectiv. Principal, Cook and Belier, Inc. in 1998. Senior Vice President/Chief Financial Officer and Vice President/Treasurer,Lukens, Inc. from 1987 to 1998. James P. Lavin, 53...................... Elected 1998 as Controller of Controller and Chief Accounting Officer Conectiv and Atlantic City Electric Company. Elected 1993 as Comptroller, Delmarva Power & Light Company.
I-10 ITEM 2. PROPERTIES
Generating Capacity Electric Generating Station Location (kilowatts) --------------------------- -------- ----------- Coal-Fired B L England................... Beesley's Pt., NJ.............. 284,000 Conemaugh..................... New Florence, PA............... 65,000* Keystone...................... Shelocta, PA................... 42,000* Deepwater..................... Pennsville, NJ................. 80,000 --------- 471,000 --------- Oil-Fired B L England................... Beesley's Pt., NJ.............. 155,000 Deepwater..................... Pennsville, NJ................. 86,000 --------- 241,000 --------- Combustion Turbines Deepwater..................... Pennsville, NJ................. 19,000 Salem......................... Lower Alloways Creek Twp., NJ.. 3,000* --------- 22,000 --------- Nuclear Peach Bottom.................. Peach Bottom Twp., PA.......... 164,000* Salem......................... Lower Alloways Creek Twp., NJ.. 164,000* Hope Creek.................... Lower Alloways Creek Twp., NJ.. 52,000* --------- 380,000 --------- Diesel Units B L England................... Beesley's Pt., NJ.............. 8,000 Keystone...................... Shelocta, PA................... 300* Conemaugh..................... New Florence, PA............... 400* --------- 8,700 --------- Total Electric Generating Capacity.............................. 1,122,700 =========
- -------- * Represents ACE's ownership interest in jointly-owned plants. The above table sets forth the summer electric capacity of the electric gen- erating plants of ACE. Substantially all utility plants and properties of ACE are subject to the lien of the Mortgage under which First Mortgage Bonds are issued. The electric transmission and distribution systems of ACE includes 1,231 transmission poleline miles of overhead lines, 9,419 distribution poleline miles of overhead lines, and 1,198 distribution cable miles of underground ca- bles. ITEM 3. LEGAL PROCEEDINGS On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire by eminent domain ACE electric distribu- tion facilities located within the City limits. The City has offered approxi- mately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the assets sought by the City are worth approximately $40 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. I-11 ATLANTIC CITY ELECTRIC COMPANY PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All shares of ACE's common stock are owned by Conectiv, its parent company. ACE's certificate of incorporation requires payment of all preferred divi- dends in arrears (if any) prior to payment of common dividends to Conectiv, and has certain other limitations on the payment of common dividends. As a subsidiary of a registered holding company under PUHCA, ACE can pay div- idends only to the extent of its retained earnings unless SEC approval is ob- tained. II-1 ATLANTIC CITY ELECTRIC COMPANY ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ------------------------------------------------------- 2000 1999(1) 1998(2) 1997(3) 1996 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Operating Results Operating Revenues...... $ 968,383 $1,076,585 $1,039,750 $1,084,890 $ 989,647 Operating Income........ 166,524 171,931 108,868 190,052 165,120 Income Before Extraordinary Item..... 54,434 63,930 30,276 85,747 75,017 Extraordinary Item, Net of Income Taxes of $40,474 (4)............ -- (58,095) -- -- -- Net Income.............. 54,434 5,835 30,276 85,747 75,017 Earnings Applicable to Common Stock........... 52,302 3,703 29,385 80,926 65,113 Capitalization Common Stockholder's Equity................. $ 580,119 $ 677,951 $ 730,093 $ 783,033 $ 778,425 Preferred Stock Not Subject to Mandatory Redemption........... 6,231 6,231 6,231 30,000 30,000 Subject to Mandatory Redemption........... 23,950 23,950 23,950 33,950 43,950 Preferred Securities of Subsidiary Trusts Subject To Mandatory Redemption............. 95,000 95,000 95,000 70,000 70,000 Variable Rate Demand Bonds (VRDB) (5)....... 22,600 22,600 22,600 22,600 -- Long-Term Debt.......... 857,653 954,752 791,127 811,144 802,245 ---------- ---------- ---------- ---------- ---------- Total Capitalization with VRDB.............. $1,585,553 $1,780,484 $1,669,001 $1,750,727 $1,724,620 ========== ========== ========== ========== ========== Other Information Total Assets............ $2,481,382 $2,654,659 $2,367,222 $2,436,755 $2,460,741 Long-Term Capital Lease Obligations............ 12,872 14,911 19,523 24,077 24,212 Capital Expenditures.... 53,717 48,931 71,342 80,896 88,914 Common Dividends Declared (6)........... 67,309 55,845 81,450 80,857 82,163
- -------- (1) As discussed in Note 4 to the Consolidated Financial Statements, Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DPL) be- came wholly-owned subsidiaries of Conectiv (the 1998 Merger) on March 1, 1998. In 1999, special charges for employee separations, additional costs related to the 1998 Merger, and other non-recurring costs reduced operat- ing income by $12.3 million and income before extraordinary item, net in- come, and earnings applicable to common stock by $7.3 million. (2) In 1998, special charges for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related charges reduced operating income by $61.1 million and income before extraordinary item, net income, and earnings applicable to common stock by $36.6 million. Al- so, in 1998, the write-down to fair value of certain operational and ad- ministrative facilities to be sold due to the Merger reduced operating in- come by $18.0 million and income before extraordinary item, net income, and earnings applicable to common stock by $10.6 million. (3) In 1997, special charges for 1998 Merger-related employee separation bene- fits reduced operating income by $22.6 million and income before extraor- dinary item, net income, and earnings applicable to common stock by $15.6 million. (4) As discussed in Note 6 to the Consolidated Financial Statements, the ex- traordinary item in 1999 resulted from the restructuring of the electric utility industry and discontinuing the application of Statement of Finan- cial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." (5) Although Variable Rate Demand Bonds are classified as current liabilities, ACE intends to use the bonds as a source of long-term financing as dis- cussed in Note 17 to ACE's Consolidated Financial Statements. (6) Amounts shown as total, rather than on a per-share basis, since ACE is a wholly-owned subsidiary of Conectiv. II-2 ATLANTIC CITY ELECTRIC COMPANY ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) provides a "safe harbor" for forward-looking statements to encourage such dis- closures without the threat of litigation, provided those statements are iden- tified as forward-looking and are accompanied by meaningful, cautionary state- ments identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on manage- ment's beliefs as well as assumptions made by and information currently avail- able to management. When used herein, the words "intend," "will," "antici- pate," "estimate," "expect," "believe," and similar expressions are intended to identify 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: the effects of deregulation of energy supply and the unbundling of delivery services; the ability to enter into purchased power agreements on acceptable terms; market demand and prices for energy, capacity, and fuel; weather variations affecting energy usage; operating performance of power plants; an increasingly competitive marketplace; results of any asset disposi- tions; sales retention and growth; federal and state regulatory actions; fu- ture litigation results; costs of construction; operating restrictions; in- creased costs and construction delays attributable to environmental regula- tions; nuclear decommissioning and the availability of reprocessing and stor- age facilities for spent nuclear fuel; and credit market concerns. Atlantic City Electric (ACE) undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing list of factors pursuant to the Litigation Reform Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made prior to the effective date of the Litigation Reform Act. OVERVIEW ACE is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with the former owner of ACE, Atlantic Energy, Inc. (Atlantic), and Delmarva Power & Light Company (DPL). In conjunction with the 1998 Merger, ACE became a Conectiv subsidiary and Atlantic was merged into Conectiv. On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statutory approvals and approval by the stockholders of Conectiv and Pepco. ACE is a public utility located in the southern one-third of New Jersey and supplies electricity to customers with power purchased from other suppliers and electricity generated by its power plants. A transition to market pricing and terms of service for supplying electricity in ACE's regulated service area began on August 1, 1999. All of ACE's customers can elect to choose an alter- native electricity supplier. Effective July 1, 2000, Conectiv formed Conectiv Energy Holding Company (CEH), which has subsidiaries engaged in non-regulated electricity production and sales, and energy trading and marketing. In connection with forming CEH, ACE contributed at book value its combustion turbines (502 megawatts of elec- tric generating capacity) and related transmission equipment, inventories, and liabilities to a wholly owned subsidiary, Conectiv Atlantic Generation, LLC (CAG), effective July 1, 2000. ACE then contributed CAG to Conectiv. The pri- mary effects on ACE's balance sheet of the contribution to Conectiv were as follows: (a) property, plant and equipment decreased $86 million (primarily electric generating plants); (b) fuel and other inventories decreased $6 mil- lion; (c) deferred income taxes and investment tax credits decreased $9 mil- lion; and (d) the additional paid-in capital portion of common stockholder's equity decreased $83 million. II-3 The electric generating plants of ACE had generating capacity of 1,122.7 megawatts (MW) as of December 31, 2000, compared to 1,624.7 MW as of December 31, 1999. The 502 MW decrease in electric generating capacity from 1999 to 2000 resulted from the contribution of the combustion turbines to Conectiv, effective July 1, 2000. During 1999 and 2000, as discussed below under "Agree- ments For The Sale of Electric Generating Plants," ACE entered into agreements for the sale of its nuclear and baseload fossil fuel-fired electric generating plants. All the electric generating plants owned by ACE as of December 31, 2000 were subject to the sales agreements. After the sales of the electric generating plants of ACE are completed, the principal remaining businesses of ACE will be the transmission and distribution of electricity. ACE will pur- chase power to supply electricity to customers who do not choose alternative electricity suppliers, as discussed under "Basic Generation Service." ACE's exit from the business of electricity production is expected to cause a decrease in ACE's earnings capacity. EARNINGS RESULTS SUMMARY Earnings applicable to common stock were $52.3 million for 2000, compared to $3.7 million for 1999. In 1999, earnings applicable to common stock of $3.7 million included (i) a $58.1 million extraordinary charge, after income taxes of $40.5 million, for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," (SFAS No. 71) to ACE's electricity supply businesses be- cause of deregulation, and (ii) $7.3 million of special charges, net of taxes, primarily for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related costs. For additional information concerning deregulation and the extraordinary charge to earnings, see Notes 1, 6, 7, 8 and 14 to the Consolidated Financial Statements and the "Electric Utility Industry Restructuring" section within the MD&A. As discussed in Note 6 to the Consolidated Financial Statements, ACE's 1999 extraordinary charge was based on a Summary Order issued by the New Jersey Board of Public Utilities (NJBPU) which addressed stranded costs, unbundled rates, and other matters related to restructuring. The NJBPU indicated that a more detailed order would be issued at a later time. If the NJBPU's final de- tailed order were to differ materially from the Summary Order, then another extraordinary item may result due to adjustment of the 1999 extraordinary charge. For information concerning a delay in the issuance of the NJBPU's fi- nal detailed order, see "Agreements for the Sales of Electric Generating Plants" in the MD&A. Earnings of $52.3 million for 2000 represent a $16.8 million decrease from earnings of $69.1 million for 1999, adjusted to exclude the 1999 extraordinary and special charges. The $16.8 million decrease in earnings (excluding the ex- traordinary and special charges) was primarily due to lower electricity sales during the summer when average rates are higher, lower customer rates related to electric utility industry restructuring, and higher interest expense, partly offset by the benefit of lower operating expenses and a lower effective income tax rate. In 1998, earnings applicable to common stock were $29.4 million, after spe- cial charges of $47.2 million after taxes. The 1998 special charges were com- prised of (i) $36.6 million after taxes for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related costs, and (ii) $10.6 million after taxes for the write-down to fair value of certain op- erational and administrative facilities to be sold, as a result of the 1998 Merger. Excluding the extraordinary and special charges, earnings applicable to com- mon stock decreased to $69.1 million in 1999 from $76.6 million in 1998. The $7.5 million earnings decrease was primarily due to higher operation and main- tenance expenses and the customer rate decreases which resulted from the elec- tric utility industry restructuring, partly offset by additional revenues from higher regulated sales of electricity to retail customers. The decrease also reflects a higher effective income tax rate and the absence of the $2.5 mil- lion gain in 1998 from the redemption of preferred stock. II-4 ELECTRIC UTILITY INDUSTRY RESTRUCTURING Based on the NJBPU's Summary Order, ACE determined that the requirements of SFAS No. 71 no longer applied to its electricity supply business as of August 1, 1999. As a result, ACE discontinued applying SFAS No. 71 and applied the requirements of SFAS No. 101, "Regulated Enterprises--Accounting for the Dis- continuation of Application of FASB Statement No. 71" (SFAS No. 101) and Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity--Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4), which among other things, resulted in an extraordi- nary charge to earnings of $58.1 million, net of $40.5 million of income tax- es. The provisions of the NJBPU's Summary Order are summarized below. Revenue Reductions Pursuant to the NJBPU's Summary Order, electric rate decreases became effec- tive on the dates shown in the table below.
Estimated Annualized Revenue Decrease Effective Date ------------------------------------- --------------- $50.0 million, or 5%....................................... August 1, 1999 $10.0 million, or 1%....................................... January 1, 2000 $10.0 million, or 1% (1)................................... January 1, 2001
- -------- (1) In addition, by August 1, 2002, rates must be ten percent lower than the rates that were in effect April 30, 1997. This rate decrease is expected to result in an additional $30 million revenue reduction. Regulatory Implications on Sales of Electric Generating Plants Except for the Deepwater plant (185 MW of capacity), any gain or loss real- ized upon the sale of electric generating plants of ACE will affect the amount of ACE's recoverable stranded costs (discussed below), due to the terms of the Summary Order. Accordingly, any gain or loss realized by ACE on the sale of these plants would not affect future earnings. Any loss on the sale of the Deepwater plant, which was written down to fair value in the fourth quarter of 1999, cannot be recovered from ACE's customers. Stranded Cost Recovery and Securitization Stranded costs are the uneconomic portion of assets and long-term contracts that resulted from electric utility industry restructuring. The NJBPU's Sum- mary Order provides ACE the opportunity to recover 100% of the net stranded costs related to certain generation units to be divested and the stranded costs associated with power purchased from non-utility generators (NUGs). The Summary Order, in conjunction with the Electric Discount and Energy Competi- tion Act (the New Jersey Act) also permits securitization of stranded costs through the issuance of transition bonds in the amount of the after-tax stranded cost recovery approved by the NJBPU. Management expects the transi- tion bonds will be issued after completion of the sale of the electric gener- ating units of ACE. The ability to issue transition bonds would depend not only upon approval of the NJBPU, but also on the conditions in the relevant capital markets at the times of the offerings. Proceeds from the transition bonds may be used to refinance ACE's debt and preferred securities, finance the restructuring of purchased power contracts, or otherwise reduce costs in order to decrease regulated electricity rates. Amounts designed to repay the principal of and interest on the transition bonds will be collected from cus- tomers through a transition bond charge. The income tax expense associated with the revenues from transition bond charges will be collected from custom- ers through a separate market transition charge. As of December 31, 2000, the balance for ACE's pre-tax recoverable stranded costs was approximately $959 million, which includes the stranded costs estimated and recorded as a result of discontinuing the application of SFAS No. 71 during 1999 and the $228.5 million payment in December 1999 to terminate a NUG contract (see "Termination and Restructuring of Purchased Power Contracts" below). ACE's amount of recov- erable stranded costs remains subject to adjustment based on the actual gains and losses realized on the sale of certain electric generating plants, addi- tional buyouts or buydowns of NUG contracts, the NJBPU's final restructuring order, and the final amount determined to be recoverable through customer rates under the New Jersey Act. II-5 Shopping Credits Customers who choose an alternative electricity supplier receive a credit to their bill, or a shopping credit, which generally represents the cost of elec- tricity supply and transmission service. Basic Generation Service Through July 31, 2002, under New Jersey's Basic Generation Service (BGS), ACE is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier. In accordance with the Summary Order, ACE sup- plies the BGS load requirement primarily with power purchased under its NUG contracts and the output generated by certain units to be sold. To replace the output of the generating units to be sold, ACE plans to increase the amount of power it purchases to supply the BGS load. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particular time) through the use of a portfolio approach, including the use of competitive bid- ding. ACE's customer rates are designed to recover the costs of providing BGS service, including above-market portions of NUG power. As a result, ACE recog- nizes revenues for BGS service equal to the related costs incurred. Any dif- ference between such revenues and costs results in a related adjustment to "Deferred energy supply costs." ACE's customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition period ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Termination and Restructuring of Purchased Power Contracts On November 10, 1999, the NJBPU issued an order approving termination of a contract under which ACE had purchased energy and 116 MW of capacity from a NUG partnership (Pedricktown Co-generation Limited Partnership, or "Pedricktown"), which is owned 50% by other Conectiv subsidiaries. The NJBPU order provided that ACE is entitled to recover from customers the contract termination payment of $228.5 million, transaction costs, and interim financ- ing costs. The NJBPU order also found that the contract termination payment and related transaction costs are eligible for long-term financing through the issuance of transition bonds. On December 28, 1999, ACE paid $228.5 million to terminate the contract and borrowed funds to finance the contract termination payment (as discussed in Note 17 to the Consolidated Financial Statements). The contract termination payment and related costs are included in "Recover- able Stranded Costs" on the Consolidated Balance Sheets. ACE's customer rates were reduced by about 1% (approximately $10 million of revenues on an annualized basis) effective January 1, 2000 as a result of the net savings from the contract termination. On December 6, 2000, the NJBPU approved ACE's payment on January 22, 2001 of $3.45 million in connection with restructuring ACE's purchased power contract with a NUG, American Ref-Fuel Company of Delaware Valley, L.P. Management anticipates that securitization will ultimately be used to fi- nance the stranded costs associated with the buyout or buydown of ACE's NUG contracts. AGREEMENTS FOR THE SALE OF ELECTRIC GENERATING PLANTS On September 30, 1999, Conectiv announced that ACE reached agreements to sell its ownership interests in nuclear electric generating plants to PSEG Power LLC (a subsidiary of Public Service Enterprise Group Incorporated) and PECO Energy Company (PECO). ACE's interests in the nuclear units that are sub- ject to the sales agreements include a 7.51% (164 MW) interest in Peach Bot- tom, a 7.41% interest (167 MW) in Salem and a 5.0% interest (52 MW) in Hope Creek. These plants had a net book value of approximately $14.5 million as of December 31, 2000. The agreements for the sale of ACE's interests in the nu- clear plants provide for (i) a sales price of approximately $11 million plus the net book value of the interests of ACE in nuclear fuel on-hand as of II-6 the closing date and (ii) the transfer of ACE's nuclear decommissioning funds and related obligation for decommissioning the plants to the purchasers upon completion of the sales. On January 19, 2000, Conectiv announced that ACE reached an agreement to sell certain wholly and jointly owned fossil fuel-fired units to NRG Energy, Inc. (NRG), a subsidiary of Northern States Power Company, for $178 million. The units to be sold to NRG have a total capacity of 739.7 MW, and had a net book value of $117.6 million as of December 31, 2000. Management expects the proceeds from the planned sales of the electric generating plants will be used to repay debt and to fund expansion of Conectiv's electric generation busi- ness. Some or all of ACE's proceeds from the sale of the electric generating plants could be paid as a dividend to Conectiv, or invested in Conectiv's pool of funds that Conectiv subsidiaries borrow from or invest in depending on their cash position. Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL, which is also selling its electric generating plants, would occur simultaneously. Appeals related to the NJBPU's final order con- cerning restructuring the electricity supply business of Public Service Elec- tric and Gas Company (PSE&G) and recent electricity shortages and price in- creases in California have resulted in delays in the issuance of required reg- ulatory approvals, the NJBPU's final order concerning restructuring the elec- tricity supply business of ACE, and the closings of the sales of the electric generating units. Effective October 3, 2000, the agreements relating to the sale of the nuclear plants were amended to, among other things, permit sepa- rate closings of the sales of the ACE and DPL interests in the nuclear plants. DPL's ownership interests in nuclear electric generating plants were sold on December 29, 2000. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Superior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G restructuring. Management currently expects the sales of ACE's nuclear and fossil electric generating plants to take place during 2001. However, management cannot pre- dict the timing of the issuance of required NJBPU approvals, the timing or outcome of appeals, if any, of such approvals, the effect of any of the fore- going on the ability of ACE to consummate the sales of various electric gener- ating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. As of December 31, 2000, $5.3 million of costs associated with selling the electric generating plants had been deferred as an adjustment to the expected future gain or loss on the sales. In the event the sales are not completed, these costs would be expensed. WHOLESALE TRANSACTION CONFIRMATION LETTER AGREEMENTS On October 3, 2000, ACE entered into Wholesale Transaction Confirmation let- ter agreements (Letter Agreements). The Letter Agreements provide for the sale of the electricity output and capacity associated with the ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. PECO and PSEG Energy Resources & Trade LLC (PSER&T), an indirect subsidiary of Public Service Enterprise Group, purchase the electricity output and capacity from ACE under the Letter Agreements. The Letter Agreements became effective October 7, 2000, and termi- nate for each plant upon the earlier of (1) the closing of the sale of the plant, (2) the termination of the agreement relating to the sale of the plant or (3) September 30, 2001. In exchange for the electricity output and capacity purchased from a given plant, PECO and PSER&T reimburse ACE for the nuclear fuel amortized during the term of the Letter Agreements at each plant, and are responsible for the pay- ment of operation and maintenance costs, inventories, capital expenditures (subject, in certain circumstances, to reimbursement by ACE) and certain other liabilities associated with the ownership interests of ACE in each plant. II-7 OPERATING REVENUES
2000 1999 1998 ------ -------- -------- (Dollars in millions) Regulated electric revenues........................ $916.8 $1,048.6 $1,003.3 Non-regulated electric revenues.................... 40.7 19.9 31.6 Other revenues..................................... 10.9 8.1 4.8 ------ -------- -------- Total operating revenues........................... $968.4 $1,076.6 $1,039.7 ====== ======== ========
The table above shows the amounts of electric revenues earned which are sub- ject to price regulation (Regulated) and which are not subject to price regu- lation (Non-regulated). "Regulated electric revenues" include revenues for de- livery (transmission and distribution) service and BGS. In 2000, "Regulated electric revenues" decreased by $131.8 million to $916.8 million, from $1,048.6 million for 1999. In 1999, "Regulated electric reve- nues" increased by $45.3 million to $1,048.6 million, from $1,003.3 million for 1998. The gross margin (revenues less fuel and purchased power costs) earned from regulated electricity sales decreased by approximately $62.6 mil- lion in 2000 and increased by approximately $24.5 million in 1999. Details of the variances in "Regulated electric revenues" are shown below.
Increase (Decrease) in Regulated Electric Revenues --------------------------- 2000 compared 1999 compared to 1999 to 1998 ------------- ------------- (Dollars in millions) Customers choosing alternative electricity suppliers..................................... $ (86.0) $ (0.5) Decrease in retail rates for electric utility industry restructuring........................ (38.9) (23.5) Revenue adjustment related to BGS cost recovery...................................... 0.3 17.2 Variance in volumes of interchange sales....... 4.0 5.0 Retail sales volume, sales mix, and all other.. (11.2) 47.1 ------- ------ $(131.8) $ 45.3 ======= ======
As a result of customers choosing alternative electricity suppliers, "Regu- lated electric revenues" decreased by $86.0 million in 2000 and by $0.5 mil- lion in 1999. The revenue decrease was larger in 2000 mainly because actual purchases of electricity by customers from alternative suppliers did not begin until late-1999, even though customers could begin choosing alternative sup- pliers effective August 1, 1999. Regulated retail electricity delivery sales increased 0.5% in 2000 and 2.6% in 1999. Although regulated retail electricity sales increased 0.5% in 2000, milder weather caused electricity sales to decrease during the summer when av- erage customer rates are higher. The milder summer weather in 2000 was the primary cause of the $11.2 million revenue decrease shown above as "Retail sales volume, sales mix, and all other." Similarly, the $47.1 million revenue increase in 1999 shown above as "Retail sales volume, sales mix, and all oth- er" was mainly due to hotter summer weather. "Non-regulated electric revenues" include revenues from the combustion tur- bines and Deepwater electric generating plant which became deregulated on Au- gust 1, 1999. Upon the transfer of the combustion turbines to Conectiv on July 1, 2000, "non-regulated electric revenues" (and expenses) from these units were excluded from ACE's results of operations. ACE's non-regulated electric- ity generation business will end upon completion of the sale of the Deepwater electric generating plant, which is expected to occur in 2001. "Non-regulated electric revenues" increased $20.8 million for 2000 compared to 1999, mainly due to the timing of deregulation which resulted in a longer period of deregulated power plant operations in 2000. "Non-regulated electric revenues" decreased $11.7 million for 1999 because revenues from electric trading activities for 1998 were higher than revenues earned in the second half of 1999 from ACE's deregulated electric generating units. However, the gross margin earned in 1999 from the deregulated electric generating units was higher than the gross margin earned from 1998 electricity trading activities. II-8 OPERATING EXPENSES Electric Fuel and Purchased Energy and Capacity "Electric fuel and purchased energy and capacity" decreased $59.6 million for 2000 compared to 1999 mainly due to lower average costs, reflecting termi- nation of the Pedricktown purchased power agreement in December 1999, and prior year costs recorded pursuant to the energy adjustment clause, which was eliminated effective August 1, 1999. "Electric fuel and purchased energy and capacity" decreased $2.3 million in 1999 due to lower volumes of energy sup- plied for non-regulated electricity sales, largely offset by higher volumes of energy supplied for regulated retail electricity sales and higher average en- ergy costs. Special Charges ACE's operating results for 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) for the cost of planned employee sepa- rations, additional costs related to the 1998 Merger and certain other nonre- curring costs. ACE's operating results for 1998 include special charges of $61.1 million before taxes ($36.6 million after taxes) for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related costs and $18.0 million before taxes ($10.6 million after taxes) for the write-down to fair value of certain operational and administrative facilities to be sold, as a result of the 1998 Merger. Operation and Maintenance Expenses In 2000, operation and maintenance expenses decreased $10.3 million primar- ily due to lower costs for pension and other postretirement benefits. In 1999, operation and maintenance expenses increased $39.4 million due to higher costs for the electric delivery business, including customer care expenses, higher power plant maintenance expenses, higher administrative costs, and lower capi- tal expenditures which caused proportionately more resources to be expensed and less resources to be capitalized. Depreciation and Amortization In 2000, depreciation and amortization expenses decreased $12.2 million mainly due to the contribution of the combustion turbines to Conectiv on July 1, 2000 and the write-downs in the third and fourth quarters of 1999 of elec- tric generating plants in connection with restructuring the electric utility industry in New Jersey. Depreciation expense for capital improvements to the electric transmission and distribution systems recently placed in-service and amortization of "Recoverable stranded costs" partly offset the decrease from lower depreciation of power plants. Taxes Other Than Income Taxes Taxes other than income taxes decreased $8.4 million in 2000 mainly due to a decrease in New Jersey's transitional energy facility assessment, which is be- ing phased out over a five-year period that ends December 31, 2003. INTEREST EXPENSE In 2000, interest charges, net of amounts capitalized, increased $15.8 mil- lion primarily due to interest charges on $228.5 million borrowed in December 1999 to finance the payment to terminate the Pedricktown purchased power con- tract. In 1999, interest expense, net of amounts capitalized, decreased $3.2 million mainly due to lower balances of long- and short-term debt. DIVIDENDS ON PREFERRED SECURITIES AND PREFERRED STOCK "Preferred stock dividend requirements on preferred securities of subsidiary trusts" increased $1.6 million in 1999 due to the issuance of $25 million of 7 3/8% preferred securities in November 1998. "Dividends on II-9 preferred stock" decreased $1.3 million in 1999 due to ACE's October 1998 pur- chase of $23.8 million of various series of its preferred stock (4.4% average dividend rate). As a result of the October 1998 purchase of preferred stock, ACE realized a gain of $2.5 million that is included in ACE's 1998 results of operations. INCOME TAXES Income taxes decreased $12.6 million in 2000, primarily due to lower pre-tax income and also due to a lower effective income tax rate. Income taxes in- creased $31.1 million in 1999 mainly due to higher pre-tax income and also due to a higher effective income tax rate. NEW ACCOUNTING STANDARD ACE implemented the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective Jan- uary 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other compre- hensive income (a separate component of common stockholder's equity) and is subsequently reclassified into earnings when the forecasted transaction oc- curs. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. ACE's financial statements were not affected by the initial adoption of SFAS No. 133, effective January 1, 2001, because ACE did not hold derivative in- struments as of December 31, 2000. To the extent ACE holds derivative instru- ments subsequent to initial adoption of SFAS No. 133, there may be increased volatility in ACE's earnings, revenues and common stockholder's equity. LIQUIDITY AND CAPITAL RESOURCES General ACE's primary sources of capital are internally generated funds (net cash provided by operating activities less common and preferred dividends) and ex- ternal financings. Additionally, restructuring the electric utility industry has created new opportunities for raising capital. As discussed under "Agree- ments For The Sale Of Electric Generating Plants," ACE plans to sell electric generating units with 1,122.7 MW of capacity in 2001 for approximately $189 million, before certain adjustments and selling expenses. As discussed under "Stranded Cost Recovery and Securitization," capital is also expected to be raised through the securitization of ACE's stranded costs, subsequent to ACE's application to the NJBPU for approval of such securitization. Capital require- ments generally include construction expenditures for the electric delivery business and electric generating units, repayment of debt, preferred stock, preferred securities, and capital lease obligations. ACE's cash flows for 2000, 1999, and 1998 are summarized below.
2000 1999 1998 ------- ------- ------- (Dollars in Millions) Cash Flows Provided / (Used) By: Operating Activities............................ $ 282.6 $ (33.3) $ 242.6 Investing Activities............................ (124.4) (121.6) (78.8) Financing Activities............................ (158.0) 134.1 (155.8) ------- ------- ------- Net change in cash and cash equivalents........... $ 0.2 $ (20.8) $ 8.0 ======= ======= =======
II-10 Cash Flows From Operating Activities Cash flows from operating activities provided $282.6 million of cash in 2000 and used $33.3 million of cash in 1999 due to the $228.5 million payment by ACE in December 1999 to terminate its purchased power contract with Pedricktown. Excluding the $228.5 million contract termination payment, oper- ating activities provided net cash of $195.2 million in 1999 compared to $282.6 million for 2000. This $87.4 million increase in cash flow for 2000 compared to 1999 was due to a $170.9 million decrease in income tax payments, partly offset by the effects of prior-year over-collections of energy costs from customers, lower electricity sales, rate decreases and higher interest expense payments. The decrease in income tax payments reflects $114.2 million of tax refunds received in 2000, which were primarily related to the December 1999 payment to terminate the Pedricktown purchased power contract. Cash flows from operating activities for 1999, excluding the Pedricktown contract termination payment, decreased $47.4 million to $195.2 million, from $242.6 million for 1998. The decrease reflects higher income tax payments and rate decreases. As of December 31, 2000, ACE had a balance of $10.2 million for accrued taxes payable, compared to a balance of $88.5 million for prepaid income taxes as of December 31, 1999. This variance resulted primarily from the income tax refunds received by ACE during 2000. ACE had a $34.7 million current liability for deferred energy supply costs related to its BGS as of December 31, 2000. This liability will decrease to the extent there are any under-recoveries of BGS and certain other costs. ACE's customers rates are to be adjusted for the deferred balance which re- mains as of July 31, 2003. Cash Flows From Investing Activities The most significant items included in cash flows from investing activities during 2000, 1999, and 1998 are summarized below.
Cash Provided/(Used) ------------------------ 2000 1999 1998 ------- ------- ------ (Dollars in Millions) Investment in Conectiv money pool.................... $ (74.4) $ (73.5) $ -- Capital expenditures................................. (53.7) (48.9) (71.3) All other investing cash flows, net.................. 3.7 0.8 (7.5) ------- ------- ------ Net cash used by investing activities................ $(124.4) $(121.6) $(78.8) ======= ======= ======
The $74.4 million and $73.5 million uses of cash in 2000 and 1999 for "In- vestment in Conectiv money pool" represent the incremental amount of ACE's in- vestment in Conectiv's pool of funds that Conectiv subsidiaries borrow from or invest in, depending on their cash position. Capital expenditures were $53.7 million in 2000, $48.9 million in 1999, and $71.3 million in 1998. Capital expenditures for 2000 include transmission and distribution system upgrades to increase system reliability. Capital expendi- tures in 1999 decreased by $22.4 million from 1998 primarily due to a shift in the funding of expenditures for certain assets to Conectiv's service subsidi- ary. See "Overview" for information concerning the non-cash investing and financ- ing transaction during 2000 involving the contribution to Conectiv of combus- tion turbines with 502 MW of electric generating capacity. Among other effects on the balance sheet, this transaction caused an $86 million decrease in prop- erty, plant and equipment and an $83 million decrease in common stockholder's equity. Cash Flows From Financing Activities ACE pays a common dividend each quarter to Conectiv. Common dividends paid were $67.3 million in 2000, $59.3 million in 1999, and $81.5 million in 1998. As a subsidiary of a registered holding company under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is obtained. II-11 During 2000, 1999, and 1998, ACE's external financing activities primarily involved debt. Cash flows from debt financing activity are summarized below.
Cash Provided/(Used) ------------------------------ Total 2000 1999 1998 ------ ------ ------ ------ (Dollars in millions) Long-term debt Issuances................................... $313.5 $ -- $228.5 $ 85.0 Purchases & redemptions..................... (153.6) (46.1) (48.9) (58.6) ------ ------ ------ ------ Net......................................... 159.9 (46.1) 179.6 26.4 Net change in short-term debt................. (72.1) (30.0) 30.0 (72.1) ------ ------ ------ ------ Net financing activity for long- and short- term debt.................................... $ 87.8 $(76.1) $209.6 $(45.7) ====== ====== ====== ======
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000 and repaid $0.1 million of other long-term debt during 2000. In 2000, ACE repaid the $30 million it borrowed on a short-term basis during 1999 and had no short-term debt outstanding as of December 31, 2000. ACE borrowed $228.5 million under a revolving credit facility on December 28, 1999 to provide interim financing for a payment made to terminate a pur- chased power contract with Pedricktown, as discussed in Note 17 to the Consol- idated Financial Statements. In December 2000, ACE exercised its option to convert the revolving loan balance to a term loan, which is due in two in- stallments; (1) 25% of the principal balance is due December 20, 2001, and (2) the remaining term loan principal is due December 20, 2002. ACE intends to re- pay this debt with proceeds from the expected issuance of transition bonds, which are discussed in Note 7 to the Consolidated Financial Statements. During 1999, ACE repaid $48.9 million of long-term debt, including $30.0 million of Medium Term Notes (7.52% average interest rate) and $18.9 million of First Mortgage Bonds (6.87% average interest rate). In 1998, ACE issued $85.0 million of Medium Term Notes (6.1% average inter- est rate) and repaid $56.0 million of 6.26% Medium Term Notes and $2.6 million of 7.25% bonds. In 1998, a subsidiary trust owned by ACE issued $25 million of 7 3/8% pre- ferred securities. In 1998, ACE also redeemed $10 million of its preferred stock subject to mandatory redemption ($8.20 annual dividend rate per $100 of preferred stock) and $23.8 million of various series of preferred stock not subject to mandatory redemption which had an average dividend rate of 4.4%. ACE's capital structure as of December 31, 2000 and 1999, expressed as a percentage of total capitalization is shown below.
December 31, December 31, 2000 1999 ------------ ------------ Common stockholder's equity...................... 34.5% 36.5% Preferred stock and preferred trust securities... 7.4% 6.7% Long-term debt and variable rate demand bonds.... 52.3% 52.7% Short-term debt and current maturities of long- term debt....................................... 5.8% 4.1%
As discussed above, the contribution of combustion turbines to Conectiv dur- ing 2000 caused an $83 million decrease in common stockholder's equity. As a result, there was a decrease in common stockholder's equity as a percentage of total capitalization. Forecasted capital requirements ACE's expected capital expenditures are estimated to be approximately $65 million in 2001, primarily for ACE's electric delivery business. During 2002 and 2003, capital expenditures for ACE's electric delivery business are ex- pected to range from $55 million to $65 million per year. Capital requirements for electric generating II-12 plants have been reduced by the contribution of the combustion turbines to Conectiv in July 2000. After the expected sale in 2001 of ACE's temporarily retained electric generating plants, ACE would not have any electric generat- ing plants or the related capital expenditure requirements. Scheduled maturities of long-term debt over the next five years are as fol- lows: 2001--$97.2 million; 2002--$221.5 million; 2003--$70.1 million; 2004-- $67.1 million, 2005--$40.1 million. Future capital requirements are expected to be funded through internally generated funds and external financings. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The following discussion contains "forward looking statements." These pro- jected results have been prepared based upon certain assumptions considered reasonable given the information currently available to ACE. Nevertheless, be- cause of the inherent unpredictability of interest rates and equity market prices as well as other factors, actual results could differ materially from those projected in such forward-looking information. Interest Rate Risk ACE is subject to the risk of fluctuating interest rates in the normal course of business. ACE manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 2000, a hypotheti- cal 10% change in interest rates for variable rate debt would result in a $0.1 million change in interest costs and earnings before taxes. Equity Price Risk ACE maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of nuclear decommissioning (See Note 13 to the Consoli- dated Financial Statements). These funds are invested primarily in domestic and international equity securities, fixed-rate, fixed income securities, and cash and cash equivalents. The equity securities included in ACE's portfolio are exposed to price fluctuations in equity markets, and the fixed-rate, fixed income securities are exposed to changes in interest rates. The accounting for nuclear decommissioning recognizes that the net costs are recovered through electric rates and the effects of fluctuations in equity prices and interest rates on the securities in the nuclear decommissioning trust funds do not af- fect ACE's earnings. Commodity Price Risk Effective August 1, 1999, ACE's combustion turbines (502 MW of electric gen- erating capacity) and Deepwater plant (185 MW of electric generating capacity) were deregulated. On July 1, 2000, ACE contributed the combustion turbines to Conectiv in conjunction with formation of an energy holding company and re- tained the Deepwater plant, which is subject to an agreement for sale as dis- cussed in Note 11 to the Consolidated Financial Statements. Beginning August 1, 1999, ACE sold the megawatt-hour (MWH) output of these plants in markets not subject to price regulation. From time-to-time, ACE hedged the MWH output of its deregulated electric generating units, primarily through forward con- tracts, which were used to lock-in selling prices for electricity. ACE uses a value-at-risk model to assess the market risk of the electricity output of its deregulated generating units. The model includes fixed price sales commitments, physical forward contracts, and commodity derivative in- struments. Value at risk represents the potential gain or loss on instruments or portfolios due to changes in market factors, for a specified time period and confidence level. ACE estimates value-at-risk using a delta-normal variance/covariance model with a 95 percent confidence level and assuming a five-day holding period. As of December 31, 2000, ACE had no value at risk with respect to commodity price exposure because ACE did not hold any deriva- tive instruments. As of December 31, 1999, ACE's calculated value at risk with respect to its commodity price exposure for the output of its deregulated gen- erating plants was approximately $6.4 million. II-13 ATLANTIC CITY ELECTRIC COMPANY Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT Management is responsible for the information and representations contained in the consolidated financial statements of Atlantic City Electric Company (ACE). Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions. ACE and its subsidiary companies maintain a system of internal controls de- signed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified per- sonnel. PricewaterhouseCoopers LLP, independent accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with auditing standards generally accepted in the United States which include a review of selected internal controls to deter- mine the nature, timing, and extent of audit tests to be applied. The Audit Committee of Conectiv's Board of Directors, composed of outside directors only, meets with management, internal auditors, and independent ac- countants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board of Directors on recommenda- tion of the Audit Committee. /s/ Joseph M. Rigby /s/ John C. van Roden _____________________________________ _____________________________________ Joseph M. Rigby John C. van Roden President Chief Financial Officer February 12, 2001 II-14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Atlantic City Electric Company Wilmington, Delaware In our opinion, the accompanying consolidated financial statements listed in the accompanying index appearing under Item 14(a)(1) on page IV-I present fairly, in all material respects, the financial position of Atlantic City Electric Company and subsidiary companies ("ACE") as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with account- ing principles generally accepted in the United States of America. In addi- tion, in our opinion, the financial statement schedule listed in the accompa- nying index appearing under Item 14(a)(2) on page IV-1, presents fairly, in all material respects, the information set forth therein when read in conjunc- tion with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of ACE's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the au- dit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP _____________________________________ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 12, 2001 II-15 ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, -------------------------------- 2000 1999 1998 -------- ---------- ---------- (Dollars in Thousands) Operating Revenues........................... $968,383 $1,076,585 $1,039,750 -------- ---------- ---------- Operating Expenses Electric fuel and purchased energy and capacity.................................. 420,737 480,381 482,684 Special charges............................ -- 12,301 79,091 Operation and maintenance.................. 243,682 253,970 214,553 Depreciation and amortization.............. 101,527 113,714 112,711 Taxes other than income taxes.............. 35,913 44,288 41,843 -------- ---------- ---------- 801,859 904,654 930,882 -------- ---------- ---------- Operating Income............................. 166,524 171,931 108,868 -------- ---------- ---------- Other Income................................. 7,808 8,712 8,621 -------- ---------- ---------- Interest Expense Interest charges........................... 76,178 60,562 63,940 Allowance for borrowed funds used during construction and capitalized interest..... (645) (809) (957) -------- ---------- ---------- 75,533 59,753 62,983 -------- ---------- ---------- Preferred Dividend Requirements on Preferred Securities of Subsidiary Trusts............. 7,619 7,634 6,052 -------- ---------- ---------- Income Before Income Taxes and Extraordinary Item........................................ 91,180 113,256 48,454 Income Taxes, Excluding Income Taxes Applicable To Extraordinary Item............ 36,746 49,326 18,178 -------- ---------- ---------- Income Before Extraordinary Item............. 54,434 63,930 30,276 Extraordinary Item (Net of income taxes of $40,474).................................... -- (58,095) -- -------- ---------- ---------- Net Income................................... 54,434 5,835 30,276 Dividends on Preferred Stock................. 2,132 2,132 3,436 Gain on Preferred Stock Redemption........... -- -- 2,545 -------- ---------- ---------- Earnings Applicable to Common Stock.......... $ 52,302 $ 3,703 $ 29,385 ======== ========== ==========
See accompanying Notes to Consolidated Financial Statements. II-16 ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars in Thousands) Cash Flows From Operating Activities Net income................................... $ 54,434 $ 5,835 $ 30,276 Adjustments to reconcile net income to net cash provided by operating activities: Deferred recoverable purchased power contract termination payment.............. -- (228,500) -- Extraordinary item net of income taxes..... -- 58,095 -- Special charges............................ -- 12,301 79,091 Depreciation and amortization.............. 113,853 126,857 117,285 Investment tax credit adjustments, net..... (3,157) (2,534) (1,690) Deferred income taxes, net................. 23,121 71,897 (37,915) Deferred energy supply costs............... (13,839) 23,844 43,001 Net change in: Accounts receivable........................ (7,333) (22,644) (500) Inventories................................ 9,110 (7,949) 5,077 Prepaid New Jersey sales & excise taxes.... 13,374 22,216 (16,274) Accounts payable........................... (15,008) 7,921 18,765 Taxes accrued.............................. 98,726 (111,399) 16,994 Other current assets and liabilities (1)... (2,721) (3,796) (29,511) Other, net................................... 12,023 14,527 18,018 --------- --------- --------- Net cash provided (used) by operating activities.................................. 282,583 (33,329) 242,617 --------- --------- --------- Cash Flows From Investing Activities Investment in Conectiv money pool............ (74,422) (73,532) -- Capital expenditures......................... (53,717) (48,931) (71,342) Deposits to nuclear decommissioning trust funds....................................... (405) (3,213) (6,424) Other, net................................... 4,196 4,070 (1,040) --------- --------- --------- Net cash used by investing activities........ (124,348) (121,606) (78,806) --------- --------- --------- Cash Flows From Financing Activities Common dividends paid........................ (67,309) (59,321) (81,450) Preferred dividends paid..................... (2,332) (2,821) (3,436) Preferred securities issued.................. -- -- 25,000 Preferred stock redeemed..................... -- -- (33,769) Long-term debt issued........................ -- 228,500 85,000 Long-term debt redeemed...................... (46,075) (48,900) (58,575) Principal portion of capital lease payments.................................... (12,326) (13,143) (12,295) Net change in short-term debt................ (30,000) 30,000 (72,100) Other, net................................... -- (223) (4,184) --------- --------- --------- Net cash provided (used) by financing activities.................................. (158,042) 134,092 (155,809) --------- --------- --------- Net change in cash and cash equivalents...... 193 (20,843) 8,002 Beginning of year cash and cash equivalents................................. 7,924 28,767 20,765 --------- --------- --------- End of year cash and cash equivalents........ $ 8,117 $ 7,924 $ 28,767 ========= ========= =========
- -------- (1) Other than debt and deferred income taxes classified as current. See accompanying Notes to Consolidated Financial Statements. II-17 ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
As of December 31, --------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents.............................. $ 8,117 $ 7,924 Accounts receivable net of allowances of $4,423 and $3,500, respectively.................................. 140,785 133,879 Investment in Conectiv money pool...................... 147,954 73,532 Inventories, at average cost Fuel (coal and oil).................................. 6,818 19,598 Materials and supplies............................... 6,786 8,890 Prepaid income taxes................................... -- 88,483 Deferred income taxes, net............................. 15,750 6,245 Other prepayments...................................... 1,738 2,223 ---------- ---------- 327,948 340,774 ---------- ---------- Investments.............................................. 112,501 105,371 ---------- ---------- Property, Plant and Equipment Electric generation.................................... 142,243 256,899 Electric transmission and distribution................. 1,255,184 1,224,644 Other electric facilities.............................. 119,782 128,388 Other property, plant, and equipment................... 5,772 5,772 ---------- ---------- 1,522,981 1,615,703 Less: Accumulated depreciation......................... 640,103 626,080 ---------- ---------- Net plant in service................................... 882,878 989,623 Construction work-in-progress.......................... 50,247 46,025 Leased nuclear fuel, at amortized cost................. 28,352 30,391 ---------- ---------- 961,477 1,066,039 ---------- ---------- Deferred Charges and Other Assets Recoverable stranded costs, net........................ 958,883 988,273 Unrecovered purchased power costs...................... 14,487 28,923 Deferred recoverable income taxes...................... 13,978 21,867 Unrecovered New Jersey state excise taxes.............. 10,360 22,567 Deferred debt refinancing costs........................ 12,409 13,574 Deferred other postretirement benefit costs............ 29,981 32,479 Unamortized debt expense............................... 12,842 14,197 Other.................................................. 26,516 20,595 ---------- ---------- 1,079,456 1,142,475 ---------- ---------- Total Assets............................................. $2,481,382 $2,654,659 ========== ==========
See accompanying Notes to Consolidated Financial Statements. II-18 ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
As of December 31, --------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt........................................ $ -- $ 30,000 Long-term debt due within one year..................... 97,200 46,075 Variable rate demand bonds............................. 22,600 22,600 Accounts payable....................................... 50,744 62,169 Taxes accrued.......................................... 10,243 -- Interest accrued....................................... 18,193 20,182 Dividends payable...................................... 17,871 18,071 Current capital lease obligation....................... 15,480 15,480 Deferred energy supply costs........................... 34,650 46,375 Above-market purchased energy contracts and other electric restructuring liabilities.................... 7,586 7,992 Other.................................................. 30,268 31,893 ---------- ---------- 304,835 300,837 ---------- ---------- Deferred Credits and Other Liabilities Deferred income taxes, net............................. 405,385 389,594 Regulatory liability for New Jersey income tax benefit............................................... 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities.................... 16,744 16,921 Deferred investment tax credits........................ 35,851 39,608 Long-term capital lease obligation..................... 12,872 14,911 Pension benefit obligation............................. 26,948 20,309 Other postretirement benefit obligation................ 37,614 42,952 Other.................................................. 28,918 22,381 ---------- ---------- 613,594 595,938 ---------- ---------- Capitalization Common stock, $3 par value; shares authorized: 25,000,000; shares outstanding: 18,320,937............ 54,963 54,963 Additional paid-in capital............................. 410,194 493,007 Retained earnings...................................... 114,962 129,981 ---------- ---------- Total common stockholder's equity...................... 580,119 677,951 Preferred stock not subject to mandatory redemption.... 6,231 6,231 Preferred stock subject to mandatory redemption........ 23,950 23,950 Preferred securities of subsidiary trusts subject to mandatory redemption.................................. 95,000 95,000 Long-term debt......................................... 857,653 954,752 ---------- ---------- 1,562,953 1,757,884 ---------- ---------- Commitments and Contingencies (Note 22).................. -- -- ---------- ---------- Total Capitalization and Liabilities..................... $2,481,382 $2,654,659 ========== ==========
See accompanying Notes to Consolidated Financial Statements. II-19 ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY
Total Common Additional Stockholder's Common Paid-in Retained Equity Stock Capital Earnings ------------- ------- ---------- -------- (Dollars in Thousands) Balance as of December 31, 1997..... $783,033 $54,963 $493,161 $234,909 Net income.......................... 30,276 30,276 Preferred Stock Redemption.......... 1,959 135 1,824 Less Cash Dividends: Preferred stock................... (3,436) (3,436) Common stock...................... (81,450) (81,450) Other............................... (289) (289) -------- ------- -------- -------- Balance as of December 31, 1998..... 730,093 54,963 493,007 182,123 Net income.......................... 5,835 5,835 Less Cash Dividends: Preferred stock................... (2,132) (2,132) Common stock...................... (55,845) (55,845) -------- ------- -------- -------- Balance as of December 31, 1999..... 677,951 54,963 493,007 129,981 Net income.......................... 54,434 54,434 Less Cash Dividends: Preferred stock................... (2,132) (2,132) Common stock...................... (67,309) (67,309) Contribution to Conectiv of subsidiaries which owned combustion turbine electric generating units (1)................................ (82,825) -- (82,813) (12) -------- ------- -------- -------- Balance as of December 31, 2000..... $580,119 $54,963 $410,194 $114,962 ======== ======= ======== ========
As of December 31, 2000, ACE had 25 million authorized shares of common stock at $3 par value. There were 18,320,937 shares outstanding during 1998, 1999, and 2000, which are owned by Conectiv. - -------- (1) See Note 11 to the Consolidated Financial Statements for additional infor- mation. See accompanying Notes to Consolidated Financial Statements. II-20 ATLANTIC CITY ELECTRIC COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Business As discussed in Note 4 to the Consolidated Financial Statements, effective March 1, 1998, Atlantic Energy, Inc. (Atlantic), and Delmarva Power & Light (DPL) consummated a series of merger transactions (the 1998 Merger) by which Atlantic City Electric Company (ACE) and DPL became wholly-owned subsidiaries of Conectiv. Conectiv is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statutory approvals and approval by the stockholders of Conectiv and Pepco. ACE is a public utility which supplies and delivers electricity to its cus- tomers under the trade name Conectiv Power Delivery. A transition to market pricing and terms of service for supplying electricity to customers in the regulated service area of ACE began on August 1, 1999. During 1998-2000, ACE also supplied electricity in markets which were not subject to price regula- tion. ACE delivers electricity within its service area to approximately 501,000 customers through its transmission and distribution systems and also supplies electricity to most of its electricity delivery customers, who have the option of choosing an alternative supplier. ACE's regulated service area covers about 2,700 square miles within the southern one-third of New Jersey and has a population of approximately 0.9 million. Effective July 1, 2000, ACE contributed at net book value its combustion turbines, with an electric generating capacity of 502 megawatts (MW), and re- lated assets and liabilities to Conectiv. Conectiv contributed the plants to a subsidiary of Conectiv Energy Holding Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity production and sales, and energy trading and marketing. During 1999 and 2000, as discussed in Note 11 to the Consolidated Financial Statements, ACE entered into agreements for the sale of its nuclear and non- strategic baseload fossil fuel-fired electric generating plants. After the sales of the nuclear and non-strategic baseload fossil electric generating plants of ACE are completed, the principal remaining businesses of ACE will be the transmission and distribution, or delivery, of electricity. ACE will pur- chase power to supply electricity to customers who do not choose alternative electricity suppliers. Regulation of Utility Operations Certain aspects of ACE's electric utility business are subject to regulation by the New Jersey Board of Public Utilities (NJBPU) and the Federal Energy Regulatory Commission (FERC). ACE's electric delivery business is subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). As discussed below, prior to the third quarter of 1999, ACE's electricity supply business was subject to the requirements of SFAS No. 71. The NJBPU occasionally provides for future recovery from customers of current period expenses. When this happens, these expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statements of Income during the periods the expenses are recov- ered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by the NJBPU. In July 1999, as discussed in Note 7 to the Consolidated Financial State- ments, the NJBPU issued a Summary Order to ACE concerning restructuring the electricity supply business of ACE. This Summary Order was II-21 issued pursuant to the New Jersey electric restructuring legislation enacted earlier in 1999. Based on the Summary Order, ACE determined that the require- ments of SFAS No. 71 no longer applied to its electricity supply business as of August 1, 1999. As a result, ACE discontinued applying SFAS No. 71 to its electricity supply business and applied the requirements of SFAS No. 101, "Regulated Enterprises--Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS No. 101) and Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity--Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4). For infor- mation concerning the extraordinary charge to earnings that resulted from ap- plying the requirements of SFAS No. 101 and EITF 97-4, refer to Note 6 to the Consolidated Financial Statements. Refer to Note 14 for information about regulatory assets and liabilities arising from the financial effects of rate regulation. Financial Statement Presentation The Consolidated Financial Statements include the accounts of ACE and its wholly-owned subsidiaries. All significant intercompany accounts and transac- tions have been eliminated in consolidation. Within the Consolidated Statements of Income, amounts previously reported for 1999 and 1998 as "Electric fuel and purchased power" and "Purchased elec- tric capacity" have been combined and reported as "Electric fuel and purchased energy and capacity." Certain reclassifications of prior period data have been made to conform with the current presentation. Use of Estimates The preparation of financial statements in conformity with accounting prin- ciples generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and ex- penses during the reporting period. Actual results could differ from those es- timates and assumptions. Revenue Recognition ACE recognizes revenues for the supply and delivery of electricity upon de- livery to the customer, including amounts for services rendered, but not yet billed. Energy Supply Costs Under the Levelized Energy Clause prior to deregulation of electricity sup- ply, regulated electric customer rates were subject to adjustment for differ- ences between energy costs incurred in supplying regulated customers and amounts billed to customers for recovery of such costs. As a result, the amount recognized in the Consolidated Statements of Income for energy costs incurred in supplying electricity to regulated customers was adjusted to match the amounts billed to ACE's regulated customers. An asset was recorded for un- der-collections from customers and a liability was recorded for over-collec- tions from customers. Effective August 1, 1999, the accounting for energy costs associated with supplying electricity changed as discussed below. As discussed under "Shopping Credits and Basic Generation Service" in Note 7 to the Consolidated Financial Statements, the Summary Order issued by the NJBPU to ACE provides for recovery through customer rates of energy and other costs of supplying customers who do not choose an alternative electricity sup- plier. Effective August 1, 1999, in recognition of these cost-based, rate-re- covery mechanisms, ACE adjusts revenues from customer billings to the amount of the related costs incurred, including an allowed return on certain electric generating plants. II-22 Nuclear Fuel The ownership interests of ACE in nuclear fuel at the Peach Bottom Atomic Power Station (Peach Bottom), the Salem Nuclear Generating Station (Salem), and the Hope Creek Nuclear Generating Station (Hope Creek) are financed through contracts accounted for as capital leases. Nuclear fuel costs, includ- ing a provision for the future disposal of spent nuclear fuel, are charged to fuel expense on a unit-of-production basis. Risk Management Activities Effective August 1, 1999, ACE's combustion turbines (502 MW) and the Deepwa- ter plant (185 MW) were deregulated. On July 1, 2000, ACE contributed the com- bustion turbines to Conectiv and retained the Deepwater plant, which is sub- ject to an agreement for sale as discussed in Note 11 to the Consolidated Fi- nancial Statements. Beginning August 1, 1999, ACE sold the megawatt-hour (MWH) output of these plants in markets not subject to price regulation. From time- to-time, ACE hedged the MWH output of its deregulated electric generating units, primarily through forward contracts, which are used to lock-in selling prices for electricity. ACE also wrote (or sold) options for sale of the de- regulated MWH output. Premiums received for written options were recorded ini- tially as a deferred credit and were amortized to operating revenues over the option term. ACE implemented the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative in- struments and for hedging activities. SFAS No. 133 requires all derivative in- struments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earn- ings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholder's equity) and is subse- quently reclassified into earnings when the forecasted transaction occurs. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the ex- tent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. ACE's financial statements were not affected by the initial adoption of SFAS No. 133, effective January 1, 2001, because ACE did not hold derivative in- struments as of December 31, 2000. To the extent ACE holds derivative instru- ments subsequent to initial adoption of SFAS No. 133, there may be increased volatility in ACE's earnings, revenues and common stockholder's equity. The cash flows from derivatives are included in the "Cash Flows from Operat- ing Activities" section of the Consolidated Statements of Cash Flows. Depreciation The annual provision for depreciation on utility property is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property re- tired, including removal costs less salvage and other recoveries. Depreciation expense includes a provision for ACE's share of the estimated cost of decommissioning nuclear power plant reactors based on site-specific studies. Refer to Note 13 to the Consolidated Financial Statements for additional in- formation on nuclear decommissioning. ACE's overall composite rate of depreci- ation was 3.6% for 2000, 3.7% for 1999, and 3.9% for 1998. Income Taxes The Consolidated Financial Statements include two categories of income tax- es, which are current and deferred. Current income taxes represent the amounts of tax expected to be reported on ACE's federal and state income tax returns. Deferred income taxes are discussed below. II-23 Deferred income tax assets and liabilities represent the tax effects of tem- porary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of ACE's deferred tax liability applicable to utility operations that has not been recovered from utility customers represents income taxes recover- able in the future and is shown on the Consolidated Balance Sheets as "De- ferred recoverable income taxes." Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes. Investment tax credits from utility plant purchased in prior years are re- ported on the Consolidated Balance Sheets as "Deferred investment tax cred- its." These investment tax credits are being amortized to income over the use- ful lives of the related utility plant. Deferred Debt Refinancing Costs Prior to the third quarter of 1999, the costs of refinancing debt of the utility business were deferred and amortized over the period during which the costs are recovered in rates, which is generally the life of the new debt. In the third quarter of 1999, the deferred costs associated with previously refi- nanced debt attributed to ACE's electric generation business were written-off and a regulatory asset, recoverable stranded costs, was established to the ex- tent recovery was provided for through rates charged to regulated delivery customers. Future debt refinancing costs that are to be recovered through cus- tomer rates of the regulated utility businesses will be deferred and subse- quently amortized to interest expense during the rate recovery period. The costs of other debt refinancings will be accounted for in accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which re- quires such costs to be expensed. Interest Expense The amortization of debt discount, premium, and expense, including deferred refinancing expenses associated with the regulated electric transmission and distribution business, is included in interest expense. Utility Plant As discussed in Note 6 to the Consolidated Financial Statements, the book cost basis of electric generation plants which became impaired as a result of deregulation of the electric utility industry in 1999, is the estimated fair value of the plants at the time of deregulation. The estimated fair values were based on amounts included in agreements for the sale of certain electric generating plants of ACE, as discussed in Note 11 to the Consolidated Finan- cial Statements. Utility plant which is not impaired is stated at original cost. Utility plant is generally subject to a first mortgage lien. Allowance for Funds Used During Construction Effective in the third quarter of 1999, the cost of financing the construc- tion of electric generation plant is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost." Allowance for Funds Used During Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction of new utility facilities. In the Consolidated Statements of Income, the borrowed funds component of AFUDC is reported as a reduction of interest expense and the equity funds component of AFUDC is reported as other income. AFUDC was capitalized on utility plant construction at the rate of 8.25% for all periods. II-24 Cash Equivalents In the Consolidated Financial Statements, ACE considers all highly liquid investments and debt securities purchased with a maturity of three months or less to be cash equivalents. Investments Investments primarily include deposits in ACE's external nuclear decommissioning trust funds, which are stated at fair market value. Changes in the fair market value of the trust funds are also reflected in the accrued li- ability for nuclear decommissioning which is included in accumulated deprecia- tion. NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year
2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Interest, net of capitalized amounts............ $ 73,520 $ 51,723 $ 68,278 Income taxes, net of refunds.................... $(80,677) $ 90,185 $ 48,215
During 2000, ACE received federal and state income tax refunds of $114.2 million and made estimated tax payments of $33.5 million, resulting in $80.7 million of net income taxes received. The income tax refunds received in 2000 were primarily related to the tax benefit associated with ACE's payment of $228.5 million on December 28, 1999 to terminate ACE's purchase of electricity under a contract with the Pedricktown Co-generation Limited Partnership (Pedricktown). For additional information concerning the contract termination, see Note 8 to the Consolidated Financial Statements. Non-cash Investing and Financing Transaction For information concerning a non-cash transaction related to investing and financing activities, see "Contribution of Combustion Turbines to Conectiv" in Note 11 to the Consolidated Financial Statements. NOTE 3. INCOME TAXES ACE, as a subsidiary of Conectiv, is included in the consolidated federal income tax return of Conectiv. Income taxes are allocated to ACE based upon the taxable income or loss, determined on a separate return basis. Components of Consolidated Income Tax Expense
2000 1999 1998 ------- -------- -------- (Dollars in Thousands) Operations Federal: Current................................. $ 6,930 $(20,940) $ 43,133 Deferred................................ 22,509 57,713 (27,694) State: Current................................. 9,853 902 14,650 Deferred................................ 611 14,185 (10,221) Investment tax credit adjustments................. (3,157) (2,534) (1,690) ------- -------- -------- 36,746 49,326 18,178 ------- -------- -------- Extraordinary Item Federal: Deferred................................ -- (31,585) -- State: Deferred................................ -- (8,889) -- ------- -------- -------- -- (40,474) -- ------- -------- -------- Total Income Tax Expense.......................... $36,746 $ 8,852 $ 18,178 ======= ======== ========
II-25 Reconciliation of Effective Income Tax Rate The amount computed by multiplying "Income before income taxes and extraor- dinary item" by the federal statutory rate is reconciled below to income tax expense on operations (which excludes amounts applicable to the extraordinary item).
2000 1999 1998 ------------- ------------- ------------- Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- (Dollars in Thousands) Statutory federal income tax expense............................ $31,913 35% $39,639 35% $16,959 35% State income taxes, net of federal tax benefit........................ 6,951 8 9,806 9 2,878 6 Plant basis differences............. 2,172 2 2,275 2 3,767 8 Amortization of investment tax credits............................ (3,157) (3) (2,534) (2) (1,690) (3) Other, net.......................... (1,133) (2) 140 -- (3,736) (8) ------- --- ------- --- ------- --- Total income tax expense............ $36,746 40% $49,326 44% $18,178 38% ======= === ======= === ======= ===
Components of Deferred Income Taxes Items comprising deferred tax balances as of December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- (Dollars in Thousands) Deferred tax liabilities: Utility plant basis differences........................ $335,221 $334,587 Deferred recoverable income taxes...................... 4,915 7,689 Unrecovered purchased power costs...................... -- 2,267 State excise taxes..................................... 2,153 6,487 Payment for termination of purchased power contract with non-utility electric generator................... 94,982 94,429 Other.................................................. 49,897 11,821 -------- -------- Total deferred tax liabilities......................... 487,168 457,280 -------- -------- Deferred tax assets: Deferred investment tax credits........................ 19,324 21,349 Other.................................................. 78,209 52,582 -------- -------- Total deferred tax assets.............................. 97,533 73,931 -------- -------- Total deferred taxes, net................................ $389,635 $383,349 ======== ========
NOTE 4. 1998 MERGER On March 1, 1998, ACE and DPL became wholly-owned subsidiaries of Conectiv (the 1998 Merger). Before the 1998 Merger, Atlantic owned ACE and non-utility subsidiaries. As a result of the 1998 Merger, Atlantic's existence ended and Conectiv became the owner of (directly or indirectly) ACE, DPL and the non- utility subsidiaries that were formerly held separately by Atlantic and DPL. Conectiv is a registered holding company under the PUHCA. In connection with the 1998 Merger, Atlantic stockholders received 0.75 shares of Conectiv common stock and 0.125 shares of Conectiv Class A common stock for each share of Atlantic stock held. The 1998 Merger was accounted for under the purchase method, with DPL as the acquirer. ACE's financial statements do not reflect "push-down" accounting-- the adjustment of the values of assets and liabilities as of the 1998 Merger date and recording of goodwill. Push-down accounting was not used because ACE had preferred stock and public debt outstanding as of the 1998 Merger date. II-26 NOTE 5. SPECIAL CHARGES ACE's operating results for 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) for the costs of employee separations, additional costs related to the 1998 Merger, and certain other nonrecurring costs. ACE's operating results for 1998 include special charges of $61.1 million before taxes ($36.6 million after taxes) for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related costs and $18.0 million before taxes ($10.6 million after taxes) for the write-down to fair value of certain operational and administrative facilities to be sold, as a result of the 1998 Merger. NOTE 6. EXTRAORDINARY ITEM As discussed in Note 1 to the Consolidated Financial Statements, based on the NJBPU's Summary Order, ACE discontinued applying SFAS No. 71 to its elec- tricity supply business and applied the requirements of SFAS No. 101 and EITF 97-4 in the third quarter of 1999. Pursuant to the requirements of SFAS No. 101 and EITF 97-4, ACE recorded extraordinary charges in the third and fourth quarters of 1999 which reduced earnings by $58.1 million, net of income taxes of $40.5 million. The portion of the extraordinary charge related to impaired assets was determined in accordance with SFAS No. 121, "Accounting for the Im- pairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No. 121). The extraordinary charge primarily resulted from impaired electric generating plants and certain other assets, uneconomic energy con- tracts, and other effects of deregulation requiring loss recognition. The im- pairment amount for electric generating plants was determined based on ex- pected proceeds under agreements for the sale of the electric generating plants, which are discussed in Note 11 to the Consolidated Financial State- ments. The extraordinary charge was decreased by the regulatory asset estab- lished for the amount of stranded costs expected to be recovered through regu- lated electricity delivery rates. As discussed in Note 7 to the Consolidated Financial Statements, ACE's ex- traordinary charge was based on the NJBPU's Summary Order and the NJBPU is to issue a more detailed order at a later date. If the NJBPU's final detailed or- der were to differ materially from the Summary Order, then another extraordi- nary item may result due to adjustment of the 1999 extraordinary charge. The details of the 1999 extraordinary charge are shown below.
Millions Items Included in the 1999 Extraordinary Charge of Dollars - ----------------------------------------------- ---------- The net book value of the nuclear power plants and certain fossil fuel-fired plants and other electric plant-related assets including inventories, were written-down due to impairment........ $(662.1) Generation-related regulatory assets and certain other utility assets impaired from deregulation were written-off. Also, various liabilities resulting from deregulation were recorded. ........... (205.7) A regulatory asset, recoverable stranded costs, was established for the amount of stranded costs expected to be recovered through regulated electricity delivery rates.............................. 769.2 ------- Total pre-tax extraordinary charge................................. (98.6) Income tax benefit................................................. 40.5 ------- Total extraordinary charge, net of income taxes.................... $ (58.1) =======
II-27 NOTE 7. REGULATORY MATTERS New Jersey Electric Utility Industry Restructuring On February 9, 1999, New Jersey enacted the Electric Discount and Energy Competition Act (the New Jersey Act) which, among other things, provided cus- tomers of New Jersey electric utilities with a choice of electricity suppliers beginning August 1, 1999. Pursuant to the New Jersey Act, on July 15, 1999, the NJBPU issued a Summary Order to ACE concerning stranded costs, unbundled rates, and other matters related to restructuring. The NJBPU indicated that a more detailed order would be issued at a later time. Issuance of the NJBPU's final order for ACE has been delayed due to appeals of the NJBPU's final order concerning restructuring the electricity supply business of Public Service Electric and Gas Company (PSE&G) and recent electricity shortages and price increases in California. On December 6, 2000, the New Jersey Supreme Court af- firmed judgment of the New Jersey Superior Court Appellate Division which had previously affirmed the NJBPU's final order concerning the PSE&G restructur- ing. However, management cannot predict the timing or outcome of this or re- lated matters, such as securitization by ACE of its stranded costs and the sale of electric generating plants, as discussed in Note 11 to the Consoli- dated Financial Statements. The key provisions of the Summary Order issued by the NJBPU to ACE are dis- cussed below. Rate Decreases In its Summary Order, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999 and an additional 2% rate reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual reve- nues by approximately $50 million. The additional 2% rate reduction required by January 1, 2001 was implemented through two separate 1% rate reductions ef- fective January 1, 2000 and 2001, respectively. Each of the 1% rate reductions reduced annual revenues by approximately $10 million, or $20 million in total. The final rate reduction, which is required by August 1, 2002, is expected to reduce revenues by an additional $30 million, which would result in a cumula- tive rate reduction of $100 million since August 1, 1999. Stranded Cost Recovery and Securitization Stranded costs are the uneconomic portion of assets and long-term contracts that resulted from electric utility industry restructuring. The Summary Order provides that ACE may divest its nuclear and fossil fuel-fired baseload units and transfer combustion turbine electric generating units to a non-utility af- filiated company at net book value. Additional NJBPU approvals are required prior to the sale of the nuclear and fossil fuel-fired baseload units of ACE. The NJBPU determined that ACE will have the opportunity to recover 100% of the net stranded costs related to certain generation units to be divested and the stranded costs associated with power purchased from non-utility generators (NUGs), subject to further NJBPU proceedings. The Summary Order, in conjunc- tion with the New Jersey Act, also permits securitization of stranded costs through the issuance of transition bonds in the amount of the after-tax stranded cost recovery approved by the NJBPU. Management expects the transi- tion bonds will be issued after ACE completes the sale of certain electric generating units, as discussed in Note 11 to the Consolidated Financial State- ments. The ability to issue transition bonds would depend not only upon ap- proval of the NJBPU, but also on the conditions in the relevant capital mar- kets at the times of the offerings. Proceeds from the transition bonds may be used to refinance ACE's debt and preferred securities, finance the restructur- ing of purchased power contracts, or otherwise reduce costs in order to de- crease regulated electricity rates. The Summary Order allows securitization of (a) 100% of the net stranded costs of certain generation units to be divested, over a period not to exceed 15 years, and (b) 100% of the costs to effect po- tential NUG contract buyouts or buydowns, over a period not to exceed the re- maining term of the restructured II-28 contracts. The Summary Order provides for the principal of and interest on transition bonds to be collected from customers through a transition bond charge over the securitization term. The Summary Order also provides for cus- tomer rates to include a separate market transition charge for recovery of the income tax expense associated with the revenues from transition bond charges. The balance for ACE's pre-tax recoverable stranded costs, net of amortized amounts, was approximately $959 million as of December 31, 2000 and $988 mil- lion as of December 31, 1999. The balances of recoverable stranded costs in- clude the stranded costs estimated and recorded as a result of discontinuing the application of SFAS No. 71 (as discussed in Note 6 to the Consolidated Fi- nancial Statements) and the $228.5 million payment to terminate a NUG contract (as discussed in Note 8 to the Consolidated Financial Statements). ACE's amount of recoverable stranded costs remains subject to adjustment based on the actual gains and losses realized on the sale of certain electric generat- ing plants, additional buyouts or buydowns of NUG contracts, the NJBPU's final restructuring order, and the final amount determined to be recoverable through customer rates under the New Jersey Act. Shopping Credits and Basic Generation Service The Summary Order established minimum initial shopping credits for customers who choose an alternative electricity supplier, from a system average 5.27 cents per kilowatt-hour (kWh), effective August 1, 1999, to a system average of 5.48 cents per kWh in 2003. These shopping credits include transmission costs and charges by ACE for its Basic Generation Service (BGS) provided to retail customers who do not choose an alternative electricity supplier. ACE is obligated to provide BGS through July 31, 2002; thereafter, the BGS supplier is expected to be determined each year based on a competitive bidding process. In accordance with the Summary Order, the rates charged to ACE's customers for BGS include a component for the market-value of power purchased from NUGs. The above-market portion of the cost of NUG power is being collected through a non-bypassable "Net NUG Charge" included in regulated electricity delivery rates, over the remaining term of the NUG contracts. The above-market portion of the costs of certain of ACE's power plants is being recovered through a "Market Transition Charge," included in regulated electricity delivery rates. The NJBPU's Summary Order also provided that ACE's regulatory liability for over-recovered energy supply costs as of July 31, 1999 would be offset by any subsequent under-recoveries of the costs associated with BGS. Due to under-re- coveries of such costs, ACE reduced its liability for over-recovered energy supply costs and recognized like amounts of revenues in the amounts of $17.5 million for 2000 and $17.2 million for 1999. Customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition pe- riod, which ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Customer Account Services During the fourth quarter of 1999, the NJBPU began a proceeding concerning customer metering, billing, and other account administration functions (Cus- tomer Account Services). On December 22, 2000, the NJBPU approved a stipula- tion, to which ACE and certain other New Jersey utilities were parties, in the Customer Account Services proceeding. One of the terms of the stipulation re- quires ACE to begin purchasing the receivables of third parties supplying electricity to ACE's delivery customers in the second quarter of 2001. The stipulation remains effective through August 1, 2003. NOTE 8. TERMINATION AND RESTRUCTURING OF PURCHASED POWER CONTRACTS On November 10, 1999, the NJBPU issued an order approving termination of a contract under which ACE had purchased energy and 116 MW of capacity from Pedricktown, a NUG partnership which was owned 50% by other Conectiv subsidi- aries. The NJBPU order also provided that ACE is entitled to recover from cus- tomers the contract termination payment of $228.5 million, transaction costs, and interim financing costs. The NJBPU order found that the contract termina- tion payment and related transaction costs are eligible for long-term financ- ing through the issuance of securitized bonds. On December 28, 1999, ACE paid $228.5 million to terminate the II-29 contract and borrowed funds to finance the contract termination payment (as discussed in Note 17 to the Consolidated Financial Statements). The contract termination payment and related costs are included in "Recoverable Stranded Costs" on the Consolidated Balance Sheets. ACE's customer rates were reduced by about 1% (approximately $10 million of revenues on an annualized basis) ef- fective January 1, 2000 as a result of the net savings from the contract ter- mination. On December 6, 2000, the NJBPU approved ACE's payment on January 22, 2001 of $3.45 million in connection with restructuring ACE's purchased power contract with a NUG, American Ref-Fuel Company of Delaware Valley, L.P. Management anticipates that transition bonds will ultimately be used to fi- nance the stranded costs associated with the buyout or buydown of ACE's NUG contracts. NOTE 9. RISK MANAGEMENT ACTIVITIES Effective August 1, 1999, ACE's combustion turbines (502 MW of electric gen- erating capacity) and Deepwater plant (185 MW of electric generating capacity) were deregulated. On July 1, 2000, ACE contributed the combustion turbines to Conectiv in conjunction with formation of an energy holding company and re- tained the Deepwater plant, which is subject to an agreement for sale as dis- cussed in Note 11 to the Consolidated Financial Statements. Beginning August 1, 1999, ACE sold the megawatt-hour (MWH) output of these plants in markets not subject to price regulation. From time-to-time, ACE hedged the MWH output of its deregulated electric generating units, primarily through forward con- tracts, which were used to lock-in selling prices for electricity. As of December 31, 2000, ACE did not hold derivative instruments. As of De- cember 31, 1999, ACE hedged 512,300 MWH of forward generation output, through the sale of forward contracts, which resulted in an $0.7 million unrealized and unrecognized gain as of December 31, 1999. NOTE 10. JOINTLY-OWNED PLANT ACE's Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. ACE has ownership interests in electric generating plants, transmission facilities, and other facilities in which various parties have ownership interests. ACE's proportionate shares of operating and maintenance expenses of the jointly owned plant are included in the corresponding expenses in ACE's Consolidated Statements of Income. ACE is responsible for providing its share of financing for the jointly owned facili- ties. Information with respect to ACE's share of jointly owned plant as of Decem- ber 31, 2000 is shown below. As discussed in Note 11 to the Consolidated Fi- nancial Statements, agreements have been reached to sell to third parties the jointly-owned nuclear and coal-fired plants listed below. II-30
Megawatt Plant Construction Ownership Capability in Accumulated Work in Share Owned Service Depreciation Progress --------- ---------- ------- ------------ ------------ (Dollars in Thousands) Nuclear Peach Bottom.......... 7.51% 164 $ 4,847 $ 944(a) $4,760 Salem................. 7.41% 167(b) 3,892 2,236(a) 2,517 Hope Creek............ 5.00% 52 1,930 923(a) 619 Coal-Fired Keystone.............. 2.47% 42 13,758 4,561 542 Conemaugh............. 3.83% 65 34,777 10,205 970 Transmission Facilities............. Various 24,881 11,191 -- Other Facilities........ Various 1,111 177 -- --- ------- ------- ------ Total................... 490 $85,196 $30,237 $9,408 === ======= ======= ======
- -------- (a) Excludes Nuclear Decommissioning Reserve. (b) Includes 3 MW for on-site combustion turbine. NOTE 11. DIVESTITURE OF ELECTRIC GENERATING PLANTS As discussed below, ACE contributed at net book value its combustion turbine electric generating units to Conectiv on July 1, 2000 and all remaining elec- tric generating plants of ACE are subject to agreements for sale. After the sales of ACE's electric generating plants are completed, the principal remain- ing businesses of ACE will be the transmission and distribution of electrici- ty. ACE will purchase power to supply electricity to customers who do not choose alternative electricity suppliers. ACE's exit from the electricity pro- duction business is expected to cause a decrease in ACE's earnings capacity. Contribution of Combustion Turbines to Conectiv Effective July 1, 2000, ACE contributed at book value its combustion tur- bines (502 megawatts of capacity) and related transmission equipment, invento- ries, and liabilities to a wholly-owned subsidiary (Conectiv Atlantic Genera- tion, LLC, or CAG). ACE then contributed CAG to Conectiv in conjunction with the formation of an energy-holding company by Conectiv, which is engaged in non-regulated electricity production and sales, and energy trading and market- ing. The primary effects on ACE's balance sheet of the contribution to Conectiv were as follows: (a) property, plant and equipment decreased $86 mil- lion (primarily electric generating plants); (b) fuel and other inventories decreased $6 million; (c) deferred income taxes and investment tax credits de- creased $9 million; and (d) the additional paid-in capital portion of common stockholder's equity decreased $83 million. Agreements for the Sale of Electric Generating Plants ACE has entered into agreements to sell the nuclear and non-strategic baseload fossil fuel-fired electric generating plants which are shown in the table below.
As of December 31, 2000 ------------------------ MW of Capacity Net Book Value -------- --------------- ($ in millions) Fossil Units: Wholly-owned...................................... 632.0 $ 82.3 Jointly-owned..................................... 107.7 35.3 Jointly-owned nuclear units......................... 383.0 14.5 ------- ------ 1,122.7 $132.1 ======= ======
II-31 On September 30, 1999, Conectiv announced that ACE reached agreements to sell its ownership interests in nuclear electric generating plants to PSEG Power LLC (a subsidiary of Public Service Enterprise Group Incorporated) and PECO Energy Company (PECO). ACE's interests in the nuclear units that are sub- ject to the sales agreements include a 7.51% (164 MW) interest in Peach Bot- tom, a 7.41% interest (167 MW) in Salem and a 5.0% interest (52 MW) in Hope Creek. The net book value of the nuclear units to be sold was $14.5 million as of December 31, 2000. The agreements for the sale of ACE's interests in the nuclear plants provide for (i) a sales price of approximately $11 million plus the net book value of the interests of ACE in nuclear fuel on-hand as of the closing date and (ii) the transfer of ACE's nuclear decommissioning funds and related obligation for decommissioning the plants to the purchasers upon com- pletion of the sales. On January 19, 2000, Conectiv announced that ACE reached an agreement to sell certain wholly and jointly owned fossil fuel-fired units to NRG Energy, Inc. (NRG), a subsidiary of Northern States Power Company, for $178 million. The units to be sold to NRG have a total capacity of 739.7 MW, and had a net book value of $117.6 million as of December 31, 2000. Management expects the proceeds from the planned sales of the electric generating plants will be used to repay debt and to fund expansion of Conectiv's electric generation busi- ness. Some or all of ACE's proceeds from the sale of the electric generating plants could be paid as a dividend to Conectiv, or invested in Conectiv's pool of funds that Conectiv subsidiaries borrow from or invest in depending on their cash position. Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL, which is also selling its electric generating plants, would occur simultaneously. Appeals related to the NJBPU's final order con- cerning restructuring the electricity supply business of Public Service Elec- tric and Gas Company (PSE&G) and recent electricity shortages and price in- creases in California have resulted in delays in the issuance of required reg- ulatory approvals, the NJBPU's final order concerning restructuring the elec- tricity supply business of ACE, and the closings of the sales of the electric generating units. Effective October 3, 2000, the agreements relating to the sale of the nuclear plants were amended to, among other things, permit sepa- rate closings of the sales of the ACE and DPL interests in the nuclear plants. DPL's ownership interests in nuclear electric generating plants were sold on December 29, 2000. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Superior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G restructuring. Management currently expects the sales of ACE's nuclear and fossil electric generating plants to take place during 2001. However, management cannot pre- dict the timing of the issuance of required NJBPU approvals, the timing or outcome of appeals, if any, of such approvals, the effect of any of the fore- going on the ability of ACE to consummate the sales of various electric gener- ating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. As of December 31, 2000, $5.3 million of costs associated with selling the electric generating plants had been deferred as an adjustment to the expected future gain or loss on the sales. In the event the sales are not completed, these costs would be expensed. NOTE 12. WHOLESALE TRANSACTION CONFIRMATION LETTER AGREEMENTS On October 3, 2000, ACE entered into Wholesale Transaction Confirmation let- ter agreements (Letter Agreements). The Letter Agreements provide for the sale of the electricity output and capacity associated with the ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. PECO and PSEG Energy Resources & Trade LLC (PSER&T), an indirect subsidiary of Public Service Enterprise Group, purchase the electricity output and capacity from ACE under the Letter Agreements. The Letter Agreements became effective October 7, 2000, and termi- nate for each plant upon the earlier of (1) the closing of the sale of the plant, (2) the termination of the agreement relating to the sale of the plant or (3) September 30, 2001. In exchange for the electricity output and capacity purchased from a given plant, PECO and PSER&T reimburse ACE for the nuclear fuel amortized during the term of the Letter Agreements at each plant, and are II-32 responsible for the payment of operation and maintenance costs, inventories, capital expenditures (subject, in certain circumstances, to reimbursement by ACE) and certain other liabilities associated with the ownership interests of ACE in each plant. NOTE 13. NUCLEAR DECOMMISSIONING ACE records a liability for its share of the estimated cost of decommissioning the Peach Bottom, Salem, and Hope Creek nuclear reactors over the remaining lives of the plants based on amounts collected in rates charged to electric customers. ACE estimates its share of future nuclear decommissioning costs ($157 million) based on site specific studies filed with and approved by the NJBPU. The ultimate cost of nuclear decommissioning for the Peach Bottom, Salem, and Hope Creek reactors may exceed the current esti- mates, which are updated periodically. ACE's consolidated accrued nuclear decommissioning liability, which is re- flected in the accumulated reserve for depreciation, was $109.0 million as of December 31, 2000 and $101.0 million as of December 31, 1999. The provision reflected in depreciation expense for nuclear decommissioning was $3.7 million in 1999 and $6.4 million in 1998. During 2000, no provision was included in depreciation expense for nuclear decommissioning. External trust funds estab- lished by ACE for the purpose of funding nuclear decommissioning costs had an aggregate book balance (stated at fair market value) of $109.0 million as of December 31, 2000 and $100.5 million as of December 31, 1999. Earnings on the trust funds are recorded as an increase to the accrued nuclear decommissioning liability, which, in effect, reduces the expense recorded for nuclear decommissioning. As discussed in Note 11 to the Consolidated Financial State- ments, upon completion of the expected sales of the nuclear plants, ACE will transfer its respective nuclear decommissioning trust funds to the purchasers who will then assume full responsibility for the decommissioning of the nu- clear plants. The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry, includ- ing ACE, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial state- ments of electric utilities. In February 2000, the FASB issued an exposure draft of a new accounting standard which addresses the accounting for obliga- tions associated with the retirement of long-lived assets, such as decommissioning costs of nuclear generating stations. Under this proposed ac- counting standard, the fair value of the decommissioning obligation would be capitalized as part of the cost of the nuclear generating station and recorded as a liability. The cost capitalized would be depreciated over the life of the nuclear generating station. Changes in the liability due to the passage of time would be recorded as interest expense. Changes in the liability resulting from revisions in the timing or amount of cash flows would increase or de- crease the liability and the carrying amount of the nuclear generating sta- tion. Trust fund income from the external decommissioning trusts would be re- ported as investment income under the proposed accounting standard rather than as a reduction of decommissioning expense. NOTE 14. REGULATORY ASSETS AND LIABILITIES In conformity with SFAS No. 71, ACE's accounting policies reflect the finan- cial effects of rate regulation and decisions issued by the NJBPU. The NJBPU occasionally provides for future recovery from customers of current period ex- penses. When this happens, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the pe- riod the expenses are recovered from customers. Similarly, regulatory liabili- ties may also be created due to the economic impact of an action taken by the NJBPU. As discussed in Notes 1, 6, and 7 to the Consolidated Financial Statements, in the third quarter of 1999, the electricity supply business of ACE no longer met the requirements of SFAS No. 71. Accordingly, regulatory assets and lia- bilities related to the electricity supply business were written off, except to the extent that future cost recovery was provided for through the regulated electricity delivery business. A regulatory asset, "Recoverable stranded costs," was established to recognize amounts to be collected from regulated delivery customers for stranded costs which resulted from deregulation of the electricity supply business. II-33 The table below displays the regulatory assets and liabilities as of Decem- ber 31, 2000 and 1999.
December 31, December 31, Regulatory Assets (Liabilities) 2000 1999 - ------------------------------- ------------ ------------ (Millions of Dollars) Recoverable stranded costs.......................... $958.9 $ 988.3 Deferred recoverable income taxes................... 14.0 21.9 Deferred debt refinancing costs..................... 12.4 13.6 Unrecovered state excise taxes...................... 10.4 22.6 Deferred other postretirement benefit costs......... 30.0 32.5 Unrecovered purchased power costs................... 14.5 28.9 Regulatory liability for deferred energy supply costs.............................................. (34.7) (46.4) Deferred costs for nuclear decommissioning/decontamination.................... 5.1 5.6 Regulatory liability for New Jersey income tax benefit............................................ (49.3) (49.3) Asbestos removal costs.............................. 8.0 8.3 ------ -------- Total............................................... $969.3 $1,026.0 ====== ========
Recoverable Stranded Costs: Represents amounts to be collected from regu- lated delivery customers (net of amounts which have been amortized to expense) for stranded costs which resulted from deregulation of the electricity supply business. Any gain realized on the sale of certain of ACE's electric generat- ing plants will reduce the amount of recoverable stranded costs. The pre-tax balances of $958.9 million as of December 31, 2000 and $988.3 million as of December 31, 1999 arose from the $228.5 million NUG contract termination pay- ment in 1999, as discussed in Note 8 to the Consolidated Financial Statements, and discontinuing the application of SFAS No. 71 to the electricity supply business in 1999, as discussed in Note 6 to the Consolidated Financial State- ments. Deferred Recoverable Income Taxes: Represents the portion of deferred income tax liabilities applicable to ACE's utility operations that has not been re- flected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized. Deferred Debt Refinancing Costs: See "Deferred Debt Refinancing Costs" in Note 1 to the Consolidated Financial Statements. Unrecovered State Excise Taxes: Represents additional amounts paid, by ACE, as a result of prior legislative changes in the computation of New Jersey state excise taxes. These costs are included in current customer rates, with the remaining balance scheduled for full recovery over the next 2 years. Deferred Other Postretirement Benefit Costs: Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period which began on Janu- ary 1, 1998. Unrecovered Purchased Power Costs: Includes costs incurred by ACE for rene- gotiation of a long-term capacity and energy contract. These costs are in- cluded in current customer rates with the balance scheduled for full recovery over the next 14 years. The balance as of December 31, 1999 also included $12 million of prior deferrals by ACE of capacity costs; the amortization of these costs to expense expired in 2000. Deferred Energy Supply Costs: See "Energy Supply Costs" in Note 1 to the Consolidated Financial Statements. Deferred Costs for Nuclear Decommissioning/Decontamination: Represents amounts recoverable from ACE's customers for amounts owed by ACE to the U.S. government for clean-up of gaseous diffusion enrichment facilities pursuant to the Energy Policy Act of 1992. II-34 Regulatory Liability for New Jersey Income Tax Benefit: In 1999, a deferred tax asset arising from the write down of ACE's electric generating plant was established. The deferred tax asset represents the future tax benefit expected to be realized when the higher tax basis of the generating plants is deducted for New Jersey state income tax purposes. ACE has requested the New Jersey Di- vision of Taxation to rule on whether or not this tax benefit may be used to reduce the rates charged to ACE's regulated electricity delivery customers for stranded cost recovery. To recognize that this tax benefit probably will be given to ACE's regulated electricity delivery customers through lower electric rates, ACE established a regulatory liability. Asbestos Removal Costs: Represents costs incurred by ACE to remove asbestos insulation from a wholly-owned generating station. These costs are included in current customer rates with the balance scheduled for full recovery over the next 29 years. NOTE 15. COMMON STOCKHOLDER'S EQUITY Effective March 1, 1998, all 18,320,937 outstanding shares ($3 per share par value) of ACE were acquired by Conectiv, pursuant to the 1998 Merger, as dis- cussed in Note 4 to the Consolidated Financial Statements. For information concerning changes to common equity accounts of ACE, see the Consolidated Statements of Changes in Common Stockholder's Equity. ACE's certificate of incorporation requires payment of all preferred divi- dends in arrears (if any) prior to payment of common dividends to Conectiv, and has certain other limitations on the payment of common dividends. As a subsidiary of a registered holding company under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is obtained. NOTE 16. PREFERRED STOCK AND PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 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. If preferred dividends are in arrears for at least a full year, preferred stockholders have the right to elect a major- ity of directors to the Board of Directors until all dividends in arrears have been paid. Preferred Stock Not Subject to Mandatory Redemption
2000 1999 Current ------------- ------------- Redemption Series Shares (000) Shares (000) Price - ------ ------ ------ ------ ------ ---------- 4%, $100 par value....................... 24,268 $2,427 24,268 $2,427 $105.50 4.1%, $100 par value..................... 20,504 2,051 20,504 2,051 101.00 4.35%, $100 par value.................... 3,102 310 3,102 310 101.00 4.35%, $100 par value.................... 1,680 168 1,680 168 101.00 4.75%, $100 par value.................... 8,631 863 8,631 863 101.00 5%, $100 par value....................... 4,120 412 4,120 412 100.00 ------ ------ ------ ------ Total.................................... 62,305 $6,231 62,305 $6,231 ====== ====== ====== ======
In the fourth quarter of 1998, ACE purchased and retired 237,695 shares, or $23.8 million of various series of $100 per share par value preferred stock, which had an average dividend rate of 4.4%. ACE realized a $2.5 million gain on this preferred stock redemption which is presented as Gain on Preferred Stock Redemption within the 1998 Consolidated Statement of Income. II-35 Preferred Stock Subject to Mandatory Redemption As of December 31, 2000 and 1999, there were 239,500 outstanding shares of preferred stock subject to mandatory redemption with a $100 stated value per share and a $7.80 annual dividend rate per share. Beginning May 1, 2001, 115,000 shares are subject to mandatory redemption annually. In August 1998, ACE redeemed 100,000 shares of its $8.20 No Par Preferred Stock ($100 per share stated value). Preferred Securities of Subsidiary Trusts Subject to Mandatory Redemption The amounts outstanding as of December 31, 2000, and December 31, 1999 of preferred securities issued by subsidiary trusts owned by ACE are presented below.
Securities Outstanding Amount ------------------- ----------------------- Issuer Series 2000 1999 2000 1999 - ------ ------ --------- --------- ----------- ----------- (Dollars in Thousands) Atlantic Capital I *.... $25 per share, 8.25% 2,800,000 2,800,000 $ 70,000 $ 70,000 Atlantic Capital II *... $25 per share, 7.375% 1,000,000 1,000,000 25,000 25,000 ----------- ----------- $ 95,000 $ 95,000 =========== ===========
- -------- * Per share value is stated liquidation value. In November 1998, Atlantic Capital II, a wholly-owned subsidiary financing trust, issued $25 million in aggregate liquidation amount of 7 3/8% Cumulative Trust Preferred Capital Securities (representing 1,000,000 preferred securi- ties at $25 per security). At the same time, $25.8 million in aggregate prin- cipal amount of 7 3/8% Junior Subordinated Debentures, Series I, due 2028 (7 3/8% Debentures) were issued by ACE to Atlantic Capital II. For consolidated financial reporting purposes, ACE's 7 3/8% Debentures are eliminated in con- solidation against the trust's investment in the 7 3/8% Debentures. The trust preferred securities are subject to mandatory redemption upon payment of the 7 3/8% Debentures at maturity or upon redemption. The 7 3/8% Debentures are sub- ject to redemption, in whole or in part at the option of ACE, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events. Atlantic Capital I is a wholly-owned subsidiary financing trust which is structured similarly to Atlantic Capital II (discussed above). Atlantic Capi- tal I had $70 million (2,800,000 securities with a stated liquidation prefer- ence of $25 each) of 8.25% Cumulative Quarterly Income ACE Obligated Mandatorily Redeemable Preferred Securities outstanding during 2000, 1999, and 1998. The combination of the obligations of ACE pursuant to the Debentures held by Atlantic Capital I and Atlantic Capital II, and ACE's guarantee of distribu- tions with respect to trust securities, to the extent the trusts have funds available therefor, constitute a full and unconditional guarantee by ACE of the obligations of the trusts under the trust securities that the trusts have issued. ACE is the owner of all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust se- curities issued by the trusts. NOTE 17. DEBT Substantially all of ACE's utility plant is subject to the lien of the Mort- gage and Deed of Trust dated January 15, 1937, as amended and supplemented, collateralizing ACE's First Mortgage Bonds and Secured Medium Term Notes. ACE's mortgage requires that the electric generating plants being sold (as discussed in Note 11 to the Consolidated Financial Statements) be released from the lien of the mortgage. These assets may be released with a combination of cash, bondable property additions, and credits representing previously is- sued and retired first mortgage bonds. ACE expects to have sufficient bondable property additions and retired first mortgage bonds to release such assets at fair values. II-36 Maturities of long-term debt during the next five years are as follows: 2001--$97.2 million; 2002--$221.5 million; 2003--$70.1 million; 2004--$67.1 million; and, 2005--$40.1 million. As discussed in Note 8 to the Consolidated Financial Statements, ACE bor- rowed $228.5 million under a revolving credit facility on December 28, 1999 to provide interim financing for a payment made to terminate a NUG purchased power contract with Pedricktown. In December 2000, ACE exercised its option to convert the revolving loan balance to a term loan, which is due in two in- stallments; (1) 25% of the principal balance is due December 20, 2001, and (2) the remaining term loan principal is due December 20, 2002. ACE intends to re- pay this debt with proceeds from the expected issuance of transition bonds. (See Note 7 to the Consolidated Financial Statements for information concern- ing transition bonds.) ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. II-37 Long-term debt outstanding as of December 31, 2000 and 1999 is presented be- low.
December 31, Maturity ------------------ Type of Debt Date 2000 1999 - ------------ -------- -------- -------- (Dollars in Thousands) Secured debt Medium Term Notes Series B (6.83%)............... 2000 $ -- $ 46,000 Medium Term Notes Series C (6.86%)............... 2001 40,000 40,000 Medium Term Notes Series C (7.02%)............... 2002 30,000 30,000 Medium Term Notes Series B (7.18%)............... 2003 20,000 20,000 Medium Term Notes Series D (6.00%)............... 2003 20,000 20,000 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 Medium Term Notes Series D (6.19%)............... 2006 65,000 65,000 6 3/8% Pollution Control Series.................. 2006 2,200 2,275 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...................... 2013 68,600 68,600 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 6.80% Pollution Control Series A................. 2021 38,865 38,865 7% First Mortgage Bonds.......................... 2023 62,500 62,500 5.60% Pollution Control Series A................. 2025 4,000 4,000 7% First Mortgage Bonds.......................... 2028 75,000 75,000 6.15% Pollution Control Series A................. 2029 23,150 23,150 7.20% Pollution Control Series A................. 2029 25,000 25,000 7% Pollution Control Series B.................... 2029 6,500 6,500 -------- -------- 663,815 709,890 -------- -------- Unsecured debt 6.46% Medium Term Notes Series A................. 2002 20,000 20,000 6.63% Medium Term Notes Series A................. 2003 30,000 30,000 7.52% Medium Term Notes Series A................. 2007 5,000 5,000 7.50% Medium Term Notes Series A................. 2007 10,000 10,000 -------- -------- 65,000 65,000 -------- -------- Other Obligations 7.11% Term Loan.................................. 2001 57,125 57,125 7.11% Term Loan.................................. 2002 171,375 171,375 Unamortized Premium and Discount, Net............ (2,462) (2,563) Current Maturities of Long-Term Debt............. (97,200) (46,075) -------- -------- Total Long Term Debt............................. 857,653 954,752 Variable Rate Demand Bonds, Pollution Control Se- ries A*......................................... 2014 18,200 18,200 Variable Rate Demand Bonds, Pollution Control Se- ries B*......................................... 2017 4,400 4,400 -------- -------- Total Long Term Debt and Variable Rate Demand Bonds........................................... $880,253 $977,352 ======== ========
- -------- * Variable Rate Demand Bonds (VRDB) are classified as current liabilities be- cause the VRDB are due on demand by the bondholder. However, bonds submit- ted to ACE for purchase are remarketed by a remarketing agent on a best ef- forts basis. ACE expects that bonds submitted for purchase will continue to be remarketed successfully due to ACE's credit worthiness and the bonds' interest rates being set at market. ACE also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, ACE considers the VRDB to be a source of long-term financing. Average interest rates on the VRDB were 3.9% for 2000 and 2.8% for 1999. II-38 NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The year-end fair value of certain financial instruments are listed below. The fair values were based on quoted market prices of ACE's securities or se- curities with similar characteristics.
2000 1999 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (Dollars in Thousands) Investments............................ $112,501 $112,501 $105,371 $105,371 Long Term Debt......................... 857,653 850,753 954,752 921,844 Preferred Stock Subject to Mandatory Redemption............................ 23,950 24,369 23,950 23,950 Preferred Securities of Subsidiary Trusts Subject to Mandatory Redemption............................ 95,000 92,914 95,000 79,750
NOTE 19. LONG-TERM PURCHASED POWER CONTRACTS As discussed in Note 6 to the Consolidated Financial Statements, the net present value of expected losses under uneconomic purchased power contracts that existed when electric utility deregulation occurred in the third quarter of 1999 was included in the extraordinary item recorded in 1999. Based on existing contracts as of December 31, 2000, ACE's commitments dur- ing the next five years for capacity (724 MW) and energy under long-term pur- chased power contracts are estimated to be as follows: $288 million in 2001, $254 million in 2002; $216 million in 2003; $209 million in 2004; and $236 million in 2005. To replace the output of the electric generating units expected to be sold during 2001, ACE plans to increase the amount of power it purchases to supply the BGS load. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particular time) through the use of a portfo- lio approach, including the use of competitive bidding. NOTE 20. LEASES Nuclear Fuel The ownership interests of ACE in nuclear fuel at Peach Bottom, Salem, and Hope Creek are financed through nuclear fuel energy contracts, which are ac- counted for as capital leases. Payments under the contracts are based on the quantity of nuclear fuel burned by the plants. The obligation of ACE under the contracts is generally the net book value of the nuclear fuel financed, which was $28.4 million, in total, as of December 31, 2000. As discussed in Note 11 to the Consolidated Financial Statements, under agreements for the sale of ACE's ownership interests in nuclear power plants, the nuclear fuel is to be sold at its net book value upon completion of the sales. Leased nuclear fuel costs included in operating expenses were $14.2 million for 2000, $14.8 million for 1999, and $12.7 million for 1998. Lease Commitments ACE also leases other types of property and equipment for use in its opera- tions. Amounts charged to operating expenses for these leases were $10.1 mil- lion in 2000, $7.6 million in 1999, and $4.6 million in 1998. Future minimum rental payments for all non-cancelable lease agreements, excluding nuclear fu- el, are less than $10 million per year for each of the next five years. II-39 NOTE 21. PENSION AND OTHER POSTRETIREMENT BENEFITS The employees of ACE and other Conectiv subsidiaries are provided pension benefits and other postretirement benefits under Conectiv benefit plans. The amounts shown below are for the benefit plans of Conectiv and include amounts for all covered employees of the Conectiv subsidiaries which elect to partici- pate in the benefit plans.
Assumptions 2000 1999 1998 - ----------- ----- ----- ----- Discount rates used to determine projected benefit obligation as of December 31............................... 7.50% 7.75% 6.75% Expected long-term rates of return on assets................ 9.50% 9.00% 9.00% Rates of increase in compensation levels.................... 4.50% 4.50% 4.50% Health-care cost trend rate on covered charges.............. 8.00% 6.50% 7.00%
The health-care cost trend rate, or the expected rate of increase in health- care costs, is assumed to gradually decrease to 5.0% by 2004. Increasing the health-care cost trend rates of future years by one percentage point would in- crease Conectiv's total accumulated postretirement benefit obligation by $10.1 million and would increase Conectiv's total annual aggregate service and in- terest costs by $0.9 million. Decreasing the health-care cost trend rates of future years by one percentage point would decrease Conectiv's total accumu- lated postretirement benefit obligation by $10.5 million and would decrease Conectiv's total annual aggregate service and interest costs by $1.0 million. The following schedules reconcile the beginning and ending balances of the pension and other postretirement benefit obligations and related plan assets for Conectiv. Other postretirement benefits include medical benefits for re- tirees and their spouses and retiree life insurance. Change in Conectiv's Benefit Obligation
Other Postretirement Pension Benefits Benefits ------------------ ------------------ 2000 1999 2000 1999 -------- -------- -------- -------- (Dollars in Thousands) Benefit obligation at beginning of year................................. $673,095 $748,689 $194,031 $232,374 Service cost.......................... 18,388 20,288 3,908 5,282 Interest cost......................... 51,856 51,442 14,513 13,839 Plan participants' contributions...... -- -- 511 500 Plan amendment........................ 4,359 -- -- -- Actuarial (gain) loss................. 12,689 (75,244) 5,500 (43,861) Benefits paid......................... (66,438) (64,671) (16,970) (9,436) Other................................. 672 (7,409) -- (4,667) -------- -------- -------- -------- Benefit obligation at end of year..... $694,621 $673,095 $201,493 $194,031 ======== ======== ======== ========
Change in Conectiv's Plan Assets
Other Postretirement Pension Benefits Benefits ---------------------- ------------------ 2000 1999 2000 1999 ---------- ---------- -------- -------- (Dollars in Thousands) Fair value of assets at beginning of year.......................... $1,017,844 $ 951,474 $120,072 $ 95,164 Actual return on plan assets...... (3,363) 138,450 166 13,494 Employer contributions............ -- -- 15,945 25,017 Plan participants' contributions.. -- -- 511 500 Benefits paid..................... (66,438) (64,671) (16,970) (9,436) Other............................. -- (7,409) -- (4,667) ---------- ---------- -------- -------- Fair value of assets at end of year............................. $ 948,043 $1,017,844 $119,724 $120,072 ========== ========== ======== ========
II-40 Reconciliation of Funded Status of Conectiv's Plans
Other Postretirement Pension Benefits Benefits -------------------- ------------------ 2000 1999 2000 1999 --------- --------- -------- -------- (Dollars in Thousands) Funded status at end of year........ $ 253,422 $ 344,749 $(81,769) $(73,959) Unrecognized net actuarial (gain)... (181,008) (300,864) (46,246) (63,286) Unrecognized prior service cost..... 7,794 4,129 149 198 Unrecognized net transition (asset) obligation......................... (10,245) (13,009) 37,531 40,659 --------- --------- -------- -------- Net amount recognized at end of year............................... $ 69,963 $ 35,005 $(90,335) $(96,388) ========= ========= ======== ======== Portion applicable to ACE........... $ (26,948) $ (20,309) $(37,614) $(42,952) ========= ========= ======== ========
Based on fair values as of December 31, 2000, Conectiv's pension plan assets were comprised of publicly traded equity securities ($606.7 million or 64%) and fixed income obligations ($341.3 million or 36%). Based on fair values as of December 31, 2000, Conectiv's other postretirement benefit plan assets in- cluded equity securities ($77.8 million or 65%) and fixed income obligations ($41.9 million or 35%). Components of Conectiv's Net Periodic Benefit Cost
Other Postretirement Pension Benefits Benefits ---------------------------- ------------------------ 2000 1999 1998 2000 1999 1998 -------- -------- -------- ------ ------- ------- (Dollars in Thousands) Service cost............ $ 18,388 $ 20,288 $ 18,933 $3,908 $ 5,282 $ 5,221 Interest cost........... 51,856 51,442 48,291 14,513 13,839 13,636 Expected return on assets................. (90,037) (83,999) (81,259) (8,645) (6,769) (4,845) Amortization of: Transition obligation (asset).............. (2,764) (2,764) (2,764) 3,128 3,128 3,244 Prior service cost.... 694 406 1,911 49 49 50 Actuarial (gain)...... (13,767) (4,248) (9,165) (3,060) (1,059) (567) -------- -------- -------- ------ ------- ------- Benefit cost before items below............ (35,630) (18,875) (24,053) 9,893 14,470 16,739 Special termination benefits............... -- -- 59,610 -- -- 2,682 Curtailment (gain) loss................... -- -- (10,256) -- -- 6,614 Settlement (gain) loss.. -- -- (45,291) -- -- 6,457 -------- -------- -------- ------ ------- ------- Total net periodic benefit cost......... $(35,630) $(18,875) $(19,990) $9,893 $14,470 $32,492 ======== ======== ======== ====== ======= ======= Portion of net periodic benefit cost applicable to ACE................. $ 6,154 $ 9,546 $ 18,118 $4,607 $ 8,856 $22,475 ======== ======== ======== ====== ======= ======= ACE portion of net periodic benefit cost included in results of operations............. $ 6,154 $ 9,546 $ 15,514 $4,607 $ 8,856 $19,553 ======== ======== ======== ====== ======= =======
The special termination benefits and curtailment and settlement gains and losses shown above for 1998 resulted from 1998 Merger-related employee separa- tion programs primarily for ACE and DPL employees. ACE's 1998 results of oper- ations include an $8.3 million charge to the cost of pension benefits and a $7.9 million charge to the cost of other postretirement benefits for the net expense of special termination benefits and curtailment and settlement gains and losses attributed to ACE's employees. Conectiv also maintains 401(k) savings plans for covered employees. Conectiv contributes to the plans, in the form of Conectiv stock, at varying levels up to $0.50 for each dollar contributed by employees, up to 6% of employee base pay. The amount expensed for ACE's share of the 401(k) savings plan was $1.0 million in 2000, $1.6 million in 1999, and $1.9 million in 1998. II-41 NOTE 22. COMMITMENTS AND CONTINGENCIES Commitments ACE's capital expenditures for 2001 are estimated to be approximately $65 million. See Note 19 to the Consolidated Financial Statements for commitments related to long-term purchased power contracts and Note 20 to the Consolidated Finan- cial Statements for commitments related to leases. Environmental Matters ACE is subject to regulation with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land use by various federal, regional, state, and local authorities. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. ACE is a po- tentially responsible party at a state superfund site and has agreed, along with other responsible parties, to remediate the site pursuant to an Adminis- trative Consent Order with the New Jersey Department of Environmental Protec- tion. ACE is also a defendant in an action to recover costs at a federal superfund site in Gloucester, New Jersey. ACE's liability for clean-up costs is affected by the activities of these governmental agencies and private land- owners, the nature of past disposal practices, the activities of others (in- cluding whether they are able to contribute to clean-up costs), and the scien- tific and other complexities involved in resolving clean-up-related issues (including whether ACE or a corporate predecessor is responsible for condi- tions on a particular parcel). There is $1.0 million included in ACE's current liabilities as of December 31, 2000 and 1999, for remediation activities at these sites. ACE does not expect such future costs to have a material effect on its financial position or results of operations. Nuclear Insurance In conjunction with ACE's ownership interests in Peach Bottom, Salem, and Hope Creek, ACE could be assessed for a portion of any third-party claims as- sociated with an incident at any commercial nuclear power plant in the United States. Under the provisions of the Price Anderson Act, if third party claims relating to such an incident exceed $200 million (the amount of primary insur- ance), ACE could be assessed up to $30.7 million on an aggregate basis for such third-party claims. In addition, Congress could impose a revenue-raising measure on the nuclear industry to pay such claims. The co-owners of Peach Bottom, Salem, and Hope Creek maintain property in- surance coverage of approximately $1.8 billion for each unit for loss or dam- age to the units, including coverage for decontamination expense and premature decommissioning. In addition, ACE is a member of an industry mutual insurance company (NEIL), which provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. Under these coverages, ACE is subject to potential retrospective loss experience assessments of up to $1.9 million on an aggregate basis. Under changes in NEIL's by-laws effective December 31, 2000, member account balances no longer exist. NEIL members who sell their interests in nuclear electric generating plants after December 31, 2000, may choose either (1) to continue to receive certain policyholders' distributions from NEIL (if, as, and when declared) over a 5-year period or (2) to remain a NEIL member by pur- chasing other insurance products from NEIL and thus remain eligible for poli- cyholders' distributions (if, as, and when declared) for a longer period. If the sale of ACE's ownership interests in nuclear electric generating plants is completed, then ACE will be able to choose one of the two options available to it. Other On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities lo- cated within the City limits by eminent domain. The City has offered II-42 approximately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the as- sets sought by the City are worth approximately $40 million. NOTE 23. BUSINESS SEGMENTS Conectiv's organizational structure and management reporting information is aligned with Conectiv's business segments, irrespective of the subsidiary, or subsidiaries, through which a business is conducted. Businesses are managed based on lines of business, not legal entity. Business segment information is not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a Conectiv subsidiary, no business segment information (as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information") is available for ACE on a stand-alone basis. However, ACE's principal business is expected to be the transmission and distribution of electricity upon comple- tion of the sale of the electric generating plants of ACE (as discussed in Note 11 to the Consolidated Financial Statements). The transfer of the combus- tion turbines to Conectiv effective July 1, 2000, resulted in electricity transmission and distribution representing a greater proportion of ACE's busi- ness. NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quar- terly data normally vary seasonally because of temperature variations, differ- ences between summer and winter rates, and the scheduled downtime and mainte- nance of electric generating units.
2000 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- ---------- (Dollars in Thousands) Operating Revenues.......... $208,886 $236,249 $282,966 $240,282 $968,383 Operating Income............ 22,680 36,411 66,123 41,310 166,524 Net Income.................. 1,573 14,113 28,155 10,593 54,434 Earnings Applicable to Common Stock............... 1,040 13,581 27,621 10,060 52,302 1999 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- ---------- (Dollars in Thousands) Operating Revenues.......... $244,839 $246,143 $351,372 $234,231 $1,076,585 Operating Income............ 38,034 35,967 85,300 12,630 171,931 Income (Loss) Before Extraordinary Item......... 15,091 14,878 35,953 (1,992) 63,930 Extraordinary Item (1)...... -- -- (17,483) (40,612) (58,095) Net Income/(Loss)........... 15,091 14,878 18,470 (42,604) 5,835 Earnings (Loss) Applicable to Common Stock............ 14,558 14,345 17,937 (43,137) 3,703
- -------- (1) For information concerning the extraordinary item recorded in the third and fourth quarters of 1999, see Note 6 to the Consolidated Financial Statements. ACE's operating results for the third quarter of 1999 include special charges for the costs of employee separations, additional costs related to the 1998 Merger, and certain other nonrecurring items which caused operating in- come to decrease $12.3 million and income before extraordinary item, net in- come, and earnings applicable to common stock to decrease $7.3 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Reference is made to Item 4 of Report on Form 8-K filed March 5, 1998. II-43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors Business Experience during Past 5 Years --------- --------------------------------------- As of December 31, 2000 Howard E. Cosgrove, 57.. Elected 1998 as Chairman of the Board and Chief Chairman of the Board Executive Officer of Conectiv and Chairman of the Board of Atlantic City Electric Company. Elected 1992 as Chairman of the Board, President and Chief Executive Officer of Delmarva Power & Light Company Thomas S. Shaw, 53...... Elected 2000 as President and Chief Operating Officer Director of Conectiv. Elected 1998 as Executive Vice President of Conectiv. Elected 1992 as Senior Vice President of Delmarva Power & Light Company. John C. van Roden, 51... Elected 2000 as Senior Vice President and Chief Director Financial Officer of Conectiv and Chief Financial Officer of Atlantic City Electric Company. Elected 1998 as Senior Vice President and Chief Financial Officer of Conectiv. Principal, Cook and Belier, Inc. in 1998. Senior Vice President/Chief Financial Officer and Vice President/Treasurer, Lukens, Inc. from 1987 to 1998. Barbara S. Graham, 52... Elected 1999 as Senior Vice President of Conectiv. Director Elected 1998 as Senior Vice President and Chief Financial Officer of Conectiv. Elected 1994 as Senior Vice President, Treasurer and Chief Financial Officer of Delmarva Power & Light Company.
Executives Information about ACE's executive officers is included under Item 1. III-1 ITEM 11. EXECUTIVE COMPENSATION Personnel and Compensation Committee Interlocks and Insider Participation The Personnel and Compensation Committee is comprised solely of non-employee directors. There are no Personnel and Compensation Committee interlocks. Summary Compensation Table For the year ended December 31, 2000, the following table shows information regarding the compensation earned during the past year by the President of ACE, during the past three fiscal years for the Chief Financial Officer of ACE, and during the past year for ACE's other three most highly compensated executive officers. Table 1--SUMMARY COMPENSATION TABLE
Long Term Compensation -------------------------------- Annual Compensation Awards Payouts ---------------------------------- --------------------- ---------- Variable Restricted Securities Compensation Other Annual Stock Underlying LTIP All Other Name and Principal Position Year(1) Salary (Bonus)(2) Compensation Awards(3) Options Payouts(4) Compensation(5) - --------------------------- ------- -------- ------------ ------------ ---------- ---------- ---------- --------------- J.M. Rigby, President..... 2000 $182,800 $70,240 0 $12,500 28,500 -- $4,884 J.C. van Roden, Chief Financial Officer.. 2000 $275,000 $85,400 0 $90,625 34,700 -- $9,810 1999 $250,000 $72,500 0 -- 170,000 -- $8,342 1998 $ 17,686 -- 0 -- -- J.C. Weller, Vice President................ 2000 $158,794 $34,500 0 $41,000 11,100 -- $4,429 J.M. Castaldi, Vice President........... 2000 $126,000 $28,800 0 0 6,800 -- $4,580 J.M. Wathen, Director..... 2000 $120,000 $16,800 0 $20,571 6,500 -- $4,362
- -------- (1) Except for J.C. van Roden, this group of executive officers was appointed as of June 2000 and, therefore, only compensation for 2000 is listed. Mr. van Roden joined Conectiv and ACE on November 30, 1998, and the 1998 sal- ary shown is his actual salary. Mr. Howard E. Cosgrove and Mr. Thomas S. Shaw served for the first half of 2000 as officers. Mr. Cosgrove's com- pensation for the past three years is as follows: Salary: 1998--$600,000, 1999--$600,000, 2000--$600,000; Variable Compensation (Bonus): 1998-- $300,000 of which $150,000 purchased Restricted Stock Units ("RSU's"), 1999--$435,000, of which $217,500 purchased RSU's, 2000--$496,800, of which $248,400 purchased RSU's; Other Annual Compensation: 1998, 1999, 2000--$0; Restricted Stock Awards: 1998--$0, 1999--$187,500, 2000-- $271,875; Securities Underlying Options: 1998--360,000, 1999--57,000, 2000--124,000; LTIP Payouts: 1998--$572,134, 1999--$0, 2000--$0; Divi- dends deferred on Dividend Equivalent Units ("DEU's"): 1998--$23,100, 1999--$48,263, 2000--$92,400; All other compensation: 1998--$12,329, 1999--$18,204, 2000--$17,682 (which includes $282, term life insurance premiums paid by Conectiv, $3,000 in Conectiv matching contributions to Conectiv's Savings and Investment Plan and $14,400 in Conectiv matching contributions to Conectiv's Deferred Compensation Plan). Mr. Shaw's com- pensation for the past three years is as follows: Salary: 1998--$325,000, 1999--$325,000, 2000--$354,700; Variable Compensation (Bonus): 1998-- $156,000, of which $78,000 purchased RSU's, 1999--$240,000, of which $120,000 purchasing RSU's, 2000--$245,000, of which $122,500 purchased RSU's, Other Annual Compensation for 1998, 1999, 2000--$0; Restricted Stock Awards: 1998--$0, 1999--$291,500, 2000--$150,000; Securities Under- lying Options: 1998--170,000, 1999--26,000, 2000--51,900; LTIP Payouts: 1998--$155,267, 1999--$0, 2000--$0; Dividends deferred on DEU's: 1998-- $7,700, 1999--$18,975, 2000--$37,367. All other compensation: 1998-- $9,478, 1999--$8,258, 2000--$10,606 (which includes $156, term life in- surance premiums paid by Conectiv, $3,267 in Conectiv matching contribu- tions to Conectiv's Savings and Investment Plan and $7,183 in Conectiv matching contributions to Conectiv's Deferred Compensation Plan). III-2 (2) The target award is 40% of annualized salary for Mr. Rigby, 45% for Mr. van Roden, 30% for Mr. Weller, 20% for Mr. Castaldi and 20% for Mr. Wathen. For 2000, the dollar value of the bonus reported above has been reduced by the portion of the bonus deferred, as follows: J.M. Rigby ($87,800 bonus with $17,560 purchasing RSU's; J.C. van Roden ($170,800 bonus with $85,400 purchasing RSU's); J.C. Weller ($69,000 bonus with $34,500 purchasing RSU's); J.M. Castaldi ($36,100 bonus with $7,220 pur- chasing RSU's); J.M. Wathen ($33,600 bonus with $16,800 purchasing RSU's). The 1999 bonus reported above for J.C. van Roden has been reduced by the portion of the bonus deferred ($145,000 bonus with $72,500 pur- chasing RSU's). (3) A mandatory 20% of the bonus (reported in this Table as "Variable Compen- sation") and any additional portion of the bonus that an executive elects to defer (up to an additional 30%) is deferred for at least three years under the Management Stock Purchase Program ("MSPP") and used to purchase RSU's at a 20% discount. The dollar value of RSU's deferred under MSPP in 2000 (inclusive of the discounted portion), based on the fair market value at the award date, was as follows: J.M. Rigby ($12,500 of which $2,500 is the discount); J.C. van Roden ($90,625 of which $18,125 is the discount); J.C. Weller ($41,000 of which $8,200 is the discount), J.M. Wathen ($20,571 of which $4,114 is the discount). J.M. Castaldi was not a member of the plan in 1999. At the end of 2000, the number and value of the aggregate restricted stock holdings (including RSU's, Performance Ac- celerated Restricted Stock ("PARS") and special grants) valued at $20.0625, the closing Conectiv common stock price on December 29, 2000, for the individuals identified in the Summary Compensation Table was as follows; for Mr. Rigby, 4,612 restricted stock holdings valued at $92,528; for Mr. van Roden, 12,217 restricted stock holdings valued at $245,104; for Mr. Weller, 6,174 restricted stock holdings valued at $123,866; for Mr. Wathen 3,671 restricted stock holdings valued at $73,549; for Mr. Castaldi 1,000 restricted stock holdings valued at $20,063. (4) Dividends on shares of restricted stock and dividend equivalents are ac- crued at the same rate as that paid to all holders of Conectiv common stock. As of December 31, 2000, Mr. Rigby held 3,800 shares of restricted stock and 11,750 DEU's; Mr. van Roden held 7,700 shares of restricted stock (3,000 for 1999 and 4,700 for 2000) and 27,350 DEU's (10,000 for 1999 and 17,350 for 2000); Mr. Weller held 4,000 shares of restricted stock and 12,350 DEU's; Mr. Castaldi held 1,000 shares of restricted stock and 3,400 DEU's; Mr. Wathen held 4,000 shares of restricted stock and 7,250 DEU'S. Dividends paid on DEU's for 1998 were as follows: Mr. Rigby, $3,480, Mr. Weller, $3,886, Mr. Wathen, $2,320. Dividends paid on DEU's for 1999 were as follows: Mr. Rigby, $7,260, Mr. van Roden, $8,250, all of which was deferred into the Conectiv Deferred Compensation Plan; Mr. Weller, $8,289, Mr. Wathen, $4,840. Dividends paid on DEU's for 2000 were as follows: Mr. Rigby, $10,340, Mr. van Roden, $20,251, all of which was deferred into the Conectiv Deferred Compensation Plan; Mr. Weller, $8,289, Mr. Castaldi, $2,992, and Mr. Wathen, $6,380. Holders of re- stricted stock are entitled to receive dividends as, if and when de- clared. (5) The amount of All Other Compensation for each of the named executive of- ficers for fiscal year 2000 include the following: Mr. Rigby, $4,533 in Conectiv matching contributions to Conectiv's Savings and Investment Plan and $351 in term life insurance premiums paid by Conectiv; for Mr. van Roden, $5,100 in Conectiv matching contributions to Conectiv's Savings and Investment Plan, $3,150 in Conectiv matching contributions to Conectiv's Deferred Compensation Plan and $156 in term life insurance premiums paid by Conectiv; for Mr. Weller, $3,193 in Conectiv matching contributions to Conectiv's Savings and Investment Plan, and $1,236 in term life insurance premiums paid by the Conectiv; for Mr. Castaldi, $3,780 in Conectiv matching contributions to Conectiv's Savings and In- vestment Plan, and $800 in term life insurance premiums paid by the Conectiv; and for Mr. Wathen, $3,525 in Conectiv matching contributions to Conectiv's Savings and Investment Plan and $837 in term life insurance premiums paid by Conectiv. III-3 Table 2--Conectiv Option Grants in Last Fiscal Year(1)
Number of % of Total Securities Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Name Granted (#) Fiscal Year ($/Sh) Date Value(3) - ---- ----------- ------------ -------- ---------- ---------- J.M. Rigby.............. 28,500(2) 4.1% $16.5625 1/3/10 $115,710 J.C. van Roden.......... 34,700(2) 5.0% $16.5625 1/3/10 $140,882 J.C. Weller............. 11,100(2) 1.6% $16.5625 1/3/10 $ 45,066 J.M. Castaldi........... 6,800(2) 1.0% $16.5625 1/3/10 $ 27,608 J.M. Wathen............. 6,500(2) 0.9% $16.5625 1/3/10 $ 26,390
- -------- (1) Currently, Conectiv does not grant stock appreciation rights. For Mr. Cosgrove the number of securities underlying options granted in 2000 were 124,000, or 18% of total options granted to employees in 2000; those op- tions granted had an exercise price per share of $16.5625, an expiration date of January 3, 2010, and a grant date present value of $503,440. For Mr. Shaw the number of securities underlying options granted in 2000 were 51,900 or 7.5% of total options granted to employees in 2000, those op- tions granted had an exercise price per share of $16.5625, an expiration date of January 3, 2010 and a grant date present value of $210,714. (2) Denotes Nonqualified Stock Options. One-half of such Options vest and are exercisable at the end of the second year from date of grant. Second one- half vest and are exercisable at end of the third year from the date of grant. (3) Determined using the Black-Scholes model, incorporating the following ma- terial assumptions and adjustments: (a) exercise price of $16.5625, equal to the Fair Market Value as of date of grant (b) an option term of ten years (c) risk-free rate of return of 5.00% (d) volatility of 20.00% and (e) dividend yield of 4.75%. Table 3--Aggregated Conectiv Option Exercises in Last Fiscal Year and FY-End Option Values(1)
Number of Securities Value of Unexercised Shares Underlying Unexercised in-the-Money Acquired Value Options at FY-End(3) Options at FY-End(2) Name On Exercise Realized ($)(2) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ----------- --------------- ------------------------- ------------------------- J.M. Rigby.............. 0 0 3,000/37,500 $ 0/99,750 J.C. van Roden.......... 0 0 0/204,700 $0/121,450 J.C. Weller............. 0 0 3,500/36,300 $ 0/38,500 J.M. Castaldi........... 0 0 0/6,800 $ 0/23,800 J.M. Wathen............. 0 0 2,635/12,500 $ 0/22,750
- -------- (1) Neither Mr. Cosgrove nor Mr. Shaw exercised any options during 2000. Mr. Cosgrove has 35,900 options that are exercisable and 511,000 options unexercisable. 124,000 out of the 511,000 unexercisable options are in the money. The value of unexercised in the money options at fiscal year- end exercisable/unexercisable is $0/$434,000. Mr. Shaw has 10,000 options that are exercisable and 237,900 options unexercisable. 51,900 out of 237,900 unexercisable options are in the money. The values of unexercised in the money options at fiscal year-end exercisable/unexercisable are $0/$181,650. (2) The closing price for Conectiv's common stock as reported by the New York Stock Exchange on December 29, 2000 was $20.0625. Any value in the op- tions is based on the difference between the exercise price of the op- tions and the value at the time of the exercise (e.g., $20.0625 as of the close of business on December 29, 2000), which difference is multiplied by the number of options exercised. (3) 28,500 out of 37,500 of Mr. Rigby's unexercisable options are in the mon- ey. 34,700 out of 204,700 of Mr. van Roden's unexercisable options are in the money. 11,000 out of 36,300 of Mr. Weller's unexercisable options are in the money. All of Mr. Castaldi's 6,800 unexercisable options are in the money. 6,500 out of 12,500 of Mr. Wathen's unexercisable options are in the money. Unless vesting is accelerated under the terms of Conectiv's Long-Term Incentiv Plan ("LTIP"), none of the remaining options may be exercised earlier than two years from date of grant for regular, non-per- formance based options and nine and one half years from date of grant for performance based options (subject to accelerated vesting for favorable stock price performance). III-4 Table 4--Conectiv Long-Term Incentive Plans--Awards in Last Fiscal Year(1)
Number of Restricted Performance Period Shares/Dividend Until Maturation Name Equivalent Units (#) Or Payout(2) ---- ------------------------- ------------------ J.M. Rigby................... 1,400 shares/5,100 units 1/3/07 J.C. van Roden............... 4,700 shares/17,350 units 1/3/07 J.C. Weller.................. 1,300 shares/4,900 units 1/3/07 J.M. Castaldi................ 800 shares/3,000 units 1/3/07 J.M. Wathen.................. 800 shares/2,900 units 1/3/07
- -------- (1) Mr. Cosgrove was granted 16,600 shares of PARS and 62,000 DEU's in 2000, with a performance period ending January 3, 2007, and with the same terms and conditions described below in note 2. Mr. Shaw was granted 7,000 shares of PARS and 25,950 DEU's in 2000, with a performance period ending January 3, 2007, and with the same terms and conditions described below in note 2. (2) Awards of PARS and DEU's were made to all of the named executive offi- cers. The payout of shares of PARS may potentially be "performance accel- erated." Restrictions may lapse any time after 3 years (i.e., after Janu- ary 3, 2003) upon achievement of favorable stock price performance goals. In the absence of such favorable performance or accelerated vesting under the terms of Conectiv's LTIP, restrictions lapse after 7 years (i.e., January 3, 2007) provided that at least a defined level of average, total return to stockholders is achieved. As of December 31, 2000, Mr. Cosgrove's 16,600 PARS were valued at $333,038, Mr. Shaw's 7,000 PARS were valued at $140,438, Mr. Rigby's 1,400 PARS were valued at $28,088, Mr. van Roden's 4,700 PARS were valued at $94,294; Mr. Weller's 1,300 PARS were valued at $26,081, Mr. Wathen's and Mr. Castaldi's 800 PARS were valued at $16,050. These values are based on the December 29, 2000 closing Conectiv common stock price of $20.0625. For DEU's, one DEU is equal in value to the regular quarterly dividend paid on one share of Conectiv common stock. The DEU's shown are payable in cash for four quar- ters over a one-year period ending with the quarterly dividend equivalent payable January 31, 2001. At that time, the 2000 DEU award lapses. Pension Plan The Conectiv Retirement Plan includes the Cash Balance Pension Plan and cer- tain "grandfathering" provisions relating to the Delmarva Retirement Plan and the Atlantic Retirement Plan that apply to employees who had attained either 20 years of service or age 50 on the effective date of the Cash Balance Pen- sion Plan (January 1, 1999). Certain executives whose benefits from the Conectiv Retirement Plan are limited by the application of federal tax laws also receive benefits from the Supplemental Executive Retirement Plan. Cash Balance Pension Plan The named executive officers participate in the Conectiv Retirement Plan and earn benefits that generally become vested after five years of service. Annu- ally, a record-keeping account in a participant's name is credited with an amount equal to a percentage of the participant's total pay, including base pay, overtime and bonuses, depending on the participant's age at the end of the plan year, as follows:
Age at end of Plan Year % of Pay ----------------------- -------- Under 30........................................................ 5 30 to 34........................................................ 6 35 to 39........................................................ 7 40 to 44........................................................ 8 45 to 49........................................................ 9 50 and over..................................................... 10
III-5 These accounts also receive interest credits based on average U.S. Treasury Bill rates for the year. In addition, certain annuity benefits earned by par- ticipants under the former Delmarva and Atlantic Energy Retirement Plans are fully protected as of December 31, 1998, and were converted to an equivalent cash amount and included in each participant's initial cash balance account. When a participant terminates employment, the amount credited to his or her account is converted into an annuity or paid in a lump sum. Supplemental Retirement Benefits Under federal tax laws and regulations, benefits payable under the Conectiv Retirement Plan are limited. Supplemental retirement benefits are provided to employees to whom these limitations apply (including executive officers), so that they receive the retirement benefits for which they would be eligible in the absence of these limitations. Estimated Retirement Benefits Payable to Named Executive Officers The following table shows the estimated retirement benefits, including sup- plemental retirement benefits under the plans applicable to the named execu- tives, that would be payable if he or she were to retire at normal retirement age (65), expressed in the form of a lump sum payment. Years of service cred- ited to each named executive officer as of his or her normal retirement date are as follows: Mr. Rigby--43, Mr. van Roden--15, Mr. Weller--21, Mr. Castaldi--42, and Mr. Wathen--27.
Name Year of 65th Birthday Lump Sum Value ---- --------------------- -------------- J.M. Rigby.......................... 2021 $1,090,000(1) J.C. van Roden...................... 2014 $ 522,000(1) J.C. Weller......................... 2014 $ 454,000(1) J.M. Castaldi....................... 2012 $1,080,000(1) J.M. Wathen......................... 2020 $ 599,000(1)
- -------- (1) Amounts include (i) interest credits for cash balances projected to be 5.80% per annum on annual salary credits and prior service balances, if any, and (ii) accrued benefits as of December 31, 2000, under retirement plans then applicable to the named executive officer. Benefits are not subject to any offset for Social Security payments or other offset amounts and assume no future increases in base pay or total pay. Under the Conectiv Retirement Plan's grandfathering provisions, employees who participated in the Delmarva or Atlantic Retirement Plans and who met cer- tain age and service requirements as of January 1, 1999, will have retirement benefits for all years of service up to the earlier of December 31, 2008 or retirement calculated according to their original benefit formula. This bene- fit will be compared to the cash balance account and the employee will receive whichever is greater. For years after December 31, 2008, all participants' benefits will be calculated under the cash balance plan. Current actuarial es- timates and assumptions indicate that all five of the above executives will receive retirement benefits based on the Cash Balance Pension Plan. Change in Control Severance Agreements and Other Provisions Relating to Possible Change Control For the executive officers of ACE, Conectiv has entered into change in con- trol severance agreements with Messrs. Rigby and van Roden. The agreements are intended to encourage the continued dedication of Conectiv's senior management team. The agreements provide potential benefits for these executives upon ac- tual or constructive termination of employment (other than for cause) follow- ing a change in control of Conectiv, as defined in the agreements. Each af- fected executive would receive a severance payment equal to three times base salary and bonus, medical, dental, vision, group life and disability benefits for three years after termination of employment, and a cash payment equal to the actuarial equivalent of accrued pension credits equal to 36 months of ad- ditional service. III-6 In the event of a change in control, the Variable Compensation Plan provides that outstanding options become exercisable in full immediately, all condi- tions to the vesting of PARS are deemed satisfied and shares will be fully vested and nonforfeitable, DEU's will become fully vested and be immediately payable, variable compensation deferred under the Management Stock Purchase Program will be immediately distributed, and payment of variable compensation, if any, for the current year will be decided by the Personnel and Compensation Committee. For the Deferred Compensation Plan, this Committee may decide to distribute all deferrals in cash immediately or continue the deferral elec- tions of participants, in which case Conectiv will fully fund a "springing rabbi trust" to satisfy the obligations. An independent institutional trustee will maintain any trust established by reason of this provision. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All shares of ACE's common stock are owned by Conectiv, ACE's parent company ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None III-7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. 1. Financial Statements The following financial statements are contained in Item 8 of Part II.
Page No. -------- Report of Independent Accountant, PricewaterhouseCoopers LLP.......... II-15 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998................................................. II-16 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998................................................. II-17 Consolidated Balance Sheets as of December 31, 2000 and 1999.......... II-18 Consolidated Statements of Changes in Common Stockholder's Equity for the years ended December 31, 2000, 1999, and 1998.................... II-20 Notes to Consolidated Financial Statements............................ II-21
2. Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2000, is presented below. No other financial statement schedules have been filed since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or the notes thereto. Schedule II--Valuation and Qualifying Accounts Years Ended December 31, 2000, 1999, 1998 (Dollars in thousands)
Column B Column C Column D Column E ---------- ------------------------- ---------- ---------- Additions ------------------------- Balance at Charged to Balance at beginning cost and Charged to end of Description of period expenses other accounts Deductions period ----------- ---------- ---------- -------------- ---------- ---------- 2000 Allowance for doubtful accounts............... $3,500 $4,248 -- $3,325(a) $4,423 1999 Allowance for doubtful accounts............... 3,500 5,590 -- 5,590(a) 3,500 1998 Allowance for doubtful accounts............... 3,500 5,003 -- 5,003(a) 3,500
- -------- (a) Accounts receivable written-off. IV-1 3. Exhibits
Exhibit Number ------- 2 Amended and Restated Agreement and Plan of Merger, dated as of December 26, 1996, between DPL, Atlantic Energy, Inc., Conectiv, Inc. and DS Sub, Inc. (Filed with Registration Statement No. 333-18843) 3-A Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc. filed with Delaware Secretary of State, effective as of March 1, 1998 (Filed with 1998 Form 10-K, file no. 1-3559) 3-B Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc. filed with New Jersey Department of State, effective as of March 1, 1998 (Filed with 1998 Form 10-K, file no. 1-3559) 3-C Certificate to change name from Conectiv, Inc. to Conectiv filed with the Delaware Secretary of State pursuant to Section 102(a) of the Delaware General Corporation Law (Filed with 1998 Form 10-K, file no. 1-3559) 3-G 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) 4-A 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) 4-B Indenture dated as of March 1, 1997 between Atlantic City Electric Company and The Bank of New York filed on Form 8-K, dated March 24, 1997, File No. 1-3559--Exhibit 4(e) 4-C Indenture Supplemental dated as of March 1, 1997 to Mortgage and Deed of Trust dated January 15, 1937 between Atlantic City Electric Company and The Bank of New York filed on Form 8-K dated March 24, 1997, File No 1-3559, Exhibit 4(b) 4-D 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, (File No. 1-9760, Form 10-K for year ended December 31, 1996--Exhibit No. 4f(7)) 4-E Junior Subordinated Indenture, dated as of October 1, 1996, by and between Atlantic City Electric Company and The Bank of New York, as Trustee, (File No. 1-9760, Form 10-K for year ended December 31, 1996--Exhibit No. 4f(8)) 4-F 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, (File No. 1-9760, Form 10-K for year ended December 31, 1996--Exhibit No. 4f(9)) 4-G Amended and Restated Trust Agreement, dated as of October 1, 1998, 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 with 1998 Form 10-K, file no. 1-3559)
IV-2
Exhibit Number ------- 4-H Junior Subordinated Indenture, dated as of October 1, 1998, by and between Atlantic City Electric Company and The Bank of New York, as Trustee (Filed with 1998 Form 10-K, file no. 1-3559) 4-I Guarantee Agreement, dated as of October 1, 1998, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee (Filed with 1998 Form 10-K, file no. 1-3559) 10-A Termination Agreement dated August 14, 1997 between Atlantic Energy, Inc. and Michael J. Chesser. (Filed with 1997 Form 10-K, file No. 1- 3559) 10-B Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (wholly owned electric generating plants)(filed herewith). 10-C Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (jointly owned electric generating plants)(filed herewith). 12-A Ratio of earnings to fixed charges, filed herewith 12-B Ratio of earnings to fixed charges and preferred dividends, filed herewith 99 Pro Forma Financial Statements--Generation Asset Sale and Transfer, filed herewith.
(b) Reports on Form 8-K The following Reports on Form 8-K were filed in the fourth quarter of 2000: On October 20, 2000, ACE filed a Current Report on Form 8-K dated October 3, 2000, reporting on Item 5, Other Events. IV-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex- change Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 2, 2001. Atlantic City Electric Company (Registrant) /s/ John C. van Roden By: _________________________________ (John C. van Roden, Chief Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Regis- trant and in the capacities indicated, on April 2, 2001.
Signature Title --------- ----- /s/ Howard E. Cosgrove Chairman of the Board ______________________________________ (Howard E. Cosgrove) /s/ Joseph M. Rigby President ______________________________________ (Joseph M. Rigby) /s/ John C. van Roden Director and Chief ______________________________________ Financial Officer (John C. van Roden) /s/ James P. Lavin Controller and Chief ______________________________________ Accounting Officer (James P. Lavin) /s/ Thomas S. Shaw Director ______________________________________ (Thomas S. Shaw) /s/ Barbara S. Graham Director ______________________________________ (Barbara S. Graham)
IV-4 EXHIBIT INDEX Exhibit No. Description - ----------- --------------------------------------------------------- 10-B Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (wholly owned electric generating plants). 10-C Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (jointly owned electric generating plants). 12-A Ratio of Earnings to Fixed Charges 12-B Ratio of Earnings to Fixed Charges and Preferred Dividends 99 Pro Forma Financial Statements--Generation Asset Sale and Transfer EX-10.B 2 dex10b.txt PURCHASE AND SALE AGREEMENT EXHIBIT 10-B PURCHASE AND SALE AGREEMENT BY AND BETWEEN ATLANTIC CITY ELECTRIC COMPANY AND NRG ENERGY, INC. DATED AS OF JANUARY 18, 2000 (ACE - WHOLLY OWNED STATIONS) LIST OF EXHIBITS AND SCHEDULES EXHIBITS Exhibit A Form of Access Agreement Exhibit B Form of Assignment and Assumption Agreement Exhibit C Form of Bill of Sale Exhibit D Form of FIRPTA Affidavit Exhibit E Form of Interconnection Agreement Exhibit F Form of Limited Warranty Deed Exhibit G Form of Transition Services Agreement Exhibit H Form of Seller's Legal Opinion Exhibit I Form of Buyer's Legal Opinion SCHEDULES 1.1(9) Description of B.L. England Station 1.1(23) Capital Expenditures 1.1(39) Description of Deepwater Station 1.1(89) Description of Merrill Creek 1.1(101) Permitted Encumbrances 1.1(134) Target Adjustment Amount Methodology 1.1(141) Transferable Permits 2.1(d) Electrical Transmission Facilities/Information Technology/ Communications Assets 2.1(g) Emission Allowances to be Transferred to Buyer 2.1(h) Excess Emission Allowances 2.1(i) Excess Merrill Creek Interests 2.6 Inventories 3.1 Certain Transactions 4.3(a) Seller's Defaults and Violations 4.3(b) Seller's Consents and Approvals 4.4 Insurance Exceptions 4.6 Environmental Matters 4.7 Labor Matter Exceptions 4.8(a) Benefit Plans 4.8(b) Benefit Plans; ERISA Exceptions 4.9 Real Property 4.11(a) Seller's Agreements 4.12 Legal Proceedings 5.3(a) Buyer's Defaults and Violations 5.3(b) Buyer's Consents and Approvals 5.10 Environmental Site Assessments 6.1 Conduct of Business Exceptions 6.8(c) Collective Bargaining Agreements i 6.8(g) Transferred Non-Union Employee Severance Benefits 6.11 Certain Tax-Exempt Bonds 6.12 T&D Assets/Relocation Costs 6.13 IT/Communications Assets/Relocation Costs 6.15(b)(i) Prorated SO2 Allowances 6.15(b)(ii) Prorated NOx Emission Allowances 7.1(c) Buyer's Required Regulatory Approvals 7.2(c) Seller's Required Regulatory Approvals ii TABLE OF CONTENTS ARTICLE I DEFINITIONS 1.1 Definitions.............................................1 1.2 Certain Interpretive Matters...........................15 1.3 U.S. Dollars...........................................15 ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets.....................................15 2.2 Excluded Assets........................................17 2.3 Assumed Liabilities....................................19 2.4 Excluded Liabilities...................................20 2.5 Control of Litigation..................................22 2.6 Inventories............................................23 ARTICLE III THE CLOSING 3.1 Closing................................................23 3.2 Payment of Purchase Price..............................23 3.3 Adjustment to Purchase Price...........................24 3.4 Tax Reporting and Allocation of Purchase Price.........25 3.5 Prorations.............................................25 3.6 Deliveries by Seller...................................26 3.7 Deliveries by Buyer....................................28 3.8 Post-Closing Excluded Asset Deliveries.................29 3.9 Relationship of this Agreement and Related Purchase Agreements....................................29 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER 4.1 Organization; Qualification............................29 4.2 Authority..............................................30 4.3 Consents and Approvals; No Violation...................30 4.4 Insurance..............................................31 4.5 Title and Related Matters..............................31 4.6 Environmental Matters..................................31 4.7 Labor Matters..........................................32 4.8 Benefit Plans; ERISA...................................32 4.9 Real Property..........................................33 4.10 Condemnation...........................................33 iii 4.11 Contracts and Leases...................................33 4.12 Legal Proceedings......................................33 4.13 Permits................................................33 4.14 Year 2000..............................................34 4.15 Assets Used in Operation of the Wholly Owned Stations...............................................34 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER 5.1 Organization; Qualification............................34 5.2 Authority..............................................34 5.3 Consents and Approvals; No Violation...................35 5.4 Buyer's Permits........................................35 5.5 Availability of Funds..................................36 5.6 Financial Statements...................................36 5.7 Legal Proceedings......................................36 5.8 Qualified Buyer........................................36 5.9 Inspections............................................36 5.10 WARN Act...............................................36 5.11 Regulation as a Utility................................36 ARTICLE VI COVENANTS OF THE PARTIES 6.1 Conduct of Business Relating to the Purchased Assets.................................................37 6.2 Access to Information..................................38 6.3 Public Statements......................................39 6.4 Further Assurances.....................................39 6.5 Consents and Approvals.................................40 6.6 Certain Tax Matters....................................41 6.7 Advice of Changes......................................43 6.8 Employees..............................................43 6.9 Risk of Loss...........................................48 6.10 ISRA Compliance........................................48 6.11 Tax Exempt Bonds. ....................................49 6.12 Relocation of Transmission/Distribution Equipment......50 6.13 Relocation of Information Technology and Communications Equipment...............................50 6.14 PJM; MAAC..............................................50 6.15 Emission Allowances....................................50 6.16 Insurance Claims.......................................54 6.17 Reimbursement of Certain Metering Expenses.............54 iv ARTICLE VII CONDITIONS 7.1 Conditions to Obligation of Buyer......................54 7.2 Conditions to Obligation of Seller.....................56 ARTICLE VIII INDEMNIFICATION AND ARBITRATION 8.1 Indemnification........................................57 8.2 Defense of Claims......................................59 8.3 Arbitration............................................60 8.4 Remediation of Matters Covered in Sections 2.4(g)......61 ARTICLE IX TERMINATION 9.1 Termination............................................63 9.2 Effect of Termination..................................64 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification.............................64 10.2 Expenses...............................................64 10.3 Fees and Commissions...................................65 10.4 Bulk Sales Laws........................................65 10.5 Waiver of Compliance; Consents.......................65 10.6 No Survival............................................65 10.7 Disclaimers............................................65 10.8 Notices................................................66 10.9 Assignment.............................................67 10.10 Governing Law; Forum; Service of Process...............68 10.11 Counterparts...........................................68 10.12 Interpretation.........................................68 10.13 Schedules and Exhibits.................................68 10.14 Entire Agreement.......................................69 v PURCHASE AND SALE AGREEMENT PURCHASE AND SALE AGREEMENT, dated as of January 18, 2000 (this "Agreement"), by and between Atlantic City Electric Company, a New Jersey corporation ("ACE" or "Seller"), and NRG Energy, Inc., a Delaware corporation ("Buyer"). Seller and Buyer may each be referred to herein individually as a "Party," and collectively as the "Parties." W I T N E S S E T H WHEREAS, Seller owns two fossil fuel-fired electric generating stations (the "Wholly Owned Stations"), and certain properties and assets associated therewith and ancillary thereto; and WHEREAS, Seller owns certain rights to, and interests in, the Merrill Creek Reservoir located in Harmony Township, New Jersey (referred to herein as the "Merrill Creek Interests"); and WHEREAS, Seller possesses certain Emission Allowances (as defined below); and WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, or cause to be sold and assigned, the Purchased Assets (as defined below) and certain associated Liabilities (as defined below), upon the terms and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, representations, warranties and agreements set forth herein, and intending to be legally bound hereby, the Parties hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following capitalized terms have the meanings specified in this Section 1.1. (1) "Access Agreement" means the easement and license agreement between Buyer and Seller, or any Affiliate thereof, to be delivered at the Closing, substantially in the form of Exhibit A hereto, pursuant to which Buyer will provide Seller, or an Affiliate thereof, with access rights with respect to certain of the Purchased Assets transferred to Buyer and to certain Excluded Assets retained by Seller. (2) "ACE" has the meaning set forth in the preamble to this Agreement. (3) "ACE Related Purchase Agreement" means the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by Seller and Buyer, relating to the purchase and sale of Seller's undivided 2.47% interest as tenant in common in the Keystone Station, Seller's undivided 3.83% interest as tenant in common in the Conemaugh Station and certain related properties and assets. (4) "Additional Agreements" means the Interconnection Agreement, the Transition Services Agreement, the Access Agreement, the Limited Warranty Deeds, the Assignment and Assumption Agreements and the Bill of Sale. (5) "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act. (6) "Agreement" means this Purchase Agreement together with the Schedules and Exhibits hereto. (7) "Assignment and Assumption Agreements" means the assignment and assumption agreements between Seller and Buyer, to be delivered at the Closing, substantially in the form of Exhibit B hereto, pursuant to which Seller shall assign the Seller's Agreements, certain intangible assets and certain other Purchased Assets to Buyer, and Buyer shall accept such assignment and assume the Assumed Liabilities. (8) "Assumed Liabilities" has the meaning set forth in Section 2.3. (9) "B.L. England Station" means the generating station known as B.L. England Station, located in the town of Beesley's Point, County of Cape May, State of New Jersey, and related properties and assets, all as more fully identified on Schedule 1.1(9) attached hereto. (10) "Benefit Plans" has the meaning set forth in Section 4.8(a). (11) "Bill of Sale" means the bill of sale of Seller, to be delivered at the Closing, substantially in the form of Exhibit C hereto. (12) "Business Day" means any day other than Saturday, Sunday and any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. (13) "Buyer" has the meaning set forth in the preamble to this Agreement. (14) "Buyer Material Adverse Effect" has the meaning set forth in Section 5.3(a). (15) "Buyer's Benefit Plans" has the meaning set forth in Section 6.8(d)(iv). 2 (16) "Buyer's Financial Statements" has the meaning set forth in Section 5.6. (17) "Buyer's Indemnitee" has the meaning set forth in Section 8.1(b). (18) "Buyer's Pension Plan" has the meaning set forth in Section 6.8(e). (19) "Buyer's Permits" has the meaning set forth in Section 5.4. (20) "Buyer's Required Regulatory Approvals" has the meaning set forth in Section 5.3(b). (21) "Buyer's Savings Plan" has the meaning set forth in Section 6.8(f). (22) "Buyer's Welfare Plans" has the meaning set forth in Section 6.8(d)(iv). (23) "Capital Expenditures" means the total amount of funds paid, or Liabilities incurred, by Seller (other than such as constitute Assumed Liabilities) for one or more of the projects listed on Schedule 1.1(23) during the period commencing on September 1, 1999 and ending on the Closing Date. (24) "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time. (25) "Closing" has the meaning set forth in Section 3.1. (26) "Closing Adjustment Amount" means an amount, calculated in a manner consistent with the calculation of the Target Adjustment Amount, equal to the sum, as of the Closing Date, of (a) the Net Book Value of Seller's right, title and interest in and to the Inventories plus (b) Capital Expenditures. (27) "Closing Date" has the meaning set forth in Section 3.1. (28) "Closing Date Benefits" has the meaning set forth in Section 6.8(e). (29) "Closing Payment" has the meaning set forth in Section 3.2(c). (30) "Closing Statement" has the meaning set forth in Section 3.3(a). (31) "COBRA" means Sections 601 through 608 of ERISA and Section 4980B of the Code. (32) "Code" means the Internal Revenue Code of 1986, as amended from time to time. 3 (33) "Commercial Arbitration Rules" has the meaning set forth in Section 8.3(c). (34) "Commercially Reasonable Efforts" means efforts which are reasonably within the contemplation of the Parties at the time of entering into this Agreement and which do not require the performing Party to expend funds other than expenditures which are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. (35) "Computer Systems" has the meaning set forth in Section 4.14. (36) "Conemaugh Station" means the generating station known as Conemaugh Station, located in the County of Indiana, Commonwealth of Pennsylvania, and related properties and assets. (37) "Confidentiality Agreement" means the Confidentiality Agreement, dated July 21, 1999, between Conectiv, a Delaware corporation, and Buyer. (38) "Courts" has the meaning set forth in Section 10.10. (39) "Deepwater Station" means the generating station known as Deepwater Station, located in the Town of Pennsville, County of Salem, State of New Jersey, and related properties and assets, all as more fully identified on Schedule 1.1(39) attached hereto. (40) "Direct Claim" has the meaning set forth in Section 8.2(c). (41) "Discrete Emission Reduction" means a unit of air emission reductions generated over a finite period of time in accordance with N.J.A.C. 7:27-30.1, et seq. (42) "Dorchester Property" means the approximately 247-acre site owned by DP&L located in the County of Dorchester, State of Maryland, and related properties and assets. (43) "DP&L" means Delmarva Power & Light Company, a Delaware and Virginia corporation. (44) "DP&L Related Purchase Agreements" means (i) the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by DP&L and Buyer, relating to the purchase and sale of the Indian River Station, the Vienna Station, the Dorchester Property, certain SO2 Allowances and NOx Emission Allowances, and certain related properties and assets; and (ii) the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by DP&L and Buyer, relating to the purchase and sale of DP&L's undivided 3.70% interest as tenant in common in the Keystone Station, DP&L's undivided 3.72% interest as tenant in common in the Conemaugh Station, and certain related properties and assets. 4 (45) "Easements" means, collectively, all easements, licenses, rights of way and other access rights to be granted by Buyer to Seller, or any Affiliate thereof, pursuant to the Access Agreement, and the easements, licenses, rights of way and other access rights reserved by Seller, or any Affiliate thereof, in the Limited Warranty Deeds, including such as authorize access, use, maintenance, construction, repair, replacement and other activities by Seller, or any Affiliate thereof, or otherwise necessary for Seller, or any Affiliate thereof, to operate its electrical transmission and distribution facilities, or information technology and telecommunications assets, or fulfill legal requirements applicable thereto. (46) "Emission Allowances" means Emission Reduction Credits, Discrete Emission Reductions, NOx Emission Allowances and SO2 Allowances. (47) "Emission Reduction Credits" means credits, in units that are established by the Governmental Authority with jurisdiction over the relevant Site that has obtained the credits, resulting from reductions in the emissions of air pollutants from an emitting source or facility (including and to the extent allowable under applicable Law, reductions resulting from shutdowns or control of emissions beyond that required by applicable Law) that have been certified by any applicable Governmental Authority as complying with the Law and regulations governing the establishment of such credits (including certification that such emissions reductions are enforceable, permanent, quantifiable and surplus), including air emissions reductions as described above that have been approved by the applicable Governmental Authority and are awaiting USEPA approval. The term also includes certified air emissions reductions, as described above, regardless as to whether the Governmental Authority certifying such reductions designates such certified air emissions reductions by a name other than "emission reduction credits." The term also includes "Creditable Emission Reductions," as defined by N.J.A.C. 7:27-18.1, but does not include "Discrete Emission Reductions" which are defined elsewhere in this Agreement. (48) "Employees" has the meaning set forth in Section 6.8(d). (49) "Encumbrances" means any and all mortgages, pledges, liens, claims, security interests, agreements, easements, activity and use limitations, restrictions, defects of title or encumbrances of any kind. (50) "Environmental Claims" has the meaning set forth in Section 8.1(c). (51) "Environmental Condition" means the presence or Release to the environment, whether at the Sites or otherwise, of Hazardous Substances, including any migration of Hazardous Substances through air, soil or groundwater at, to or from the Sites or at, to or from any Off-Site Location, regardless of when such presence or Release occurred or is discovered. 5 (52) "Environmental Laws" means all (a) Laws, in each case, as amended from time to time, relating to pollution or protection of the environment, natural resources or human health and safety, including Laws relating to Releases or threatened Releases of Hazardous Substances or otherwise relating to the manufacture, formulation, generation, processing, distribution, use, treatment, storage, Release, transport, Remediation, abatement, cleanup or handling of Hazardous Substances, (b) Laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Substances and (c) Laws relating to the management or use of natural resources. (53) "Environmental Permits" means all permits, certificates, licenses and authorizations of all Governmental Authorities under Environmental Laws. (54) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (55) "ERISA Affiliate" has the meaning set forth in Section 2.4(k). (56) "ERISA Affiliate Plans" has the meaning set forth in Section 2.4(k). (57) "Estimated Adjustment Amount" has the meaning set forth in Section 3.2(b). (58) "Excess Emission Allowances" has the meaning set forth in Section 2.1(h). (59) "Excess Merrill Creek Interests" has the meaning set forth in Section 2.1(i). (60) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (61) "Excluded Assets" has the meaning set forth in Section 2.2. (62) "Excluded Liabilities" has the meaning set forth in Section 2.4. (63) "FERC" means the United States Federal Energy Regulatory Commission, and any successor agency thereto. (64) "FIRPTA Affidavit" means the Foreign Investment in Real Property Tax Act Certification and Affidavit of Seller, to be delivered at the Closing, substantially in the form of Exhibit D hereto. (65) "Good Utility Practices" means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods or acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, would have been expected to 6 accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. (66) "Governmental Authority" means any executive, legislative, judicial, regulatory or administrative agency, body, commission, department, board, court, tribunal, arbitrating body or authority of the United States or any foreign country, or any state, local or other governmental subdivision thereof. (67) "Hazardous Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain polychlorinated biphenyls, (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law. (68) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time. (69) "IBEW" means Local 210 of the International Brotherhood of Electrical Workers. (70) "IBEW Collective Bargaining Agreements" has the meaning set forth in Section 6.8(c). (71) "Income Tax" means any Tax imposed by any Governmental Authority (a) based upon, measured by or calculated with respect to net income, profits or receipts (including capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including corporate franchise taxes) if one or more of such bases is described in clause (a), in each case, together with any interest, penalties or additions attributable thereto. (72) "Indemnifiable Loss" has the meaning set forth in Section 8.1(a). (73) "Indemnifying Party" has the meaning set forth in Section 8.1(e). (74) "Indemnitee" has the meaning set forth in Section 8.1(b). (75) "Independent Accounting Firm" means such nationally recognized, independent accounting firm as is mutually appointed by Seller and Buyer for purposes of this Agreement. 7 (76) "Indian River Station" means the generating station known as Indian River Power Plant, located in the town of Millsboro, County of Sussex, State of Delaware, and related properties and assets. (77) "Inspection" means all tests, reviews, examinations, inspections, investigations, verifications, samplings and similar activities conducted by Buyer or its Representatives with respect to the Purchased Assets prior to the Closing. (78) "Interconnection Agreement" means the interconnection agreement, between Seller, or an Affiliate thereof, and Buyer, to be delivered at the Closing, substantially in the form of Exhibit E hereto. (79) "Inventories" means coal, oil, tire-derived fuel and other fuel inventories, limestone, materials, spare parts, capital spare parts, consumable supplies and chemical and gas inventories (together with related freight, commodity and handling (other than on-site handling)) which are located at or in transit to the Wholly Owned Stations relating to the operation of the Wholly Owned Stations. (80) "ISRA" has the meaning set forth in Section 6.10(a)(i). (81) "Keystone Station" means the generating station known as Keystone Station located in Plumcreek Township, County of Armstrong, Commonwealth of Pennsylvania, and related properties and assets. (82) "Knowledge" means the actual knowledge of the directors and executive officers of the specified Person, which directors and executive officers are charged with responsibility for the particular function as of the date of this Agreement, or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of such certificate. (83) "Laws" means all laws, statutes, rules, regulations and ordinances of any Governmental Authority. (84) "Liability" or "Liabilities" means any liability or obligation (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due), including any liability for Taxes. (85) "Like-Kind Exchange" has the meaning set forth in Section 6.6(e). (86) "Limited Warranty Deeds" means the Limited Warranty Deeds, to be delivered at the Closing, substantially in the form of Exhibit F hereto, pursuant to which Seller will convey the Real Property to Buyer. 8 (87) "MAAC" means the Mid-Atlantic Area Council. (88) "Material Adverse Effect" means any change in or effect on the Purchased Assets or the operation of the Purchased Assets after the date hereof that is materially adverse to the operation or condition (financial or otherwise) of the Purchased Assets, taken as a whole, other than (i) any change or effect affecting the international, national, regional or local electric industry as a whole and not specific and exclusive to the Purchased Assets, (ii) any change or effect resulting from changes in the international, national, regional or local wholesale or retail markets for electricity, including any change in or effect on the structure, operating agreements, operations or procedures of Pennsylvania-New Jersey-Maryland Interconnection L.L.C. or its control area, (iii) any change or effect resulting from changes in the international, national, regional or local markets for any fuel used at each of the Wholly Owned Stations, (iv) any change or effect resulting from changes in the North American, national, regional or local electricity transmission systems or operations thereof, (v) changes in Law, or any judgments, orders or decrees that apply generally to similarly situated Persons, (vi) any change or effect to the extent constituting or involving an Excluded Asset or an Excluded Liability and (vii) any change in or effect on the Purchased Assets which is cured (including by payment of money) before the earlier of the Closing and the termination of this Agreement pursuant to Section 9.1. (89) "Merrill Creek" means the Merrill Creek Reservoir located in Harmony Township, County of Warren, State of New Jersey, as more fully identified on Schedule 1.1(89) attached hereto. (90) "Merrill Creek Interest" means Seller's 4.834% undivided interest as tenant in common without the right of partition in Merrill Creek. (91) "Net Book Value" means, as of any date, original cost (including related freight, commodity and handling (other than on-site handling)) less applicable depreciation and amortization, as reflected on Seller's books and records through such date in accordance with United States generally accepted accounting principles as applied by Seller on August 31, 1999. (92) "NJBPU" means the New Jersey Board of Public Utilities, and any successor agency thereto. (93) "NJDEP" means the New Jersey Department of Environmental Protection, and any successor agency thereto. (94) "Non-Union Employees" has the meaning as set forth in Section 6.8(d). (95) "NOx" means oxides of nitrogen. 9 (96) "NOx Budget Program" means Nitrogen Oxides Budget Program, which is a statutory or regulatory program promulgated by the United States or a state pursuant to which the United States or state provides for a limit on the oxides of nitrogen that can be emitted by all sources covered by the program and establishes allowances or authorizations, which in total are equal to the amount of oxides of nitrogen allowed by the limit, where each allowance or authorization represents a "right" to emit a unit of oxides of nitrogen, as the means for ensuring compliance with the limit. (97) "NOx Emission Allowance" means (a) an authorization by the NJDEP under its NOx Budget Program authorizing the emission of one ton of NOx during the ozone season, as such season is defined by the NJDEP; or (b) an authorization by the USEPA under any future NOx Budget Program promulgated by the USEPA, including any future program implemented in lieu of a state NOx Budget Program, authorizing the emission of one ton of NOx during the ozone season, as such season is defined by the USEPA. (98) "NTH" has the meaning set forth in Section 6.10(c)(ii). (99) "Off-Site Location" means any real property other than the Sites. (100) "Party" and "Parties" have the respective meanings set forth in the preamble to this Agreement. (101) "Permitted Encumbrances" means: (a) the Easements; (b) those exceptions to title to the Purchased Assets listed on Schedule 1.1(101); (c) statutory liens for Taxes or other charges or assessments of Governmental Authorities not yet due or delinquent, or which are being contested in good faith by appropriate proceedings; (d) mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business to the extent that they secure payment of obligations which are not in arrears or otherwise due and which have been incurred under Good Utility Practices; (e) zoning, entitlement, conservation restriction and other land use and environmental regulations by Governmental Authorities; and (f) with respect to any Station, such non-monetary Encumbrances as do not materially detract from the value of the Purchased Assets located at such Station, taken as a whole, as currently used, or materially interfere with the present use of the Purchased Assets located at such Station, taken as a whole. (102) "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, other business association or Governmental Authority. (103) "PJM" means the Pennsylvania-New Jersey-Maryland Power Pool, as established and administered by Pennsylvania-New Jersey-Maryland Interconnection L.L.C. 10 (104) "PJM Agreement" means the Operating Agreement dated June 2, 1997 of Pennsylvania-New Jersey-Maryland Interconnection L.L.C., as amended from time to time. (105) "Prime Rate" has the meaning set forth in Section 3.3(c). (106) "Proprietary Information" of a Party means all information about any Party or its properties or operations furnished to the other Party or its Representatives by such Party or its Representatives, after the date hereof, regardless of the manner or medium in which it is furnished. Proprietary Information does not include information that: (a) is or becomes generally available to the public, other than as a result of a disclosure by the other Party or its Representatives; (b) was available to the other Party on a non-confidential basis prior to its disclosure by the Party or its Representatives; (c) is or becomes available to the other Party on a non-confidential basis from a source other than such Party, provided that the source of such information was not known by such Party or its Representatives, after reasonable investigation, to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to such Party or any of its Representatives with respect to such material; (d) is independently developed by the other Party; or (e) was disclosed pursuant to the Confidentiality Agreement and remains subject to the terms and conditions of the Confidentiality Agreement. (107) "PUHCA" means the Public Utility Holding Company Act of 1935, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (108) "Purchase Price" has the meaning set forth in Section 3.2(a). (109) "Purchased Assets" has the meaning set forth in Section 2.1. (110) "Qualified Offer" has the meaning set forth in Section 6.8(d). (111) "Qualifying Use" has the meaning set forth in Section 6.11. (112) "Real Property" has the meaning set forth in Section 2.1(a). (113) "Related Purchase Agreements" means, collectively, the ACE Related Purchase Agreement and the DP&L Related Purchase Agreements. (114) "Release" means any release, spill, leak, discharge, disposal of, pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing to escape into or through the environment. (115) "Remediation" means an action of any kind to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Sites or an Off-Site Location, including the following activities to the extent they relate to, result from or arise out of the presence of a Hazardous Substance at the Sites or an Off-Site Location: 11 (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Sites or an Off-Site Location under Environmental Laws that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of removal actions on the Sites or an Off-Site Location, remedial technologies applied to the surface or subsurface soils, excavation and treatment or disposal of soils at an Off-Site Location, systems for long-term treatment of surface water or groundwater, engineering controls or institutional controls; and (f) any other activities reasonably determined by a Party to be necessary or appropriate or required under Environmental Laws to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Sites or an Off- Site Location. (116) "Remediation Standard" means a numerical standard (whether resulting from an enacted statute, promulgated regulation, guidance or policy document issued by a regulatory agency, or developed on a case-by-case basis through a risk assessment or other methodology authorized pursuant to an applicable Environmental Law) that defines the concentrations of Hazardous Substances that may be permitted to remain in any environmental media after a Remediation. (117) "Representatives" of a Person means, collectively, such Person's Affiliates and its and their respective directors, officers, partners, members, employees, representatives, agents, advisors (including accountants, legal counsel, environmental consultants, engineering consultants and financial advisors), parent entities and other controlling Persons. (118) "SEC" means the United States Securities and Exchange Commission, and any successor agency thereto. (119) "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (120) "Seller" has the meaning set forth in the preamble to this Agreement. (121) "Seller's Agreements" means, collectively, (i) the contracts, agreements, arrangements, licenses and leases of any nature to which, as of the date hereof, Seller is a party, or by or to which Seller or the Purchased Assets is bound or subject, and (ii) those contracts, agreements, arrangements, licenses and leases of any nature entered into by Seller on or after the date of this Agreement consistent with the terms of Section 6.1(iii), in each case, relating to the ownership, lease, maintenance or operation of the Purchased Assets, but excluding Benefit Plans. (122) "Seller's Indemnitee" has the meaning set forth in Section 8.1(a). 12 (123) "Seller's Pension Plan" has the meaning set forth in Section 6.8(e). (124) "Seller's Permits" has the meaning set forth in Section 4.13. (125) "Seller's Required Regulatory Approvals" has the meaning set forth in Section 4.3(b). (126) "Seller's Savings Plans" has the meaning set forth in Section 6.8(f). (127) "Sites" means the Real Property, forming a part, or used or usable in connection with the operation, of the Wholly Owned Stations and Merrill Creek, including any real property used for the disposal of solid or hazardous waste that is included in the Real Property. Any reference to the Sites shall include the surface and subsurface elements, to the extent owned by or subject to any interest of Seller, including the soil and groundwater present at the Sites, and any reference to materials or conditions "at the Sites", including Hazardous Substances and Environmental Conditions, shall include all materials and conditions "at, on, in, upon, over, across, under or within" the Sites. (128) "SO2" means sulfur dioxide. (129) "SO2 Allowance" means an authorization by the Administrator of the USEPA under the Clean Air Act, 42 U.S.C.ss. 7401, et seq., to emit one ton of sulfur dioxide during or after a specified calendar year. (130) "Statement" has the meaning set forth in Section 6.15(c). (131) "Stations" means, together, the B.L. England Station, the Deepwater Station and Merrill Creek. (132) "Subsidiary", when used in reference to any Person, means any entity of which outstanding securities or interests having ordinary voting power to elect a majority of the board of directors or other governing body performing similar functions of such entity are owned directly or indirectly by such Person. (133) "Tangible Personal Property" has the meaning set forth in Section 2.1(d). (134) "Target Adjustment Amount" means $15,488,000, which represents the Net Book Value, as of August 31, 1999, of Seller's right, title and interest in and to the Inventories, as calculated in the manner set forth on Schedule 1.1(134). (135) "Tax" or "Taxes" means all taxes, charges, fees, levies, penalties and other assessments imposed by any Governmental Authority, including income, gross receipts, excise, 13 property, sales, transfer, use, franchise, payroll, withholding, social security and other taxes, together with any interest, penalties or additions attributable thereto. (136) "Tax Return" means any return, report, information return or other document, together with all amendments and supplements thereto (including any related or supporting information), required to be supplied to any Governmental Authority responsible for the administration of Laws governing Taxes. (137) "Third-Party Claim" has the meaning set forth in Section 8.2(a). (138) "Title Commitments" means (i) the Title Commitment provided by Lawyers Title Insurance Corporation, dated October 8, 1999, relating to the B.L. England Station; (ii) the Title Commitment provided by Lawyers Title Insurance Corporation, dated October 13, 1999, relating to the Deepwater Station; and (iii) the Title Commitment provided by Lawyers Title Insurance Corporation, dated November 8, 1999, relating to Merrill Creek. (139) "Total Cash Compensation" has the meaning set forth in Section 6.8(d)(ii). (140) "Transfer Taxes" has the meaning set forth in Section 6.6(a). (141) "Transferable Permits" means those Permits and Environmental Permits (and all applications pertaining thereto) which are transferable under applicable Laws by Seller to Buyer (with or without a filing with, notice to, consent or approval of any Governmental Authority), as set forth on Schedule 1.1(141). (142) "Transferred Employee Records" means records of Seller that relate to Transferred Employees, but only to the extent that such records pertain to: (i) skill and development training, (ii) seniority histories, (iii) salary and benefit information, (iv) Occupational, Safety and Health Administration reports and (v) active medical restriction forms. (143) "Transferred Employees" has the meaning set forth in Section 6.8(d). (144) "Transferred Non-Union Employee" has the meaning set forth in Section 6.8(d). (145) "Transferred Savings Employees" has the meaning set forth in Section 6.8(f). (146) "Transferred Union Employee" has the meaning set forth in Section 6.8(a). (147) "Transition Services Agreement" means the Transition Services Agreement between Seller and Buyer, to be delivered at the Closing, substantially in the form of Exhibit G attached hereto. (148) "Transmission Assets" has the meaning set forth in Section 2.2(a). 14 (149) "Union Employees" has the meaning set forth in Section 6.8(a). (150) "USEPA" means the United States Environmental Protection Agency, and any successor agency thereto. (151) "Vienna Station" means the generating station known as Vienna Power Plant, located in the town of Vienna, County of Dorchester, State of Maryland, and related properties and assets. (152) "WARN Act" means the Worker Adjustment Retraining and Notification Act of 1988, as amended. (153) "Wholly Owned Stations" means, collectively, the B.L. England Station and the Deepwater Station. (154) "Year 2000 Compliance" has the meaning set forth in Section 4.14. 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the singular words include the plural, the masculine includes the feminine and neuter, and vice versa. In this Agreement, the term "includes" or "including" shall be deemed followed by the words "including without limitation." References herein to a section, article, Exhibit or Schedule mean a section, article, Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument constitutes a reference to that agreement or instrument as modified, amended, supplemented and restated through the date as of which such reference is made. 1.3 U.S. Dollars. When used herein, the term "dollars" and the symbol "$" refer to the lawful currency of the United States of America. ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Seller shall sell, assign, convey, transfer and deliver to Buyer, and Buyer shall purchase, assume and acquire from Seller, free and clear of all Encumbrances, except for the Permitted Encumbrances, all of Seller's right, title and interest in, to and under the following assets and properties, except as otherwise provided in Section 2.2, each as of the Closing Date (collectively, the "Purchased Assets"): (a) The real property (including all buildings and other improvements thereon and all appurtenances thereto) described on Schedule 4.9 (the "Real Property"); 15 (b) Such of the Merrill Creek Interests of Seller as are allocated by Seller on the date hereof to the operation of the Deepwater Station, consisting of entitlements to 273 acre feet of water; (c) The Inventories; (d) Machinery, equipment, vehicles, furniture and other personal property owned by Seller, located on the Real Property on the Closing Date (collectively, "Tangible Personal Property"), including the electrical transmission facilities (as opposed to generation facilities) and information technology and telecommunications assets set forth on Schedule 2.1(d); (e) The Seller's Agreements; (f) Subject to the receipt of necessary consents and approvals, the Transferable Permits; (g) The Emission Allowances identified on Schedule 2.1(g); (h) Such of the Emission Allowances of Seller as are identified on Schedule 2.1(h) (the "Excess Emission Allowances"); (i) Such of the Merrill Creek Interests as are identified on Schedule 2.1(i) (the "Excess Merrill Creek Interests"); (j) The names "B.L. England Generating Station" and "Deepwater Generating Station"; provided, however, that Buyer expressly acknowledges and agrees that the Purchased Assets do not include any right, title or interest in or to the names "Atlantic City Electric Company", "ACE" or any derivation thereof, as well as any related or similar name, or any other trade names, trademarks, service marks, corporate names and logos or any part, derivation, colorable imitation or combination thereof; (k) To the extent permitted by applicable Law, the Transferred Employee Records; (l) All books, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures, and similar items relating specifically to the Wholly Owned Stations (subject to the right of Seller to retain copies of same for its use), other than such items as are proprietary to third parties and accounting records; and 16 (m) The rights of Seller in, to and under all causes of action against third parties with respect to, arising out of or in connection with Seller's rights, title and interest in and to the Purchased Assets or the Assumed Liabilities, or any portion thereof, whether accruing prior to, on or after the Closing Date, other than any such causes of action as constitute Excluded Assets or Excluded Liabilities, whether received as payment or credit against future liabilities. 2.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall constitute or be construed as requiring Seller to sell, assign, convey, transfer or deliver, and Buyer shall not be entitled to purchase or acquire, any right, title or interest in, to or under any properties, assets, business, operation or division of Seller, or any Affiliate thereof, not expressly set forth in Section 2.1, including the following assets and properties which are hereby specifically excluded from the definition of Purchased Assets (collectively, the "Excluded Assets"): (a) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all electrical transmission or distribution facilities (as opposed to generation facilities) or information technology and telecommunications assets of Seller or any of its Affiliates located at or forming a part of either of the Wholly Owned Stations (whether or not regarded as a "transmission" or "generation" asset for regulatory or accounting purposes), including all switchyard facilities, substation facilities and support equipment, as well as all permits, contracts and warranties, to the extent they relate to such transmission and distribution assets or information technology and telecommunications assets (other than the electrical transmission facilities and information technology and telecommunications assets identified on Schedule 2.1(d), all of which are included as Purchased Assets) (collectively, the "Transmission Assets"); (b) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under certain switches and meters, gas facilities, revenue meters and remote testing units, drainage pipes and systems, pumping equipment and associated piping, in each case, located at or forming a part of the Wholly Owned Stations, as identified in the Access Agreement; (c) All certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities; (d) All cash, cash equivalents, bank deposits, accounts and notes receivable (trade or otherwise), prepaid expenses relating to the operation of the Purchased Assets and any income, sales, payroll or other Tax receivables (in each case, whether held by Seller or any third party); (e) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all intellectual property, including the names "Atlantic City 17 Electric Company", "ACE" or any derivation thereof, as well as any related or similar name, or any other trade names, trademarks, service marks, corporate names and logos, or any part, derivation, colorable imitation or combination thereof; (f) All tariffs, agreements and arrangements to which Seller or its Representatives is a party for the purchase or sale of electric capacity or energy, or for the purchase of transmission, distribution or ancillary services; (g) Subject to Section 6.16, the rights of Seller and its successors, assigns and Representatives in, to and under all causes of action against third parties relating to any Excluded Assets or Excluded Liabilities, if any, whether accruing prior to, on or after the Closing Date, including all claims for refunds, prepayments, offsets, recoupment, insurance proceeds, insurance distributions, dividends or other proceeds, condemnation awards, judgments and the like, whether received as payment or credit against future Liabilities, in each case, relating to any period prior to the Closing Date; (h) All Tax refunds or credits (including refunds or credits of real property Taxes paid or due with respect to the Wholly Owned Stations, Merrill Creek or any related Real Property), which refunds or credits are with respect to periods prior to the Closing Date, whether directly or indirectly, regardless of when actually paid; (i) All employment agreements and personnel records of Seller and their respective successors, assigns and Representatives, other than, to the extent permitted by applicable Law, Transferred Employee Records; (j) The minute books, stock transfer books, corporate seal and other corporate records of Seller and its successors, assigns and Representatives; (k) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all contracts, agreements, arrangements, licenses and leases of any nature, other than the Seller's Agreements; (l) Except as set forth in Section 6.8(f), all assets and properties owned or held by any Benefit Plan; (m) All insurance policies relating to the ownership, lease, maintenance or operation of the Purchased Assets; (n) All other assets and properties owned or leased by Seller or its successors, assigns and Representatives which are not used in the operation of the Wholly Owned Stations; (o) The right, title and interest of Seller and its successors, assigns and Representatives under this Agreement and the Additional Agreements; and 18 (p) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all Emission Allowances of Seller or any of its Affiliates (other than the Emission Allowances identified on Schedule 2.1(g) and the Excess Emission Allowances identified on Schedule 2.1(h)). 2.3 Assumed Liabilities. On the Closing Date, Buyer shall assume and agree to pay, perform and otherwise discharge, without recourse to Seller or its Affiliates, all of the Liabilities of Seller and its Affiliates, successors, assigns or Representatives which relate, directly or indirectly, to the Purchased Assets, other than Excluded Liabilities (collectively, the "Assumed Liabilities"), including the following such Liabilities: (a) All Liabilities of Seller under the Seller's Agreements and the Transferable Permits in accordance with the terms thereof, including the contracts, agreements, arrangements, licenses and leases of whatever nature entered into by Seller with respect to the Purchased Assets on or after the date hereof consistent with the terms of Section 6.1(iii), except, in each case, to the extent such Liabilities, but for a breach or default by Seller, would have been paid, performed or otherwise discharged prior to the Closing Date; (b) All Liabilities of Seller which relate to the Purchased Assets in respect of Taxes for which Buyer is liable pursuant to Section 3.5 or 6.6; (c) All Liabilities of Seller which relate to the Transferred Employees for which Buyer is responsible on or after the Closing Date pursuant to Section 6.8; (d) All Liabilities of Seller arising under or relating to Environmental Laws or relating to any claim in respect of Environmental Conditions or Hazardous Substances, whether based on common law or Environmental Laws, whether relating to the Sites or any Off-Site Location, including (i) any violation or alleged violation of Environmental Laws, whether prior to, on or after the Closing Date, with respect to the ownership, lease, maintenance or operation of any of the Purchased Assets, including any fines or penalties that arise in connection with the ownership, lease, maintenance or operation of the Purchased Assets on or after the Closing Date (but excluding all fines and penalties that arise in connection with the ownership, lease, maintenance or operation of the Purchased Assets prior to the Closing Date), and the costs associated with correcting any such violations; (ii) loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage arose or was made manifest before the Closing Date or arises or becomes manifest on or after the Closing Date) caused (or allegedly caused) by any Environmental Condition or the presence or Release of Hazardous Substances at, on, in, under, or migrating from the Purchased Assets prior to, on or after the Closing Date, including any Environmental Condition or Hazardous Substances contained in building materials at or migrating from the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or near the Purchased Assets; (iii) any Remediation (whether or not such Remediation commenced before the Closing Date or 19 commences on or after the Closing Date) of any Environmental Condition or Hazardous Substances that are present or have been Released prior to, on or after the Closing Date at, on, in, under, or migrating from, the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells or in other environmental media at or migrating from the Purchased Assets; (iv) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; and (v) any Remediation of any Environmental Condition or Release of Hazardous Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; provided that nothing set forth in this Section 2.3(d) shall require Buyer to assume any Liabilities that are Excluded Liabilities pursuant to Sections 2.4(e), 2.4(g), 2.4(h), 2.4(i) or 2.4(j); (e) With respect to the Purchased Assets, any Tax that may be imposed by any federal, state or local government on the ownership, lease, maintenance, use or sale of the Purchased Assets on or after the Closing Date, except for any Income Taxes attributable to income received by Seller; and (f) For purposes of clarification, Buyer acknowledges that it shall assume and be fully responsible for holding in its accounts sufficient SO2 Allowances and NOx Allowances to cover emissions of SO2 and NOx from all of the Sites for all of the calendar year in which the Closing occurs, including the period of such year prior to the Closing Date. 2.4 Excluded Liabilities. Notwithstanding Section 2.3, Buyer shall not assume or be obligated to pay, perform or otherwise discharge the following Liabilities of Seller (the "Excluded Liabilities"): (a) Any Liabilities of Seller in respect of any Excluded Assets or other assets of Seller which are not Purchased Assets, except to the extent caused by the acts or omissions of Buyer or its Representatives or Buyer's ownership, lease, maintenance or operation of the Purchased Assets; (b) Any Liabilities of Seller in respect of Taxes attributable to the Purchased Assets for taxable periods ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 3.5 or 6.6; (c) Any Liabilities of Seller arising from the breach prior to the Closing Date by Seller of any of the Seller's Agreements; 20 (d) Any and all Liabilities to third parties for personal injury or tort, or similar causes of action to the extent arising out of the ownership, lease, maintenance or operation of the Purchased Assets prior to the Closing Date, other than the Liabilities assumed by Buyer under Section 2.3(d); (e) Any fines or penalties imposed by any Governmental Authority resulting from any violation of law by Seller that occurred prior to the Closing Date; (f) Any payment obligations of Seller or its Affiliates for goods delivered or services rendered prior to the Closing Date, other than the Liabilities assumed by Buyer under Section 2.3(d); (g) Liability for Remediation of Environmental Conditions at, on, under or migrating from the Purchased Assets, but only to the extent that (i) such Liability arises out of or derives from the same facts which form the basis of a conviction, guilty plea or plea of nolo contendere by Seller for a violation of Environmental Laws by Seller; (ii) Seller's conviction, guilty plea or plea of nolo contendere was based on Seller's intentional and willful wrongful actions; and (iii) Seller's conviction, guilty plea or plea of nolo contendere arises from a matter as to which Seller has received written notice from a Governmental Authority on or before the sixth anniversary of the Closing Date. (h) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage arose or was made manifest before the Closing Date or arises or becomes manifest on or after the Closing Date) caused (or allegedly caused) by the disposal, storage, transportation, discharge, migration of, Release or recycling of Hazardous Substances at an Off-Site Location, or the arrangement for such activities, prior to the Closing Date, in connection with the ownership, lease, maintenance or operation of the Purchased Assets, provided that, for purposes of this Section, "Off-Site Location" does not include any location to which Hazardous Substances disposed of or Released at the Purchased Assets have migrated; (i) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with the Remediation (whether or not such Remediation commenced before the Closing Date or commences on or after the Closing Date) of Hazardous Substances that are disposed, stored, transported, discharged, migrating from, Released, recycled, or the arrangement of such activities, in connection with the ownership, lease, maintenance or operation of the Purchased Assets, at any Off-Site Location, prior to the Closing Date; provided that, for purposes of this Section, "Off-Site Location" does not include any location to which Hazardous Substances disposed of or Released at the Purchased Assets have migrated; (j) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with the ownership, lease, maintenance or operation by 21 Seller or its Affiliates of the Transmission Assets prior to, on or after the Closing Date, except to the extent caused by the acts or omissions of Buyer or Buyer's ownership, lease, maintenance or operation of the Purchased Assets; (k) Any Liabilities relating to any Benefit Plan maintained by Seller or any trade or business (whether or not incorporated) which is or ever has been under common control, or which is or ever has been treated as a single employer, with Seller under Section 414(b), (c), (m) or (o) of the Code ("ERISA Affiliate") or to which Seller and any ERISA Affiliate contributed thereunder (the "ERISA Affiliate Plans"), maintained by, contributed to, or obligated to contribute to, by Seller or any ERISA Affiliate, including any Liability (i) to the Pension Benefit Guaranty Corporation under Title IV of ERISA; or (ii) with respect to any noncompliance by Seller with ERISA or any other applicable Laws, but not including any Liabilities assumed by Buyer pursuant to Section 6.8; (l) Any Liabilities relating to the employment or termination of employment, including discrimination, wrongful discharge, unfair labor practices, or constructive termination by Seller of any individual, attributable to any action or inaction by Seller prior to the Closing Date other than such actions or inactions taken at the direction of Buyer; (m) Any obligation to provide continuation coverage under COBRA (and notice of the right to elect such coverage) to Transferred Employees, employees associated with the Purchased Assets who do not become Transferred Employees (and their dependents or former dependents), and former dependents of Transferred Employees who became eligible for continuation coverage under COBRA on account of a "qualifying event" (as defined under COBRA) occurring before the Closing Date (but not including any Liabilities assumed by Buyer pursuant to Section 6.8); and (n) Subject to Section 6.11, any Liabilities under the bonds listed on Schedule 6.11. 2.5 Control of Litigation. The Parties agree and acknowledge that Seller shall be entitled exclusively to control, defend and settle any suit, action or proceeding, and any investigation arising out of or relating to any Excluded Assets or Excluded Liabilities, and Buyer agrees to cooperate in connection therewith to the extent Seller reasonably requests; provided, however, that Buyer shall not be required to incur any out-of-pocket costs and Seller shall reimburse Buyer for the costs incurred by Buyer in making its employees available for such purpose, including the allocable amount of salaries and wages of such employees. 2.6 Inventories. Schedule 2.6 lists the quantities of Inventories relating to the Wholly Owned Stations that will be transferred at the Closing to Buyer, to the extent located at or in transit to any Wholly Owned Station on the Closing Date, together with the Net Book Value of Inventories, in each case, as of August 31, 1999. 22 ARTICLE III THE CLOSING 3.1 Closing. The sale, assignment, conveyance, transfer and delivery of the Purchased Assets by Seller to Buyer, and the purchase, assumption and acquisition by Buyer of the Purchased Assets and the Assumed Liabilities, and the consummation of the other transactions contemplated hereby, shall take place at a closing (the "Closing") to be held at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, One Rodney Square, Wilmington, Delaware, at 10:00 a.m. local time, on the first Business Day after August 31, 2000 that is ten (10) Business Days after the date on which the last of the conditions precedent to the Closing set forth in Sections 7.1(a) and (c), and Sections 7.2(a), (c) and (g) of this Agreement, shall have been satisfied or, to the extent permitted by applicable Law, waived by the Party for whose benefit such conditions precedent exist, or at such other date, time and location thereafter as may be agreed upon in writing between Buyer and Seller in order to facilitate the consummation by Seller of the transactions set forth on Schedule 3.1. The date on which the Closing actually occurs is hereinafter called the "Closing Date." The Closing shall be effective for all purposes as of 12:01 a.m., New York City time, on the Closing Date. 3.2 Payment of Purchase Price. (a) Upon the terms and subject to the conditions set forth in this Agreement, in consideration of the aforesaid sale, assignment, conveyance, transfer and delivery of the Purchased Assets, Buyer shall, at the Closing, (i) pay to Seller cash in the aggregate amount of $82,265,000 (the "Initial Amount") plus the amount, if any, by which the Closing Adjustment Amount exceeds the Target Adjustment Amount, or minus the amount, if any, by which the Target Adjustment Amount exceeds the Closing Adjustment Amount (the "Purchase Price"), and (ii) assume and agree to pay, perform and otherwise discharge the Assumed Liabilities. The Parties hereby acknowledge and agree that: (i) $12,077,000 of the Initial Amount shall be attributable to the Purchased Assets relating to the Deepwater Station, including the Emissions Allowances relating thereto (other than Excess Emission Allowances), the Merrill Creek Interests allocated on the date hereof to the operation thereof and the Excess Merrill Creek Interests; (ii) $102,000 of the Initial Amount shall be attributable to the NOx Emission Allowances relating to the Deepwater Station that are Excess Emission Allowances; (iii) $1,608,000 of the Initial Amount shall be attributable to the SO2 Emission Allowances relating to the Deepwater Station that are Excess Emission Allowances; and (iv) $68,478,000 of the Initial Amount shall be attributable to the remainder of the Purchased Assets, it being understood that each of the attributions set forth in clauses (i) and (iv) of this sentence shall be adjusted in a manner consistent with the final determination of the Purchase Price pursuant to Section 3.3. (b) At least five (5) Business Days prior to the Closing Date, Seller shall provide to Buyer its good faith estimate of the Closing Adjustment Amount, which estimate shall 23 be certified in writing by an appropriate officer of each Seller (the "Estimated Adjustment Amount"). (c) At the Closing, in furtherance but not in duplication of Section 3.2(a) and without limiting the generality of Section 3.7, Buyer shall pay to Seller cash in an aggregate amount equal to $82,265,000 plus the amount, if any, by which the Estimated Adjustment Amount exceeds the Target Adjustment Amount, or minus the amount, if any, by which the Target Adjustment Amount exceeds the Estimated Adjustment Amount (the "Closing Payment"). The Closing Payment shall be paid to Seller by Buyer at the Closing by wire transfer of immediately available funds to the account of Seller designated by Seller at least two (2) Business Days prior to the Closing Date. 3.3 Adjustment to Purchase Price. (a) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer, at Seller's sole cost and expense, a statement setting forth the Closing Adjustment Amount (the "Closing Statement"). Contemporaneously, Seller shall deliver to Buyer a schedule setting forth a calculation of the Purchase Price and the amount of any payment to be made, and by whom, pursuant to Section 3.3(c). (b) In the event that Buyer is in disagreement with the Closing Statement, and in the event that the aggregate amount of such disagreements exceeds $100,000, Buyer shall, within ten (10) Business Days after receipt of the Closing Statement, notify Seller of such disagreements setting forth with specificity the nature and amounts thereof. In the event that Buyer is in disagreement with only a portion of the Closing Statement, Buyer or Seller, as the case may be, shall pay all undisputed amounts in the manner set forth in Section 3.3(c); and all other amounts shall be paid at such time as all disagreements are resolved in accordance with this Section 3.3(b). If (i) the aggregate amount of the disagreements referred to in this Section 3.3(b) does not exceed $100,000 or (ii) Buyer fails to notify Seller of all disagreements within the ten (10) Business Day period provided for herein, then the Closing Statement, as delivered by Seller pursuant to Section 3.3(a), shall be final, binding and conclusive on the Parties hereto. If Buyer is in disagreement with the Closing Statement and notifies Seller within such ten (10) Business Day period, then the Parties shall promptly attempt to resolve such disagreements by negotiation. If the Parties are unable to resolve such disagreements within thirty (30) days following such notice of disagreement by Buyer, the Parties shall appoint an Independent Accounting Firm within forty-five (45) days following such notice, which shall review the Closing Statement and determine the Closing Adjustment Amount. Resolution of any disagreements shall be made by the Independent Accounting Firm in a writing addressed to all Parties within thirty (30) days following referral to it by the Parties of such disagreements in accordance with this Agreement. The findings of such Independent Accounting Firm shall be final, binding and conclusive on the Parties. All costs and fees of the Independent Accounting Firm shall be borne equally by Buyer and Seller. 24 (c) No later than the fifth (5th) Business Day following the determination of the Closing Adjustment Amount pursuant to Section 3.3(b), either (i) Seller shall pay Buyer the amount, if any, by which the Closing Payment exceeds the Purchase Price, or (ii) Buyer shall pay Seller the amount, if any, by which the Purchase Price exceeds the Closing Payment, in either case, together with simple interest accruing on such payment at the Prime Rate from the Closing Date through and including the date of payment, by wire transfer of immediately available funds to an account designated by the receiving Party. As used herein, "Prime Rate" means, as of any date, the prime rate as published in The Wall Street Journal on such date or, if not published on such date, on the most recent date of publication. 3.4 Tax Reporting and Allocation of Purchase Price. Consistent with the allocation set forth in Section 3.2(a), Buyer and Seller shall use their respective reasonable best efforts to agree in good faith upon an allocation among the Purchased Assets of the sum of the Purchase Price and the Assumed Liabilities consistent with Section 1060 of the Code and the Treasury Regulations thereunder within sixty (60) days after the Closing Date. In the event that the Parties cannot agree on a mutually satisfactory allocation within such sixty-day period, the Parties shall appoint an Independent Accounting Firm that shall, at Seller's and Buyer's joint expense, determine the appropriate allocation. The finding of such Independent Accounting Firm shall be final, binding and conclusive on the Parties. After determination of the allocation by agreement of the Parties or by binding determination of the Independent Accounting Firm, Buyer and Seller shall file, for the tax year in which the Closing occurs, Internal Revenue Service Form 8594, and all Tax Returns, in accordance with such allocation. Buyer and Seller shall report the transactions contemplated by this Agreement for United States federal Income Tax and all other Tax purposes in a manner consistent with the allocation determined pursuant to this Section 3.4. Buyer and Seller shall provide the other promptly with any information required to complete Form 8594. Buyer and Seller shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed-upon allocation of the Purchase Price and the Assumed Liabilities. 3.5 Prorations. (a) Buyer and Seller agree that, except as otherwise provided in this Agreement, all of the items customarily prorated relating to the ownership, lease, maintenance or operation of the Purchased Assets, including those listed below (but not including Income Taxes), shall be prorated as of the Closing Date, with Seller liable to the extent such items relate to any period prior to the Closing Date, and Buyer liable to the extent such items relate to any period on or after the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days): (i) Personal property, real estate and occupancy Taxes, assessments and other charges, if any, on or with respect to the ownership, lease, maintenance or operation of the Purchased Assets; 25 (ii) Rent, Taxes and all other items (including prepaid services and goods not included in Inventory), in each case, payable by or to Seller under any of the Seller's Agreements; (iii) Any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit; (iv) Sewer rents and charges for water, telephone, electricity and other utilities; (v) Insurance premiums paid on or with respect to the ownership, lease, maintenance or operation of the Purchased Assets to the extent payable under any policy or other arrangement included among the Seller's Agreements; and (vi) Prepaid operating and maintenance expenses. (b) Seller or Buyer, as the case may be, shall promptly reimburse the other Party that portion of any amount paid by such other Party to the extent relating to the period for which Seller or Buyer, as the case may be, is liable under Section 3.5(a), in each case, upon presentation of a statement setting forth in reasonable detail the nature and amount of any such payment. In connection with the prorations set forth in Section 3.5(a), if actual figures are not available on the Closing Date, the proration shall be calculated based upon the respective amounts accrued through the Closing Date or paid for the most recent year or other appropriate period for which such amounts paid are available. All prorated amounts shall be recalculated and paid to the appropriate Party within sixty (60) days after the date that the previously unavailable actual figures become available. Seller and Buyer shall furnish each other with such documents and other records as may be reasonably requested in order to confirm all proration calculations made pursuant to this Section 3.5. Notwithstanding anything to the contrary herein, no proration shall be made under this Section 3.5 with respect to (i) real property Tax refunds that are Excluded Assets under Section 2.2(h) or (ii) Taxes payable by Buyer pursuant to Section 6.6(a). 3.6 Deliveries by Seller. At the Closing, Seller shall deliver, or cause to be delivered, the following to Buyer: (a) One or more Limited Warranty Deeds, duly executed by Seller and in recordable form; (b) The Bills of Sale, duly executed by Seller; (c) The Assignment and Assumption Agreements, duly executed by Seller; (d) The Interconnection Agreement, duly executed by Seller; 26 (e) The Transition Services Agreement, duly executed by Seller; (f) The Access Agreement, duly executed by Seller and in recordable form; (g) Evidence, in form and substance reasonably satisfactory to Buyer, demonstrating that Seller has obtained the Seller's Required Regulatory Approvals set forth on Schedule 7.2(c); (h) A FIRPTA Affidavit, duly executed by Seller; (i) Copies, certified by the Secretary or Assistant Secretary of Seller, of resolutions authorizing the execution and delivery of this Agreement, each Additional Agreement to which Seller is a party and all of the other agreements and instruments, in each case, to be executed and delivered by Seller in connection herewith; (j) A certificate of the Secretary or Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement, each Additional Agreement to which Seller is a party and the other agreements and instruments contemplated hereby; (k) All such other agreements, documents, instruments and writings as shall, in the reasonable opinion of Buyer and its counsel, be necessary to sell, assign, convey, transfer and deliver to Buyer the Purchased Assets, in accordance with this Agreement and, where necessary or desirable, in recordable form, provided that Seller shall not be required to prepare or obtain any survey, abstract, title opinion or title insurance policy with respect to the Real Property; and (l) Such other agreements, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably required in connection herewith. 3.7 Deliveries by Buyer. At the Closing, Buyer shall deliver, or cause to be delivered, the following to Seller: (a) The Closing Payment, by wire transfer of immediately available funds in accordance with Seller's instructions to the account of Seller designated by Seller at least two (2) Business Days prior to the Closing Date; (b) The Assignment and Assumption Agreements, including an Assignment and Assumption Agreement with respect to all applicable obligations under the IBEW Collective Bargaining Agreements as they relate to Transferred Union Employees, duly executed by Buyer; (c) The Interconnection Agreement, duly executed by Buyer; 27 (d) The Transition Services Agreement, duly executed by Buyer; (e) The Access Agreement, duly executed by Buyer; (f) Evidence, in form and substance reasonably satisfactory to Seller, demonstrating that Buyer has obtained the Buyer's Required Regulatory Approvals set forth on Schedule 7.1(c); (g) A copy, certified by the Secretary or Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement, each Additional Agreement and all of the agreements and instruments, in each case, to be executed and delivered by Buyer in connection herewith; (h) A certificate of the Secretary or Assistant Secretary of Buyer identifying the name and title and bearing the signatures of the officers of Buyer authorized to execute and deliver this Agreement, each Additional Agreement to which Buyer is a party and the other agreements contemplated hereby; (i) All such other permits, agreements, documents, instruments and writings as shall, in the reasonable opinion of Seller and its counsel, be necessary for Buyer to purchase and acquire the Purchased Assets, and to assume the Assumed Liabilities, in each case, in accordance with this Agreement and, where necessary or desirable, in recordable form; and (j) Such other permits, agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably required in connection herewith. 3.8 Post-Closing Excluded Asset Deliveries. In the event that Seller or Buyer, or any of their respective Representatives, shall determine after the Closing that any Excluded Asset is in the possession of Buyer or any of its Representatives, Buyer shall, or shall cause any such Representative to, promptly, but in no event later than five (5) Business Days following such determination, pay or deliver, or cause to be paid or delivered, to Seller such Excluded Asset, at Buyer's sole cost and expense. 3.9 Relationship of this Agreement and Related Purchase Agreements. The transactions contemplated by this Agreement, together with the transactions contemplated by the Related Purchase Agreements, are intended by the Parties to be consummated substantially simultaneously; and if any of the transactions contemplated hereby or by any of the Related Purchase Agreements are not consummated simultaneously on the Closing Date in accordance with the terms and subject to the conditions set forth herein and therein, as applicable, then each Party shall take, or cause to be taken, all actions, and do, or cause to be done, all things, in each case, that are necessary to dissolve and invalidate all transactions contemplated hereby; provided, 28 however, that if the failure to consummate the transactions contemplated hereby or by the Related Purchase Agreements results from a default or breach of a party under this Agreement or any of the Related Purchase Agreements, then nothing in the foregoing shall preclude or limit the rights or remedies of any Party in connection with such default or breach. Notwithstanding any provision contained herein to the contrary, if all conditions to the obligations of all parties to this Agreement and the ACE Related Purchase Agreement to consummate the transactions contemplated hereby and thereby have been satisfied or, to the extent permitted by applicable Law, waived, but, for any reason, the transactions contemplated by the DP&L Related Purchase Agreements cannot be consummated simultaneously therewith, then the Parties shall, at Buyer's option and in its sole discretion, consummate the transactions contemplated by this Agreement and the ACE Related Purchase Agreement; provided, however, that nothing contained in this Section 3.9 shall be construed as relieving Buyer of any of its obligations under the DP&L Related Purchase Agreements, as set forth therein. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows (all such representations and warranties, except those set forth in Sections 4.1 and 4.2, being made to the Knowledge of Seller): 4.1 Organization; Qualification. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which its business as now being conducted requires it to be so qualified, except to the extent that the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. 4.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Seller of this Agreement and each Additional Agreement to which it is a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller. This Agreement has been duly and validly executed and delivered by Seller and, subject to the receipt of Seller's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Seller of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting 29 or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3 Consents and Approvals; No Violation. (a) Except as set forth on Schedule 4.3(a), subject to obtaining or making all Seller's Required Regulatory Approvals, neither the execution and delivery by Seller of this Agreement and the Additional Agreements to which it is a party nor the consummation by Seller of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the certificate or articles of incorporation or bylaws of Seller; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Seller is a party or by which it, or any of the Purchased Assets, may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite consents, approvals or waivers have been, or will be prior to the Closing obtained, or which would not, individually or in the aggregate, have a Material Adverse Effect; or (iii) constitute violations of any Law, order, judgment or decree applicable to Seller, which violations, individually or in the aggregate, would have a Material Adverse Effect. (b) Except for consents, approvals, filings and notices (i) required under the HSR Act or (ii) set forth on Schedule 4.3(b) (the consents, approvals, filings and notices referred to in clause (ii) of this sentence are collectively referred to herein as the "Seller's Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery by Seller of this Agreement and the Additional Agreements to which it is a party or the consummation by Seller of the transactions contemplated hereby or thereby, other than (i) such consents, approvals, filings and notices which, if not obtained or made, would not materially impair Seller's ability to perform its material obligations under this Agreement or such Additional Agreements; (ii) such consents, approvals, filings and notices which become applicable to Seller or the Purchased Assets as a result of the status of Buyer (or any of its Affiliates) or as a result of any other facts that specifically relate to the business or activities in which Buyer (or any of its Affiliates) is or proposes to be engaged; and (iii) such consents, approvals, filings and notices, the failure of which to obtain or make would not, individually or in the aggregate, have a Material Adverse Effect. 4.4 Insurance. Except as set forth on Schedule 4.4, all material policies of fire, liability, workers' compensation and other forms of insurance owned or held by, or on behalf of, Seller and insuring any Purchased Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and workers' compensation insurance policies), and no written notice of cancellation or termination has been received by Seller with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation or termination. Except as set forth on 30 Schedule 4.4, as of the date of this Agreement, Seller has not been refused any such insurance with respect to any Purchased Assets. 4.5 Title and Related Matters. Except for Permitted Encumbrances, Seller has good, valid and marketable title to the Real Property included in the Purchased Assets and has good and valid title to all other Purchased Assets, free and clear of all Encumbrances. 4.6 Environmental Matters. Except as set forth on Schedule 4.6: (a) Seller holds, and is in compliance with, all Environmental Permits that Seller requires in order to own, lease and operate the Purchased Assets, and Seller is otherwise in compliance with applicable Environmental Laws with respect to the ownership, lease, maintenance or operation of the Purchased Assets, except for such failures to hold or comply with required Environmental Permits, and such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof; (b) Seller has not received any written request for information, or been notified in writing that it is a potentially responsible party under CERCLA or any similar state law, with respect to any of the Sites, or any written notice relating to any Governmental Authority's allegation or investigation of any criminal violations by Seller of any Environmental Laws, except for requests or notices with respect to Liabilities as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof; and (c) Seller has not entered into or agreed to any consent decree or order under any Environmental Law relating to the Purchased Assets, and Seller is not subject to any outstanding judgment, decree or order relating to compliance with any Environmental Law or to the investigation or cleanup of Hazardous Substances under any Environmental Law relating to the Purchased Assets, except for such decrees, orders and judgments as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof. 4.7 Labor Matters. Seller has previously delivered to Buyer true and correct copies of all collective bargaining agreements to which Seller is a party or is subject and which relate to its Employees. With respect to the Employees, except as set forth on Schedule 4.7 and except for such matters as would not, individually or in the aggregate, have a Material Adverse Effect, (a) Seller is in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours; (b) Seller has not received written notice of any unfair labor practice complaint against it pending before the National Labor Relations Board; and (c) no material arbitration proceeding arising out of or under any collective bargaining agreement is pending against Seller. 31 4.8 Benefit Plans; ERISA. (a) Schedule 4.8(a) lists, as of the date of this Agreement, all material deferred compensation, profit-sharing, retirement and pension plans, and all material bonus, fringe benefit and other employee benefit plans, maintained or with respect to which contributions are made by Seller for the benefit of any Employee ("Benefit Plans"). True and complete copies of all such Benefit Plans have been made available to Buyer. (b) Except as set forth on Schedule 4.8(b) and except for such matters as would not, individually or in the aggregate, have a Material Adverse Effect: with respect to Employees, Seller has fulfilled its obligations under the minimum funding requirements of Section 302 of ERISA, and Section 412 of the Code, with respect to each of its "employee pension benefit plans" (as defined in Section 3(2) of ERISA), and each such plan is in compliance with the presently applicable provisions of ERISA and the Code; Seller has not incurred any liability under Section 4062(b) of ERISA to the Pension Benefit Guaranty Corporation in connection with any employee pension benefit plan relating to its Employees which is subject to Title IV of ERISA; Seller shall as soon as practicable after the date of this Agreement apply for a letter from the Internal Revenue Service for each employee pension benefit plan determining that such plan is exempt from United States federal income Tax under Sections 401(a) and 501(a) of the Code; and no withdrawal liability has been incurred by or asserted against Seller with respect to any employee pension benefit plan which is a "multiemployer plan" (as defined in Section 3(37) of ERISA). 4.9 Real Property. Schedule 4.9 sets forth a description of the Real Property. True and correct copies of all current surveys, abstracts, title opinions and policies of title insurance currently in force, in each case, in Seller's possession and relating to the Real Property, have been previously made available to Buyer. 4.10 Condemnation. As of the date hereof, Seller has not received any written notice of any pending or threatened proceedings or actions by any Governmental Authority to condemn or take by power of eminent domain all or any material part of the Purchased Assets. 4.11 Contracts and Leases. (a) Schedule 4.11(a) sets forth a list of all written Seller's Agreements, other than such contracts, licenses, agreements, arrangements and personal property leases as (i) are set forth in any other Schedule, (ii) constitute Excluded Assets or Excluded Liabilities, (iii) may be terminated after the Closing by Buyer upon notice of no more than ninety (90) days, (iv) involve future annual expenditures by Buyer after the Closing of $1,000,000 or less, (v) are expected to expire or terminate prior to the Closing or (vi) are entered into by Seller after the date hereof consistent with the terms of Section 6.1(iii). 32 (b) Except as set forth on Schedule 4.11(a), each Seller's Agreement set forth on Schedule 4.11(a): (i) constitutes the valid and binding obligation of Seller that is a party thereto and the other parties thereto and (ii) will continue in full force and effect after the Closing in accordance with its terms. (c) Except as set forth on Schedule 4.11(a), there is not under any Seller's Agreement set forth on Schedule 4.11(a) any default or event which, with notice or lapse of time or both, would constitute a default, on the part of Seller or any other party thereto, except such defaults as would not, individually or in the aggregate, have a Material Adverse Effect. 4.12 Legal Proceedings. Except as set forth on Schedule 4.12, there are no suits, actions or proceedings pending or, to the Knowledge of Seller, threatened against Seller by or before any Governmental Authority, which would, individually or in the aggregate, have a Material Adverse Effect or would materially impair Seller's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. Except as set forth on Schedule 4.12, Seller is not subject to any judgment, order or decree of any Governmental Authority which would, individually or in the aggregate, have a Material Adverse Effect or would materially impair Seller's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. 4.13 Permits. Seller holds, and is in compliance with, all permits, certificates, licenses and other authorizations of all Governmental Authorities (collectively, "Seller's Permits") that Seller requires in order to own the Purchased Assets, except for (a) Environmental Permits (which are governed by Section 4.6) and (b) such failures to hold, or comply with, Seller's Permits as would not, individually or in the aggregate, have a Material Adverse Effect. 4.14 Year 2000. Seller, with respect to all Computer Systems included in the Purchased Assets, has plans to achieve Year 2000 Compliance with respect to such Computer Systems and are using Commercially Reasonable Effects to execute and carry out such plans. "Computer Systems" means data processing hardware, software and firmware products (including embedded microcontrollers in non-computer equipment). "Year 2000 Compliance" means that the Computer Systems will correctly differentiate between years in different centuries that end in the same two digits, and will accurately process date/time data (including calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries. 4.15 Assets Used in Operation of the Wholly Owned Stations. Other than Emission Allowances and the Excluded Assets, the Purchased Assets include all material assets and properties that are used by Seller in the operation of the Wholly Owned Stations as electrical generation stations as of the date hereof. 33 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows (all such representations and warranties, except those set forth in Sections 5.1 and 5.2, being made to the Knowledge of Buyer): 5.1 Organization; Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Buyer is, or by the Closing will be, qualified to do business in the State of New Jersey. Buyer has heretofore delivered to Seller true and correct copies of its certificate or articles of incorporation and bylaws (or other similar governing documents) as currently in effect. 5.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each such Additional Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby or thereby have been duly and validly authorized by all necessary corporate action required on the part of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and, subject to the receipt of Buyer's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Buyer of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 5.3 Consents and Approvals; No Violation. (a) Except as set forth on Schedule 5.3(a), and subject to obtaining or making all Buyer's Required Regulatory Approvals, neither the execution and delivery by Buyer of this Agreement or the Additional Agreements to which it is a party nor the consummation by Buyer of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the certificate or articles of incorporation or bylaws (or other similar governing documents) of Buyer or any of its Subsidiaries; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer or any of its Subsidiaries is a party or by which Buyer, any such Subsidiary or any of their respective properties and assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite consents, approvals or waivers have been or will be prior to the Closing obtained, or which would not, individually or in the aggregate, 34 materially impair Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement, or to perform its material obligations hereunder or thereunder (a "Buyer Material Adverse Effect"); or (iii) constitute violations of any Law, order, judgment or decree applicable to Buyer or any of its Subsidiaries, which violations, individually or in the aggregate, would have a Buyer Material Adverse Effect. (b) Except for consents, approvals, filings and notices (i) required under the HSR Act or (ii) set forth on Schedule 5.3(b) (the consents, approvals, filings and notices referred to in clause (ii) of this sentence are collectively referred to herein as the "Buyer's Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery by Buyer of this Agreement and the Additional Agreements to which it is a party or the consummation by Buyer of the transactions contemplated hereby or thereby, other than such consents, approvals, filings or notices, which, if not obtained or made, would not have a Buyer Material Adverse Effect. 5.4 Buyer's Permits. Buyer holds, and is in compliance with, or on or prior to the Closing Date will hold, and from and after the Closing Date will comply with, all permits, certificates, licenses and other authorizations of all Governmental Authorities that Buyer requires in order to own, lease, maintain and operate the Wholly Owned Stations, including the Purchased Assets (collectively, "Buyer's Permits"). 5.5 Availability of Funds. Buyer has sufficient funds and lines of credit available to it, or has received binding written commitments from creditworthy financial institutions, true and correct copies of which have been provided to Seller, to permit Buyer on the Closing Date to pay the Purchase Price, all other amounts payable by Buyer hereunder or under any Additional Agreement, and all fees and expenses incurred by Buyer in connection with the transactions contemplated hereby and by the Additional Agreements, and to permit Buyer to timely pay or perform all of its other obligations (including its obligations pursuant to Article VIII) under this Agreement and the Additional Agreements. 5.6 Financial Statements. Buyer has provided Seller with true and correct copies of its balance sheet, income statement and statement of changes in cash flows of Buyer for each of its last three completed fiscal years, together with the related reports of its independent accountants, PricewaterhouseCoopers LLP, and for its most recently completed fiscal quarter ("Buyer's Financial Statements"). Buyer's Financial Statements have been prepared in accordance with United States generally accepted accounting principles consistently applied and fairly reflect, in all material respects, the financial position, results of operations and cash flow of Buyer at and for the periods therein. 5.7 Legal Proceedings. There are no suits, actions or proceedings pending or threatened against Buyer by or before any Governmental Authority, which would, individually or in the aggregate, have a Buyer Material Adverse Effect or would materially impair such Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement to 35 which it is a party. Buyer is not subject to any judgments, orders or decrees of any Governmental Authority which would, individually or in the aggregate, have a Buyer Material Adverse Effect or would materially impair such Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. 5.8 Qualified Buyer. Buyer is qualified to obtain and, after the Closing, retain all Buyer Permits, including Environmental Permits, necessary for Buyer to own, lease, maintain and operate the Wholly Owned Stations, including, from and after the Closing Date, the Purchased Assets. 5.9 Inspections. Buyer has, prior to the execution and delivery of this Agreement, reviewed the environmental site assessments prepared for Seller and set forth on Schedule 5.10. 5.10 WARN Act. Buyer does not intend to engage within sixty (60) days of the Closing Date in a "plant closing" or "mass layoff" as such terms are defined in the WARN Act. 5.11 Regulation as a Utility. Buyer is not subject to regulation as a public utility or public service company (or similar designation) by any Governmental Authority. ARTICLE VI COVENANTS OF THE PARTIES 6.1 Conduct of Business Relating to the Purchased Assets. Except as set forth on Schedule 6.1, as contemplated by this Agreement or any Additional Agreement or to the extent Buyer otherwise consents in writing, during the period from the date of this Agreement to the Closing Date, Seller shall operate the Purchased Assets in the ordinary course of business consistent with the past practices of Seller and in accordance with Good Utility Practices, and shall use all Commercially Reasonable Efforts to preserve intact the Purchased Assets, and endeavor to preserve the goodwill and relationships with customers, vendors, suppliers, employees and others having business dealings with it. Without limiting the generality of the foregoing, and, except as contemplated in this Agreement or as set forth on Schedule 6.1 or as required under applicable Law or by any Governmental Authority, between the date hereof and the Closing Date, without the prior written consent of Buyer, Seller shall not, with respect to the Purchased Assets: (i) Sell, lease (as lessor), encumber, pledge, transfer or otherwise dispose of, any Purchased Assets (except for Purchased Assets used, consumed or replaced in the ordinary course of business consistent with past practices of Seller or its Affiliates or with Good Utility Practices) other than (a) to any Affiliate of Seller, in which event, Seller shall cause such Affiliate to convey such Purchased Assets to Buyer at the Closing, or (b) to the extent that any 36 such action results in a Permitted Encumbrance of the type described in clauses (c), (d) or (f) of Section 1.1(101); (ii) Modify, amend or voluntarily terminate prior to the expiration date any of the material Seller's Agreements, other than (a) in the ordinary course of business, to the extent consistent with the past practices of Seller or its Affiliates or with Good Utility Practices or (b) as may be required in connection with transferring Seller's rights or obligations thereunder to Buyer pursuant to this Agreement; (iii) Enter into any contract, agreement, commitment or arrangement relating to the Purchased Assets (other than Capital Expenditures) that provides for future payments in any twelve-month period that individually exceed $1,000,000 or in the aggregate exceed $5,000,000, unless it is terminable by Seller without penalty or premium upon no more than ninety (90) days' notice; (iv) Except as otherwise required by the terms of the IBEW Collective Bargaining Agreements, Benefit Plans or applicable Law, (a) materially increase the salaries or wages of Employees prior to the Closing, (b) take any action prior to the Closing to effect a material change in the IBEW Collective Bargaining Agreements or Benefit Plans or (c) take any action prior to the Closing to materially increase the aggregate benefits payable to Employees; or (v) Except as otherwise provided herein, enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the prohibited transactions set forth in the foregoing paragraphs (i) through (iv). 6.2 Access to Information. (a) Between the date of this Agreement and the Closing Date, Seller shall: (i) give Buyer and its Representatives, during ordinary business hours and upon reasonable notice, reasonable access to all books, records, plans, offices and other facilities and properties in the possession of Seller included in the Purchased Assets; (ii) furnish Buyer with such financial and operating data and other information in the possession of Seller with respect to the Purchased Assets as Buyer may from time to time reasonably request; and (iii) furnish Buyer with all such other information in the possession of Seller as shall be reasonably necessary to enable Buyer to verify the accuracy of the representations and warranties of Seller contained in this Agreement; provided, however, that (A) any such inspections and investigations shall be conducted in such manner as not to interfere unreasonably with the operation of the Purchased Assets, (B) Seller shall not be required to take any action which would constitute a waiver of the attorney-client or other privilege, and (C) Seller need not supply Buyer with any information which Seller is under a legal or contractual obligation not to supply. Notwithstanding anything herein to the contrary, prior to the Closing Date, Buyer shall not have the right to perform or conduct, or cause to be performed or conducted, any environmental sampling or testing at, in, on or underneath any Wholly Owned Station, and Seller shall only furnish or provide such access to Employee 37 personnel records and files to the extent permitted by applicable Law and to the extent that such records and files pertain to the following: (i) skill and development training; (ii) seniority histories; (iii) salary and benefit information; (iv) Occupational, Safety and Health Administration reports; and (v) active medical restriction forms. (b) All information furnished to or obtained by Buyer and Buyer's Representatives pursuant to this Section 6.2 shall be Proprietary Information and shall be kept confidential in accordance with the terms of the Confidentiality Agreement. Nothing in this Section 6.2 is intended to or shall be deemed to amend, supplement or otherwise modify the obligations of Buyer, its Representatives or its Affiliates under the Confidentiality Agreement, all of which remain in effect until termination of such agreement in accordance with its terms. (c) For a period of seven (7) years from and after the Closing Date, each Party and its Representatives shall have reasonable access to all of the books and records of the Purchased Assets, including all Transferred Employee Records, in the possession of the other Party to the extent that such access may reasonably be required by such Party in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Purchased Assets or the Excluded Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the other Party with respect to such access pursuant to this Section 6.2(c). If the Party in possession of such books and records shall desire to dispose of any books and records upon or prior to the expiration of such seven-year period, such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at such other Party's cost and expense, to segregate and remove such books and records as such other Party may select. (d) Buyer shall not, prior to the Closing Date, contact any customer, vendor, supplier or employee of, or any other Person having business dealings with, Seller or its Affiliates with respect to any aspect of the Purchased Assets or the transactions contemplated hereby or by any Additional Agreement, without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed. 6.3 Public Statements. Except as required by applicable Law or by applicable rules of any national securities exchange, in which event the Parties shall consult with each other in advance, prior to the Closing Date, no press release or other public announcement, statement or comment in response to any inquiry relating to the transactions contemplated by this Agreement shall be issued, made or permitted to be issued or made by any Party or its Representatives without the prior written consent of the other Party. 6.4 Further Assurances. 38 (a) Subject to the terms and conditions of this Agreement, each of the Parties hereto shall use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the purchase and sale of the Purchased Assets pursuant to this Agreement and the assumption of the Assumed Liabilities, including using its reasonable best efforts to ensure satisfaction of the conditions precedent to each Party's obligations hereunder, including obtaining all necessary consents, approvals and authorizations of, and making all required notices or filings with, third parties required to be obtained or made in order to consummate the transactions hereunder, including the transfer of the Transferable Permits to Buyer. Seller shall cooperate with Buyer in its efforts to obtain all other Permits and Environmental Permits necessary for Buyer to operate the Purchased Assets. Buyer shall perform all conditions required of Buyer in connection with obtaining the Seller's Required Regulatory Approvals. No Party shall, without prior written consent of the other Party, take or fail to take any action which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) Without limiting the generality of Section 6.4(a): (i) In the event that any Purchased Asset shall not have been conveyed to Buyer at the Closing, Seller shall, subject to Section 6.4(b)(ii), use Commercially Reasonable Efforts after the Closing to convey such asset to Buyer as promptly as practicable. (ii) To the extent that Seller's rights under any material Seller's Agreement may not be assigned without the consent, approval or authorization of any third party which consent, approval or authorization has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign such right if an attempted assignment would constitute a breach of such Seller's Agreement or violate any applicable Law. If any consent, approval or authorization to the assignment of any material Seller's Agreement shall not be obtained, or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under such Seller's Agreement, such that Buyer would not acquire and assume the benefit and detriment of all such rights and obligations, Seller, at its option and to the fullest extent permitted by applicable Law and such Seller's Agreement, shall, after the Closing Date, appoint Buyer to be Seller's agent with respect to such Seller's Agreement, or, to the fullest extent permitted by applicable Law and such Seller's Agreement, enter into such reasonable arrangements with Buyer or take such other actions as are necessary to provide Buyer with the same or substantially similar rights and obligations under such Seller's Agreement. 6.5 Consents and Approvals. Without limiting the generality of Section 6.4(a): (a) As promptly as practicable after the date of this Agreement, Seller and Buyer shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice all notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder, as amended from time to time, with respect to the 39 transactions contemplated hereby and by the Additional Agreements. The Parties shall use their respective Commercially Reasonable Efforts to respond promptly to any requests for additional information made by such agencies, and to cause the applicable waiting period under the HSR Act to terminate or expire at the earliest possible date after the date of filing. Buyer shall pay all filing fees payable under the HSR Act but each Party shall bear its own costs and expenses of the preparation of any filing. (b) As promptly as practicable after the date of this Agreement, Seller and Buyer shall take, or cause to be taken, all actions, and do, or cause to be done, all things necessary, proper or advisable under applicable Laws to obtain all required consents and approvals of the NJBPU, the SEC and all other Governmental Authorities, and make all other filings and give all other notices required to be made prior to the Closing with respect to the transactions contemplated hereby and by the Additional Agreements. The Parties shall respond promptly to any requests for additional information made by such Persons, and use their respective Commercially Reasonable Efforts to cause all such consents and approvals to be obtained or waived at the earliest possible date after the date of filing. Each Party will bear its own costs of the preparation of any such filing or notice; provided, however, that Buyer shall bear all costs associated with experts and consultants reasonably necessary for the preparation of any such filing or notice or reasonably necessary to obtain such consents and approvals as promptly as practicable. (c) Seller and Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which Buyer would otherwise be liable for any Tax Liabilities of Seller pursuant to state or local Tax Law. (d) Without limiting the generality of Section 6.5(b), as promptly as practicable after the date hereof, Buyer shall make all filings required by the Federal Power Act. Prior to filing any application with the FERC, Buyer shall submit such application to Seller for review and comment and shall incorporate into such application all revisions reasonably requested. Buyer shall be solely responsible for the cost of preparing and filing such application, as well as all petition(s) for rehearing and all reapplications. If any filing is rejected by the FERC, Buyer shall petition the FERC for rehearing or permission to re-submit an application with the FERC, provided that, in either case, such action has been approved by Seller. 6.6 Certain Tax Matters. (a) All transfer, sales and similar Taxes ("Transfer Taxes") incurred in connection with this Agreement and the Additional Agreements, and the transactions contemplated hereby and thereby (including (i) sales Tax on the sale or purchase of the Purchased Assets imposed by New Jersey and (ii) transfer Tax on conveyances of interests in real property imposed by New Jersey) shall be borne by Buyer (and, to the extent paid by Seller, Buyer shall 40 reimburse Seller upon request); provided, however, that if, pursuant to Section 6.6(e), the transactions contemplated by this Agreement are effectuated as a Like-Kind Exchange, then Seller shall bear such Transfer Taxes to the extent that they exceed the amount of Transfer Taxes that would have otherwise been incurred had the transactions not been effectuated as a Like-Kind Exchange (and all such amounts shall be computed on an after-Tax basis). Buyer, at its expense, shall prepare and file, to the extent required by, or permissible under, applicable Law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable Law, Seller shall join in the execution of all such Tax Returns and other documentation; provided, however, that prior to the Closing Date, to the extent applicable, Buyer shall provide to Seller appropriate certificates of Tax exemption from each applicable Governmental Authority. (b) With respect to Taxes to be prorated in accordance with Section 3.5, Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing Date with respect to the Purchased Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Buyer's preparation of such Tax Returns shall be subject to Seller's approval, which approval shall not be unreasonably withheld or delayed. Buyer shall make each such Tax Return available for Seller's review and approval (which approval shall not be unreasonably withheld or delayed) no later than fifteen (15) Business Days prior to the due date for filing such Tax Return, it being understood that Seller's failure to approve any such Tax Return shall not limit Buyer's obligation to timely file such Tax Return and duly and timely pay all Taxes shown to be due thereon. (c) Buyer and Seller shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, audit or other examination, or any proceeding, by or before any Governmental Authority relating to Liability for Taxes, and each Party shall retain and provide the requesting Party with all books and records or other information which may be relevant to such Tax Return, audit, examination or proceeding. All books, records and information obtained pursuant to this Section 6.6(c) or pursuant to any other Section that provides for the sharing of books, records and information or review of any Tax Return or other instrument relating to Taxes shall be kept confidential by the parties hereto in accordance with the terms and conditions set forth in the Confidentiality Agreement. (d) In the event that a dispute arises between Seller and Buyer regarding Taxes or any amount due under this Section 6.6, the affected Parties shall attempt in good faith to resolve such dispute and any agreed-upon amount shall be promptly paid to the appropriate Party. If any such dispute is not resolved within thirty (30) days after notice thereof is given to any Party, the affected Parties shall submit the dispute to an Independent Accounting Firm for resolution, which resolution shall be final, binding and conclusive on such Parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of the Independent Accounting Firm in resolving the dispute shall be borne equally by Seller and Buyer. Any payment required to be made as a result of the resolution by the Independent Accounting Firm of 41 any such dispute shall be made within five (5) Business Days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. (e) As reasonably requested by Seller, Buyer shall cooperate with Seller in effectuating the transactions contemplated by this Agreement in such a manner as to qualify for deferred like-kind exchange treatment under Section 1031 of the Code ("Like-Kind Exchange") (including the transfer of cash and other property and the assignment of this Agreement to one or more qualified intermediaries and the execution of appropriate documentation). In such event, Seller shall be responsible, and shall indemnify Buyer for, any Transfer Taxes incurred by Buyer as a result of effectuating such Like-Kind Exchange to the extent that the amount of such Transfer Taxes exceeds the amount of Transfer Taxes that the Buyer would have otherwise incurred had the transactions not been effectuated as a Like-Kind Exchange (and all such amounts shall be computed on an after-Tax basis). At Buyer's request, Seller shall promptly provide Buyer copies of all documents prepared by Seller, including proposed agreements, relating to the Like-Kind Exchange and shall give Buyer a reasonable opportunity to promptly comment on such documents and agreements. (f) To the extent that any Party receives a Tax refund or credit with respect to a Tax that was paid or incurred by the other Party, such receiving Party shall promptly pay the amount of such Tax refund or credit to the other Party. 6.7 Advice of Changes. Prior to the Closing, each Party shall advise the other in writing with respect to any matter arising after the date of this Agreement of which that Party obtains Knowledge and which, if existing or occurring on or prior to the date of this Agreement, would have been required to be set forth in this Agreement, including any of the Schedules hereto. Seller shall, from time to time prior to the Closing, promptly supplement or amend the Schedules to this Agreement with respect to (a) any matter that existed as of the date of this Agreement and should have been set forth or described in any of the Schedules hereto and (b) any matter hereafter arising which, if existing as of the date of this Agreement, would have been required to be set forth or described in any of the Schedules hereto in order to make any representation or warranty set forth in this Agreement true and correct as of such date; provided, however, that, with respect to clause (a) above, any such supplemental or amended disclosure shall not be deemed to have been disclosed as of the date of this Agreement unless expressly consented to in writing by Buyer; and provided further, that, with respect to clause (b) above, any such supplemental or amended disclosure shall, for purposes of this Agreement, including for purposes of determining whether the conditions to Closing set forth in Article VII are satisfied, be deemed to have been disclosed as of the date of this Agreement. 6.8 Employees. (a) Buyer shall offer employment, effective as of the Closing Date, to all employees of Seller employed at the Wholly Owned Stations as of the Closing Date who are covered by any IBEW Collective Bargaining Agreement, including those employees absent from 42 active service due to illness or leave of absence (the "Union Employees"), pursuant to and in accordance with the applicable IBEW Collective Bargaining Agreement and applicable Law. Each Union Employee who becomes employed by Buyer pursuant to this Section 6.8(a) is referred to herein as a "Transferred Union Employee". Each Transferred Union Employee shall receive on or before the date that is thirty (30) days after the Closing Date a $4,500 lump sum signing bonus from Seller, less applicable withholdings. (b) Any Union Employee who refuses an offer of employment from Buyer shall be treated by Seller as a terminated employee under the terms of the IBEW Collective Bargaining Agreements. (c) Schedule 6.8(c) sets forth the collective bargaining agreements and amendments and supplements thereto to which Seller is a party with the IBEW in connection with the Wholly Owned Stations (as so amended and supplemented, "IBEW Collective Bargaining Agreements"). Transferred Union Employees shall retain their seniority and receive full credit for service with Seller and its Affiliates in connection with entitlement to vacation and all other benefits and rights under the IBEW Collective Bargaining Agreements to which seniority or years of service are applicable. On the Closing Date, Buyer shall assume the IBEW Collective Bargaining Agreements for the duration of their respective terms as they relate to Transferred Union Employees and other employees to be employed by Buyer or its Affiliates at the Wholly Owned Stations in positions covered by the IBEW Collective Bargaining Agreements, and Buyer shall comply with all applicable obligations under the IBEW Collective Bargaining Agreements. Buyer shall establish a pension plan and benefit programs for the duration of the remaining term of the IBEW Collective Bargaining Agreements which are substantially equivalent to Seller's plans and programs and shall provide, with respect to each benefit and coverage thereunder, at least the same level of benefits and coverage as Seller's plans and programs as of the Closing Date, all in accordance with the IBEW Collective Bargaining Agreements. Buyer shall recognize the IBEW as the collective bargaining agent for the Transferred Employees in positions covered by the IBEW Collective Bargaining Agreements. (d) Buyer may, but, except as set forth below, shall not be required to, offer employment, effective as of the Closing Date, to certain employees of Seller, to be agreed to by Buyer and Seller, who are (i) employed at the Wholly Owned Stations (other than Union Employees) or (ii) corporate support personnel identified by Seller within thirty (30) days after the date hereof (collectively, the "Non-Union Employees" and, together with Union Employees, "Employees"), provided that, Buyer shall hire its initial complement of management personnel from among the Non-Union Employees. Within ninety (90) days after the date hereof, Buyer shall notify Seller as to the identity of those Non-Union Employees to whom it intends to offer employment, provided that, during such period, Seller shall, upon reasonable notice and to the extent not disruptive to the operation of the Purchased Assets, provide Buyer with reasonable access to Non-Union Employees and, to the extent permitted by applicable Law, their personnel records. Each Non-Union Employee who becomes employed by Buyer pursuant to this Section 6.8(d) shall be referred to herein as a "Transferred Non-Union Employee" and, together with 43 Transferred Union Employees, the "Transferred Employees." Each Transferred Non-Union Employee shall receive on or before the date that is thirty (30) days after the Closing Date a lump sum signing bonus from Seller equal to 10% of such Transferred Non-Union Employee's base salary in the most recent calendar year ending prior to the Closing, less applicable withholdings. Any offer of employment to a Non-Union Employee that satisfies all of the following requirements is referred to herein as a "Qualified Offer": (i) Buyer shall offer such Non-Union Employee full-time employment with Buyer; provided, however, that nothing herein shall prevent Buyer from terminating any Transferred Non-Union Employee following the Closing Date for cause within twelve (12) months after the Closing and for any reason thereafter. (ii) Buyer shall pay and provide such Transferred Non-Union Employee annual compensation, bonus and other incentive opportunities (the "Total Cash Compensation") at a rate equal to at least 85% of such Transferred Non-Union Employee's Total Cash Compensation in the most recent calendar year ending prior to the Closing. (iii) The location of such Transferred Non-Union Employee's workplace must be no more than 50 miles from the location of such Transferred Non-Union Employee's workplace as of immediately prior to the Closing Date. (iv) Such Transferred Non-Union Employee shall be eligible to participate in such employee benefit plans, programs and arrangements of Affiliates of Buyer as are offered to similarly situated non-union employees of Buyer's operating Affiliates ("Buyer's Benefit Plans") and shall receive full credit for service with Seller and their Affiliates for eligibility, vesting and benefits entitlement purposes; provided, however, that such service shall not be required to be recognized to the extent that such recognition would result in a duplication of benefits. Buyer shall cause the Buyer's Benefit Plans to (x) waive all limitations as to pre- existing condition exclusions and waiting periods with respect to such Transferred Non-Union Employee under the employee welfare benefit plans (as such term is defined in Section 3(1) of ERISA) of Buyer or its Affiliates ("Buyer's Welfare Plans") to the extent such limitations or waiting periods that were in effect with respect to such Transferred Non-Union Employees under Seller's employee welfare plans have been satisfied as of the Closing Date, and (y) provide such Transferred Non-Union Employee with credit for any co-payments and deductibles paid prior to the Closing Date in satisfying any deductible or out-of-pocket requirements under the Buyer Welfare Plans (on a pro rata basis in the event of a difference in plan years). (e) With respect to each Transferred Employee's accrued benefit (based on service and compensation as of the Closing Date) (the "Closing Date Benefits"), Seller shall, effective as of the Closing Date, amend the Conectiv Retirement Plan ("Seller's Pension Plan") to (i) recognize service with Buyer for purposes of vesting the Closing Date Benefits in Seller's Pension Plan; (ii) recognize service with Buyer toward eligibility for receipt of subsidized early retirement and optional benefit forms with respect to the Closing Date Benefits under Seller's 44 Pension Plan; (iii) provide that retirement from Buyer's service shall be deemed retirement from active employment with Seller for purposes of eligibility for receipt of subsidized early retirement and optional benefit forms with respect to the Closing Date Benefits under Seller's Pension Plan; and (iv) provide that Closing Date Benefits cannot commence until the earlier of such Transferred Employee's actual retirement from Buyer's employment or attainment of age 65. The pension plan of Buyer ("Buyer's Pension Plan") shall recognize all prior service with Seller for purposes of vesting and benefit accrual for Transferred Union Employees (and, at Buyer's election, Transferred Non-Union Employees), and may offset the Closing Date Benefits from benefit accruals thereunder. Buyer and Seller shall provide each other with such records and information as may be necessary or appropriate to carry out their respective obligations under this Section 6.8(e) for the purposes of administration of Buyer's Pension Plan and Seller's Pension Plan. (f) As soon as practicable, and in any event within ninety (90) days after the Closing Date, Buyer shall establish or make available to Transferred Union Employees a defined contribution pension plan (or plans) and trust (or trusts) intended to qualify under Sections 401(a) and 501(a) of the Code (such plan or plans referred to as "Buyer's Savings Plan") in which all Transferred Union Employees shall be eligible to participate as of the later of the Closing Date or the Buyer's Savings Plan's Effective Date. Buyer's Savings Plan shall provide for deferral options and employer matching contributions with respect to the Transferred Union Employees who are participants in the Conectiv Savings & Investment Plan and the Atlantic City Electric Co. Savings Plan B (collectively, "Seller's Savings Plans") as of the Closing Date (such employees, the "Transferred Savings Employees") that are no less favorable than those provided as of immediately prior to the Closing Date to the Transferred Savings Employees under the Seller's Savings Plans (including an opportunity to make up for any lost deferrals and/or employer matching contributions that were unavailable because of a delay between the Closing Date and the effective date of Buyer's Savings Plan). Contributions to the Seller's Savings Plans with respect to the Transferred Savings Employees shall cease effective as of the Closing Date. Each Transferred Savings Employee shall be afforded the option of transferring his or her account balance into the Buyer's Savings Plan; provided, however, that if Seller is able to obtain a favorable ruling from the Internal Revenue Service to the effect that the consummation of the transactions contemplated hereby shall constitute a sale of substantially all of the assets used in a trade or business within the meaning of Section 401(k)(10) of the Code, each Transferred Savings Employee shall be afforded the option of rolling over his or her account balance into the Buyer's Savings Plan. Such transfers or rollovers shall satisfy the requirements of Section 414(l) of the Code and Section 208 of ERISA and shall be in the form of cash or other property, as Seller and Buyer shall mutually agree prior to such transfer or rollover. Prior to such transfer or rollover, Buyer will provide Seller with such documents and other information as Seller shall reasonably request to assure itself that Buyer's Savings Plan and the trust or trusts established pursuant thereto (i) provide for voluntary participant after-tax contributions and (ii) contain participant loan provisions and procedures necessary to effect the orderly transfer of participant loan balances associated with the transfer or rollover. In the event that a Transferred Savings Employee shall elect to leave his or her loan balance in one of Seller's Savings Plans, Buyer shall 45 cooperate with Seller in providing that such outstanding loan balance shall be repaid through payroll deductions from Buyer's payroll. Upon such transfer, Buyer's Savings Plan shall assume all Liabilities whatsoever with respect to all amounts transferred from Seller's Savings Plan to Buyer's Savings Plan in respect of the Transferred Savings Employees and Seller, its Affiliates and Seller's Savings Plan shall be relieved of all such Liabilities. Notwithstanding anything in this Section 6.8(f) to the contrary, no such transfer or rollover shall take place unless and until Seller have received written evidence of the adoption of Buyer's Savings Plan and the trust (or trusts) thereunder by Buyer and either (A) a copy of a favorable determination letter issued by the Internal Revenue Service and satisfactory to Seller's counsel with respect to Buyer's Savings Plan or (B) an opinion, satisfactory to Seller's counsel, of Buyer's counsel to the effect that the terms of Buyer's Savings Plan and its related trust or trusts qualify under Sections 401(a) and 501(a) of the Code. Buyer and Seller shall provide each other with such records and information as may be necessary or appropriate to carry out their obligations under this Section 6.8(f) for the purposes of administration of Buyer's Savings Plan, and they shall cooperate in the filing of documents required by the transactions described herein. (g) Buyer shall provide severance benefits as set forth on Schedule 6.8(g) to any Transferred Non-Union Employee (i) who, within the 12-month period immediately following the Closing Date, is terminated by Buyer or any of its Affiliates other than for cause (as defined on Schedule 6.8(g)) or (ii) with respect to such Persons who have received and accepted Qualifying Offers, whose terms and conditions of employment with Buyer or any of its Affiliates are changed during the 12-month period immediately following the Closing Date, such that such terms and conditions fail to satisfy all of the requirements set forth in clauses (i) through (iv) of Section 6.8(d). (h) Buyer shall provide notice of and the opportunity to purchase continuation coverage as required by COBRA to any dependent or former dependent of a Transferred Union Employee or Transferred Non-Union Employee who incurs a "qualifying event" (as such term is defined in COBRA) on or after the Closing Date, or who incurs a "qualifying event" prior to the Closing Date (other than a termination of employment or death of the employee) as to which notice is not provided to Seller or Buyer until the Closing Date or thereafter. (i) Seller shall be responsible, with respect to the Purchased Assets, for performing and discharging all requirements under the WARN Act and under applicable state and local Laws for the notification of Union Employees and Non-Union Employees of any "employment loss" (within the meaning of the WARN Act) which occurs prior to the Closing Date. (j) Notwithstanding any contrary provision of this Section 6.8, Buyer may, in its sole discretion and at its expense, choose to offer a voluntary early retirement or employment termination benefit program to any group of Union Employees or Non-Union Employees, and such program may be offered either before or after the Closing. Seller shall (i) cooperate with Buyer in the design, implementation and administration of such program; and (ii) provide Buyer 46 with such financial and demographic information as may be reasonably necessary for such design, implementation or administration. Buyer acknowledges and agrees that (x) any such program will require participating Employees to sign a release or waiver as a condition of receipt of benefits thereunder; (y) such release or waiver shall be designed and implemented in compliance with the requirements for valid waivers contained in the Age Discrimination in Employment Act, as amended, whether or not a participating Employee is protected by such Act; and (z) such release or waiver shall release Seller, its officers and subsidiaries, to the same extent that Buyer is released thereby. Buyer shall reimburse Seller for all reasonable out-of-pocket costs, fees and expenses incurred at the direction of Buyer in the design, implementation or administration of such program. 6.9 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the Tangible Personal Property included in the Purchased Assets shall be borne by Seller, other than loss or damage caused by the negligent acts or omissions of Buyer or any Buyer Representative, which loss or damage shall be the responsibility of Buyer. (b) Notwithstanding any provision hereof to the contrary, subject to Section 9.1(g), if, before the Closing Date, all or any portion of the Purchased Assets is (i) condemned or taken by eminent domain or is the subject of a pending or threatened condemnation or taking which has not been consummated, or (ii) materially damaged or destroyed by fire or other casualty, Seller shall notify Buyer promptly in writing of such fact, and (x) in the case of a condemnation or taking, Seller shall assign or pay, as the case may be, any net proceeds thereof to Buyer at the Closing and (y) in the case of a fire or other casualty, Seller shall either restore such damage or assign the insurance proceeds therefor to Buyer at the Closing. Notwithstanding the foregoing, if such condemnation, taking, damage or destruction results in a Material Adverse Effect, Buyer and Seller shall negotiate to resolve the loss resulting from such condemnation, taking, damage or destruction (and such negotiation shall include the negotiation of a fair and equitable adjustment to the Purchase Price). If no such resolution can be agreed upon within ninety (90) days after Seller has notified Buyer of such loss, then Buyer, on the one hand, or Seller, on the other hand, may terminate this Agreement pursuant to Section 9.1(g). 6.10 ISRA Compliance. Subject to Section 2.4(g), with respect to the Purchased Assets located within the State of New Jersey: (a) Prior to the Closing. (i) Prior to the Closing, Seller shall be responsible for taking all necessary actions to comply with the requirements of the New Jersey Industrial Site Recovery Act, N.J.S.A. 13:1K-6, et seq. ("ISRA"), including filing all necessary forms and conducting any Remediation as may be required by NJDEP criteria, procedures and time schedules. Buyer shall cooperate with Seller in connection with such compliance, including by executing any forms 47 necessary to allow the parties to consummate the transactions contemplated by this Agreement and the Additional Agreements in accordance with ISRA requirements. Seller shall promptly provide Buyer copies of all notices from NJDEP, correspondence with NJDEP, draft reports, submissions to NJDEP, work plans, proposed and final agreements, and final reports and shall give Buyer a reasonable opportunity to comment on any submissions Seller intends to deliver to the NJDEP prior to said submission. Seller shall not submit any reports, workplans, or proposed remedial actions to the NJDEP without Buyer's consent, such consent not to be unreasonably withheld, provided, that nothing herein shall require or force Seller to violate ISRA. (ii) At the Closing, Buyer shall reimburse Seller for all reasonable costs and expenses incurred by Seller in connection with actions taken by Seller to comply with ISRA prior to the Closing, including all costs and expenses of environmental consultants and engineers retained by Seller to comply with ISRA, but excluding attorneys' fees. (b) Closing Covenant. Seller and Buyer acknowledge and agree that in order to consummate the transactions contemplated by this Agreement and the Additional Agreements, it may be necessary for one or both of the parties to enter into one or more Remediation Agreements, as such term is used in ISRA, or alternative agreements or orders whereby the party executing such agreements or orders commits to comply with all requirements of ISRA after the Closing. Such Remediation Agreements or alternative agreements or orders may require the party or parties executing such agreements or orders to establish financial assurance in accordance with NJDEP regulations. Seller shall cooperate with Buyer in determining whether one or more Remediation Agreements, or alternative agreements or orders, are necessary to consummate the transactions contemplated by this Agreement and the Additional Agreements. If the Parties determine that one or more Remediation Agreements or alternative agreements or orders are necessary to effectuate the Closing, Buyer shall, to the extent permitted by applicable Law, execute all such agreements and orders with the NJDEP and provide all financial assurance required by the NJDEP in connection therewith. (c) Post-Closing. (i) After the Closing, Buyer shall be liable for compliance with ISRA in connection with all of the Purchased Assets that are subject to ISRA, including with respect to the investigation and Remediation of all areas of environmental concern or the Purchased Assets to the extent required by the NJDEP under ISRA, whether or not Buyer or Seller have executed any Remediation Agreements or alternative agreements or orders. Notwithstanding anything to the contrary herein, Buyer shall indemnify Seller for all Indemnifiable Losses or costs incurred by Seller after the Closing Date in connection with ISRA compliance in connection with the Purchased Assets, including, but not limited to, any penalties or costs related to a remedial investigation or Remediation incurred because of Buyer's failure to comply with ISRA or to comply with the terms of any Remediation Agreement or alternative agreement or order issued under ISRA. 48 (ii) Subject to the applicable provision of the Confidentiality Agreement, Seller does not, and shall not, object to Buyer's reasonable use of the Phase I and the Phase II Environmental Site Assessments prepared by NTH Consultants, Ltd. ("NTH") for the Deepwater Station and the B.L. England Station, for purposes of Buyer's compliance with ISRA after the Closing, including submission of such reports to the NJDEP to the extent that NTH does not object to such use or submission; and Seller shall, at Buyer's request and expense, use its reasonable best efforts to cause NTH to consent, if necessary, to such use and submission. 6.11 Tax Exempt Bonds. Buyer acknowledges that Seller financed the Purchased Assets set forth on Schedule 6.11 with the proceeds of tax-exempt bonds and that the continuing tax-exempt status of such bonds depends on the continuing qualifying use of such assets as property used to abate or control water or atmospheric pollution or contamination by removing, altering, disposing or storing pollutants, contaminants, water or heat within the meaning of Section 103(b)(4)(F) of the Code ("Qualifying Use"). In the event that the use of such assets is changed to a non-Qualifying Use on or before the maturity date of such bonds, as set forth on Schedule 6.11, Seller will be required to take certain action to comply with their obligations to maintain the tax-exempt status of those bonds. Accordingly, Buyer shall give Seller written notice of any change in the use of such assets from their current Qualifying Use that occurs before the maturity date of such bonds, as set forth on Schedule 6.11. Such notice shall be given at least ten (10) Business Days prior to such change in use. Notwithstanding the foregoing, Buyer shall not be deemed to have breached this Section 6.11 if Buyer shall abandon the use of such assets. In the event that Buyer sells or otherwise transfers such assets on or before the maturity date of such bonds, as set forth on Schedule 6.11, Buyer shall give written notice to Sellers at least ten (10) Business Days prior thereto and Buyer shall require the subsequent owner of such assets to covenant and agree to comply with the provisions of this Section 6.11. This covenant shall be included in any recorded deed of transfer of such assets and, to the extent applicable, will be considered a covenant that runs with the land. 6.12 Relocation of Transmission/Distribution Equipment. With respect to the Transmission Assets situated on the Real Property or otherwise constituting Excluded Assets, (i) Buyer shall reimburse Seller for all amounts expended by Seller in connection with the relocation of such Transmission Assets, which amounts shall not exceed the aggregate amount set forth on Schedule 6.12; (ii) Buyer shall provide Seller with reasonable access to the Real Property and the Transmission Assets for the purpose of relocating such Transmission Assets; and (iii) Buyer shall cooperate with Seller as fully as reasonably possible in order to facilitate Seller's relocation of such Transmission Assets. 6.13 Relocation of Information Technology and Communications Equipment. With respect to the information technology and communications assets or equipment of Seller situated on the Real Property or otherwise constituting Excluded Assets, (i) Buyer shall reimburse Seller for all amounts expended by Seller in connection with the relocation of such assets and equipment, which amount shall not exceed the aggregate amount set forth on Schedule 6.13; (ii) Buyer shall provide Seller with reasonable access to the Real Property and such Excluded Assets for the 49 purpose of relocating such Excluded Assets; and (iii) Buyer shall cooperate with Seller as fully as reasonably possible in order to facilitate Seller's relocation of such Assets. 6.14 PJM; MAAC. From and after the Closing Date, Buyer shall maintain membership in good standing in PJM and MAAC, and shall submit to the governance of the independent system operator established and administered under the PJM Agreement. 6.15 Emission Allowances. (a) Buyer and Seller shall take all necessary actions, including executing any required forms or providing appropriate notices to Governmental Authorities, in a timely fashion, to ensure that (i) Buyer will obtain all, or the rights to all, (A) Emission Allowances that are to be transferred to it pursuant to Section 2.1(g) and as set forth on Schedule 2.1(g), including the right to receive such Emission Allowances that are to be allocated or issued by a Governmental Authority in the future, and (B) Excess Emission Allowances that are to be transferred to it pursuant to Section 2.1(h) and as set forth on Schedule 2.1(h) and (ii) Seller will retain or obtain all, or the rights to all, Emission Allowances that are defined as Excluded Assets pursuant to Section 2.2(p), including the right to receive such Emission Allowances that are to be allocated or issued by a Governmental Authority in the future. Buyer and Seller further acknowledge and agree that such actions may be required before, on or after the Closing Date. (b) Notwithstanding anything in this Agreement to the contrary, Seller shall provide additional Emissions Allowances to Buyer in connection with Seller's operation of the Purchased Assets during the year of the Closing, or Buyer shall transfer Emissions Allowances to Seller, as follows: (i) SO2 Allowances. (A) Seller shall provide SO2 Allowances to Buyer based on the following formula: (1) Seller's emissions of SO2 (in tons) from the units subject to Title IV of the Clean Air Act, 42 U.S.C. ss. 7401, et seq., for the period of the year from and including January 1 of the year the transaction closes up to, but not including, the Closing Date; minus (2) Seller's Prorated SO2 Allowances. Seller's Prorated SO2 Allowances shall be determined by adding all of the SO2 Allowances set forth on Schedule 6.15(b)(i) from and including January 1 of the year in which the transaction closes up to, but not including, the Closing Date. If the result of this calculation is less than zero, then Buyer shall transfer to Seller SO2 Allowances equal to the absolute value of the result of the calculation set forth in this subsection. (B) If Schedule 6.15(b)(i) is not finalized as of the date of the execution of this Agreement, Seller hereby covenants to act in good faith to promptly prepare such schedule. Schedule 6.15(b)(i) shall be prepared as follows. First, Seller shall develop a projection of its SO2 emissions for each of the Purchased Assets for each calendar day for the year 2000. Second, Seller shall take the SO2 Allowances set forth on Schedule 2.1(g) for each 50 Purchased Asset for the year 2000 and allocate the SO2 Allowances to each calendar day for the year 2000 so that for each calendar day, the ratio of said SO2 Allowances to the total number of SO2 Allowances for the Purchased Asset set forth on Schedule 2.1(g) for the year 2000 shall equal the ratio of the projected SO2 emissions for each calendar day to the total number of projected SO2 emissions for the Purchased Asset for the year 2000. When completed, Schedule 6.15(b)(i) shall be a day-by-day schedule of SO2 Allowances for each of the Purchased Assets. The final form and substance of Schedule 6.15(b)(i) shall be subject to the agreement of Seller and Buyer, acting in good faith, consistent with the terms of this subsection. (ii) NOx Emission Allowances. (A) Seller shall provide NOx Emission Allowances to Buyer based on the following formula: (1) Seller's emissions of NOx (in tons) from the units subject to the NOx Budget Program of New Jersey for the period of the year from and including May 1 of the year in which the transaction closes up to, but not including, the Closing Date or September 30 of said year, whichever comes first; minus (2) Seller's Prorated NOx Emission Allowances. Seller's Prorated NOx Emission Allowances shall be determined by adding all of the NOx Emission Allowances set forth on Schedule 6.15(b)(ii) from and including May 1 of the year the transaction closes up to, but not including, the Closing Date or September 30 of the year the transaction closes, whichever comes first. If the result of this calculation is less than zero, than Buyer shall transfer to Seller an amount of NOx Emission Allowances equal to the absolute value of the result of the calculation set forth in this subsection. (B) If Schedule 6.15(b)(ii) is not finalized as of the date of the execution of this Agreement, Seller hereby covenants to act in good faith to promptly prepare such schedule after the relevant Governmental Authority finalizes the allocation of NOx Emission Allowances for the year 2000. Schedule 6.15(b)(ii) shall be prepared as follows. First, Seller shall develop a projection of its NOx emissions for each of the Purchased Assets for each calendar day from May 1, 2000 to and including September 30, 2000. Second, Seller shall take the NOx Emission Allowances set forth on Schedule 2.1(g) for each Purchased Asset for the year 2000 and allocate the NOx Emission Allowances to each calendar day for the period May 1, 2000 to and including September 30, 2000, so that for each such calendar day, the ratio of said NOx Emission Allowances to the total number of NOx Emission Allowances for the Purchased Asset set forth on Schedule 2.1(g) for the year 2000 shall equal the ratio of the projected NOx emissions for each such calendar day to the total number of projected NOx emissions for the Purchased Asset for the period May 1, 2000 to and including September 30, 2000. When completed, Schedule 6.15(b)(ii) shall be a day-by-day schedule of NOx Emission Allowances for each of the Purchased Assets. The final form and substance of Schedule 6.15(b)(ii) shall be subject to the agreement of Seller and Buyer, acting in good faith, consistent with the terms of this subsection. (iii) If it appears that the Closing of the transactions contemplated by this Agreement will not occur until after December 31, 2000, Seller shall prepare schedules that 51 will accomplish the same purpose as Schedules 6.15(b)(i) and 6.15(b)(ii) for calendar year 2001. Such schedules shall be prepared consistent with the terms of Section 6.15(b). (c) Buyer shall deliver to Seller, within thirty (30) days after Closing, a statement indicating the amount of SO2 Allowances and NOx Emission Allowances it is owed, or that it owes Seller, in accordance with the formulas set forth in subsection (b) (the "Statement"). The Statement shall be based on verified CEMs data for SO2 and NOx and shall include sufficient information to be evaluated by Seller. In the event that Seller is in disagreement with the Statement, Seller shall, within ten (10) calendar days after receipt of the Statement, notify Buyer of such disagreement setting forth with specificity the nature of such disagreement. If Seller fails to notify Buyer of all disagreements within the ten (10) calendar days provided for herein, then the Statement, as delivered by Buyer pursuant to Section 6.15(c), shall be final, binding and conclusive on the Parties hereto and the Party owing SO2 Allowances and/or NOx Emission Allowances to the other Party shall transfer such SO2 Allowances and/or NOx Emission Allowances (or make a payment in lieu of transferring such Emissions Allowances in accordance with Section 6.15(d)). If Seller is in disagreement with the Statement and notifies Buyer within such ten (10) calendar day period, then the Parties shall promptly attempt to resolve such disagreement by negotiation. If the Parties are unable to resolve such disagreements within fifteen (15) calendar days following such notice of disagreement, the Parties shall appoint an Independent Accounting Firm within thirty (30) calendar days following such notice, which shall review the Statement and any additional information related to the Statement submitted by either of the Parties and shall determine the amount of SO2 Allowances and/or NOx Emission Allowances owed by either of the Parties. Resolution of any such disagreements shall be made by the Independent Accounting Firm in a writing addressed to all Parties within thirty (30) calendar days following referral to it by the Parties of such disagreements in accordance with this Agreement. The findings of such Independent Accounting Firm shall be final, binding and conclusive on the Parties. All costs and fees of the Independent Accounting Firm shall be borne by Buyer and Seller equally. (d) The Party or Parties owing SO2 Allowances and/or NOx Emission Allowances calculated pursuant to this Section shall transfer the number of SO2 Allowances and/or NOx Emission Allowances owed to the other Party by no later than thirty (30) days prior to the dates by which Buyer must have sufficient SO2 Allowances and/or NOx Emission Allowances in its compliance accounts in order to comply with Title IV of the federal Clean Air Act or the NOx Budget Program of New Jersey. The NOx Emission Allowances and SO2 Allowances transferred hereunder shall have a vintage year that is the same as the year the transaction closes or, solely in the case of SO2 Allowances, a prior vintage year, unless the Party that is owed such Emission Allowances waives such requirement in writing. If the Party owing SO2 Allowances and/or NOx Emission Allowances does not or cannot meet this provision, the other Party shall be entitled to (i) acquire SO2 Allowances and/or NOx Emission Allowances equal to the number of additional SO2 Allowances and/or NOx Emission Allowances calculated pursuant to this Section and (ii) seek compensation from the owing Party for the cost of acquiring such additional 52 SO2 Allowances and/or NOx Emission Allowances, respectively ("Allowance Cost"), which shall be calculated based on the market price for such allowances as of the date such allowances are purchased; provided, that a Party that is owed SO2 Allowances and/or NOx Emission Allowances and has the right to purchase such Emission Allowances pursuant to this Section must purchase such Emission Allowances no later than 180 days after the date(s) by which the owing Party was to provide such Emission Allowances to the owed Party, as set forth in the first sentence of this subsection, in order to be entitled to receive compensation under this subsection. The Party that has the right to purchase SO2 Allowances and/or NOx Emission Allowances pursuant to this Section shall also be entitled to receive simple interest at the Prime Rate on the Allowance Cost, which shall accrue from the date(s) payment is due as provided in the following sentence through and including the date of payment by the owing Party. Payment shall be made no later than thirty (30) days after the owing Party receives an invoice from the owed Party for compensation, which invoice shall specify the market price of the Emissions Allowances acquired by the owed Party; provided, that the owing Party shall not be obligated to make such payment if it disputes the amount of compensation claimed by the owed Party within fifteen (15) days after receipt of the invoice from the owed Party. Any disputes concerning the compensation owed to Buyer under Section 6.15(d) shall be resolved through good faith negotiations between the Parties. Buyer and Seller shall be obligated to act reasonably to mitigate the Allowance Cost as set forth herein. Furthermore, notwithstanding anything to the contrary herein, Seller shall have no obligation to indemnify Buyer for any penalties or fines or other costs or expenses related to Buyer's failure to comply with the legal requirements of Title IV of the Clean Air Act or the NOx Budget Program of New Jersey. 6.16 Insurance Claims. Seller shall use its Commercially Reasonable Efforts to assist Buyer in making any claims relating to pre-Closing periods against any insurance policies of Seller that may provide coverage related to the Assumed Liabilities. 6.17 Reimbursement of Certain Metering Expenses. From and after the Closing, Buyer shall (i) reimburse Seller for reasonable amounts expended by Seller prior to the later to occur of December 31, 2000 and the date that is ninety (90) days after the Closing Date in connection with the installation, renovation or improvement of revenue quality meters and related equipment up to an aggregate amount of $1,500,000; and (ii) cooperate with Seller as fully as reasonably possible in order to facilitate Seller's installation, renovation or improvement of revenue quality meters and related equipment to the extent that such installation, renovation or improvement requires that Seller gain access to the Real Property after the Closing Date. ARTICLE VII CONDITIONS 7.1 Conditions to Obligation of Buyer. The obligation of Buyer to effect the transactions contemplated by this Agreement shall be subject to the satisfaction (or the waiver, to 53 the extent permitted by applicable Law, by Buyer) at or prior to the Closing of the following conditions: (a) The waiting period under the HSR Act applicable to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction, order or decree by any Governmental Authority which prevents the consummation of the transactions contemplated hereby or by the Additional Agreements shall have been issued and remain in effect (Buyer agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted), and no applicable Law shall be in effect which prohibits the consummation of the transactions contemplated hereby or thereby; (c) Buyer shall have obtained the Buyer's Required Regulatory Approvals set forth on Schedule 7.1(c), in form and substance reasonably satisfactory to Buyer (including any adverse conditions therein); and such Buyer's Required Regulatory Approvals shall be final and nonappealable; (d) Seller shall have in all material respects performed and complied with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date; (e) (i) The representations and warranties of Seller set forth in this Agreement that are qualified by reference to Material Adverse Effect shall be true and correct in all respects and (ii) the representations and warranties of Seller set forth in this Agreement that are not so qualified shall be true and correct in substantially all respects, in each case, as of the Closing Date as though made at and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date); (f) Buyer shall have received a certificate from an authorized officer of Seller, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.1(d) and (e) have been satisfied by Seller; (g) Buyer shall have received an opinion from Seller's counsel, which counsel shall be reasonably acceptable to Buyer, dated the Closing Date, substantially in the form of Exhibit H hereto; (h) There shall not have occurred any Material Adverse Effect during the period commencing on the date hereof and ending at the Closing; (i) Buyer shall be able to obtain at Closing an owner's policy or policies of title insurance issued on the form customarily used in New Jersey as applicable, insuring title to the Real Property in an amount equal to the Purchase Price relating to such Real Property, or 54 such lesser amount as Buyer elects, with exceptions only for Permitted Encumbrances, but without the so-called "standard" exceptions for (x) the rights of parties in possession, (y) unfiled mechanics' and materialmens' liens and (z) matters arising after the dates of the Title Commitments and with the creditors' rights exclusion to coverage deleted, without Buyer being obligated to pay more than $50,000 in aggregate additional premium in order for the issuer to delete or insure over title exceptions which are not Permitted Encumbrances. For purposes hereof "additional premium" means premium in excess of the amount that the title insurer has otherwise agreed to accept for issuing the policies of title insurance to Buyer in the requested amount; and (j) Subject to the last sentence of Section 3.9, the Related Purchase Agreements shall be in full force and effect and the valid and binding obligation of each party thereto (other than Buyer); and all conditions to the obligations of all parties to the Related Purchase Agreements to consummate the transactions contemplated thereby shall have been satisfied or, to the extent permitted by applicable Law, waived. 7.2 Conditions to Obligation of Seller. The obligation of Seller to effect the transactions contemplated by this Agreement shall be subject to the satisfaction (or the waiver, to the extent permitted by applicable Law, by Seller) at or prior to the Closing of the following conditions: (a) The waiting period under the HSR Act applicable to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the transactions contemplated hereby or by the Additional Agreements shall have been issued and remain in effect (Seller agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted), and no applicable Law shall be in effect which prohibits the consummation of the transactions contemplated hereby or thereby; (c) Seller shall have obtained the Seller's Required Regulatory Approvals set forth on Schedule 7.2(c), in form and substance reasonably satisfactory to Seller (including any adverse conditions therein), and all conditions to effectiveness prescribed therein or otherwise by Law shall have been satisfied in all material respects; and such Seller's Required Regulatory Approvals shall be final and nonappealable; (d) Buyer shall have in all material respects performed and complied with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer on or prior to the Closing Date; (e) (i) The representations and warranties of Buyer set forth in this Agreement that are qualified by reference to Buyer Material Adverse Effect shall be true 55 and correct in all respects and (ii) the representations and warranties of Buyer that are not so qualified shall be true and correct in substantially all respects, in each case, as of the Closing Date as though made at and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date); (f) Seller shall have received a certificate from an authorized officer of each Buyer, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.2(d) and (e) have been satisfied by Buyer; (g) To the extent that ISRA is applicable to any of the Purchased Assets that are being transferred pursuant to this Agreement, Seller shall have obtained, for each such Purchased Asset, either (i) a No Further Action Letter from the NJDEP; (ii) the approval of a Remedial Action Workplan (as such term is defined by ISRA); (iii) the execution of a Remediation Agreement (to be executed by Buyer to the extent allowed by ISRA) or an alternative agreement or order; or (iv) such other approval as may be authorized by the NJDEP in accordance with the requirements of ISRA; (h) Seller shall have received an opinion from Buyer's counsel, which counsel shall be reasonably acceptable to Seller, dated the Closing Date, substantially in the form of Exhibit I hereto; and (i) Subject to the last sentence of Section 3.9, the Related Purchase Agreements shall be in full force and effect and the valid and binding obligation of each party thereto (other than Seller); and all conditions to the obligations of all parties to the Related Purchase Agreements to consummate the transactions contemplated thereby shall have been satisfied or, to the extent permitted by applicable Law, waived. ARTICLE VIII INDEMNIFICATION AND ARBITRATION 8.1 Indemnification. (a) From and after the Closing Date, Buyer shall indemnify, defend and hold harmless Seller and its Representatives (each, a "Seller's Indemnitee"), from and against any and all claims, demands, suits, losses, liabilities, penalties, damages, obligations, payments, costs and expenses (including reasonable attorneys' fees and expenses in connection therewith) (each, an "Indemnifiable Loss"), asserted against or suffered by any Seller's Indemnitee relating to, resulting from or arising out of (i) any breach by Buyer of any covenant or agreement of Buyer contained in this Agreement, (ii) the Assumed Liabilities, (iii) any Inspection, (iv) the failure by Buyer to comply with ISRA with respect to the Purchased Assets that are subject thereto or (v) any Third-Party Claim against any Seller's Indemnitee in connection with Buyer's ownership, lease, maintenance or operation of any of the Purchased Assets on or after the Closing Date 56 (other than to the extent such Third-Party Claim constitutes an Excluded Liability); provided, however, that Buyer shall be liable to Seller pursuant to clause (i) of Section 8.1(a) only for Indemnifiable Losses for which any Seller's Indemnitee gives written notice to Buyer (setting forth with reasonable specificity the nature and amount of the Indemnifiable Loss) during the period for which such covenants or agreements survive the Closing in accordance with Section 10.6. (b) From and after the Closing, Seller shall indemnify, defend and hold harmless Buyer and its Representatives (each, a "Buyer's Indemnitee" and, together with Seller's Indemnitees, an "Indemnitee"), from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer's Indemnitee relating to, resulting from or arising out of (i) any breach by Seller of any covenant or agreement of Seller set forth in this Agreement or (ii) the Excluded Liabilities; provided, however, that Seller shall be liable pursuant to clause (i) of this Section 8.1(b) only for Indemnifiable Losses for which any Buyer's Indemnitee gives written notice to Seller (setting forth with reasonable specificity the nature and amount of the Indemnifiable Loss) during the period for which such covenants or agreements survive the Closing in accordance with Section 10.6. (c) In furtherance, and not in limitation, of the provisions set forth in Section 8.1(a), Buyer, for itself and on behalf of its Representatives, hereby irrevocably releases, holds harmless and forever discharges Seller from any and all Indemnifiable Losses of any kind or character, whether known or unknown, contingent or accrued, arising under or relating to Environmental Laws, or relating to any claim in respect of any Environmental Condition or Hazardous Substance, whether based on common law or Environmental Laws relating to the Purchased Assets, other than such Liabilities which have been retained by Seller hereunder (collectively, "Environmental Claims"). In furtherance of the foregoing, Buyer, for itself and on behalf of its Representatives, hereby irrevocably waives any and all rights and benefits with respect to such Environmental Claims that it now has, or in the future may have conferred upon it by virtue of any Law or common law principle, which provides that a general release does not extend to claims which a party does not know or suspect to exist in its favor at the time of executing the release, if knowledge of such claims would have materially affected such party's settlement with the obligor. In this connection, Buyer hereby acknowledges that it is aware that factual matters now unknown to it may have given, or hereafter may give, rise to Environmental Claims that are presently unknown, unanticipated and unsuspected, and Buyer further agrees that this release set forth in this Section 8.1(c) has been negotiated and agreed upon in light of that awareness, and Buyer, for itself and on behalf of its Representatives, nevertheless hereby intends irrevocably to release, hold harmless and forever discharge Seller from all such Environmental Claims. (d) The rights and remedies of Seller and Buyer set forth in this Article VIII are exclusive and in lieu of any and all other rights and remedies which Seller and Buyer may have under this Agreement, under applicable Law, whether at common law or in equity, 57 including for declaratory, injunctive or monetary relief, in each case, with respect to any Indemnifiable Loss. (e) Notwithstanding anything to the contrary herein, no Person (including an Indemnitee) shall be entitled to recover from any other Person (including any Party hereto required to provide indemnification under this Agreement (an "Indemnifying Party")) any amount in excess of the actual compensatory damages, court costs and reasonable attorneys' fees suffered by such Party. Buyer and Seller hereby irrevocably waive any right to recover punitive, special, exemplary and consequential damages arising in connection with or with respect to this Agreement (other than with respect to indemnification for a Third-Party Claim). (f) Any Indemnitee shall use Commercially Reasonable Efforts to mitigate all losses, damages and the like relating to a claim under the indemnification provisions in this Section 8.1, including availing itself of any defenses, limitations, rights of contribution, claims against third Persons and other rights at law or equity. For purposes of this Section 8.1(f), the Indemnitee's Commercially Reasonable Efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, and, in addition to its other obligations hereunder, the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking the mitigation. 8.2 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any suit, action or proceeding made or brought by any Person who is not an Indemnitee (a "Third-Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in no event later than ten (10) Business Days after the Indemnitee's receipt of notice of such Third-Party Claim. Such notice shall describe the nature of the Third- Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be incurred by the Indemnitee. The Indemnifying Party shall have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third-Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel. If an Indemnifying Party elects not to assume the defense of any Third-Party Claim, the Indemnitee may defend, compromise or settle such Third-Party Claim with counsel selected by it, provided that, without the prior written consent of the Indemnifying Party, the Indemnitee shall not agree to the entry of any judgment with respect to, or any compromise or settlement of, any Third-Party Claim, which judgment, compromise or settlement does not include the unconditional release of the Indemnifying Party. (b) If, within twenty (20) Business Days after an Indemnitee gives written notice to the Indemnifying Party of any Third-Party Claim, such Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the 58 defense of such Third-Party Claim as provided in Section 8.2(a), then the Indemnifying Party shall not be liable for any costs, fees or expenses subsequently incurred by the Indemnitee in connection with the defense, compromise or settlement thereof. (c) Subject to Section 8.3, any claim by an Indemnitee on account of an Indemnifiable Loss which does not constitute a Third-Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, in no event later than twenty (20) Business Days after the Indemnitee becomes aware of such Direct Claim, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, of such Indemnifiable Loss and the Indemnifying Party shall have a period of twenty (20) Business Days within which to respond to such Direct Claim. If the Indemnifying Party fails to respond during such twenty (20) Business Day period, the Indemnifying Party shall be deemed to have accepted such claim and, subject to this Article VIII, shall promptly reimburse the Indemnitee for the Indemnifiable Losses set forth in the Indemnitee's notice. (d) A failure to give timely notice as provided in this Section 8.2 shall not affect the rights or obligations of any Party hereunder except to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure. 8.3 Arbitration. (a) Notwithstanding any provision hereof to the contrary, in the event of any dispute between Seller and Buyer arising after the Closing (whether relating to facts, events or circumstances occurring or existing prior to, on or after the Closing Date) and relating to or arising out of any provision of this Agreement (other than disputes arising under Section 2.3, 2.4, 3.2, 3.3, 3.4, 6.6 or 8.1(a)(ii)), the Party asserting such dispute shall give written notice to the other of the fact that a dispute has arisen pursuant hereto. Such notice shall include (i) a statement setting forth in reasonable detail the facts, events, circumstances, evidence and arguments underlying such dispute and (ii) proposed arrangements for a meeting to attempt to resolve the dispute to be held within sixty (60) days after such notice is given. Within thirty (30) days after such notice is given, the other Party hereto shall submit to the Party giving such notice a written summary responding to such statement of facts, events, circumstances, evidence and arguments contained in the notice and an acceptance of or proposed alternative to the meeting arrangements set forth in the initial notice. (b) The chief executive officers (or any other executive officer or officers directly reporting to, and duly designated by, such chief executive officers) of each of the Parties shall meet at a mutually acceptable time and place to attempt to settle any dispute in good faith; provided, however, that such meeting shall be held at the principal offices of the Party receiving the notice of dispute unless otherwise agreed; and provided further, that any such meeting shall be held no later than sixty (60) days after the written notice of dispute is given pursuant to 59 Section 8.3(a). Each Party shall bear its own costs and expenses with respect to preparation for, attendance at and participation in such meeting. (c) In the event that (i) a meeting has been held in accordance with Section 8.3(b), (ii) any such dispute of the kind referred to in Section 8.3(a) shall not have been resolved at such meeting and (iii) the aggregate amount in dispute exceeds $100,000, then either Party may submit such dispute to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the "Commercial Arbitration Rules"). In the event that such dispute is submitted to arbitration pursuant to the Commercial Arbitration Rules, then the arbitration tribunal shall be composed of three arbitrators (one arbitrator selected by each Party within thirty (30) days after the meeting held in accordance with Section 8.3(b) with the third selected by the other two arbitrators or, in the absence of agreement between them, the American Arbitration Association), the venue of the arbitration shall be Wilmington, Delaware, the language of the arbitration shall be English and the arbitration shall commence no later than sixty (60) days after the meeting held in accordance with Section 8.3(b). The decision, judgment and order of the arbitration tribunal shall be final, binding and conclusive as to the Parties and their respective Representatives, and may be entered in court of competent jurisdiction. Other than the fees and expenses of the arbitrators, which shall be shared equally by the Parties, each Party shall bear its own costs and expenses (including attorneys' fees and expenses) relating to the arbitration. 8.4 Remediation of Matters Covered in Sections 2.4(g). With respect to the Liabilities as to which Seller has retained responsibility for Remediation pursuant to Section 2.4(g): (a) Seller shall have the right, but not the obligation, to control the management of any Remediation covered by this Section 8.4. With respect to Liabilities that are potentially covered by this Section 8.4, Seller must notify Buyer within thirty (30) days of receipt of notice of Buyer's claim for indemnification for such matter that it intends to undertake responsibility for said Remediation. Prior to a determination by Seller that it will undertake Remediation pursuant to this Section 8.4, Buyer shall, at Seller's expense, take only those actions necessary to comply with applicable Environmental Laws or as required by Governmental Authorities or address conditions that pose an immediate and acute environmental or health risk (unless additional actions are approved by Seller, such approval not to be unreasonably withheld or delayed). (b) Seller shall comply with all applicable Laws, including all applicable Environmental Laws, with respect to its performance pursuant to this Section 8.4. Seller shall promptly provide copies to Buyer of all notices, correspondence, draft reports, submissions, work plans, and final reports and shall give Buyer a reasonable opportunity (at Buyer's own expense) to promptly comment on any submissions Seller intends to deliver or submit to the appropriate regulatory body prior to said submission. Buyer may, at its own expense, hire its own consultants, attorneys or other professionals to monitor the investigation or remediation, including any field work undertaken by Seller, and Seller shall provide Buyer with the results of all such field 60 work. Notwithstanding the foregoing, Buyer shall not take any actions that shall unreasonably interfere with Seller's performance of the Remediation. Seller shall undertake any such work required herein in a manner designed to minimize any disruption, to the greatest extent possible, with the conduct of operations at the property. Buyer shall allow Seller reasonable access to conduct any of the work contemplated herein and shall fully cooperate with Seller in the performance of the Remediation, including providing Seller with reasonable access to employees and documents as necessary. (c) If Seller declines to undertake the performance of a Remediation hereunder, Buyer shall be entitled to control the investigation and remediation. Buyer shall promptly provide copies to Seller of all notices, correspondence, draft reports, submissions, work plans, and final reports and shall give Seller a reasonable opportunity (at Seller's own expense) to promptly comment on any submissions Buyer intends to deliver or submit to the appropriate regulatory body prior to said submission. Seller may, at its own expense, hire its own consultants, attorneys or other professionals to monitor the Remediation, including any field work undertaken by Buyer, and Buyer shall provide Seller with the results of all such field work. Notwithstanding the foregoing, Seller shall not take any actions that shall unreasonably interfere with Buyer's performance of the Remediation. Seller's decision to allow Buyer to undertake Remediation hereunder shall not limit or affect Seller's obligation to indemnify Buyer for said investigation and remediation as otherwise provided in this Agreement. (d) Without regard to whether Buyer or Seller is conducting a Remediation pursuant to this Section 8.4, the Parties agree that such Remediation will be conducted in a reasonable manner and consistent with the use of the Site in question as an electric generating station. Without limiting the foregoing, the Parties agree that they will conduct any such Remediation so that the Remediation Standard that is applicable to the Site is the least stringent Remediation Standard that would apply to the Site based on the current use of the Site, and Buyer furthermore covenants that it will accept a deed restriction or other reasonable institutional or engineering controls, including approval of a Classification Exception Area (as such term is defined by New Jersey Law), if such mechanisms will (A) allow the Remediation of the Site to be completed in the least cost manner in compliance with applicable Environmental Law and (B) not unreasonably interfere with operations at the Site. Notwithstanding the foregoing, if Buyer determines at or after the Closing that it desires a Remediation such that the Site is remediated to a more stringent Remediation Standard, it may do so, provided, that (x) if Seller is managing a Remediation pursuant to this Section 8.4, it has the right, to the extent permitted by Law, to cease conduct of the Remediation and request Buyer to assume the conduct of the Remediation and (y) notwithstanding which of the Parties conducts the Remediation, Buyer shall be liable for the costs and expenses associated with the Remediation to the extent those costs and expenses exceed those that would be associated with a Remediation Standard as determined by the previous sentence. 61 ARTICLE IX TERMINATION 9.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing by mutual written consent of the Parties. (b) This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, (i) at any time prior to the Closing if any court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable; (ii) at any time prior to the Closing if any Law shall have been enacted or issued by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated by this Agreement or by any Additional Agreement; or (iii) at any time after the first anniversary of the date of this Agreement if the Closing shall not have occurred on or before such date; provided, however, that the right to terminate this Agreement under this Section 9.1(b) (iii) shall not be available to any Party whose breach of this Agreement has caused, or resulted in, the failure of the Closing to occur on or before such date; and provided, further, that if on such date, the conditions to the Closing set forth in Section 7.1(c) or 7.2(c) shall not have been satisfied but all other conditions to the Closing shall be satisfied or shall be capable of being satisfied, then no Party shall be entitled to terminate this Agreement prior to the date which is 180 days after the first anniversary of the date of this Agreement. (c) This Agreement may be terminated by Buyer, upon written notice to Seller, if any of Buyer's Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Section 7.1(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied), and such denial was not caused by or the result of a breach of this Agreement by Buyer. (d) This Agreement may be terminated by Seller, upon written notice to Buyer, if any of the Seller's Required Regulatory Approvals, the receipt of which is a condition to the obligation of Seller to consummate the Closing as set forth in Section 7.2(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied), and such denial was not caused by or the result of a breach of this Agreement by Seller. (e) Except as otherwise provided in this Agreement, this Agreement may be terminated by Buyer, upon written notice to Seller, if there has been a breach by Seller of any covenant, agreement, representation or warranty contained in this Agreement which has had a Material Adverse Effect and such breach is not cured by the earlier of the Closing Date or the 62 date thirty (30) days after receipt by Seller of notice specifying in reasonable detail the nature of such breach, unless Buyer shall have previously waived such breach. (f) Except as otherwise provided in this Agreement, this Agreement may be terminated by Seller, upon written notice to Buyer, if there has been a material breach by Buyer of any covenant, agreement, representation or warranty contained in this Agreement which has had a Material Adverse Effect and such breach is not cured by the earlier of the Closing Date or the date thirty (30) days after receipt by Buyer of notice specifying in reasonable detail the nature of such breach, unless Seller shall have previously waived such breach. (g) This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, in accordance with the provisions of Section 6.9(b), provided that the Party seeking to so terminate shall have complied with its obligations under Section 6.9. 9.2 Effect of Termination. Upon termination of this Agreement prior to the Closing pursuant to Section 9.1, this Agreement shall be null and void and of no further force or effect (except that the provisions set forth in Section 6.3, this Section 9.2 and Article X, and the Confidentiality Agreement, shall remain in full force and effect in accordance with their respective terms); and no Party shall have any further Liability under this Agreement (other than for any wilful breach of its obligations hereunder). ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification. Subject to applicable Law, this Agreement may be amended, supplemented or otherwise modified only by written agreement entered into by all Parties. 10.2 Expenses. Except to the extent provided herein, whether or not the transactions contemplated hereby are consummated, all costs, fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs, fees and expenses, including the fees and commissions referred to in Section 10.3. Notwithstanding the foregoing, Buyer shall be responsible for the payment of, or reimbursement of Seller for, (a) all actual out-of-pocket costs, fees and expenses charged by Lawyers Title Insurance Corporation in connection with obtaining any title insurance policy and all endorsements thereto, including policy premiums, (b) all survey costs, fees and expenses, incurred by Buyer, (c) all survey costs, fees and expenses incurred by Seller on or prior to the date hereof, but, together with all such costs, fees and expenses incurred in connection with the Related Purchase Agreements, not in excess of $600,000, (d) all filing fees under the HSR Act and (e) all costs for experts and consultants in accordance with Section 6.5(b). 63 10.3 Fees and Commissions. Seller, on the one hand, and Buyer, on the other hand, represent and warrant to the other that, except for Credit Suisse First Boston, Inc. and Reed/Navigant Consulting Group, which are acting for and at the expense of Seller, and CIBC World Markets Corp., which is acting for and at the expense of Buyer, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by such Party or its Representatives. Seller, on the one hand, and Buyer, on the other hand, shall pay or otherwise discharge all such brokerage fees, commissions and finder's fees so incurred by such Parties. 10.4 Bulk Sales Laws. Buyer hereby acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provisions of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement; and Buyer hereby irrevocably waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions. 10.5 Waiver of Compliance; Consents. To the extent permitted by applicable Law, any failure of any of the Parties to comply with any covenant, agreement or condition set forth herein may be waived by the Party entitled to the benefit thereof only by a written instrument signed by such Party, but any such waiver shall not operate as a waiver of, or estoppel with respect to, any prior or subsequent failure to comply therewith. 10.6 No Survival. No representation or warranty contained in this Agreement shall survive the delivery of the Limited Warranty Deeds and the Closing. The covenants and agreements of the Parties contained in this Agreement shall survive the Closing in accordance with their respective terms. 10.7 Disclaimers. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE IV, THE PURCHASED ASSETS ARE SOLD "AS IS, WHERE IS", AND SELLER EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO SELLER AND THE PURCHASED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE IV: SELLER EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES REGARDING LIABILITIES, OWNERSHIP, LEASE, MAINTENANCE OR OPERATION OF THE PURCHASED ASSETS, THE TITLE, CONDITION, VALUE OR QUALITY OF THE PURCHASED ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE PURCHASED ASSETS; AND SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE PURCHASED ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL 64 REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL AUTHORITY, INCLUDING ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE PURCHASED ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER FURTHER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS OR WARRANTIES REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE PURCHASED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES OF ANY KIND REGARDING THE CONDITION OF THE PURCHASED ASSETS OR THE SUITABILITY OF THE PURCHASED ASSETS FOR OPERATION AS A POWER PLANT OR AS A FUEL PROCESSING FACILITY, AS APPLICABLE, AND NO SCHEDULE OR EXHIBIT TO THIS AGREEMENT, NOR ANY OTHER MATERIAL OR INFORMATION PROVIDED, OR COMMUNICATIONS MADE, BY SELLER OR ITS REPRESENTATIVES, INCLUDING ANY BROKER OR INVESTMENT BANKER, WILL CAUSE OR CREATE ANY SUCH REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE PURCHASED ASSETS. SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE NAMES "B.L. ENGLAND GENERATING STATION" AND "DEEPWATER GENERATING STATION", INCLUDING ALL REPRESENTATIONS AND WARRANTIES OF (1) TITLE; (2) LENGTH, NATURE, EXCLUSIVITY AND CONTINUITY OF USE; (3) STRENGTH OR FAME; AND (4) NONINFRINGEMENT AND NONDILUTION OF TRADEMARK, SERVICE MARK, TRADE NAME OR OTHER PROPRIETARY RIGHTS OF ANY THIRD PARTY. BUYER HEREBY ACKNOWLEDGES THAT THE NAMES "B.L. ENGLAND GENERATING STATION" AND "DEEPWATER GENERATING STATION" EACH HAVE A GEOGRAPHIC CONNOTATION ASSOCIATED WITH THE LOCATION OF CERTAIN OF THE PURCHASED ASSETS. 10.8 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on the day when delivered personally or by facsimile transmission (with confirmation), on the next Business Day when delivered to a nationally recognized overnight courier or five (5) Business Days after deposited as registered or certified mail (return receipt requested), in each case, postage prepaid, addressed to the recipient Party at its address set forth below (or at such other address or facsimile number for a Party as shall be specified by like notice; provided, however, that any notice of a change of address or facsimile number shall be effective only upon receipt thereof): (a) If to Seller, to: Conectiv 800 King Street 65 P.O. Box 231 Wilmington, Delaware 19899 Attention: Chairman Facsimile: (302) 429-3367 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square Wilmington, Delaware 19801 Attention: Steven J. Rothschild, Esquire Facsimile: (302) 651-3001 (b) if to Buyer, to: NRG Energy, Inc. 1221 Nicollet Mall, Suite 700 Minneapolis, Minnesota 55403 Attention: Vice President and General Counsel Facsimile: (612) 373-5392 with a copy to: Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, Minnesota 55402 Attention: Joseph T. Kinning, Esquire Facsimile: (612) 333-0066 10.9 Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests, obligations or remedies hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of the other Parties, nor is this Agreement intended to confer upon any other Person any rights, interests, obligations or remedies hereunder. Without limiting the generality of the foregoing, no provision of this Agreement shall create any third-party beneficiary rights in any Employee or former employee of Seller (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement except as expressly provided for thereunder. Notwithstanding the foregoing, (i) Seller may assign all or any portion of its rights, interests, obligations and remedies hereunder to Conectiv, a Delaware corporation, or any of Conectiv's wholly 66 owned subsidiaries; provided, however, that no such assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or (B) relieve or discharge Seller from any of its obligations hereunder; and (ii) Buyer may assign all or any portion of its rights, interests, obligations and remedies hereunder to (A) any of its wholly owned subsidiaries or (B) a trustee, lending institution or other Person solely for purposes of financing the transactions contemplated hereby; provided, however, that no such assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or (B) relieve or discharge Buyer from any of its obligations hereunder. 10.10 Governing Law; Forum; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (without giving effect to conflicts of law principles) as to all matters, including validity, construction, effect, performance and remedies. Venue in any and all suits, actions and proceedings related to the subject matter of this Agreement shall be in the state and federal courts located in and for the State of Delaware (the "Courts"), which shall have exclusive jurisdiction for such purpose, and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts and irrevocably waive the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding. Service of process may be made in any manner recognized by such Courts. Each of the Parties hereby irrevocably waives its right to a jury trial arising out of any dispute in connection with this Agreement or the transactions contemplated hereby. 10.11 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. 10.12 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or construction of this Agreement. Ambiguities and uncertainties in the wording of this Agreement shall not be construed for or against any Party, but shall be construed in the manner that most accurately reflects the Parties' intent as of the date of this Agreement. Each Party acknowledges that it has been represented by counsel in connection with the review and execution of this Agreement, and, accordingly, there shall be no presumption that this Agreement or any provision hereof be construed against the Party that drafted this Agreement. 10.13 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are made a part of this Agreement. 10.14 Entire Agreement. This Agreement (including the Schedules and Exhibits), together with the Confidentiality Agreement, embodies the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement and the Additional Agreements and supersedes all prior agreements and understandings between or 67 among the Parties with respect to such transactions. There are no representations, warranties, covenants or agreements between or among the Parties with respect to the subject matter set forth in such agreements, other than those expressly set forth or referred to herein or therein. Without limiting the generality of the foregoing, Buyer hereby acknowledges and agrees that there are no representations, warranties, covenants or agreements between or among the Parties with respect to the subject matter set forth in such agreements contained in any material made available to Buyer pursuant to the terms of the Confidentiality Agreement (including the Offering Memorandum dated June 18, 1999, previously provided to Buyer by or on behalf of Seller, Reed/Navigant Consulting Group and Credit Suisse First Boston, Inc.). [SIGNATURE PAGE FOLLOWS] 68 IN WITNESS WHEREOF, Seller and Buyer have caused this Purchase and Sale Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written. ATLANTIC CITY ELECTRIC COMPANY By: /s/ Thomas S. Shaw ---------------------------------- Name: Thomas S. Shaw Title: Executive Vice President NRG ENERGY, INC. By: /s/ Craig A. Mataczynski ---------------------------------- Name: Craig A. Mataczynski Title: Senior Vice President EX-10.C 3 dex10c.txt PURCHASE AND SALE AGREEMENT EXHIBIT 10-C PURCHASE AND SALE AGREEMENT BY AND BETWEEN ATLANTIC CITY ELECTRIC COMPANY AND NRG ENERGY, INC. DATED AS OF JANUARY 18, 2000 (ACE - JOINTLY OWNED STATIONS) LIST OF EXHIBITS AND SCHEDULES ------------------------------ EXHIBITS - -------- Exhibit A Form of Assignment and Assumption Agreement Exhibit B Form of Bill of Sale Exhibit C Form of FIRPTA Affidavit Exhibit D Form of Limited Warranty Deed Exhibit E Form of Seller's Legal Opinion Exhibit F Form of Buyer's Legal Opinion SCHEDULES - --------- 1.1(17) Capital Expenditures 1.1(28) Description of Conemaugh Station 1.1(66) Description of Keystone Station 1.1(85) Permitted Encumbrances 1.1(115) Target Adjustment Amount Methodology 1.1(121) Transferable Permits 2.1(c) Electrical Transmission Facilities 2.1(f) Emission Allowances to be Transferred to Buyer 2.1(g) Excess Emission Allowances 2.6 Inventories 4.3(a) Seller's Defaults and Violations 4.3(b) Seller's Consents and Approvals 4.4 Insurance Exceptions 4.6 Environmental Matters 4.7 Real Property 4.9(a) Seller's Agreements 4.10 Legal Proceedings 5.3(a) Buyer's Defaults and Violations 5.3(b) Buyer's Consents and Approvals 5.9 Environmental Site Assessments 7.1(c) Buyer's Required Regulatory Approvals 7.2(c) Seller's Required Regulatory Approvals i TABLE OF CONTENTS ----------------- ARTICLE I DEFINITIONS 1.1 Definitions......................................................1 1.2 Certain Interpretive Matters....................................13 1.3 U.S. Dollars....................................................13 1.4 Sellers' Interest in Jointly Owned Stations. ..................14 ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets..............................................14 2.2 Excluded Assets.................................................15 2.3 Assumed Liabilities.............................................17 2.4 Excluded Liabilities............................................18 2.5 Control of Litigation...........................................20 2.6 Inventories.....................................................20 ARTICLE III THE CLOSING 3.1 Closing.........................................................20 3.2 Payment of Purchase Price.......................................21 3.3 Adjustment to Purchase Price....................................21 3.4 Tax Reporting and Allocation of Purchase Price..................22 3.5 Prorations......................................................23 3.6 Deliveries by Seller............................................24 3.7 Deliveries by Buyer.............................................25 3.8 Post-Closing Excluded Asset Deliveries..........................26 3.9 Relationship of this Agreement and Related Purchase Agreements..26 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER 4.1 Organization; Qualification.....................................27 4.2 Authority.......................................................27 4.3 Consents and Approvals; No Violation............................27 4.4 Insurance.......................................................28 4.5 Title and Related Matters.......................................28 4.6 Environmental Matters...........................................28 4.7 Real Property...................................................29 4.8 Condemnation....................................................29 4.9 Contracts and Leases............................................29 4.10 Legal Proceedings...............................................30 ii 4.11 Permits.........................................................30 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER 5.1 Organization; Qualification.....................................30 5.2 Authority.......................................................31 5.3 Consents and Approvals; No Violation............................31 5.4 Buyer's Permits.................................................32 5.5 Availability of Funds...........................................32 5.6 Financial Statements............................................32 5.7 Legal Proceedings...............................................32 5.8 Qualified Buyer.................................................32 5.9 Inspections.....................................................33 5.10 Regulation as a Utility.........................................33 ARTICLE VI COVENANTS OF THE PARTIES 6.1 Access to Information...........................................33 6.2 Public Statements...............................................34 6.3 Further Assurances..............................................34 6.4 Consents and Approvals..........................................35 6.5 Certain Tax Matters.............................................36 6.6 Advice of Changes...............................................38 6.7 Risk of Loss....................................................38 6.8 PJM; MAAC.......................................................39 6.9 Emission Allowances.............................................39 ARTICLE VII CONDITIONS 7.1 Conditions to Obligation of Buyer...............................39 7.2 Conditions to Obligation of Seller..............................41 ARTICLE VIII INDEMNIFICATION AND ARBITRATION 8.1 Indemnification.................................................42 8.2 Defense of Claims...............................................44 8.3 Arbitration.....................................................45 8.4 Remediation of Matters Covered in Section 2.4(g)................46 ARTICLE IX TERMINATION iii 9.1 Termination.....................................................47 9.2 Effect of Termination...........................................48 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification......................................49 10.2 Expenses........................................................49 10.3 Fees and Commissions............................................49 10.4 Bulk Sales Laws.................................................49 10.5 Waiver of Compliance; Consents................................50 10.6 No Survival.....................................................50 10.7 Disclaimers.....................................................50 10.8 Notices.........................................................51 10.9 Assignment......................................................52 10.10 Governing Law; Forum; Service of Process........................52 10.11 Counterparts....................................................53 10.12 Interpretation..................................................53 10.13 Schedules and Exhibits..........................................53 10.14 Entire Agreement................................................53 iv PURCHASE AND SALE AGREEMENT --------------------------- PURCHASE AND SALE AGREEMENT, dated as of January 18, 2000 (this "Agreement"), by and between Atlantic City Electric Company, a New Jersey corporation ("ACE" or "Seller"), and NRG Energy, Inc., a Delaware corporation ("Buyer"). Seller and Buyer may be referred to herein individually as a "Party," and collectively as the "Parties." W I T N E S S E T H ------------------- WHEREAS, Seller owns minority interests in two fossil fuel-fired electric generating stations (referred to herein as the "Jointly Owned Stations"), and certain properties and assets associated therewith and ancillary thereto; and WHEREAS, Seller possesses certain Emission Allowances (as defined below) relating to the Jointly Owned Stations; and WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, or cause to be sold and assigned, the Purchased Assets (as defined below) and certain associated Liabilities (as defined below), upon the terms and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, representations, warranties and agreements set forth herein, and intending to be legally bound hereby, the Parties hereby agree as follows: ARTICLE I DEFINITIONS ----------- 1.1 Definitions. As used in this Agreement, the following capitalized terms have the meanings specified in this Section 1.1. (1) "ACE" has the meaning set forth in the preamble to this Agreement. (2) "ACE Related Purchase Agreement" means the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by Seller and Buyer, relating to the purchase and sale of the B.L. England Station, the Deepwater Station, certain Excess Merrill Creek Interests, certain SO2 Allowances and NOx Emission Allowances and certain related properties and assets. (3) "Additional Agreements" means the Limited Warranty Deeds, the Assignment and Assumption Agreement and the Bill of Sale. (4) "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act. (5) "Agreement" means this Purchase and Sale Agreement together with the Schedules and Exhibits hereto. (6) "Assignment and Assumption Agreements" means the assignment and assumption agreements between Seller and Buyer, to be delivered at the Closing, substantially in the form of Exhibit A hereto, pursuant to which Seller shall assign to Buyer the Seller's Agreements, certain intangible assets and certain other Purchased Assets, and Buyer shall accept such assignment and assume the Assumed Liabilities. (7) "Assumed Liabilities" has the meaning set forth in Section 2.3. (8) "B.L. England Station" means the generating station known as B.L. England Station, located in the Town of Beesley's Point, County of Cape May, State of New Jersey, and certain related properties and assets. (9) "Bill of Sale" means the bill of sale of Seller, to be delivered at the Closing, substantially in the form of Exhibit B hereto. (10) "Business Day" means any day other than Saturday, Sunday and any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. (11) "Buyer" has the meaning set forth in the preamble to this Agreement. (12) "Buyer Material Adverse Effect" has the meaning set forth in Section 5.3(a). (13) "Buyer's Financial Statements" has the meaning set forth in Section 5.5. (14) "Buyer's Indemnitee" has the meaning set forth in Section 8.1(b). (15) "Buyer's Permits" has the meaning set forth in Section 5.4. (16) "Buyer's Required Regulatory Approvals" has the meaning set forth in Section 5.3(b). (17) "Capital Expenditures" means the total amount of funds paid, or Liabilities incurred, by Seller (other than such as constitute Assumed Liabilities) for one or more of the projects listed on Schedule 1.1(17) during the period commencing on September 1, 1999 and ending on the Closing Date. 2 (18) "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time. (19) "Closing" has the meaning set forth in Section 3.1. (20) "Closing Adjustment Amount" means an amount, calculated in a manner consistent with the calculation of the Target Adjustment Amount, equal to the sum, as of the Closing Date, of (a) the Net Book Value of Seller's right, title and interest in and to the Inventories plus (b) Capital Expenditures. (21) "Closing Date" has the meaning set forth in Section 3.1. (22) "Closing Payment" has the meaning set forth in Section 3.2(c). (23) "Closing Statement" has the meaning set forth in Section 3.3(a). (24) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (25) "Commercial Arbitration Rules" has the meaning set forth in Section 8.3(c). (26) "Commercially Reasonable Efforts" means efforts which are reasonably within the contemplation of the Parties at the time of entering into this Agreement and which do not require the performing Party to expend funds other than expenditures which are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. (27) "Conemaugh Interest" means Seller's 3.83% undivided interest as tenant in common in Conemaugh Station. (28) "Conemaugh Station" means the generating station known as Conemaugh Station, located in the County of Indiana, Commonwealth of Pennsylvania, and related properties and assets, all as more fully identified on Schedule 1.1(28) attached hereto. (29) "Confidentiality Agreement" means the Confidentiality Agreement, dated July 21, 1999, between Conectiv, a Delaware corporation, and Buyer. (30) "Courts" has the meaning set forth in Section 10.10. (31) "Deepwater Station" means the generating station known as Deepwater Station, located in the Town of Pennsville, County of Salem, State of New Jersey, and certain related properties and assets. 3 (32) "Direct Claim" has the meaning set forth in Section 8.2(c). (33) "Dorchester Property" means the approximately 247-acre site owned by DP&L located in the County of Dorchester, State of Maryland, and related properties and assets. (34) "DP&L" means Delmarva Power & Light Company, a Delaware and Virginia corporation. (35) "DP&L Related Purchase Agreements" means (i) the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by DP&L and Buyer, relating to the purchase and sale of the Indian River Station, the Vienna Station, the Dorchester Property, certain SO2 Allowances and NOx Emission Allowances, and certain related properties and assets; and (ii) the separate Purchase and Sale Agreement, dated as of the date hereof, entered into by DP&L and Buyer, relating to the purchase and sale of DP&L's undivided 3.70% interest as tenant in common in the Keystone Station, DP&L's undivided 3.72% interest as tenant in common in the Conemaugh Station, and certain related properties and assets. (36) "Easements" means, collectively, all easements, licenses, rights of way and other access rights reserved by Seller, or any Affiliate thereof, in the Limited Warranty Deeds, including such as authorize access, use, maintenance, construction, repair, replacement and other activities by Seller, or any Affiliate thereof, or otherwise necessary for Seller, or any Affiliate thereof, to operate its electrical transmission and distribution facilities, or information technology and telecommunications assets, or fulfill legal requirements applicable thereto. (37) "Emission Allowances" means Emission Reduction Credits, NOx Emission Allowances and SO2 Allowances. (38) "Emission Reduction Credits" means credits, in units that are established by the Governmental Authority with jurisdiction over the relevant Site that has obtained the credits, resulting from reductions in the emissions of air pollutants from an emitting source or facility (including, and to the extent allowable under applicable Law, reductions resulting from shutdowns or control of emissions beyond that required by applicable Law) that have been certified by any applicable Governmental Authority as complying with the Law and regulations governing the establishment of such credits (including certification that such emissions reductions are enforceable, permanent, quantifiable and surplus), including air emissions reductions as described above that have been approved by the applicable Governmental Authority and are awaiting USEPA approval. The term also includes certified air emissions reductions, as described above, regardless as to whether the Governmental Authority certifying such reductions designates such certified air emissions reductions by a name other than "emission reduction credits." 4 (39) "Encumbrances" means any and all mortgages, pledges, liens, claims, security interests, agreements, easements, activity and use limitations, restrictions, defects of title or encumbrances of any kind. (40) "Environmental Claims" has the meaning set forth in Section 8.1(c). (41) "Environmental Condition" means the presence or Release to the environment, whether at the Sites or otherwise, of Hazardous Substances, including any migration of Hazardous Substances through air, soil or groundwater at, to or from the Sites or at, to or from any Off-Site Location, regardless of when such presence or Release occurred or is discovered. (42) "Environmental Laws" means all (a) Laws, in each case, as amended from time to time, relating to pollution or protection of the environment, natural resources or human health and safety, including Laws relating to Releases or threatened Releases of Hazardous Substances or otherwise relating to the manufacture, formulation, generation, processing, distribution, use, treatment, storage, Release, transport, Remediation, abatement, cleanup or handling of Hazardous Substances, (b) Laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Substances and (c) Laws relating to the management or use of natural resources. (43) "Environmental Permits" means all permits, certificates, licenses and authorizations of all Governmental Authorities under Environmental Laws. (44) "Estimated Adjustment Amount" has the meaning set forth in Section 3.2(b). (45) "Excess Emission Allowances" has the meaning set forth in Section 2.1(g). (46) "Excess Merrill Creek Interests" means the interests of Seller in the Merrill Creek Reservoir located in Harmony Township, County of Warren, State of New Jersey, which are to be sold to Buyer pursuant to the ACE Related Purchase Agreement. (47) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (48) "Excluded Assets" has the meaning set forth in Section 2.2. (49) "Excluded Liabilities" has the meaning set forth in Section 2.4. (50) "FERC" means the United States Federal Energy Regulatory Commission, and any successor agency thereto. 5 (51) "FIRPTA Affidavit" means the Foreign Investment in Real Property Tax Act Certification and Affidavit of Seller, to be delivered at the Closing, substantially in the form of Exhibit C hereto. (52) "Governmental Authority" means any executive, legislative, judicial, regulatory or administrative agency, body, commission, department, board, court, tribunal, arbitrating body or authority of the United States or any foreign country, or any state, local or other governmental subdivision thereof. (53) "Hazardous Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain polychlorinated biphenyls, (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law. (54) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time. (55) "Income Tax" means any Tax imposed by any Governmental Authority (a) based upon, measured by or calculated with respect to net income, profits or receipts (including capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including corporate franchise taxes) if one or more of such bases is described in clause (a), in each case, together with any interest, penalties or additions attributable thereto. (56) "Indemnifiable Loss" has the meaning set forth in Section 8.1(a). (57) "Indemnifying Party" has the meaning set forth in Section 8.1(f). (58) "Indemnitee" has the meaning set forth in Section 8.1(b). (59) "Independent Accounting Firm" means such nationally recognized, independent accounting firm as is mutually appointed by Seller and Buyer for purposes of this Agreement. (60) "Indian River Station" means the generating station known as Indian River Power Plant, located in the Town of Millsboro, County of Sussex, State of Delaware, and related properties and assets. 6 (61) "Inspection" means all tests, reviews, examinations, inspections, investigations, verifications, samplings and similar activities conducted by Buyer or its Representatives with respect to the Purchased Assets prior to the Closing. (62) "Inventories" means coal, oil, tire-derived fuel and other fuel inventories, limestone, materials, spare parts, capital spare parts, consumable supplies and chemical and gas inventories (together with related freight, commodity and handling (other than on-site handling)) which are located at or in transit to the Jointly Owned Stations relating to the operation of the Jointly Owned Stations. (63) "Jointly Owned Stations" means, together, Conemaugh Station and Keystone Station. (64) "Jointly Owned Stations Operating Agreements" means, together, (i) the Operating Agreement, dated December 1, 1967, as amended, among Pennsylvania Electric Company, ACE, Baltimore Gas and Electric Company, DP&L, Metropolitan Edison Company, Pennsylvania Power & Light Company, Philadelphia Electric Company, Potomac Electric Power Company, Public Service Electric and Gas Company and UGI Corporation, with respect to the ownership and operation of Conemaugh Station and (ii) the Operating Agreement, dated December 1, 1965, as amended, among Pennsylvania Electric Company, ACE, Baltimore Gas and Electric Company, DP&L, Jersey Central Power & Light Company, Pennsylvania Power & Light Company, Philadelphia Electric Company and Public Service Electric and Gas Company, with respect to the ownership and operation of the Keystone Station. (65) "Keystone Interest" means Seller's 2.47% undivided interest as tenant in common in Keystone Station. (66) "Keystone Station" means the generating station known as Keystone Station located in Plumcreek Township, County of Armstrong, Commonwealth of Pennsylvania, and related properties and assets, all as more fully identified on Schedule 1.1(66) attached hereto. (67) "Knowledge" means the actual knowledge of the directors and executive officers of the specified Person, which directors and executive officers are charged with responsibility for the particular function as of the date of this Agreement, or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of such certificate. (68) "Laws" means all laws, statutes, rules, regulations and ordinances of any Governmental Authority. (69) "Liability" or "Liabilities" means any liability or obligation (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due), including any liability for Taxes. 7 (70) "Like-Kind Exchange" has the meaning set forth in Section 6.5(e). (71) "Limited Warranty Deeds" means the Limited Warranty Deeds, to be delivered at the Closing, substantially in the form of Exhibit D hereto, pursuant to which Seller will convey the Real Property to Buyer. (72) "MAAC" means the Mid-Atlantic Area Council. (73) "Material Adverse Effect" means any change in or effect on the Purchased Assets or the operation of the Purchased Assets after the date hereof that is materially adverse to the operation or condition (financial or otherwise) of the Purchased Assets, taken as a whole, other than (i) any change or effect affecting the international, national, regional or local electric industry as a whole and not specific and exclusive to the Purchased Assets, (ii) any change or effect resulting from changes in the international, national, regional or local wholesale or retail markets for electricity, including any change in or effect on the structure, operating agreements, operations or procedures of Pennsylvania-New Jersey-Maryland Interconnection L.L.C. or its control area, (iii) any change or effect resulting from changes in the international, national, regional or local markets for any fuel used at the Jointly Owned Stations, (iv) any change or effect resulting from changes in the North American, national, regional or local electricity transmission systems or operations thereof, (v) changes in Law, or any judgments, orders or decrees that apply generally to similarly situated Persons, (vi) any change or effect to the extent constituting or involving an Excluded Asset or an Excluded Liability and (vii) any change in or effect on the Purchased Assets which is cured (including by payment of money) before the earlier of the Closing and the termination of this Agreement pursuant to Section 9.1. (74) "Net Book Value" means, as of any date, original cost (including related freight, commodity and handling (other than on-site handling)) less applicable depreciation and amortization, as reflected on Seller's books and records through such date in accordance with United States generally accepted accounting principles as applied by Seller on August 31, 1999. (75) "Net PURTA Refund" has the meaning set forth in Section 3.5(c). (76) "NJBPU" means the New Jersey Board of Public Utilities, and any successor agency thereto. (77) "NOx" means oxides of nitrogen. (78) "NOx Budget Program" means Nitrogen Oxides Budget Program, which is a statutory or regulatory program promulgated by the United States or a state pursuant to which the United States or state provides for a limit on the oxides of nitrogen that can be emitted by all sources covered by the program and establishes allowances or authorizations, which in total are 8 equal to the amount of oxides of nitrogen allowed by the limit, where each allowance or authorization represents a "right" to emit a unit of oxides of nitrogen, as the means for ensuring compliance with the limit. (79) "NOx Emission Allowance" means (a) an authorization by the PaDEP under its NOx Budget Program authorizing the emission of one ton of NOx during the ozone season, as such season is defined by the PaDEP; or (b) an authorization by the USEPA under any future NOx Budget Program promulgated by the USEPA, including any future program implemented in lieu of a state NOx Budget Program, authorizing the emission of one ton of NOx during the ozone season, as such season is defined by the USEPA. (80) "Off-Site Location" means any real property other than the Sites. (81) "PaDEP" means the Pennsylvania Department of Environmental Protection, and any successor agency thereto. (82) "PaPUC" means the Pennsylvania Public Utility Commission, and any successor agency thereto. (83) "Party" and "Parties" have the respective meanings set forth in the preamble to this Agreement. (84) "Pennsylvania Assets" has the meaning set forth in Section 3.5(c). (85) "Permitted Encumbrances" means: (a) the Easements; (b) those exceptions to title to the Purchased Assets listed in Schedule 1.1(85); (c) statutory liens for Taxes or other charges or assessments of Governmental Authorities not yet due or delinquent, or which are being contested in good faith by appropriate proceedings; (d) mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business to the extent that they secure payment of obligations which are not in arrears or otherwise due and which have been incurred under Good Utility Practices; (e) zoning, entitlement, conservation restriction and other land use and environmental regulations by Governmental Authorities; and (f) with respect to any Jointly Owned Station, such non-monetary Encumbrances as do not materially detract from the value of the Purchased Assets located at such Jointly Owned Station, taken as a whole, as currently used, or materially interfere with the present use of the Purchased Assets located at such Jointly Owned Station, taken as a whole. (86) "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, other business association or Governmental Authority. (87) "PJM" means the Pennsylvania-New Jersey-Maryland Power Pool, as established and administered by Pennsylvania - New Jersey - Maryland Interconnection L.L.C. 9 (88) "PJM Agreement" means the Operating Agreement dated June 2, 1997 of Pennsylvania-New Jersey-Maryland Interconnection L.L.C., as amended from time to time. (89) "Prime Rate" has the meaning set forth in Section 3.3(c). (90) "Proprietary Information" of a Party means all information about any Party or its properties or operations furnished to the other Party or its Representatives by such Party or its Representatives, after the date hereof, regardless of the manner or medium in which it is furnished. Proprietary Information does not include information that: (a) is or becomes generally available to the public, other than as a result of a disclosure by the other Party or its Representatives; (b) was available to the other Party on a non-confidential basis prior to its disclosure by the Party or its Representatives; (c) is or becomes available to the other Party on a non-confidential basis from a source other than such Party, provided that the source of such information was not known by such Party or its Representatives, after reasonable investigation, to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to such Party or any of its Representatives with respect to such material; (d) is independently developed by the other Party; or (e) was disclosed pursuant to the Confidentiality Agreement and remains subject to the terms and conditions of the Confidentiality Agreement. (91) "PUHCA" means the Public Utility Holding Company Act of 1935, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (92) "Purchase Price" has the meaning set forth in Section 3.2(a). (93) "Purchased Assets" has the meaning set forth in Section 2.1. (94) "PURTA" has the meaning set forth in Section 3.5(a)(i). (95) "PURTA Assessment" has the meaning set forth in Section 3.5(c). (96) "Real Property" has the meaning set forth in Section 2.1(a). (97) "Related Purchase Agreements" means, collectively, the ACE Related Purchase Agreement and the DP&L Related Purchase Agreements. (98) "Release" means any release, spill, leak, discharge, disposal of, pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing to escape into or through the environment. (99) "Remediation" means an action of any kind to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Sites or an Off-Site Location, including the following activities to the extent they relate to, result 10 from or arise out of the presence of a Hazardous Substance at the Sites or an Off-Site Location: (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Sites or an Off-Site Location under Environmental Laws that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of removal actions on the Sites or an Off-Site Location, remedial technologies applied to the surface or subsurface soils, excavation and treatment or disposal of soils at an Off-Site Location, systems for long-term treatment of surface water or groundwater, engineering controls or institutional controls; and (f) any other activities reasonably determined by a Party to be necessary or appropriate or required under Environmental Laws to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Sites or an Off-Site Location. (100) "Remediation Standard" means a numerical standard (whether resulting from an enacted statute, promulgated regulation, guidance or policy document issued by a regulatory agency, or developed on a case-by-case basis through a risk assessment or other methodology authorized pursuant to an applicable Environmental Law) that defines the concentrations of Hazardous Substances that may be permitted to remain in any environmental media after a Remediation. (101) "Representatives" of a Person means, collectively, such Person's Affiliates and its and their respective directors, officers, partners, members, employees, representatives, agents, advisors (including accountants, legal counsel, environmental consultants, engineering consultants and financial advisors), parent entities and other controlling Persons. (102) "SEC" means the United States Securities and Exchange Commission, and any successor agency thereto. (103) "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. (104) "Seller" has the meaning set forth in the preamble to this Agreement. (105) "Seller's Agreements" means, collectively, (i) the contracts, agreements, arrangements, licenses and leases of any nature to which, as of the date hereof, Seller is a party, or by or to which Seller or the Purchased Assets is bound or subject, (ii) those contracts, agreements, arrangements, licenses and leases of any nature entered into by Seller on or after the date of this Agreement consistent with the terms of this Agreement and (iii) those contracts, agreements, arrangements, licenses and leases entered into by any party to the Jointly Owned Stations Operating Agreements, for and on behalf of Seller, with or without Seller's Knowledge, and by or to 11 which Seller or the Purchased Assets are bound or subject as of the date hereof, or by or to which Seller or the Purchased Assets become bound or subject after the date hereof, in each case, relating to the ownership, lease, maintenance or operation of the Purchased Assets. (106) "Seller's Indemnitee" has the meaning set forth in Section 8.1(a). (107) "Seller's Interests" means, together, the Conemaugh Interest and the Keystone Interest. (108) "Seller's Permits" has the meaning set forth in Section 4.11. (109) "Seller's Required Regulatory Approvals" has the meaning set forth in Section 4.3(b). (110) "Sites" means the Real Property forming a part, or used or usable in connection with the operation, of the Jointly Owned Stations, including any real property used for the disposal of solid or hazardous waste that is included in the Real Property. Any reference to the Sites shall include the surface and subsurface elements, to the extent owned by or subject to any interest of Seller, including the soil and groundwater present at the Sites, and any reference to materials or conditions "at the Sites", including Hazardous Substances and Environmental Conditions, shall include all materials and conditions "at, on, in, upon, over, across, under or within" the Sites. (111) "SO2" means sulfur dioxide. (112) "SO2 Allowance" means an authorization by the Administrator of the USEPA under the Clean Air Act, 42 U.S.C. ss. 7401, et seq., to emit one ton of sulfur dioxide during or after a specified calendar year. (113) "Subsidiary", when used in reference to any Person, means any entity of which outstanding securities or interests having ordinary voting power to elect a majority of the board of directors or other governing body performing similar functions of such entity are owned directly or indirectly by such Person. (114) "Tangible Personal Property" has the meaning set forth in Section 2.1(e). (115) "Target Adjustment Amount" means $2,271,000, which represents the Net Book Value, as of August 31, 1999, of Seller's right, title and interest in and to the Inventories, as calculated in the manner set forth in Schedule 1.1(115). (116) "Tax" or "Taxes" means all taxes, charges, fees, levies, penalties and other assessments imposed by any Governmental Authority, including income, gross receipts, excise, property, sales, transfer, use, franchise, payroll, withholding, social security and other taxes, together with any interest, penalties or additions attributable thereto. 12 (117) "Tax Return" means any return, report, information return or other document, together with all amendments and supplements thereto (including any related or supporting information), required to be supplied to any Governmental Authority responsible for the administration of Laws governing Taxes. (118) "Third-Party Claim" has the meaning set forth in Section 8.2(a). (119) "Title Commitments" means (i) the Title Commitment provided by Lawyers Title Insurance Corporation, dated December 20, 1999, relating to the Conemaugh Station; (ii) the Title Commitment provided by Lawyers Title Insurance Corporation, dated December 20, 1999, relating to the Keystone Station; and (iii) the Title Commitment provided by Lawyers Title Insurance Corporation, dated December 20, 1999, relating to Keystone Lake. (120) "Transfer Taxes" has the meaning set forth in Section 6.6(a). (121) "Transferable Permits" means those Permits and Environmental Permits (and all applications pertaining thereto) which are transferable under applicable Laws by Seller to Buyer (with or without a filing with, notice to, consent or approval of any Governmental Authority), as set forth in Schedule 1.1(121). (122) "Transmission Assets" has the meaning set forth in Section 2.2(a). (123) "USEPA" means the United States Environmental Protection Agency, and any successor agency thereto. (124) "Vienna Station" means the generating station known as Vienna Power Plant, located in the town of Vienna, County of Dorchester, State of Maryland, and related properties and assets. (125) "Year 2000 Compliance" has the meaning set forth in Section 4.14. 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the singular words include the plural, the masculine includes the feminine and neuter, and vice versa. In this Agreement, the term "includes" or "including" shall be deemed followed by the words "including without limitation." References herein to a section, article, Exhibit or Schedule mean a section, article, Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument constitutes a reference to that agreement or instrument as modified, amended, supplemented and restated through the date as of which such reference is made. 1.3 U.S. Dollars. When used herein, the term "dollars" and the symbol "$" refer to the lawful currency of the United States of America. 13 1.4 Sellers' Interest in Jointly Owned Stations. The Parties acknowledge and agree that Seller owns and holds (a) an undivided three and eighty-three hundredths percent (3.83%) interest as tenant in common in the Conemaugh Station and (b) an undivided two and forty-seven hundredths percent (2.47%) interest as tenant in common in the Keystone Station. All references in this Agreement to Seller's right, title and interest in, to and under the Purchased Assets, and, in each case, the rights, liabilities and obligations in connection therewith, shall be construed in this context. ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Seller shall sell, assign, convey, transfer and deliver to Buyer, and Buyer shall purchase, assume and acquire from Seller, free and clear of all Encumbrances, except for the Permitted Encumbrances, all of Seller's right, title and interest in, to and under the following assets and properties, except as otherwise provided in Section 2.2, each as of the Closing Date, but only to the extent of the Seller's Interests (collectively, the "Purchased Assets"): (a) The real property (including all buildings and other improvements thereon and all appurtenances thereto) described on Schedule 4.7 (the "Real Property"); (b) The Inventories; (c) Machinery, equipment, vehicles, furniture and other personal property owned by Seller, located on the Real Property on the Closing Date (collectively, "Tangible Personal Property"), including the electrical transmission facilities (as opposed to generation facilities) set forth on Schedule 2.1(c); (d) The Seller's Agreements; (e) Subject to the receipt of necessary consents and approvals, the Transferable Permits; (f) The Emission Allowances identified on Schedule 2.1(f); (g) Such of the Emission Allowances of Seller as are identified on Schedule 2.1(g) (the "Excess Emission Allowances"); (h) The names "Conemaugh Station" and "Keystone Station"; provided, however, that Buyer expressly acknowledges and agrees that the Purchased Assets do not include 14 any right, title or interest in or to the names "Atlantic City Electric Company", "ACE" or any derivation thereof, as well as any related or similar name, or any other trade names, trademarks, service marks, corporate names and logos or any part, derivation, colorable imitation or combination thereof; and (i) All books, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items relating specifically to the Jointly Owned Stations that are in Seller's possession (subject to the right of Seller to retain copies of same for its use), other than such items as are proprietary to third parties and accounting records. (j) The rights of Seller in, to and under all causes of action against third parties with respect to, arising out of or in connection with Seller's rights, title and interest in and to the Purchased Assets or the Assumed Liabilities, or any portion thereof, whether accruing prior to, on or after the Closing Date, other than any such causes of action as constitute Excluded Assets or Excluded Liabilities, whether received as payment or credit against future liabilities. 2.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall constitute or be construed as requiring Seller to sell, assign, convey, transfer or deliver, and Buyer shall not be entitled to purchase or acquire, any right, title or interest in, to or under any properties, assets, business, operation or division of Seller, or any Affiliate thereof, not expressly set forth in Section 2.1, including the following assets and properties which are hereby specifically excluded from the definition of Purchased Assets (collectively, the "Excluded Assets"): (a) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all electrical transmission or distribution facilities (as opposed to generation facilities) or information technology and communications assets of Seller or any of its Affiliates located at or forming a part of any of the Jointly Owned Stations (whether or not regarded as a "transmission" or "generation" asset for regulatory or accounting purposes), including all switchyard facilities, substation facilities and support equipment, as well as all permits, contracts and warranties, to the extent they relate to such transmission and distribution assets or information technology and communications assets (other than the electrical transmission facilities identified on Schedule 2.1(c), all of which are included as Purchased Assets) (collectively, the "Transmission Assets"); (b) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under certain switches and meters, gas facilities, revenue meters and remote testing units, drainage pipes and systems, pumping equipment and associated piping, in each case, located at or forming a part of the Jointly Owned Stations; 15 (c) All certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities; (d) All cash, cash equivalents, bank deposits, accounts and notes receivable (trade or otherwise), prepaid expenses relating to the operation of the Purchased Assets and any income, sales, payroll or other Tax receivables (in each case, whether held by Seller or any third party, including under any Jointly Owned Stations Operating Agreements); (e) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all intellectual property, including the names "Atlantic City Electric Company", "ACE" or any derivation thereof, as well as any related or similar name, or any other trade names, trademarks, service marks, corporate names and logos, or any part, derivation, colorable imitation or combination thereof; (f) All tariffs, agreements and arrangements to which Seller or any of its Representatives is a party for the purchase or sale of electric capacity or energy, or for the purchase of transmission, distribution or ancillary services; (g) The rights of Seller and its successors, assigns and Representatives in, to and under all causes of action against third parties relating to any Excluded Assets or Excluded Liabilities, if any, whether accruing prior to, on or after the Closing Date, including all claims for refunds, prepayments, offsets, recoupment, insurance proceeds, insurance distributions, dividends or other proceeds, condemnation awards, judgments and the like, whether received as payment or credit against future Liabilities, in each case, relating to any period prior to the Closing Date; (h) All Tax refunds or credits (including refunds or credits of real property Taxes paid or due with respect to the Jointly Owned Stations), which refunds or credits are with respect to periods prior to the Closing Date, whether directly or indirectly, under the Jointly Owned Stations Operating Agreements or otherwise, regardless of when actually paid; (i) All employment agreements and personnel records of Seller and its successors, assigns and Representatives; (j) The minute books, stock transfer books, corporate seal and other corporate records of Seller and its successors, assigns and Representatives; (k) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all contracts, agreements, arrangements, licenses and leases of any nature, other than the Seller's Agreements; 16 (l) All insurance policies relating to the ownership, lease, maintenance or operation of the Purchased Assets; (m) All other assets and properties owned or leased by Seller or its successors, assigns and Representatives which are not used in the operation of the Jointly Owned Stations; (n) The right, title and interest of Seller and its successors, assigns and Representatives under this Agreement and the Additional Agreements; and (o) The right, title and interest of Seller and its successors, assigns and Representatives in, to and under all Emission Allowances of Seller or any of its Affiliates (other than the Emission Allowances identified on Schedule 2.1(f) and the Excess Emission Allowances identified on Schedule 2.1(g)). 2.3 Assumed Liabilities. On the Closing Date, Buyer shall assume and agree to pay, perform and otherwise discharge, without recourse to Seller or its Affiliates, all of the Liabilities of Seller and its Affiliates, successors, assigns or Representatives which relate, directly or indirectly, to the Purchased Assets, other than Excluded Liabilities, but only to the extent of the Seller's Interests (collectively, the "Assumed Liabilities"), including the following such Liabilities: (a) All Liabilities of Seller under the Seller's Agreements, including the Jointly Owned Stations Operating Agreements, and the Transferable Permits in accordance with the terms thereof, including (i) the contracts, agreements, arrangements, licenses and leases of whatever nature entered into by Seller with respect to the Purchased Assets after the date hereof consistent with the terms of this Agreement and (ii) those contracts, agreements, arrangements, licenses and leases entered into by any party to the Jointly Owned Stations Operating Agreements, for and on behalf of Seller, with or without Seller's Knowledge, and by or to which Seller or the Purchased Assets are bound or subject as of the date hereof, or by or to which Seller or the Purchased Assets become bound or subject after the date hereof, in each case, relating to the ownership, lease, maintenance or operation of the Purchased Assets, except, in each case, to the extent such Liabilities, but for a breach or default by Seller, would have been paid, performed or otherwise discharged prior to the Closing Date; (b) All Liabilities of Seller which relate to the Purchased Assets in respect of Taxes for which Buyer is liable pursuant to Section 3.5 or 6.5; (c) All Liabilities of Seller arising under or relating to Environmental Laws or relating to any claim in respect of Environmental Conditions or Hazardous Substances, whether based on common law or Environmental Laws, whether relating to the Sites or any Off-Site Location, including (i) any violation or alleged violation of Environmental Laws, whether prior to, on or after the Closing Date, with respect to the ownership, lease, maintenance or operation of any of the Purchased Assets, including any fines or penalties that arise in connection with the 17 ownership, lease, maintenance or operation of the Purchased Assets on or after the Closing Date (but excluding all fines and penalties that arise in connection with the ownership, lease, maintenance or operation of the Purchased Assets prior to the Closing Date), and the costs associated with correcting any such violations; (ii) loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage arose or was made manifest before the Closing Date or arises or becomes manifest on or after the Closing Date) caused (or allegedly caused) by any Environmental Condition or the presence or Release of Hazardous Substances at, on, in, under or migrating from, the Purchased Assets prior to, on or after the Closing Date, including any Environmental Condition or Hazardous Substances contained in building materials at or migrating from the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or near the Purchased Assets; (iii) any Remediation (whether or not such Remediation commenced before the Closing Date or commences on or after the Closing Date) of any Environmental Condition or Hazardous Substances that are present or have been Released prior to, on or after the Closing Date at, on, in, under or migrating from, the Purchased Assets or in the soil, surface water, sediments, groundwater, landfill cells or in other environmental media at or migrating from the Purchased Assets; (iv) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; and (v) any Remediation of any Environmental Condition or Release of Hazardous Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Purchased Assets; provided that nothing set forth in this Subsection 2.3(c) shall require Buyer to assume any liabilities or obligations that are Excluded Liabilities pursuant to Section 2.4(e), 2.4(g), 2.4(h), 2.4(i) or 2.4(j); (d) With respect to the Purchased Assets, any Tax that may be imposed by any federal, state or local government on the ownership, lease, maintenance, use or sale of the Purchased Assets on or after the Closing Date, except for any Income Taxes attributable to income received by Seller; and (e) For purposes of clarification, Buyer acknowledges that it shall assume and be fully responsible for holding in its accounts sufficient SO2 Allowances and NOx Allowances to cover emissions of SO2 and NOx from all of the Sites for all of the calendar year in which the Closing occurs, including the period of such year prior to the Closing Date. 2.4 Excluded Liabilities. Notwithstanding Section 2.3, Buyer shall not assume or be obligated to pay, perform or otherwise discharge the following Liabilities of Seller (the "Excluded Liabilities"): 18 (a) Any Liabilities of Seller in respect of any Excluded Assets or other assets of Seller which are not Purchased Assets, except to the extent caused by the acts or omissions of Buyer or its Representatives or Buyer's ownership, lease, maintenance or operation of the Purchased Assets; (b) Any Liabilities of Seller in respect of Taxes attributable to the Purchased Assets for taxable periods ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 3.5 or 6.5; (c) Any Liabilities of Seller arising from the breach prior to the Closing Date by Seller of any of the Seller's Agreements; (d) Any and all Liabilities to third parties for personal injury or tort, or similar causes of action to the extent arising out of the ownership, lease, maintenance or operation of the Purchased Assets prior to the Closing Date, other than the Liabilities assumed by Buyer under Section 2.3(c); (e) Any fines or penalties imposed by any Governmental Authority resulting from any violation of law by Seller that occurred prior to the Closing Date; (f) Any payment obligations of Seller or its Affiliates for goods delivered or services rendered prior to the Closing Date, other than the Liabilities assumed by Buyer under Section 2.3(c); (g) Liability for Remediation of Environmental Conditions at, on, under or migrating from, the Purchased Assets, but only to the extent that (i) such Liability arises out of or derives from the same facts which form the basis of a conviction, guilty plea or plea of nolo contendere by Seller for a violation of Environmental Laws by Seller; (ii) Seller's conviction, guilty plea or plea of nolo contendere was based on Seller's intentional and willful wrongful actions; and (iii) Seller's conviction, guilty plea or plea of nolo contendere arises from a matter as to which Seller has received written notice from a Governmental Authority on or before the sixth anniversary of the Closing Date. (h) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with loss of life, injury to persons or property or damage to natural resources (whether or not such loss, injury or damage arose or was made manifest before the Closing Date or arises or becomes manifest on or after the Closing Date) caused (or allegedly caused) by the disposal, storage, transportation, discharge, migration of, Release or recycling of Hazardous Substances at an Off-Site Location, or the arrangement for such activities, prior to the Closing Date, in connection with the ownership, lease, maintenance or operation of the Purchased Assets, provided that, for purposes of this Section, "Off-Site Location" does not include any location to which Hazardous Substances disposed of or Released at the Purchased Assets have migrated; 19 (i) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with the Remediation (whether or not such Remediation commenced before the Closing Date or commences on or after the Closing Date) of Hazardous Substances that are disposed, stored, transported, discharged, migrating from, Released, recycled, or the arrangement of such activities, in connection with the ownership, lease, maintenance or operation of the Purchased Assets, at any Off-Site Location, prior to the Closing Date; provided that, for purposes of this Section, "Off-Site Location" does not include any location to which Hazardous Substances disposed of or Released at the Purchased Assets have migrated; and (j) Any Liability under or related to Environmental Laws or the common law arising as a result of or in connection with the ownership, lease, maintenance or operation by Seller or its Affiliates of the Transmission Assets prior to, on or after the Closing Date, except to the extent caused by the acts or omissions of Buyer or Buyer's ownership, lease, maintenance or operation of the Purchased Assets. 2.5 Control of Litigation. The Parties agree and acknowledge that Seller shall be entitled exclusively to control, defend and settle any suit, action or proceeding, and any investigation arising out of or relating to any Excluded Assets or Excluded Liabilities, and Buyer agrees to cooperate in connection therewith to the extent Seller reasonably requests; provided, however, that Buyer shall not be required to incur any out-of-pocket costs and Seller shall reimburse Buyer for the costs incurred by Buyer in making its employees available for such purpose, including the allocable amount of salaries and wages of such employees. 2.6 Inventories. Schedule 2.6 lists the quantities of Inventories relating to the Jointly Owned Stations that will be transferred to Buyer, but only to the extent of the Seller's Interest, together with the Net Book Value of such Inventories, in each case, as of August 31, 1999. ARTICLE III THE CLOSING 3.1 Closing. The sale, assignment, conveyance, transfer and delivery of the Purchased Assets by Seller to Buyer, and the purchase, assumption and acquisition by Buyer of the Purchased Assets and the Assumed Liabilities, and the consummation of the other transactions contemplated hereby, shall take place at a closing (the "Closing") to be held at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, One Rodney Square, Wilmington, Delaware, at 10:00 a.m. local time on the first Business Day after August 31, 2000 that is ten (10) Business Days after the date on which the last of the conditions precedent to the Closing set forth in Sections 7.1(a) and (c), and Sections 7.2(a) and (c) of this Agreement shall have been satisfied or, to the extent permitted by applicable Law, waived by the Party for whose benefit such conditions precedent exist, or at such other date, time and location thereafter as may be agreed 20 upon in writing between Buyer and Seller. The date on which the Closing actually occurs is hereinafter called the "Closing Date." The Closing shall be effective for all purposes as of 12:01 a.m., New York City time, on the Closing Date. 3.2 Payment of Purchase Price. (a) Upon the terms and subject to the conditions set forth in this Agreement, in consideration of the aforesaid sale, assignment, conveyance, transfer and delivery of the Purchased Assets, Buyer shall, at the Closing, (i) pay to Seller cash in the aggregate amount of $96,136,000 plus the amount, if any, by which the Closing Adjustment Amount exceeds the Target Adjustment Amount, or minus the amount, if any, by which the Target Adjustment Amount exceeds the Closing Adjustment Amount (the "Purchase Price"), and (ii) assume and agree to pay, perform and otherwise discharge the Assumed Liabilities. (b) At least five (5) Business Days prior to the Closing Date, Seller shall provide to Buyer its good faith estimate of the Closing Adjustment Amount, which estimate shall be certified in writing by an appropriate officer of Seller (the "Estimated Adjustment Amount"). (c) At the Closing, in furtherance but not in duplication of Section 3.2(a) and without limiting the generality of Section 3.7, Buyer shall pay to Seller cash in an aggregate amount equal to $96,136,000 plus the amount, if any, by which the Estimated Adjustment Amount exceeds the Target Adjustment Amount, or minus the amount, if any, by which the Target Adjustment Amount exceeds the Estimated Adjustment Amount (the "Closing Payment"). The Closing Payment shall be paid to Seller by Buyer at the Closing by wire transfer of immediately available funds to the account of Seller designated by Seller at least two (2) Business Days prior to the Closing Date. 3.3 Adjustment to Purchase Price. (a) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer, at Seller's sole cost and expense, a statement setting forth the Closing Adjustment Amount (the "Closing Statement"). Contemporaneously, Seller shall deliver to Buyer a schedule setting forth a calculation of the Purchase Price and the amount of any payment to be made, and by whom, pursuant to Section 3.3(c). (b) In the event that Buyer is in disagreement with the Closing Statement, and in the event that the aggregate amount of such disagreements exceeds $100,000, Buyer shall, within ten (10) Business Days after receipt of the Closing Statement, notify Seller of such disagreements setting forth with specificity the nature and amounts thereof. In the event that Buyer is in disagreement with only a portion of the Closing Statement, Buyer or Seller, as the case may be, shall pay all undisputed amounts in the manner set forth in Section 3.3(c); and all other amounts shall be paid at such time as all disagreements are resolved in accordance with this Section 3.3(b). 21 If (i) the aggregate amount of the disagreements referred to in this Section 3.3(b) does not exceed $100,000 or (ii) Buyer fails to notify Seller of all disagreements within the ten (10) Business Day period provided for herein, then the Closing Statement, as delivered by Seller pursuant to Section 3.3(a), shall be final, binding and conclusive on the Parties hereto. If Buyer is in disagreement with the Closing Statement and notifies Seller within such ten (10) Business Day period, then the Parties shall promptly attempt to resolve such disagreements by negotiation. If the Parties are unable to resolve such disagreements within thirty (30) days following such notice of disagreement by Buyer, the Parties shall appoint an Independent Accounting Firm within forty- five (45) days following such notice, which shall review the Closing Statement and determine the Closing Adjustment Amount. Resolution of any disagreements shall be made by the Independent Accounting Firm in a writing addressed to all Parties within thirty (30) days following referral to it by the Parties of such disagreements in accordance with this Agreement. The findings of such Independent Accounting Firm shall be final, binding and conclusive on the Parties. All costs and fees of the Independent Accounting Firm shall be borne equally by Buyer and Seller. (c) No later than the fifth (5th) Business Day following the determination of the Closing Adjustment Amount pursuant to Section 3.3(b), either (i) Seller shall pay Buyer the amount, if any, by which the Closing Payment exceeds the Purchase Price, or (ii) Buyer shall pay Seller the amount, if any, by which the Purchase Price exceeds the Closing Payment, in either case, together with simple interest accruing on such payment at the Prime Rate from the Closing Date through and including the date of payment, by wire transfer of immediately available funds to an account designated by the receiving Party. As used herein, "Prime Rate" means, as of any date, the prime rate as published in The Wall Street Journal on such date or, if not published on such date, on the most recent date of publication. 3.4 Tax Reporting and Allocation of Purchase Price. Buyer and Seller shall use their respective reasonable best efforts to agree in good faith upon an allocation among the Purchased Assets of the sum of the Purchase Price and the Assumed Liabilities consistent with Section 1060 of the Code and the Treasury Regulations thereunder within sixty (60) days after the Closing Date. In the event that the Parties cannot agree on a mutually satisfactory allocation within such sixty-day period, the Parties shall appoint an Independent Accounting Firm that shall, at Seller's and Buyer's joint expense, determine the appropriate allocation. The finding of such Independent Accounting Firm shall be final, binding and conclusive on the Parties. After determination of the allocation by agreement of the Parties or by binding determination of the Independent Accounting Firm, Buyer and Seller shall file, for the tax year in which the Closing occurs, Internal Revenue Service Form 8594, and all Tax Returns, in accordance with such allocation. Buyer and Seller shall report the transactions contemplated by this Agreement for United States federal Income Tax and all other Tax purposes in a manner consistent with the allocation determined pursuant to this Section 3.4. Buyer and Seller shall provide the other promptly with any information required to complete Form 8594. Buyer and Seller shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed-upon allocation of the Purchase Price and the Assumed Liabilities. 22 3.5 Prorations. (a) Buyer and Seller agree that, except as otherwise provided in this Agreement, all of the items customarily prorated relating to the ownership, lease, maintenance or operation of the Purchased Assets, including those listed below (but not including Income Taxes), shall be prorated as of the Closing Date, with Seller liable to the extent such items relate to any period prior to the Closing Date, and Buyer liable to the extent such items relate to any period on or after the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days): (i) Personal property, real estate and occupancy Taxes (other than any Pennsylvania public utility realty tax pursuant to 72 P.S. ss. 8102-A ("PURTA"), as well as additional assessments and surtaxes relating to PURTA (collectively, the "PURTA Assessment") which are addressed in Section 3.5(c)), assessments and other charges, if any, on or with respect to the ownership, lease, maintenance or operation of the Purchased Assets; (ii) Rent, Taxes and all other items (including prepaid services and goods not included in Inventory), in each case, payable by or to Seller under any of the Seller's Agreements; (iii) Any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit; (iv) Sewer rents and charges for water, telephone, electricity and other utilities; (v) Insurance premiums paid on or with respect to the ownership, lease, maintenance or operation of the Purchased Assets to the extent payable under any policy or other arrangement included among the Seller's Agreements; and (vi) Prepaid operating and maintenance expenses, whether arising under the Jointly Owned Stations Operating Agreements or otherwise. (b) Seller or Buyer, as the case may be, shall promptly reimburse the other Party that portion of any amount paid by such other Party to the extent relating to the period for which Seller or Buyer, as the case may be, is liable under Section 3.5(a), in each case, upon presentation of a statement setting forth in reasonable detail the nature and amount of any such payment. In connection with the prorations set forth in Section 3.5(a), if actual figures are not available on the Closing Date, the proration shall be calculated based upon the respective amounts accrued through the Closing Date or paid for the most recent year or other appropriate period for which such amounts paid are available. All prorated amounts shall be recalculated and paid to the appropriate Party within sixty (60) days after the date that the previously unavailable actual figures become available. Seller and Buyer shall furnish each other with such documents 23 and other records as may be reasonably requested in order to confirm all proration calculations made pursuant to this Section 3.5. Notwithstanding anything to the contrary herein, no proration shall be made under this Section 3.5 with respect to (i) real property Tax refunds that are Excluded Assets under Section 2.2(h) or (ii) Taxes payable by Buyer pursuant to Section 6.5(a). (c) (i) Seller shall be responsible for and pay the PURTA Assessment imposed on any public utilities which are included in the Purchased Assets located in the Commonwealth of Pennsylvania (the "Pennsylvania Assets") with respect to the calendar year in which the Closing occurs. Buyer shall reimburse Seller in accordance with this Section 3.5(c) for its proportionate share of the PURTA Assessment for the calendar year in which the Closing occurs. Buyer's proportionate share shall be based upon the number of days within the Closing year that Buyer owned the Pennsylvania Assets. For example, if the Closing were to occur on December 1, 2000, and $1,000,000 of PURTA Assessment for calendar year 2000 had been paid, then Buyer's proportionate share of such PURTA Assessment would be equal to the product obtained by multiplying $1,000,000 by a fraction, the numerator of which would be the number of days in calendar year 2000 during which Buyer owned the Pennsylvania Assets (31), and the denominator of which would be the number of days in calendar year 2000 (366). Therefore, the aggregate amount of Buyer's proportionate share of the PURTA Assessment would be $1,000,000 multiplied by 31/366, or $84,699.50. Seller shall compute Buyer's obligation hereunder and notify Buyer of such obligation at least five (5) Business Days before the Closing. The reimbursement payable by Buyer to Seller hereunder shall be paid at Closing. (ii) In the event Seller or Buyer obtains a refund of the PURTA Assessment paid with respect to the year in which the Closing occurred, any such refund, net of any costs incurred by the Party obtaining such refund (a "Net PURTA Refund"), shall be prorated in accordance with this Section 3.5(c). Any prorated Net PURTA Refund shall be paid to the Party entitled to such prorated Net PURTA Refund promptly upon final adjudication or settlement of such Net PURTA Refund. Buyer and Seller shall provide each other with such cooperation and information as either of them reasonably may request of the other in connection with the filing of any refund claim for a PURTA Assessment, or the conduct of any audit, dispute, proceeding, suit or action concerning any PURTA Assessment. 3.6 Deliveries by Seller. At the Closing, Seller shall deliver, or cause to be delivered, the following to Buyer: (a) One or more Limited Warranty Deeds, duly executed by Seller and in recordable form; (b) The Bills of Sale, duly executed by Seller; (c) The Assignment and Assumption Agreements, duly executed by Seller; 24 (d) Evidence, in form and substance reasonably satisfactory to Buyer, demonstrating that Seller has obtained the Seller's Required Regulatory Approvals set forth on Schedule 7.2(c); (e) A FIRPTA Affidavit, duly executed by Seller; (f) Copies, certified by the Secretary or Assistant Secretary of Seller, of resolutions authorizing the execution and delivery of this Agreement, each Additional Agreement to which Seller is a party and all of the other agreements and instruments, in each case, to be executed and delivered by Seller in connection herewith; (g) A certificate of the Secretary or Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement, each Additional Agreement to which Seller is a party and the other agreements and instruments contemplated hereby; (h) All such other agreements, documents, instruments and writings as shall, in the reasonable opinion of Buyer and its counsel, be necessary to sell, assign, convey, transfer and deliver to Buyer the Purchased Assets, in accordance with this Agreement and, where necessary or desirable, in recordable form, provided that Seller shall not be required to prepare or obtain any survey, abstract, title opinion or title insurance policy with respect to the Real Property; and (i) Such other agreements, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably required in connection herewith. 3.7 Deliveries by Buyer. At the Closing, Buyer shall deliver, or cause to be delivered, the following to Seller: (a) The Closing Payment, by wire transfer of immediately available funds in accordance with Seller's instructions to the account of Seller designated by Seller at least two (2) Business Days prior to the Closing Date; (b) The Assignment and Assumption Agreements, duly executed by Buyer; (c) Evidence, in form and substance reasonably satisfactory to Seller, demonstrating that Buyer has obtained the Buyer's Required Regulatory Approvals set forth on Schedule 7.1(c); (d) A copy, certified by the Secretary or Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement, each Additional Agreement 25 and all of the agreements and instruments, in each case, to be executed and delivered by Buyer in connection herewith; (e) A certificate of the Secretary or Assistant Secretary of Buyer identifying the name and title and bearing the signatures of the officers of Buyer authorized to execute and deliver this Agreement, each Additional Agreement to which Buyer is a party and the other agreements contemplated hereby; (f) All such other permits, agreements, documents, instruments and writings as shall, in the reasonable opinion of Seller and its counsel, be necessary for Buyer to purchase and acquire the Purchased Assets, and to assume the Assumed Liabilities, in each case, in accordance with this Agreement and, where necessary or desirable, in recordable form; and (g) Such other permits, agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably required in connection herewith. 3.8 Post-Closing Excluded Asset Deliveries. In the event that Seller or Buyer, or any of their respective Representatives, shall determine after the Closing that any Excluded Asset is in the possession of Buyer or any of its Representatives, Buyer shall, or shall cause any such Representative to, promptly, but in no event later than five (5) Business Days following such determination, pay or deliver, or cause to be paid or delivered, to Seller such Excluded Asset, at Buyer's sole cost and expense. 3.9 Relationship of this Agreement and Related Purchase Agreements. The transactions contemplated by this Agreement, together with the transactions contemplated by the Related Purchase Agreements, are intended by the Parties to be consummated substantially simultaneously; and if any of the transactions contemplated hereby or by any of the Related Purchase Agreements are not consummated simultaneously on the Closing Date in accordance with the terms and subject to the conditions set forth herein and therein, as applicable, then each Party shall take, or cause to be taken, all actions, and do, or cause to be done, all things, in each case, that are necessary to dissolve and invalidate all transactions contemplated hereby; provided, however, that if the failure to consummate the transactions contemplated hereby or by the Related Purchase Agreements results from a default or breach of a party under this Agreement or any of the Related Purchase Agreements, then nothing in the foregoing shall preclude or limit the rights or remedies of any Party in connection with such default or breach. Notwithstanding any provision contained herein to the contrary, if all conditions to the obligations of all parties to this Agreement and the ACE Related Purchase Agreement to consummate the transactions contemplated hereby and thereby have been satisfied or, to the extent permitted by applicable Law, waived, but, for any reason, the transactions contemplated by the DP&L Related Purchase Agreements cannot be consummated simultaneously therewith, then the Parties shall, at Buyer's option and in its sole discretion, consummate the transactions contemplated by this Agreement and the ACE Related Purchase Agreement; provided, however, that nothing contained in this 26 Section 3.9 shall be construed as relieving Buyer of any of its obligations under the DP&L Related Purchase Agreements, as set forth therein. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows (all such representations and warranties, except those set forth in Sections 4.1 and 4.2, being made to the Knowledge of Seller): 4.1 Organization; Qualification. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which its business as now being conducted requires it to be so qualified, except to the extent that the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. 4.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Seller of this Agreement and each Additional Agreement to which it is a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller. This Agreement has been duly and validly executed and delivered by Seller and, subject to the receipt of Seller's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Seller of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3 Consents and Approvals; No Violation. (a) Except as set forth on Schedule 4.3(a), subject to obtaining or making all Seller's Required Regulatory Approvals, neither the execution and delivery by Seller of this Agreement and the Additional Agreements to which it is a party nor the consummation by Seller of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the certificate or articles of incorporation or bylaws of Seller; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the 27 terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Seller is a party or by which it, or any of the Purchased Assets, may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite consents, approvals or waivers have been, or will be prior to the Closing obtained, or which would not, individually or in the aggregate, have a Material Adverse Effect; or (iii) constitute violations of any Law, order, judgment or decree applicable to Seller, which violations, individually or in the aggregate, would have a Material Adverse Effect. (b) Except for consents, approvals, filings and notices (i) required under the HSR Act or (ii) set forth on Schedule 4.3(b) (the consents, approvals, filings and notices referred to in clause (ii) of this sentence are collectively referred to herein as the "Seller's Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery by Seller of this Agreement and the Additional Agreements to which it is a party or the consummation by Seller of the transactions contemplated hereby or thereby, other than (i) such consents, approvals, filings and notices which, if not obtained or made, would not materially impair Seller's ability to perform its material obligations under this Agreement or such Additional Agreements; (ii) such consents, approvals, filings and notices which become applicable to Seller or the Purchased Assets as a result of the status of Buyer (or any of its Affiliates) or as a result of any other facts that specifically relate to the business or activities in which Buyer (or any of its Affiliates) is or proposes to be engaged; and (iii) such consents, approvals, filings and notices, the failure of which to obtain or make would not, individually or in the aggregate, have a Material Adverse Effect. 4.4 Insurance. Except as set forth on Schedule 4.4, all material policies of fire, liability, workers' compensation and other forms of insurance owned or held by, or on behalf of, Seller and insuring any Purchased Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and workers' compensation insurance policies), and no written notice of cancellation or termination has been received by Seller with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation or termination. Except as set forth on Schedule 4.4, as of the date of this Agreement, Seller has not been refused any such insurance with respect to any Purchased Assets. 4.5 Title and Related Matters. Except for Permitted Encumbrances, Seller has good, valid and marketable title to the Real Property included in the Purchased Assets and has good and valid title to all other Purchased Assets, free and clear of all Encumbrances. 4.6 Environmental Matters. Except as set forth on Schedule 4.6: (a) Seller holds, and is in compliance with, all Environmental Permits that Seller requires in order to own, lease and operate the Purchased Assets, and Seller is otherwise in 28 compliance with applicable Environmental Laws with respect to the ownership, lease, maintenance or operation of the Purchased Assets, except for such failures to hold or comply with required Environmental Permits, and such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof. (b) Seller has not received any written request for information, or been notified in writing that it is a potentially responsible party under CERCLA or any similar state law, with respect to any of the Sites, or any written notice relating to any Governmental Authority's allegation or investigation of any criminal violations by Seller of any Environmental Laws, except for requests or notices with respect to Liabilities as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof; and (c) Seller has not entered into or agreed to any consent decree or order under any Environmental Law relating to the Purchased Assets, and Seller is not subject to any outstanding judgment, decree or order relating to compliance with any Environmental Law or to the investigation or cleanup of Hazardous Substances under any Environmental Law relating to the Purchased Assets, except for such decrees, orders and judgments as would not, individually or in the aggregate, materially impair the ability of Buyer to operate the Purchased Assets after the Closing in the manner operated by Seller on the date hereof. 4.7 Real Property. Schedule 4.7 sets forth a description of the Real Property. True and correct copies of all current surveys, abstracts, title opinions and policies of title insurance currently in force, in each case, in Seller's possession and relating to the Real Property, have been previously made available to Buyer. 4.8 Condemnation. As of the date hereof, Seller has not received any written notice of any pending or threatened proceedings or actions by any Governmental Authority to condemn or take by power of eminent domain all or any material part of the Purchased Assets. 4.9 Contracts and Leases. (a) Schedule 4.9(a) sets forth a list of all written Seller's Agreements, other than such contracts, licenses, agreements, arrangements and personal property leases as (i) are set forth in any other Schedule, (ii) constitute Excluded Assets or Excluded Liabilities, (iii) may be terminated after the Closing by Buyer upon notice of no more than ninety (90) days, (iv) involve future annual expenditures by Buyer after the Closing of $1,000,000 or less, (v) are expected to expire or terminate prior to the Closing, (vi) are entered into by Seller after the date hereof in accordance with the term of this Agreement or (vii) are entered into by any party to the Jointly Owned Stations Operating Agreements, for and on behalf of Seller, with or without Seller's Knowledge, and by or to which Seller or the Purchased Assets are bound or subject as of the date 29 hereof, or by or to which Seller or the Purchased Assets become bound or subject after the date hereof. (b) Except as set forth on Schedule 4.9(a), each Seller's Agreement set forth on Schedule 4.9(a): (i) constitutes the valid and binding obligation of Seller and the other parties thereto and (ii) will continue in full force and effect after the Closing in accordance with its terms. (c) Except as set forth on Schedule 4.9(a), there is not under any Seller's Agreement set forth on Schedule 4.9(a) any default or event which, with notice or lapse of time or both, would constitute a default, on the part of Seller or any other party thereto, except such defaults as would not, individually or in the aggregate, have a Material Adverse Effect. 4.10 Legal Proceedings. Except as set forth on Schedule 4.10, there are no suits, actions or proceedings pending or, to the Knowledge of Seller, threatened against Seller by or before any Governmental Authority, which would, individually or in the aggregate, have a Material Adverse Effect or would materially impair Seller's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. Except as set forth on Schedule 4.10, Seller is not subject to any judgment, order or decree of any Governmental Authority which would, individually or in the aggregate, have a Material Adverse Effect or would materially impair Seller's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. 4.11 Permits. Seller holds, and is in compliance with, all permits, certificates, licenses and other authorizations of all Governmental Authorities (collectively, "Seller's Permits") that Seller requires in order to own the Purchased Assets, except for (a) Environmental Permits (which are governed by Section 4.6) and (b) such failures to hold, or comply with, Seller's Permits as would not, individually or in the aggregate, have a Material Adverse Effect. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows (all such representations and warranties, except those set forth in Sections 5.1 and 5.2, being made to the Knowledge of Buyer): 5.1 Organization; Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Buyer is, or by the Closing will be, qualified to do business in the Commonwealth of Pennsylvania. Buyer has heretofore delivered to Seller true and correct 30 copies of its certificate or articles of incorporation and bylaws (or other similar governing documents) as currently in effect. 5.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each such Additional Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby or thereby have been duly and validly authorized by all necessary corporate action required on the part of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and, subject to the receipt of Buyer's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Buyer of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 5.3 Consents and Approvals; No Violation. (a) Except as set forth on Schedule 5.3(a), and subject to obtaining or making all Buyer's Required Regulatory Approvals, neither the execution and delivery by Buyer of this Agreement or the Additional Agreements to which it is a party nor the consummation by Buyer of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the certificate or articles of incorporation or bylaws (or other similar governing documents) of Buyer or any of its Subsidiaries; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer or any of its Subsidiaries is a party or by which Buyer, any such Subsidiary or any of their respective properties and assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite consents, approvals or waivers have been or will be prior to the Closing obtained, or which would not, individually or in the aggregate, materially impair Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement, or to perform its material obligations hereunder or thereunder (a "Buyer Material Adverse Effect"); or (iii) constitute violations of any Law, order, judgment or decree applicable to Buyer or any of its Subsidiaries, which violations, individually or in the aggregate, would have a Buyer Material Adverse Effect. (b) Except for consents, approvals, filings and notices (i) required under the HSR Act or (ii) set forth on Schedule 5.3(b) (the consents, approvals, filings and notices referred to in clause (ii) of this sentence are collectively referred to herein as the "Buyer's Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery by Buyer of this Agreement and the 31 Additional Agreements to which it is a party or the consummation by Buyer of the transactions contemplated hereby or thereby, other than such consents, approvals, filings or notices, which, if not obtained or made, would not have a Buyer Material Adverse Effect. 5.4 Buyer's Permits. Buyer holds, and is in compliance with, or on or prior to the Closing Date will hold, and from and after the Closing Date will comply with, all permits, certificates, licenses and other authorizations of all Governmental Authorities that Buyer requires in order to own, lease, maintain and operate the Purchased Assets (collectively, "Buyer's Permits"). 5.5 Availability of Funds. Buyer has sufficient funds and lines of credit available to it, or has received binding written commitments from creditworthy financial institutions, true and correct copies of which have been provided to Seller, to permit Buyer on the Closing Date to pay the Purchase Price, all other amounts payable by Buyer hereunder or under any Additional Agreement, and all fees and expenses incurred by Buyer in connection with the transactions contemplated hereby and by the Additional Agreements, and to permit Buyer to timely pay or perform all of its other obligations (including its obligations pursuant to Article VIII) under this Agreement and the Additional Agreements. 5.6 Financial Statements. Buyer has provided Seller with true and correct copies of its balance sheet, income statement and statement of changes in cash flows of Buyer for each of its last three completed fiscal years, together with the related reports of its independent accountants, PricewaterhouseCoopers LLP, and for its most recently completed fiscal quarter ("Buyer's Financial Statements"). Such Buyer's Financial Statements have been prepared in accordance with United States generally accepted accounting principles consistently applied and fairly reflect, in all material respects, the financial position, results of operations and cash flow of Buyer at and for the periods therein. 5.7 Legal Proceedings. There are no suits, actions or proceedings pending or threatened against Buyer by or before any Governmental Authority, which would, individually or in the aggregate, have a Buyer Material Adverse Effect or would materially impair such Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. Buyer is not subject to any judgments, orders or decrees of any Governmental Authority which would, individually or in the aggregate, have a Buyer Material Adverse Effect or would materially impair such Buyer's ability to consummate the transactions contemplated hereby or by any Additional Agreement to which it is a party. 5.8 Qualified Buyer. Buyer is qualified to obtain and, after the Closing, retain all Buyer Permits, including Environmental Permits, necessary for Buyer to own, lease, maintain and operate the Jointly Owned Stations, including, from and after the Closing Date, the Purchased Assets. 32 5.9 Inspections. Buyer has, prior to the execution and delivery of this Agreement, reviewed the environmental site assessments prepared for Seller and set forth on Schedule 5.9. 5.10 Regulation as a Utility. Buyer is not subject to regulation as a public utility or public service company (or similar designation) by any Governmental Authority. ARTICLE VI COVENANTS OF THE PARTIES 6.1 Access to Information. (a) Between the date of this Agreement and the Closing Date, Seller shall: (i) use its Commercially Reasonable Efforts to give Buyer and its Representatives, during ordinary business hours and upon reasonable notice, reasonable access to all books, records, plans, offices and other facilities and properties included in the Purchased Assets; (ii) furnish Buyer with such financial and operating data and other information in the possession of Seller with respect to the Purchased Assets as Buyer may from time to time reasonably request; and (iii) furnish Buyer with all such other information in the possession of Seller as shall be reasonably necessary to enable Buyer to verify the accuracy of the representations and warranties of Seller contained in this Agreement; provided, however, that (A) any such inspections and investigations shall be conducted in such manner as not to interfere unreasonably with the operation of the Purchased Assets, (B) Seller shall not be required to take any action which would constitute a waiver of the attorney-client or other privilege, (C) Seller need not supply Buyer with any information which Seller is under a legal or contractual obligation not to supply and (D) Seller shall not be required to supply Buyer with any information with respect to the Jointly Owned Stations to which Seller is not entitled pursuant to the terms of the Jointly Owned Stations Operating Agreements. Notwithstanding anything herein to the contrary, prior to the Closing Date, Buyer shall not have the right to perform or conduct, or cause to be performed or conducted, any environmental sampling or testing at, in, on or underneath any Jointly Owned Station. (b) All information furnished to or obtained by Buyer and Buyer's Representatives pursuant to this Section 6.1 shall be Proprietary Information and shall be kept confidential in accordance with the terms of the Confidentiality Agreement. Nothing in this Section 6.1 is intended to or shall be deemed to amend, supplement or otherwise modify the obligations of Buyer, its Representatives or its Affiliates under the Confidentiality Agreement, all of which remain in effect until termination of such agreement in accordance with its terms. (c) For a period of seven (7) years from and after the Closing Date, each Party and its Representatives shall have reasonable access to all of the books and records of the Purchased Assets in the possession of the other Party to the extent that such access may 33 reasonably be required by such Party in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Purchased Assets or the Excluded Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the other Party with respect to such access pursuant to this Section 6.1(c). If the Party in possession of such books and records shall desire to dispose of any books and records upon or prior to the expiration of such seven-year period, such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at such other Party's cost and expense, to segregate and remove such books and records as such other Party may select. (d) Buyer shall not, prior to the Closing Date, contact any customer, vendor, supplier or employee of, or any other Person having business dealings with, Seller or its Affiliates with respect to any aspect of the Purchased Assets or the transactions contemplated hereby or by any Additional Agreement, without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed. 6.2 Public Statements. Except as required by applicable Law or by applicable rules of any national securities exchange, in which event the Parties shall consult with each other in advance, prior to the Closing Date, no press release or other public announcement, statement or comment in response to any inquiry relating to the transactions contemplated by this Agreement shall be issued, made or permitted to be issued or made by any Party or its Representatives without the prior written consent of the other Party. 6.3 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of the Parties hereto shall use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the purchase and sale of the Purchased Assets pursuant to this Agreement and the assumption of the Assumed Liabilities, including using its reasonable best efforts to ensure satisfaction of the conditions precedent to each Party's obligations hereunder, including obtaining all necessary consents, approvals and authorizations of, and making all required notices or filings with, third parties required to be obtained or made in order to consummate the transactions hereunder, including the transfer of the Transferable Permits to Buyer. Seller shall cooperate with Buyer in its efforts to obtain all other Permits and Environmental Permits necessary for Buyer to operate the Purchased Assets. Buyer shall perform all conditions required of Buyer in connection with obtaining the Seller's Required Regulatory Approvals. No Party shall, without prior written consent of the other Party, take or fail to take any action which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) Without limiting the generality of Section 6.3(a): 34 (i) In the event that any Purchased Asset shall not have been conveyed to Buyer at the Closing, Seller shall, subject to Section 6.3(b)(ii), use Commercially Reasonable Efforts after the Closing to convey such asset to Buyer as promptly as practicable. (ii) To the extent that Seller's rights under any material Seller's Agreement may not be assigned without the consent, approval or authorization of any third party which consent, approval or authorization has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign such right if an attempted assignment would constitute a breach of such Seller's Agreement or violate any applicable Law. If any consent, approval or authorization to the assignment of any material Seller's Agreement shall not be obtained, or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under such Seller's Agreement, such that Buyer would not acquire and assume the benefit and detriment of all such rights and obligations, Seller, at its option and to the fullest extent permitted by applicable Law and such Seller's Agreement, shall, after the Closing Date, appoint Buyer to be Seller's agent with respect to such Seller's Agreement, or, to the fullest extent permitted by applicable Law and such Seller's Agreement, enter into such reasonable arrangements with Buyer or take such other actions as are necessary to provide Buyer with the same or substantially similar rights and obligations under such Seller's Agreement. 6.4 Consents and Approvals. Without limiting the generality of Section 6.3(a): (a) As promptly as practicable after the date of this Agreement, Seller and Buyer shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice all notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder, as amended from time to time, with respect to the transactions contemplated hereby and by the Additional Agreements. The Parties shall use their respective Commercially Reasonable Efforts to respond promptly to any requests for additional information made by such agencies, and to cause the applicable waiting period under the HSR Act to terminate or expire at the earliest possible date after the date of filing. Buyer shall pay all filing fees payable under the HSR Act but each Party shall bear its own costs and expenses of the preparation of any filing. (b) As promptly as practicable after the date of this Agreement, Seller and Buyer shall take, or cause to be taken, all actions, and do, or cause to be done, all things necessary, proper or advisable under applicable Laws to obtain all required consents and approvals of the NJBPU, the PaPUC, the SEC and all other Governmental Authorities, and make all other filings and give all other notices required to be made prior to the Closing with respect to the transactions contemplated hereby and by the Additional Agreements. The Parties shall respond promptly to any requests for additional information made by such Persons, and use their respective Commercially Reasonable Efforts to cause all such consents and approvals to be obtained or waived at the earliest possible date after the date of filing. Each Party will bear its own costs of the preparation of any such filing or notice; provided, however, that Buyer shall 35 bear all costs associated with experts and consultants reasonably necessary for the preparation of any such filing or notice or reasonably necessary to obtain such consents and approvals as promptly as practicable. (c) Seller and Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which Buyer would otherwise be liable for any Tax Liabilities of Seller pursuant to state or local Tax Law. (d) Without limiting the generality of Section 6.4(b), as promptly as practicable after the date hereof, Buyer shall make all filings required by the Federal Power Act. Prior to filing any application with the FERC, Buyer shall submit such application to Seller for review and comment and shall incorporate into such application all revisions reasonably requested. Buyer shall be solely responsible for the cost of preparing and filing such application, as well as all petition(s) for rehearing and all reapplications. If any filing is rejected by the FERC, Buyer shall petition the FERC for rehearing or permission to re-submit an application with the FERC, provided that, in either case, such action has been approved by Seller. 6.5 Certain Tax Matters. (a) All transfer, sales and similar Taxes ("Transfer Taxes") incurred in connection with this Agreement and the Additional Agreements, and the transactions contemplated hereby and thereby (including (i) sales Tax on the sale or purchase of the Purchased Assets imposed by Pennsylvania and (ii) transfer Tax on conveyances of interests in real property imposed by Pennsylvania) shall be borne by Buyer (and, to the extent paid by Seller, Buyer shall reimburse Seller upon request); provided, however, that if, pursuant to Section 6.6(e), the transactions contemplated by this Agreement are effectuated as a Like-Kind Exchange, then Seller shall bear such Transfer Taxes to the extent that they exceed the amount of Transfer Taxes that would have otherwise been incurred had the transactions not been effectuated as a Like-Kind Exchange (and all such amounts shall be computed on an after-Tax basis). Buyer, at its expense, shall prepare and file, to the extent required by, or permissible under, applicable Law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable Law, Seller shall join in the execution of all such Tax Returns and other documentation; provided, however, that prior to the Closing Date, to the extent applicable, Buyer shall provide to Seller appropriate certificates of Tax exemption from each applicable Governmental Authority. (b) With respect to Taxes to be prorated in accordance with Section 3.5, Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing Date with respect to the Purchased Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Buyer's preparation of such Tax Returns shall be subject to Seller's approval, which approval shall not be unreasonably withheld or delayed. Buyer shall make each 36 such Tax Return available for Seller's review and approval (which approval shall not be unreasonably withheld or delayed) no later than fifteen (15) Business Days prior to the due date for filing such Tax Return, it being understood that Seller's failure to approve any such Tax Return shall not limit Buyer's obligation to timely file such Tax Return and duly and timely pay all Taxes shown to be due thereon. (c) Buyer and Seller shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, audit or other examination, or any proceeding, by or before any Governmental Authority relating to Liability for Taxes, and each Party shall retain and provide the requesting Party with all books and records or other information which may be relevant to such Tax Return, audit, examination or proceeding. All books, records and information obtained pursuant to this Section 6.5(c) or pursuant to any other Section that provides for the sharing of books, records and information or review of any Tax Return or other instrument relating to Taxes shall be kept confidential by the parties hereto in accordance with the terms and conditions set forth in the Confidentiality Agreement. (d) In the event that a dispute arises between Seller and Buyer regarding Taxes or any amount due under this Section 6.5, the affected Parties shall attempt in good faith to resolve such dispute and any agreed-upon amount shall be promptly paid to the appropriate Party. If any such dispute is not resolved within thirty (30) days after notice thereof is given to any Party, the affected Parties shall submit the dispute to an Independent Accounting Firm for resolution, which resolution shall be final, binding and conclusive on such Parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of the Independent Accounting Firm in resolving the dispute shall be borne equally by Seller and Buyer. Any payment required to be made as a result of the resolution by the Independent Accounting Firm of any such dispute shall be made within five (5) Business Days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. (e) As reasonably requested by Seller, Buyer shall cooperate with Seller in effectuating the transactions contemplated by this Agreement in such a manner as to qualify for deferred like-kind exchange treatment under Section 1031 of the Code ("Like-Kind Exchange") (including the transfer of cash and other property and the assignment of this Agreement to one or more qualified intermediaries and the execution of appropriate documentation). In such event, Seller shall be responsible, and shall indemnify Buyer, for any Transfer Taxes incurred by Buyer as a result of effectuating such Like-Kind Exchange to the extent that the amount of such Transfer Taxes exceeds the amount of Transfer Taxes that the Buyer would have otherwise incurred had the transactions not been effectuated as a Like-Kind Exchange (and all such amounts shall be computed on an after-Tax basis). At Buyer's request, Seller shall promptly provide Buyer copies of all documents prepared by Seller, including proposed agreements, relating to the Like-Kind Exchange and shall give Buyer a reasonable opportunity to promptly comment on such documents and agreements. 37 (f) To the extent that any Party receives a Tax refund or credit with respect to a Tax that was paid or incurred by the other Party, such receiving Party shall promptly pay the amount of such Tax refund or credit to the other Party. 6.6 Advice of Changes. Prior to the Closing, each Party shall advise the other in writing with respect to any matter arising after the date of this Agreement of which that Party obtains Knowledge and which, if existing or occurring on or prior to the date of this Agreement, would have been required to be set forth in this Agreement, including any of the Schedules hereto. Seller shall, from time to time prior to the Closing, promptly supplement or amend the Schedules to this Agreement with respect to (a) any matter that existed as of the date of this Agreement and should have been set forth or described in any of the Schedules hereto and (b) any matter hereafter arising which, if existing as of the date of this Agreement, would have been required to be set forth or described in any of the Schedules hereto in order to make any representation or warranty set forth in this Agreement true and correct as of such date; provided, however, that, with respect to clause (a) above, any such supplemental or amended disclosure shall not be deemed to have been disclosed as of the date of this Agreement unless expressly consented to in writing by Buyer; and provided further, that, with respect to clause (b) above, any such supplemental or amended disclosure shall, for purposes of this Agreement, including for purposes of determining whether the conditions to Closing set forth in Article VII are satisfied, be deemed to have been disclosed as of the date of this Agreement. 6.7 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the Tangible Personal Property included in the Purchased Assets shall be borne by Seller, other than loss or damage caused by the negligent acts or omissions of Buyer or any Buyer Representative, which loss or damage shall be the responsibility of Buyer. (b) Notwithstanding any provision hereof to the contrary, subject to Section 9.1(g), if, before the Closing Date, all or any portion of the Purchased Assets is (i) condemned or taken by eminent domain or is the subject of a pending or threatened condemnation or taking which has not been consummated, or (ii) materially damaged or destroyed by fire or other casualty, Seller shall notify Buyer promptly in writing of such fact, and (x) in the case of a condemnation or taking, Seller shall assign or pay, as the case may be, any net proceeds thereof to Buyer at the Closing and (y) in the case of a fire or other casualty, Seller shall either restore such damage or assign the insurance proceeds therefor to Buyer at the Closing. Notwithstanding the foregoing, if such condemnation, taking, damage or destruction results in a Material Adverse Effect, Buyer and Seller shall negotiate to resolve the loss resulting from such condemnation, taking, damage or destruction (and such negotiation shall include the negotiation of a fair and equitable adjustment to the Purchase Price). If no such resolution can be agreed upon within ninety (90) days after Seller has notified Buyer of such loss, then Buyer, on the one hand, or Seller, on the other hand, may terminate this Agreement pursuant to Section 9.1(g). 38 6.8 PJM; MAAC. From and after the Closing Date, Buyer shall maintain membership in good standing in PJM and MAAC, and shall submit to the governance of the independent system operator established and administered under the PJM Agreement. 6.9 Emission Allowances. Buyer and Seller shall take all necessary actions, including executing any required forms or providing appropriate notices to Governmental Authorities, in a timely fashion, to ensure that (i) Buyer will obtain all, or the rights to all, (A) Emission Allowances that are to be transferred to it pursuant to Section 2.1(f) and as set forth on Schedule 2.1(f), including the right to receive such Emission Allowances that are to be allocated or issued by a Governmental Authority in the future, and (B) Excess Emission Allowances that are to be transferred to it pursuant to Section 2.1(g) and as set forth on Schedule 2.1(g) and (ii) Seller will retain or obtain all, or the rights to all, Emission Allowances that are defined as Excluded Assets pursuant to Section 2.2(o), including the right to receive such Emission Allowances that are to be allocated or issued by a Governmental Authority in the future. Buyer and Seller further acknowledge and agree that such actions may be required before, on or after the Closing Date. ARTICLE VII CONDITIONS 7.1 Conditions to Obligation of Buyer. The obligation of Buyer to effect the transactions contemplated by this Agreement shall be subject to the satisfaction (or the waiver, to the extent permitted by applicable Law, by Buyer) at or prior to the Closing of the following conditions: (a) The waiting period under the HSR Act applicable to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction, order or decree by any Governmental Authority which prevents the consummation of the transactions contemplated hereby or by the Additional Agreements shall have been issued and remain in effect (Buyer agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted), and no applicable Law shall be in effect which prohibits the consummation of the transactions contemplated hereby or thereby; (c) Buyer shall have obtained the Buyer's Required Regulatory Approvals set forth on Schedule 7.1(c), in form and substance reasonably satisfactory to Buyer (including any adverse conditions therein); and such Buyer's Required Regulatory Approvals shall be final and nonappealable; 39 (d) Seller shall have in all material respects performed and complied with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date; (e) (i) The representations and warranties of Seller set forth in this Agreement that are qualified by reference to Material Adverse Effect shall be true and correct in all respects and (ii) the representations and warranties of Seller set forth in this Agreement that are not so qualified shall be true and correct in substantially all respects, in each case, as of the Closing Date as though made at and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date); (f) Buyer shall have received a certificate from an authorized officer of Seller, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.1(d) and (e) have been satisfied by Seller; (g) Buyer shall have received an opinion from Seller's counsel, which counsel shall be reasonably acceptable to Buyer, dated the Closing Date, substantially in the form of Exhibit E hereto; (h) There shall not have occurred any Material Adverse Effect during the period commencing on the date hereof and ending at the Closing; (i) Buyer shall be able to obtain at Closing an owner's policy or policies of title insurance issued on the form customarily used in Pennsylvania insuring title to the Real Property in an amount equal to the Purchase Price relating to such Real Property, or such lesser amount as Buyer elects, with exceptions only for Permitted Encumbrances, but without the so- called "standard" exceptions for (x) the rights of parties in possession, (y) unfiled mechanics' and materialmens' liens and (z) matters arising after the dates of the Title Commitments and with the creditors' rights exclusion to coverage deleted, without Buyer being obligated to pay more than $50,000 in aggregate additional premium in order for the issuer to delete or insure over title exceptions which are not Permitted Encumbrances. For purposes hereof "additional premium" means premium in excess of the amount that the title insurer has otherwise agreed to accept for issuing the policies of title insurance to Buyer in the requested amount; and (j) Subject to the last sentence of Section 3.9, the Related Purchase Agreements shall be in full force and effect and the valid and binding obligation of each party thereto (other than Buyer); and all conditions to the obligations of all parties to the Related Purchase Agreements to consummate the transactions contemplated thereby shall have been satisfied or, to the extent permitted by applicable Law, waived. 7.2 Conditions to Obligation of Seller. The obligation of Seller to effect the transactions contemplated by this Agreement shall be subject to the satisfaction (or the waiver, to the 40 extent permitted by applicable Law, by Seller) at or prior to the Closing of the following conditions: (a) The waiting period under the HSR Act applicable to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the transactions contemplated hereby or by the Additional Agreements shall have been issued and remain in effect (Seller agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted), and no applicable Law shall be in effect which prohibits the consummation of the transactions contemplated hereby or thereby; (c) Seller shall have obtained the Seller's Required Regulatory Approvals set forth on Schedule 7.2(c), in form and substance reasonably satisfactory to Seller (including any adverse conditions therein), and all conditions to effectiveness prescribed therein or otherwise by Law shall have been satisfied in all material respects; and such Seller's Required Regulatory Approvals shall be final and nonappealable; (d) Buyer shall have in all material respects performed and complied with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer on or prior to the Closing Date; (e) (i) The representations and warranties of Buyer set forth in this Agreement that are qualified by reference to Buyer Material Adverse Effect shall be true and correct in all respects and (ii) the representations and warranties of Buyer that are not so qualified shall be true and correct in substantially all respects, in each case, as of the Closing Date as though made at and as of the Closing Date (other than representations and warranties that are made as of a specific date which shall have been true and correct as of such date); (f) Seller shall have received a certificate from an authorized officer of Buyer, dated the Closing Date, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.2(d) and (e) have been satisfied by Buyer; (g) The Jointly Owned Stations Operating Agreements shall have been amended to (i) join Buyer as a party to each of the Jointly Owned Stations Operating Agreements and (ii) irrevocably release Seller from any and all liabilities and obligations under the Jointly Owned Stations Operating Agreements, in each case, effective from and after the Closing Date; the Jointly Owned Stations Operating Agreements, as amended, shall be in form and substance satisfactory to Seller; and the Jointly Owned Stations Operating Agreements, as amended, shall be in full force and effect and the valid and binding obligation of each signatory thereto, including Buyer, enforceable against each such signatory in accordance with their respective terms; 41 (h) Seller shall have received an opinion from Buyer's counsel, which counsel shall be reasonably acceptable to Seller, dated the Closing Date, substantially in the form of Exhibit F hereto; and (i) Subject to the last sentence of Section 3.9, the Related Purchase Agreements shall be in full force and effect and the valid and binding obligation of each party thereto (other than Seller); and all conditions to the obligations of all parties to the Related Purchase Agreements to consummate the transactions contemplated thereby shall have been satisfied or, to the extent permitted by applicable Law, waived. ARTICLE VIII INDEMNIFICATION AND ARBITRATION 8.1 Indemnification. (a) From and after the Closing Date, Buyer shall indemnify, defend and hold harmless Seller and its Representatives (each, a "Seller's Indemnitee"), from and against any and all claims, demands, suits, losses, liabilities, penalties, damages, obligations, payments, costs and expenses (including reasonable attorneys' fees and expenses in connection therewith) (each, an "Indemnifiable Loss"), asserted against or suffered by any Seller's Indemnitee relating to, resulting from or arising out of (i) any breach by Buyer of any covenant or agreement of Buyer contained in this Agreement, (ii) the Assumed Liabilities, (iii) any Inspection or (iv) any Third-Party Claim against any Seller's Indemnitee in connection with Buyer's ownership, lease, maintenance or operation of any of the Purchased Assets on or after the Closing Date (other than to the extent such Third-Party Claim constitutes an Excluded Liability); provided, however, that Buyer shall be liable to Seller pursuant to clause (i) of this Section 8.1(a) only for Indemnifiable Losses for which any Seller's Indemnitee gives written notice to Buyer (setting forth with reasonable specificity the nature and amount of the Indemnifiable Loss) during the period for which such covenants or agreements survive the Closing in accordance with Section 10.6. (b) From and after the Closing, Seller shall indemnify, defend and hold harmless Buyer and its Representatives (each, a "Buyer's Indemnitee" and, together with Seller's Indemnitees, an "Indemnitee"), from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer's Indemnitee relating to, resulting from or arising out of (i) any breach by Seller of any covenant or agreement of Seller set forth in this Agreement or (ii) the Excluded Liabilities; provided, however, that Seller shall be liable pursuant to clause (i) of this Section 8.1(b) only for Indemnifiable Losses for which any Buyer's Indemnitee gives written notice to Seller (setting forth with reasonable specificity the nature and amount of the Indemnifiable Loss) during the period for which such covenants or agreements survive the Closing in accordance with Section 10.6. 42 (c) In furtherance, and not in limitation, of the provisions set forth in Section 8.1(a), Buyer, for itself and on behalf of its Representatives, hereby irrevocably releases, holds harmless and forever discharges Seller from any and all Indemnifiable Losses of any kind or character, whether known or unknown, contingent or accrued, arising under or relating to Environmental Laws, or relating to any claim in respect of any Environmental Condition or Hazardous Substance, whether based on common law or Environmental Laws relating to the Purchased Assets, other than such Liabilities which have been retained by Seller hereunder (collectively, "Environmental Claims"). In furtherance of the foregoing, Buyer, for itself and on behalf of its Representatives, hereby irrevocably waives any and all rights and benefits with respect to such Environmental Claims that it now has, or in the future may have conferred upon it by virtue of any Law or common law principle, which provides that a general release does not extend to claims which a party does not know or suspect to exist in its favor at the time of executing the release, if knowledge of such claims would have materially affected such party's settlement with the obligor. In this connection, Buyer hereby acknowledges that it is aware that factual matters now unknown to it may have given, or hereafter may give, rise to Environmental Claims that are presently unknown, unanticipated and unsuspected, and Buyer further agrees that this release set forth in this Section 8.1(c) has been negotiated and agreed upon in light of that awareness, and Buyer, for itself and on behalf of its Representatives, nevertheless hereby intends irrevocably to release, hold harmless and forever discharge Seller from all such Environmental Claims. (d) The rights and remedies of Seller and Buyer set forth in this Article VIII are exclusive and in lieu of any and all other rights and remedies which Seller and Buyer may have under this Agreement, under applicable Law, whether at common law or in equity, including for declaratory, injunctive or monetary relief, in each case, with respect to any Indemnifiable Loss. (e) Notwithstanding anything to the contrary herein, no Person (including an Indemnitee) shall be entitled to recover from any other Person (including any Party hereto required to provide indemnification under this Agreement (an "Indemnifying Party")) any amount in excess of the actual compensatory damages, court costs and reasonable attorneys' fees suffered by such Party. Buyer and Seller hereby irrevocably waive any right to recover punitive, special, exemplary and consequential damages arising in connection with or with respect to this Agreement (other than with respect to indemnification for a Third-Party Claim). (f) Any Indemnitee shall use Commercially Reasonable Efforts to mitigate all losses, damages and the like relating to a claim under the indemnification provisions in this Section 8.1, including availing itself of any defenses, limitations, rights of contribution, claims against third Persons and other rights at law or equity. For purposes of this Section 8.1(f), the Indemnitee's Commercially Reasonable Efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, and, in addition to its other obligations hereunder, the Indemnifying 43 Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking the mitigation. 8.2 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any suit, action or proceeding made or brought by any Person who is not an Indemnitee (a "Third-Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in no event later than ten (10) Business Days after the Indemnitee's receipt of notice of such Third-Party Claim. Such notice shall describe the nature of the Third-Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be incurred by the Indemnitee. The Indemnifying Party shall have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third-Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel. If an Indemnifying Party elects not to assume the defense of any Third-Party Claim, the Indemnitee may defend, compromise or settle such Third-Party Claim with counsel selected by it, provided that, without the prior written consent of the Indemnifying Party, the Indemnitee shall not agree to the entry of any judgment with respect to, or any compromise or settlement of, any Third-Party Claim, which judgment, compromise or settlement does not include the unconditional release of the Indemnifying Party. (b) If, within twenty (20) Business Days after an Indemnitee gives written notice to the Indemnifying Party of any Third-Party Claim, such Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third-Party Claim as provided in Section 8.2(a), then the Indemnifying Party shall not be liable for any costs, fees or expenses subsequently incurred by the Indemnitee in connection with the defense, compromise or settlement thereof. (c) Subject to Section 8.3, any claim by an Indemnitee on account of an Indemnifiable Loss which does not constitute a Third-Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, in no event later than twenty (20) Business Days after the Indemnitee becomes aware of such Direct Claim, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, of such Indemnifiable Loss and the Indemnifying Party shall have a period of twenty (20) Business Days within which to respond to such Direct Claim. If the Indemnifying Party fails to respond during such twenty (20) Business Day period, the Indemnifying Party shall be deemed to have accepted such claim and, subject to this Article VIII, shall promptly reimburse the Indemnitee for the Indemnifiable Losses set forth in the Indemnitee's notice. (d) A failure to give timely notice as provided in this Section 8.2 shall not affect the rights or obligations of any Party hereunder except to the extent that, as a result of such 44 failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure. 8.3 Arbitration. (a) Notwithstanding any provision hereof to the contrary, in the event of any dispute between Seller and Buyer arising after the Closing (whether relating to facts, events or circumstances occurring or existing prior to, on or after the Closing Date) and relating to or arising out of any provision of this Agreement (other than disputes arising under Section 2.3, 2.4, 3.2, 3.3, 3.4, 6.5 or 8.1(a)(ii)), the Party asserting such dispute shall give written notice to the other of the fact that a dispute has arisen pursuant hereto. Such notice shall include (i) a statement setting forth in reasonable detail the facts, events, circumstances, evidence and arguments underlying such dispute and (ii) proposed arrangements for a meeting to attempt to resolve the dispute to be held within sixty (60) days after such notice is given. Within thirty (30) days after such notice is given, the other Party hereto shall submit to the Party giving such notice a written summary responding to such statement of facts, events, circumstances, evidence and arguments contained in the notice and an acceptance of or proposed alternative to the meeting arrangements set forth in the initial notice. (b) The chief executive officers (or any other executive officer or officers directly reporting to, and duly designated by, such chief executive officers) of each of the Parties shall meet at a mutually acceptable time and place to attempt to settle any dispute in good faith; provided, however, that such meeting shall be held at the principal offices of the Party receiving the notice of dispute unless otherwise agreed; and provided further, that any such meeting shall be held no later than sixty (60) days after the written notice of dispute is given pursuant to Section 8.3(a). Each Party shall bear its own costs and expenses with respect to preparation for, attendance at and participation in such meeting. (c) In the event that (i) a meeting has been held in accordance with Section 8.3(b), (ii) any such dispute of the kind referred to in Section 8.3(a) shall not have been resolved at such meeting and (iii) the aggregate amount in dispute exceeds $100,000, then either Party may submit such dispute to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the "Commercial Arbitration Rules"). In the event that such dispute is submitted to arbitration pursuant to the Commercial Arbitration Rules, then the arbitration tribunal shall be composed of three arbitrators (one arbitrator selected by each Party within thirty (30) days after the meeting held in accordance with Section 8.3(b) with the third selected by the other two arbitrators or, in the absence of agreement between them, the American Arbitration Association), the venue of the arbitration shall be Wilmington, Delaware, the language of the arbitration shall be English and the arbitration shall commence no later than sixty (60) days after the meeting held in accordance with Section 8.3(b). The decision, judgment and order of the arbitration tribunal shall be final, binding and conclusive as to the Parties and their respective Representatives, and may be entered in court of competent jurisdiction. Other than the fees and expenses of the arbitrators, which shall be shared equally by the Parties, each Party shall 45 bear its own costs and expenses (including attorneys' fees and expenses) relating to the arbitration. 8.4 Remediation of Matters Covered in Section 2.4(g). With respect to the Liabilities as to which Seller has retained responsibility for Remediation pursuant to Section 2.4(g): (a) Seller shall have the right, but not the obligation, to control the management of any Remediation covered by this Section 8.4. With respect to Liabilities that are potentially covered by this Section 8.4, Seller must notify Buyer within thirty (30) days of receipt of notice of Buyer's claim for indemnification for such matter that it intends to undertake responsibility for said Remediation. Prior to a determination by Seller that it will undertake Remediation pursuant to this Section 8.4, Buyer shall, at Seller's expense, take only those actions necessary to comply with applicable Environmental Laws or as required by Governmental Authorities or address conditions that pose an immediate and acute environmental or health risk (unless additional actions are approved by Seller, such approval not to be unreasonably withheld or delayed). (b) Seller shall comply with all applicable Laws, including all applicable Environmental Laws, with respect to its performance pursuant to this Section 8.4. Seller shall promptly provide copies to Buyer of all notices, correspondence, draft reports, submissions, work plans, and final reports and shall give Buyer a reasonable opportunity (at Buyer's own expense) to promptly comment on any submissions Seller intends to deliver or submit to the appropriate regulatory body prior to said submission. Buyer may, at its own expense, hire its own consultants, attorneys or other professionals to monitor the investigation or remediation, including any field work undertaken by Seller, and Seller shall provide Buyer with the results of all such field work. Notwithstanding the foregoing, Buyer shall not take any actions that shall unreasonably interfere with Seller's performance of the Remediation. Seller shall undertake any such work required herein in a manner designed to minimize any disruption, to the greatest extent possible, with the conduct of operations at the property. Buyer shall allow Seller reasonable access to conduct any of the work contemplated herein and shall fully cooperate with Seller in the performance of the Remediation, including providing Seller with reasonable access to employees and documents as necessary. (c) If Seller declines to undertake the performance of a Remediation hereunder, Buyer shall be entitled to control the investigation and remediation. Buyer shall promptly provide copies to Seller of all notices, correspondence, draft reports, submissions, work plans, and final reports and shall give Seller a reasonable opportunity (at Seller's own expense) to promptly comment on any submissions Buyer intends to deliver or submit to the appropriate regulatory body prior to said submission. Seller may, at its own expense, hire its own consultants, attorneys or other professionals to monitor the Remediation, including any field work undertaken by Buyer, and Buyer shall provide Seller with the results of all such field work. Notwithstanding the foregoing, Seller shall not take any actions that shall unreasonably interfere with Buyer's performance of the Remediation. Seller's decision to allow Buyer to undertake 46 Remediation hereunder shall not limit or affect Seller's obligation to indemnify Buyer for said investigation and remediation as otherwise provided in this Agreement. (d) Without regard to whether Buyer or Seller is conducting a Remediation pursuant to this Section 8.4, the Parties agree that such Remediation will be conducted in a reasonable manner and consistent with the use of the Site in question as an electric generating station. Without limiting the foregoing, the Parties agree that they will conduct any such Remediation so that the Remediation Standard that is applicable to the Site is the least stringent Remediation Standard that would apply to the Site based on the current use of the Site, and Buyer furthermore covenants that it will accept a deed restriction or other reasonable institutional or engineering controls, if such mechanisms will (A) allow the Remediation of the Site to be completed in the least cost manner in compliance with applicable Environmental Law and (B) not unreasonably interfere with operations at the Site. Notwithstanding the foregoing, if Buyer determines at or after the Closing that it desires a Remediation such that the Site is remediated to a more stringent Remediation Standard, it may do so, provided, that (x) if Seller is managing a Remediation pursuant to this Section 8.4, it has the right, to the extent permitted by Law, to cease conduct of the Remediation and request Buyer to assume the conduct of the Remediation and (y) notwithstanding which of the Parties conducts the Remediation, Buyer shall be liable for the costs and expenses associated with the Remediation to the extent those costs and expenses exceed those that would be associated with a Remediation Standard as determined by the previous sentence. ARTICLE IX TERMINATION 9.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing by mutual written consent of the Parties. (b) This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, (i) at any time prior to the Closing if any court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable; (ii) at any time prior to the Closing if any Law shall have been enacted or issued by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated by this Agreement or by any Additional Agreement; or (iii) at any time after the first anniversary of the date of this Agreement if the Closing shall not have occurred on or before such date; provided, however, that the right to terminate this Agreement under this Section 9.1(b)(iii) shall not be available to any Party whose breach of this Agreement has caused, or resulted in, the failure of the Closing to occur on or 47 before such date; and provided, further, that if on such date, the conditions to the Closing set forth in Section 7.1(c) or 7.2(c) shall not have been satisfied but all other conditions to the Closing shall be satisfied or shall be capable of being satisfied, then no Party shall be entitled to terminate this Agreement prior to the date which is 180 days after the first anniversary of the date of this Agreement. (c) This Agreement may be terminated by Buyer, upon written notice to Seller, if any of Buyer's Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Section 7.1(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied), and such denial was not caused by or the result of a breach of this Agreement by Buyer. (d) This Agreement may be terminated by Seller, upon written notice to Buyer, if any of the Seller's Required Regulatory Approvals, the receipt of which is a condition to the obligation of Seller to consummate the Closing as set forth in Section 7.2(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied), and such denial was not caused by or the result of a breach of this Agreement by Seller. (e) Except as otherwise provided in this Agreement, this Agreement may be terminated by Buyer, upon written notice to Seller, if there has been a breach by Seller of any covenant, agreement, representation or warranty contained in this Agreement which has had a Material Adverse Effect and such breach is not cured by the earlier of the Closing Date or the date thirty (30) days after receipt by Seller of notice specifying in reasonable detail the nature of such breach, unless Buyer shall have previously waived such breach. (f) Except as otherwise provided in this Agreement, this Agreement may be terminated by Seller, upon written notice to Buyer, if there has been a material breach by Buyer of any covenant, agreement, representation or warranty contained in this Agreement which has had a Material Adverse Effect and such breach is not cured by the earlier of the Closing Date or the date thirty (30) days after receipt by Buyer of notice specifying in reasonable detail the nature of such breach, unless Seller shall have previously waived such breach. (g) This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, in accordance with the provisions of Section 6.7(b), provided that the Party seeking to so terminate shall have complied with its obligations under Section 6.7. 9.2 Effect of Termination. Upon termination of this Agreement prior to the Closing pursuant to Section 9.1, this Agreement shall be null and void and of no further force or effect (except that the provisions set forth in Section 6.2, this Section 9.2 and Article X, and the Confidentiality Agreement, shall remain in full force and effect in accordance with their 48 respective terms); and no Party shall have any further Liability under this Agreement (other than for any wilful breach of its obligations hereunder). ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification. Subject to applicable Law, this Agreement may be amended, supplemented or otherwise modified only by written agreement entered into by all Parties. 10.2 Expenses. Except to the extent provided herein, whether or not the transactions contemplated hereby are consummated, all costs, fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs, fees and expenses, including the fees and commissions referred to in Section 10.3. Notwithstanding the foregoing, Buyer shall be responsible for the payment of, or reimbursement of Seller for: (a) all actual out-of-pocket costs, fees and expenses charged by Lawyers Title Insurance Corporation in connection with obtaining any title insurance policy and all endorsements thereto, including policy premiums; (b) all survey costs, fees and expenses incurred by Buyer; (c) all survey costs, fees and expenses incurred by Seller on or prior to the date hereof, but, together with all such costs, fees and expenses incurred in connection with the Related Purchase Agreements, not in excess of $600,000; (d) all filing fees under the HSR Act; and (e) all costs for experts and consultants in accordance with Section 6.4(b). 10.3 Fees and Commissions. Seller, on the one hand, and Buyer, on the other hand, represent and warrant to the other that, except for Credit Suisse First Boston, Inc. and Reed/Navigant Consulting Group, which are acting for and at the expense of Seller, and CIBC World Markets Corp., which is acting for and at the expense of Buyer, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by such Party or its Representatives. Seller, on the one hand, and Buyer, on the other hand, shall pay or otherwise discharge all such brokerage fees, commissions and finder's fees so incurred by such Parties. 10.4 Bulk Sales Laws. Buyer hereby acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provisions of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement; and Buyer hereby irrevocably waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions. 10.5 Waiver of Compliance; Consents. To the extent permitted by applicable Law, any failure of any of the Parties to comply with any covenant, agreement or condition set forth herein may be waived by the Party entitled to the benefit thereof only by a written instrument 49 signed by such Party, but any such waiver shall not operate as a waiver of, or estoppel with respect to, any prior or subsequent failure to comply therewith. 10.6 No Survival. No representation or warranty contained in this Agreement shall survive the delivery of the Limited Warranty Deeds and the Closing. The covenants and agreements of the Parties contained in this Agreement shall survive the Closing in accordance with their respective terms. 10.7 Disclaimers. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE IV, THE PURCHASED ASSETS ARE SOLD "AS IS, WHERE IS", AND SELLER EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO SELLER AND THE PURCHASED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE IV: SELLER EXPRESSLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES REGARDING LIABILITIES, OWNERSHIP, LEASE, MAINTENANCE OR OPERATION OF THE PURCHASED ASSETS, THE TITLE, CONDITION, VALUE OR QUALITY OF THE PURCHASED ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE PURCHASED ASSETS; AND SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE PURCHASED ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL AUTHORITY, INCLUDING ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE PURCHASED ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER FURTHER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS OR WARRANTIES REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE PURCHASED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES OF ANY KIND REGARDING THE CONDITION OF THE PURCHASED ASSETS OR THE SUITABILITY OF THE PURCHASED ASSETS FOR OPERATION AS A POWER PLANT OR AS A FUEL PROCESSING FACILITY, AS APPLICABLE, AND NO SCHEDULE OR EXHIBIT TO THIS AGREEMENT, NOR ANY OTHER MATERIAL OR INFORMATION PROVIDED, OR COMMUNICATIONS MADE, BY SELLER OR ITS REPRESENTATIVES, INCLUDING ANY BROKER OR INVESTMENT BANKER, WILL CAUSE OR CREATE ANY SUCH REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE PURCHASED ASSETS. 50 SELLER EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE NAMES "CONEMAUGH STATION" AND "KEYSTONE STATION", INCLUDING ALL REPRESENTATIONS AND WARRANTIES OF (1) TITLE; (2) LENGTH, NATURE, EXCLUSIVITY AND CONTINUITY OF USE; (3) STRENGTH OR FAME; AND (4) NONINFRINGEMENT AND NONDILUTION OF TRADEMARK, SERVICE MARK, TRADE NAME OR OTHER PROPRIETARY RIGHTS OF ANY THIRD PARTY. BUYER HEREBY ACKNOWLEDGES THAT THE NAMES "CONEMAUGH STATION" AND "KEYSTONE STATION" EACH HAVE A GEOGRAPHIC CONNOTATION ASSOCIATED WITH THE LOCATION OF CERTAIN OF THE PURCHASED ASSETS. 10.8 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on the day when delivered personally or by facsimile transmission (with confirmation), on the next Business Day when delivered to a nationally recognized overnight courier or five (5) Business Days after deposited as registered or certified mail (return receipt requested), in each case, postage prepaid, addressed to the recipient Party at its address set forth below (or at such other address or facsimile number for a Party as shall be specified by like notice; provided, however, that any notice of a change of address or facsimile number shall be effective only upon receipt thereof): (a) If to Seller, to: Conectiv 800 King Street P.O. Box 231 Wilmington, Delaware 19899 Attention: Chairman Facsimile: (302) 429-3367 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square Wilmington, Delaware 19801 Attention: Steven J. Rothschild, Esquire Facsimile: (302) 651-3001 (b) if to Buyer, to: NRG Energy, Inc. 1221 Nicollet Mall, Suite 700 Minneapolis, Minnesota 55403 Attention: Vice President and General Counsel 51 Facsimile: (612) 373-5392 with a copy to: Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, Minnesota 55402 Attention: Joseph T. Kinning, Esquire Facsimile: (612) 333-0066 10.9 Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests, obligations or remedies hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of the other Parties, nor is this Agreement intended to confer upon any other Person any rights, interests, obligations or remedies hereunder. Notwithstanding the foregoing, (i) Seller may assign all or any portion of its rights, interests, obligations and remedies hereunder to Conectiv, a Delaware corporation, or any of Conectiv's wholly owned subsidiaries; provided, however, that no such assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or (B) relieve or discharge Seller from any of its obligations hereunder; and (ii) Buyer may assign all or any portion of its rights, interests, obligations and remedies hereunder to (A) any of its wholly owned subsidiaries or (B) a trustee, lending institution or other Person solely for purposes of financing the transactions contemplated hereby; provided, however, that no such assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or (B) relieve or discharge Buyer from any of its obligations hereunder. 10.10 Governing Law; Forum; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (without giving effect to conflicts of law principles) as to all matters, including validity, construction, effect, performance and remedies. Venue in any and all suits, actions and proceedings related to the subject matter of this Agreement shall be in the state and federal courts located in and for the State of Delaware (the "Courts"), which shall have exclusive jurisdiction for such purpose, and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts and irrevocably waive the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding. Service of process may be made in any manner recognized by such Courts. Each of the Parties hereby irrevocably waives its right to a jury trial arising out of any dispute in connection with this Agreement or the transactions contemplated hereby. 10.11 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. 52 10.12 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or construction of this Agreement. Ambiguities and uncertainties in the wording of this Agreement shall not be construed for or against any Party, but shall be construed in the manner that most accurately reflects the Parties' intent as of the date of this Agreement. Each Party acknowledges that it has been represented by counsel in connection with the review and execution of this Agreement, and, accordingly, there shall be no presumption that this Agreement or any provision hereof be construed against the Party that drafted this Agreement. 10.13 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are made a part of this Agreement. 10.14 Entire Agreement. This Agreement (including the Schedules and Exhibits), together with the Confidentiality Agreement, embodies the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement and the Additional Agreements and supersedes all prior agreements and understandings between or among the Parties with respect to such transactions. There are no representations, warranties, covenants or agreements between or among the Parties with respect to the subject matter set forth in such agreements, other than those expressly set forth or referred to herein or therein. Without limiting the generality of the foregoing, Buyer hereby acknowledges and agrees that there are no representations, warranties, covenants or agreements between or among the Parties with respect to the subject matter set forth in such agreements contained in any material made available to Buyer pursuant to the terms of the Confidentiality Agreement (including the Offering Memorandum dated June 18, 1999, previously provided to Buyer by or on behalf of Seller, Reed/Navigant Consulting Group and Credit Suisse First Boston, Inc.). [SIGNATURE PAGE FOLLOWS] 53 IN WITNESS WHEREOF, Seller and Buyer have caused this Purchase and Sale Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written. ATLANTIC CITY ELECTRIC COMPANY By: /s/ Thomas S. Shaw ------------------------------- Name: Thomas S. Shaw Title: Executive Vice President NRG ENERGY, INC. By: /s/ Craig A. Mataczynski ------------------------------- Name: Craig A. Mataczynski Title: Senior Vice President EX-12.A 4 dex12a.txt RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12-A Atlantic City Electric Company Ratio of Earnings to Fixed Charges ---------------------------------- (Dollars in Thousands) --------------------
Year Ended December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- -------------- ------------- ------------- ------------- Income before extraordinary item $ 54,434 $ 63,930 $ 30,276 $ 85,747 $ 75,017 ------------- -------------- ------------- ------------- ------------- Income taxes 36,746 49,326 18,178 50,442 36,958 ------------- -------------- ------------- ------------- ------------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 76,178 60,562 63,940 64,501 64,847 Other interest 4,518 3,837 3,435 3,574 4,019 Preferred dividend requirements of subsidiary trusts 7,619 7,634 6,052 5,775 1,428 ------------- -------------- ------------- ------------- ------------- Total fixed charges 88,315 72,033 73,427 73,850 70,294 ------------- -------------- ------------- ------------- ------------- Earnings before extraordinary item, income taxes and fixed charges $179,495 $185,289 $121,881 $210,039 $182,269 ============= ============== ============= ============= ============= Ratio of earnings to fixed charges 2.03 2.57 1.66 2.84 2.59
For purposes of computing the ratio, earnings are income before extraordinary item plus income taxes and fixed charges. Fixed charges consist of interest on long- and short-term debt, amortization of debt discount, premium, and expense, dividends on preferred securities of subsidiary trusts, and the estimated interest component of rentals. EX-12.B 5 dex12b.txt RATIO OF EARNINGS TO FIXED CHARGES & PREFERRED DIV Exhibit 12-B Atlantic City Electric Company Ratio of Earnings to Fixed Charges and Preferred Dividends ---------------------------------------------------------- (Dollars in Thousands) ---------------------
Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- --------- ---------- --------- ------------ Income before extraordinary item $ 54,434 $ 63,930 $ 30,276 $ 85,747 $ 75,017 --------- -------- --------- -------- ---------- Income taxes 36,746 49,326 18,178 50,442 36,958 --------- -------- --------- -------- ---------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 76,178 60,562 63,940 64,501 64,847 Other interest 4,518 3,837 3,435 3,574 4,019 Preferred dividend requirements of subsidiary trusts 7,619 7,634 6,052 5,775 1,428 --------- -------- --------- -------- ---------- Total fixed charges 88,315 72,033 73,427 73,850 70,294 --------- -------- --------- -------- ---------- Earnings before extraordinary item, income taxes and fixed charges $179,495 $185,289 $121,881 $210,039 $182,269 ========= ======== ========= ======== ========== Fixed charges $ 88,315 $ 72,033 $ 73,427 $ 73,850 $ 70,294 Preferred dividend requirements 3,571 3,777 5,289 7,506 14,214 --------- -------- --------- -------- ---------- $ 91,886 $ 75,810 $ 78,716 $ 81,356 $ 84,508 ========= ======== ========= ======== ========== Ratio of earnings to fixed charges and preferred dividends 1.95 2.44 1.55 2.58 2.16
For purposes of computing the ratio, earnings are income before extraordinary item plus income taxes and fixed charges. Fixed charges consist of interest on long- and short-term debt, amortization of debt discount, premium, and expense, dividends on preferred securities of subsidiary trusts, and the estimated interest component of rentals. Preferred dividend requirements represent annualized preferred dividend requirements multiplied by the ratio that pre-tax income bears to income. EX-99 6 dex99.txt PRO FORMA FINANCIAL STATEMENTS EXHIBIT 99 2000 ATLANTIC CITY ELECTRIC COMPANY PRO FORMA FINANCIAL STATEMENTS - GENERATION ASSET SALE AND TRANSFER BACKGROUND In 1999, the electric utility business of Atlantic City Electric Company (ACE) was restructured pursuant to legislation enacted in New Jersey and a Summary Order issued by the New Jersey Board of Public Utilities (NJBPU). The restructuring of ACE's electric utility business is discussed in Notes 1, 6, 7, 8 and 14 to the Consolidated Financial Statements, included in Item 8 of Part II, and "Electric Utility Industry Restructuring," within Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), included in Item 7 of Part II. Conectiv is realigning the mix of electric generating plants owned by its subsidiaries in connection with electric utility industry restructuring and its "mid-merit" electric generation strategy. ACE has entered into agreements to sell its nuclear and non-strategic baseload fossil fuel-fired electric generating plants. As of December 31, 2000, all the electric generating plants of ACE were subject to agreements for sale and the plants had 1,122.7 megawatts of capacity and a net book value of $132.1 million, excluding the nuclear decommissioning liability included in accumulated depreciation. The agreements for the sale of the electric generating plants provide for an aggregate sales price of approximately $189 million, before certain adjustments and selling expenses, as discussed in Note 11 to the Consolidated Financial Statements included in Item 8 of Part II. Upon the sale of the ownership interests of ACE in nuclear electric generating units, ACE will transfer its nuclear decommissioning funds to the purchasers who will assume full responsibility for decommissioning such units. The sales of the electric generating plants are expected to take place during 2001. However, as discussed in Note 11 to the Consolidated Financial Statements included in Item 8 of Part II, there can be no assurances that the sales will be completed. Effective July 1, 2000, ACE contributed at net book value to Conectiv combustion turbine electric generating units with 502 megawatts of capacity. Then, Conectiv transferred the electric generating plants to a subsidiary of Conectiv Energy Holding Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading, and marketing. DESCRIPTION OF PRO FORMA FINANCIAL INFORMATION The following Consolidated Financial Statements for ACE are filed with this Exhibit: . Unaudited Pro Forma Consolidated Balance Sheet at December 31, 2000, and . Unaudited Pro Forma Consolidated Statement of Income for the Year Ended December 31, 2000. The following major assumptions were made in preparing these pro forma Consolidated Financial Statements: . For purposes of the pro forma Consolidated Balance Sheet, the sales of nuclear and non-strategic baseload fossil fuel-fired electric generating plants were all assumed to occur as of December 31, 2000. . For purposes of the pro forma Consolidated Statement of Income, the sales and transfer described above were assumed to occur as of January 1, 2000. As a result, expenses related to generation assets assumed to be sold were eliminated. . The contribution of the combustion turbines of ACE to Conectiv was assumed to be at net book value, on a non-taxable basis. -1- . Replacement energy and capacity were assumed to be purchased from the PJM Interconnection, L.L.C. (PJM). The energy costs were based on an hourly PJM Locational Marginal Price (LMP) and the capacity costs were based on semi- annual weighted average PJM capacity rates. . Under its rates for electricity supplied to utility customers, ACE was assumed to be permitted to earn a return on the stranded costs resulting from the sale of the power plants and to no longer earn a return on the power plants sold. . Revenues which resulted from the Wholesale Transaction Confirmation Letter Agreements during 2000, as discussed in Note 12 to the Consolidated Financial Statements, were assumed to have not been earned due to the assumed sale of the nuclear power plants on January 1, 2000. . Revenues earned from plants contributed to Conectiv on July 1, 2000 were assumed to not have been earned, based on an assumed transfer date of January 1, 2000 for the pro forma Consolidated Statement of Income. . The proceeds from the sale of the nuclear and non-strategic baseload fossil electric generation plants of ACE were assumed to be used to repay long-term debt, after considering expected debt retirement costs. . The transfer of the decommissioning trusts as a result of the sale of the ownership interests of ACE in nuclear electric generating units was assumed to occur on a non-taxable basis. . The net pro forma gain from the sale of ACE's generation units, except for the Deepwater generation unit, was recorded as a reduction to recoverable stranded costs. The net loss of approximately $38 million which is expected to result from the sale of the Deepwater generation unit was recorded as an extraordinary charge in the 4th quarter of 1999. A pro forma adjustment resulting from the recognition of unamortized investment tax credits which are recognized upon completion of the sale was credited to retained earnings. . An effective tax rate of 40% was utilized to calculate the income tax effects of adjustments to the pro forma Consolidated Statement of Income. These pro forma Consolidated Financial Statements have been prepared for comparative purposes only and do not purport to be indicative of operations or financial condition which would have actually resulted if the sale and transfer of generation assets or other related transactions occurred on the dates of the periods presented, or which may result in the future. Further, these pro forma Consolidated Financial Statements have been prepared using information available at the date of this filing. As a result, certain amounts indicated herein are preliminary in nature and, therefore, will be subject to adjustment in the future. DESCRIPTION OF PRO FORMA ADJUSTMENTS The Unaudited Pro Forma Consolidated Statement of Income and Consolidated Balance Sheet filed with this Exhibit reflect the following adjustments: Adjustments to the Consolidated Statement of Income: 1. A net decrease in "Electric revenues" due to (i) no revenues from the operations of deregulated electric generating units (contributed to Conectiv) and the nuclear plants under the "Wholesale Transaction Confirmation Letter Agreements," and (ii) no return earned on generation rate base of divested plants, partly offset by a return earned on stranded costs. 2. A net increase in "Electric fuel and purchased energy and capacity" primarily because the cost increase from ACE purchasing all energy and capacity requirements to meet its retail load exceeded the cost -2- decrease from no longer purchasing fuel for the electric generating units sold and contributed to Conectiv. 3. Decreases in other operating expenses as a result of the sale and transfer of the electric generating plants of ACE. 4. A decrease in "Interest charges" as a result of retirement of long-term debt after the sale of the electric generating plants of ACE. Adjustments to the Consolidated Balance Sheet: 1. A net increase to "Cash and cash equivalents" primarily as a result of net proceeds received from the sale of the electric generating plants, less cash used for the retirement of long-term debt. 2. A decrease to "Fuel" inventories as a result of the sale of the electric generating plants. 3. An increase in "Taxes receivable" and a decrease in "Taxes accrued" due to the tax benefit associated with the tax loss on the sale of the electric generating plants. 4. A decrease to "Investments" as a result of the transfer of nuclear decommissioning trust funds to the buyers of the nuclear generation assets. 5. A decrease to "Property, plant and equipment" and "Construction work-in- progress" as a result of the sale of the electric generating plants and related assets. 6. A decrease to "Accumulated Depreciation" as a result of the sale of the electric generating plants and the assumption of the nuclear decommissioning obligations of ACE by the purchasers of the nuclear plants. 7. Decreases to "Leased nuclear fuel, at amortized cost", "Current capital lease obligation", and "Long-term capital lease obligation" as a result of the sale of the nuclear fuel to the buyers of the nuclear electric generating units and the corresponding liquidation of the capital lease obligation. 8. Decrease to "Recoverable stranded costs" and an increase to "Regulatory Liability for New Jersey income tax benefit" due to the sale of the electric generating plants of ACE, which are subject to stranded cost recovery. As a result of an expected net gain from the sale of such assets, there is a decrease in recoverable stranded costs. 9. Changes to "Deferred income taxes, net," "Deferred investment tax credits," "Above-market purchased energy contracts and other electric restructuring liabilities," and "Other Deferred Credits and Other Liabilities" as a result of the sale of the electric generating plants. 10. Net increase to "Retained Earnings" as a result of reversal of the unamortized investment tax credit balance associated with the deregulated Deepwater plant, at the time of its sale. 11. Decrease to "Long-term debt" due to assumed repayment of debt with net sale proceeds assumed to be available after payment of debt retirement costs. -3- ATLANTIC CITY ELECTRIC COMPANY UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 2000
------------- ------------- ------------- Reported Adjustments Pro Forma ------------- ------------- ------------- (Dollars in Thousands) OPERATING REVENUES $ 968,383 $ (74,362) (1) $ 894,021 ------------- ------------- ------------- OPERATING EXPENSES Electric fuel and purchased energy and capacity 420,737 72,357 (2) 493,094 Operation and maintenance 243,682 (83,006) (3) 160,676 Depreciation and amortization 101,527 (37,264) (3) 64,263 Taxes other than income taxes 35,913 (1,322) (3) 34,591 ------------- ------------- ------------- 801,859 (49,235) 752,624 ------------- ------------- ------------- OPERATING INCOME 166,524 (25,127) 141,397 ------------- ------------- ------------- OTHER INCOME 7,808 7,808 ------------- ------------- ------------- INTEREST EXPENSE Interest charges 76,178 (12,394) (4) 63,784 Allowance for borrowed funds used during construction and capitalized interest (645) (645) ------------- ------------- ------------- 75,533 (12,394) 63,139 ------------- ------------- ------------- PREFERRED DIVIDEND REQUIREMENTS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 7,619 7,619 ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 91,180 (12,733) 78,447 INCOME TAXES 36,746 (5,093) 31,653 ------------- ------------- ------------- NET INCOME 54,434 (7,640) 46,794 DIVIDENDS ON PREFERRED STOCK 2,132 2,132 ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK $ 52,302 $ (7,640) $ 44,662 ============= ============= =============
4 ATLANTIC CITY ELECTRIC COMPANY UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS DECEMBER 31, 2000
Reported Adjustments Pro Forma ----------- ------------- ------------ (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents $ 8,117 $ 4,000 (1) $ 12,117 Accounts receivable net of allowance of $4,423 140,785 140,785 Investment in Conectiv money pool 147,954 147,954 Inventories, at average cost Fuel (coal and oil) 6,818 (117)(2) 6,701 Materials and supplies 6,786 6,786 Deferred income taxes, net 15,750 15,750 Taxes receivable - 42,521 (3) 42,521 Prepayments 1,738 1,738 ------------- ------------ ------------- 327,948 46,404 374,352 ------------- ------------ ------------- Investments 112,501 (109,399)(4) 3,102 ------------- ------------ ------------- Property, Plant and Equipment Electric generation 142,243 (142,243)(5) - Electric transmission and distribution 1,255,184 (6,021)(5) 1,249,163 Other electric facilities 119,782 119,782 Other property, plant, and equipment 5,772 5,772 ------------- ------------ ------------- 1,522,981 (148,264) 1,374,717 Less: Accumulated depreciation 640,103 (126,345)(6) 513,758 ------------- ------------ ------------- Net plant in service 882,878 (21,919) 860,959 Construction work-in-progress 50,247 (514)(5) 49,733 Leased nuclear fuel, at amortized cost 28,352 (28,352)(7) - ------------- ------------ ------------- 961,477 (50,785) 910,692 ------------- ------------ ------------- Deferred Charges and Other Assets Recoverable stranded costs, net 958,883 (46,757)(8) 912,126 Unrecovered purchased power costs 14,487 14,487 Deferred recoverable income taxes 13,978 13,978 Unrecovered New Jersey state excise taxes 10,360 10,360 Deferred debt refinancing costs 12,409 12,409 Deferred other postretirement benefit costs 29,981 29,981 Unamortized debt expense 12,842 12,842 Other 26,516 26,516 ------------- ------------ ------------- 1,079,456 (46,757) 1,032,699 ------------- ------------ ------------- Total Assets $ 2,481,382 $ (160,537) $ 2,320,845 ============= ============ =============
5 ATLANTIC CITY ELECTRIC COMPANY UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS DECEMBER 31, 2000
----------- ------------ ---------- Reported Adjustments Pro Forma ----------- ------------ ---------- (Dollars in Thousands) CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt $ - $ - Long-term debt due within one year 97,200 97,200 Variable rate demand bonds 22,600 22,600 Accounts payable 50,744 50,744 Taxes accrued 10,243 $ (10,243) (3) - Interest accrued 18,193 18,193 Dividends payable 17,871 17,871 Current capital lease obligation 15,480 (15,480) (7) - Deferred energy supply costs 34,650 34,650 Above-market purchased energy contracts and other electric restructuring liabilities 7,586 7,586 Other 30,268 (1,170) 29,098 ------------ ---------- ------------- 304,835 (26,893) 277,942 ------------ ---------- ------------- Deferred Credits and Other Liabilities Deferred income taxes, net 405,385 81,143 (9) 486,528 Regulatory liability for New Jersey income tax benefit 49,262 5,174 (8) 54,436 Above-market purchased energy contracts and other electric restructuring liabilities 16,744 (6,813) (9) 9,931 Deferred investment tax credits 35,851 (14,188) (9) 21,663 Long-term capital lease obligation 12,872 (12,872) (7) - Pension benefit obligation 26,948 26,948 Other postretirement benefit obligation 37,614 37,614 Other 28,918 (9,789) (9) 19,129 ------------ ------------- ------------- 613,594 42,655 656,249 ------------ ------------- ------------- Capitalization Common stock, $3 par value; shares authorized: 25,000,000 ; shares outstanding: 18,320,937 54,963 54,963 Additional paid-in capital 410,194 410,194 Retained earnings 114,962 3,330 (10) 118,292 ------------ ------------- ------------- Total common stockholder's equity 580,119 3,330 583,449 Preferred stock not subject to mandatory redemption 6,231 6,231 Preferred stock subject to mandatory redemption 23,950 23,950 Preferred securities of subsidiary trusts subject to mandatory redemption 95,000 95,000 Long-term debt 857,653 (179,629) (11) 678,024 ------------ ------------- ------------- 1,562,953 (176,299) 1,386,654 ------------ ------------- ------------- Total Capitalization and Liabilities $ 2,481,382 $ (160,537) $ 2,320,845 ============ ============= =============
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