ML18082A351

Annual Financial Rept 1979

ML18082A351
Person / Time
Site:	Salem, Hope Creek
Issue date:	02/15/1980
From:	Feehan J, Linkletter A ATLANTIC ELECTRIC OF NEW JERSEY
To:
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ML18082A342	List: ML18082A340 ML18082A343 ML18082A348 ML18082A351 ML18082A353
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NUDOCS 8005090416
Download: ML18082A351 (36)

Text

1979 Annual Report REGULATORY DOCKU FILE tOPf.

80 05 0 9 0 1'/~ :j:'

Docket# so-2-7 2 Control# 8t>o.;o1ol/t>!..

Date

~foe> f8o of Docume REGULA OR DOCKET f'tlE

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Contents Letter to Shareholders Construction Program Financi ng Earnings and Dividends Revenues Community Involvement Environment Conservation Rate Matters Fuel and Fuel Costs Employees Company Facilities Our Service Area Energy Sales Information for Investors Financial Statements Management's Discussion and Analysis of the Statements of Income Supplementary Information Concerning the Effects of Changing Prices 1979-1969 Statistical Review and Summary of Operations Directors Other Information for Investors 2

4 5

6 6

6 6

7 8

8 10 11 12 12 14 15-26 27 28 30 32 32 Officers Inside Back Cover

Rf *u fORY DOCKET FILE COPY Advance Notice The control room of the Systems Operations Department is the Company's "nerve center, constantly monitoring the generation of electricity to help assure reliable service to our customers.

The 1980 Annual Meeting of Shareholders will be held Tuesday, April 22, 1980, at the Company's Customer Service Center, Black Horse Pike and Fire Road, near Pleasantville, New Jersey. A Notice of Meeting will be mailed in March to those shareholders entitled to vote.

In August the Company began conversion of its computer system to the highly advanced IBM 370/158. Th e conversion will be completed in 1982 and will greatly expand our data processing capabilities. It also will enable us to provide even better service to customers and shareholders and will result in elimination of some outside service costs.

Our Cover Atlantic Electric is Reliable Electric! The symbolic photo-graphs on the cover of this Report depict just a few of the employees and types of equipment needed to insure that reliable service is a reality in Southern New Jersey.

Results of Operations 1979-1975 Sales of Electricity (Billions of Kilowatt-hours)............................

Electric Operating Revenues (Millions)........

Net Income (Millions)........................

Earnings per Share..........................

Dividends Paid per Share....................

Gross Additions to Utility Plant (Millions).....

Generating Capacity (Kilowatts)..............

Utility System Peak Load (Kilowatts)..........

Average Annual Residential Kilowatt-hour Use.........................

Electrically Heated Dwelling Units (Year-end).................................

Customer Service Installations (Year-end).....

1979 5.308

$ 283.1 34.3 2.36

$ 1.765 72.8 1,384,700 1, 192,600 7,849 51,930 371,362 1978 5.275

$ 255.1 30.1 2.21 1.67 58.1 1,414,700 1, 177,400 7,951 48,778 362,131 1977 4.979

$ 235.0 27.4 2.06 1.62 48.7 1,414,700 1,176,000 7,653 45,389 352,205 1976 4.664

$ 212.0 30.8 2.60 1.56 41.7 1,334,700 1,030,300 7,320 42,878 343,147 1975 4.378

$ 199.1 28.3 2.41 1.51 46.7 1,334,700 1,069,400 7,018 41,026 336,105

Mr. Alfred C. Linkletter, Chairman of the Board of Directors, and Mr. John 0. Feehan, President and Chief Executive Officer.

2 To Our Shareholders In this period of international unrest and energy uncertainty, Atlantic Electric has made progress. We have made progress on a number of fronts and as a result we are in a better position to cope with whatever the future may bring.

Over the years since the 1973-74 oil embargo, we have made progress in moving away from overseas oil as a fuel for our generating stations. At the time of the embargo, approximately 73% of the electricity serving our Southern New Jersey region was produced from oil.

By shifting to coal and nuclear we now have that dependence on oil down to approximately 35% and we are addressing measures which would lower that de-pendence even further.

We have made progress in arranging for the generating capacity to meet the electric energy needs of the future.

Such capacity will be a mix of coal and nuclear energy which will further reduce our dependence on overseas oil. Coal and nuclear are basically domestic energy sources and as such are less subject to international pressure.

The Company has been making gradual but steady improvement in its financial strength including improved earnings and dividends and improved capitalization and debt protection. Such financial strengthening and in-creasingly responsive regulators are essential if your Company is to continue to serve its customers well. In the face of high inflation and serious concern about oil's availability, your Company must be financially strong in order to cope with the future.

Atlantic Electric has been working hard over the years to forge a strong team and a strong Company to meet these challenges. That team is in place and it is forging the strength we need as a Company.

Atlantic Electric has been emphasizing preparedness and we have made progress. Looking beyond the Company to the Nation, we have grave concern over the country's preparedness. While Atlantic Electric was reducing its dependence on overseas oil, the Nation was doubling its dependence. We are now all keenly aware of the implications of such dependence on foreign oil.

In searching for words of advice for our Country at this time, we would find none more appropriate than the very words we used in our 1974 Annual Report to you.

"Our nation is in the most important struggle of its 200-year history, short of war and the Great Depres-sion. The problem is the threat of world dominance by the oil producing nations-dominance in fuel supplies and the resultant dominance in the finan-cial world as a result of the massive payments being exacted from the user nations for the oil they need.

The projected increase in U.S. imports of oil, if allowed to go unchecked, will almost bankrupt this nation in the next decade or two. Weaker user nations could fall or fail even sooner.

Our entire nation needs to perceive this threat very quickly and put its united strength behind its leadership to launch an aggressive program to minimize our dependence on overseas oil. Here's what we must do as a nation:

1. Develop more of our own domestic energy re-sources, such as:

A. Oil and natural gas from the Alaskan pipeline, from further drilling in the Gulf of Mexico, and from the Outer Continental Shelf off the A ti antic and Pacific coasts.

B. Nuclear power, our most abundant, clean and completely self-sufficient energy source.

C. Coal, our most abundant fossil fuel.

2. Develop a better balance between our environ-mental aspirations and our energy needs. Our individual, corporate, local, state and national budgets just cannot afford all that we would like to do environmentally and all that we must do to provide the energy needs of the nation.

3. Conserve energy in all forms by utilizing it more efficiently and wisely whether it be in our homes, offices, factories or automobiles. We have switched from a nation of 'Haves' to a nation of 'Have Nots' and we must start acting accordingly.

4. Recognize that we will have to pay more for energy in all forms in order to have sufficient quantities and that without it our economy will grind to a halt.

Massive amounts of capital will be required to develop our domestic resources, and the rate of return on such capital must be sufficient to attract investors.

There are more things that we can do as a nation, but in our view these are the most important.

What can you do as a shareholder? You can add your voice to that of the leadership in the nation in attempting to get public understanding of the enor-mity of the need. Because many sacrifices will be required, the nation cannot move forward until the public understands and then puts its resources and dedication behind the program. Only by pulling together during what will be an extended struggle can we protect our national integrity from this threat of world dominance. We strongly urge that you speak out."

In the five years since we wrote those thoughts, the problem for the Nation has not gone away-only time has.

We believe Atlantic Electric has used that time well and that with the combination of coal, nuclear and conservation we can meet our responsibilities in the future.

For the Board of Directors a. c.~

A. C. Linkletter Chairman of the Board

~~

President (Per Share of Common Stock)

$3.00-

$2.60 2.50-

$2.41

$2.21

$2.36

$2.06 2.00-1.50-

$1.62

$1.67

$1765

$1.51

$1.56 1.00-

.50-

.0-1975 1976 1977 1978 1979 Earnings and Dividends Earnings per share Dividends paid per share 80-Percent 70-20 10-01~

1973 1974 1975 1976 I II 1977 1978 1979 Percent of Kilowatt-hours Produced from Various Fuels Oil

• Coal

• Nuclear

• Gas 3

Models are fine (such as this model of our proposed coal-fired station) but what these and other young people are asking is "Will there be enough electricity for our generation and those of the future?... What is Atlantic Electric doing to insure safe and reliable service to its customers?"

4 Our Customers-The People We Serve Reliability has a different meaning to different groups of people. To shareholders it means an adequate reliable return on their investment, to customers it means reliable service and reliable benefits in the form of prosperity and progress for the service area, to em-ployees it means an opportunity for continuous em ploy-ment. We at Atlantic Electric strive to ensure reliability in every aspect of our business. Pages4 through 9 respond to questions we believe are most often asked by three groups of people-the young, the mature worker, and senior citizens on fixed incomes. We hope that after reading this Annual Report, you will agree that Atlantic Electric is reliable electric.

During 1979, your Company made several important decisions which will help to provide reliable electric service during the 1980's and beyond. We have made arrangements to obtain generating capacity from two units being constructed by Delmarva Power & Light Company and from two units being constructed by Pennsylvania Power & Light Company. We also pro-ceeded with a siting study and with other plans to enable us to construct a coal-fired unit in Southern New Jersey.

We continued discussions with other utilities as to the possibility of our sharing in their capacity additions scheduled for service in the late 1980's or early 1990's. A list of expected major generating capacity additions in which we will participate during the next decade is shown below:

MAJOR GENERATING CAPACITY ADDITIONS Scheduled In-Service Unit and Location Fuel Year Salem Unit No. 2 (N.J.)............. Nuclear 1980 Indian River Unit No. 4 (Del.)............. Coal 1980 Susquehanna Unit No. 1 (Pa.)............. Nuclear 1982 Susquehanna Unit No. 2 (Pa. )............. Nuclear 1983 Hope Creek Unit No. 1 (N.J.)............. Nuclear 1985 Hope Creek Unit No. 2 (N.J.)............. Nuclear 1987 Vienna Unit No. 9 (Md.)............. Coal 1987 (Not yet designated)

(N.J.).................. Coal 1988 A.C.E. Co.

Share of Capacity (Megawatts) 83 (a) 50 (b) (d) 62 (c) (e) 63 (c) (e) 53 (a) 54 (a) 125 (b) 250 740 mw (a) Public Service Electric & Gas Company in charge of con-struction and operation.

(b) Delmarva Power & Light Company in charge of construc-tion and operation.

(c) Pennsylvania Power & Light Company in charge of con-struction and operation.

(d) Company will not have direct ownership but will purchase capacity from service date through May 31, 1985.

(e) Company will not have direct ownership but will purchase capacity from service date through September 30, 1991.

Substantial amounts of capital will be required to finance the construction of new generating stations, transmission, distribution and other facilities in order to serve the growing energy needs of the people of Southern New Jersey. In 1979 cash construction expen-ditures amounted to $66.4 million, and allowance for funds used during construction totaled $6.4 million. The cash construction estimate for 1980 is $115.6 million.

That amount includes (1) $44.9 million for production facilities, (2) $65.3 million for construction of additional substations, improvements to the transmission and distribution system and general plant and, (3) $5.4 m ii lion for nuclear fuel. Allowance for funds used du ring construction in 1980 is expected to total $7.3 million.

Securities issued during 1979 consisted of 1,000,000 shares of Common Stock issued in January and 233,599 shares of Common Stock issued during the year through the Company's Dividend Reinvestment and Stock Pur-chase Plan and the Employee Stock Ownership Plan.

Short-term loans, which were negotiated during the year to help finance construction, amounted to $39.5 million at year-end. In January, 1980 the Company sold

$75 million principal amount of 12%% First Mortgage Bonds to the public. The proceeds are to be used to repay short-term debt, to retire First Mortgage Bonds maturing in 1980, and for other corporate purposes.

About 70% of the cash construction requirements in 1980 are expected to be generated internally through retained earnings, depreciation accruals and similar items. The balance is to be obtained from the issuance of shares of Common Stock under the Dividend Reinvest-ment and Stock Purchase Plan, the Employee Stock Ownership Plan and from short-term loans. No sales of additional long-term securities are expected until 1981.

In 1979 we continued to provide safe and reliable service to our customers. We're proud that our custo-mers receive uninterrupted service more than 99.98% of the time. One of the principal reasons for this good record of reliability is the excellent performance of our own generating units and the adequacy of our transmis-sion and distribution systems. Another is the progress we have made in interconnecting our power system with those of neighboring utilities. The Company has, for many years, been an associate member of the Pennsyl-vania-New Jersey-Maryland Interconnection (PJM) which provides for the interchange of energy and capacity through pooling arrangements. PJM integrates the genera-tion and transmission power supply operations of eleven electric utilities serving an area of about 48,700 square miles with a population in excess of 21,000,000. We have applied for and have been accepted for full membership status in PJM. We expect to attain this no later than June 1, 1981 at which time additional operating and economic benefits will become available. Also, 1979 marked the first full year of service of the entire Lower Delaware Valley Transmission System (LDVTS) which is part of the PJM. LDVTS is owned by the Company and three other utilities and strengthens our ability to provide reliable service to our customers and to withstand emergency situations.

To help me:t the increased demand for energy in the 19BO's, the Company will be receiving 5.94% of the net capacity and energy output of each of two 1,050 MW units of the Susquehanna Steam Electric Station, presently under construction.

The Company will purchase 50,000 kilowatts of the capacity and output of the 400 MW coal-fired Indian River Station to help serve our customer's needs during the first five years of this decade.

(Millions of dollars-Projected for 1980-1982)

$125-100-75-50-111 25-0-

1977 1978 1979 1980 1981 Cash Construction Expenditures 1982 5

"What responsibilities does Atlantic Electric have to its shareholders and communities in its service area?"

6 Our Customers-The People We Serve Our primary responsibility to the shareholders, or owners, of Atlantic Electric is to endeavor to provide a fair return on the investment that they have made. This can be a difficult task, particularly in the face of double-digit inflation and regulatory lag (the amount of time between when an increase is required and when it is granted). In addition, the regulatory climate must con-tinue to be responsive to our needs. Over the years, we have been able to establish a record of which we are proud : dividends have been paid for sixty-two consecu-tive years and the cash dividend has increased in twenty-seven consecutive years.

Earnings available for Common Stock amounted to

$2.36 per average share outstanding in 1979 as com-pared to $2.21 in 1978 when there were fewer average shares outstanding. Dividends paid on Common Stock during 1979 amounted to $1.765 per share, compared with $1.67 per share paid in 1978. The quarterly dividend rate was increased by two and one-half cents per share with the October 1979 dividend payment and the new rate is equivalent to $1.84 on an annual basis.

Electric operating revenues totaled $283 million, an increase of 11 % over 1978. These additional revenues can be attributed to (1) the increases in base rates granted to the Company in 1978 and 1979, (2) the modest increase in kilowatt-hour sales and (3) higher fuel costs recovered through base rates and the level-ized energy adjustment.

An important part of our responsibility to the share-holder and customer is to provide them with information about their electric energy supply and the Company's efforts on their behalf. Our people are active in telling Atlantic Electric's "story" to the public and to the financia l community. Our Speakers Bureau made over 200 presentations in 1979 on topics coveri ng every aspect of our business as well as providing information on conservation and safety. Teams of Company officers made presentations to the New York Society of Security Analysts in May, to the Philadelphia Securities Associa-tion in July, and met with representatives of securities rating agencies. Many key financial representatives were in attendance at these three meetings.

While we are always aware of the need to safeguard the interests of our shareholders and our customers, we strongly believe in the need to protect our environment.

In keeping with this philosophy, Atlantic Electric as-sembled a 21 member advisory board comprised of members of professional groups, political representa-tives, Company employees and other interested persons who gave us their views on the siting of the proposed new generating station. Issues of primary concern were discussed, including air quality, water quality and avail-ability, site accessibility and community sensitivity.

Follow-up meetings were held with key segments of the public. We are pleased with the results of this action and know it has helped create greater awareness of our concern for the environment and our desire to listen to and, whenever practical, adopt the ideas and sugges-tions of our customers.

In accord with our environmental concerns, the instal-lation of more efficient electrostatic precipitators on Units No. 1 and No. 2 at the B. L. England Generating Station has begun and completion is expected by December 31, 1980 and June 1, 1982 respectively. The installation of this new equipment is expected to cost

$30.8 million and will enable us to satisfy particulate emission standards. It also will enable us to continue to burn coal in those units. Based on the current cost of fuel, using coal instead of oil will save about $43.5 million per year for our customers. Over the next three years approximately $ 33 million will be spent by the Company for capital purposes relating to improvement of the environment.

Your Company intensified its efforts in 1979 to pro-mote energy conservation. We continue to believe that conserving energy and increasing use of nuclear fuel and coal are the best ways to achieve independence from foreign oil. Our energy conservation program was a strong one:

- Our popular Energy Conservation Van made many appearances on behalf of the Company at various locations in Southern New Jersey.

- During Energy Awareness Week, we sponsored an "Energy Exposition" at a local shopping mall. In all,

28 exhibitors participated in this event which was seen by about 10,000 persons.

- Over 1,000 customers took advantage of our Energy Audit Program and learned how to hold the line on energy-related costs.

- An intensive newspaper advertisement campaign was undertaken to encourage the wise use of energy at times of peak demand.

- The Company launched a major customer usage-pattern study. Data from the study will help us better utilize our facilities, forecast future demand and design electric rates for each class of customers.

Company President John 0. Feehan addressed the Philadelphia Securities Association in July to inform the financial community about the progress of the Company and the challenges it faces.

Extensive wetland areas in the Southern New Jersey area require that Company employees use extreme caution to protect the delicate ecology of the area.

More efficient electrosta tic precipitators are being constructed on two units at B. L. England Generating Station.

7

"Why does Atlantic Electric ask for rate increases?... In view of the escalating costs of electricity, is aid available to people on fixed incomes?"

8 Our Customers-The People We Serve Reliability is the answer again. Based on current and projected operating conditions, periodic and timely rate relief will be required if we are to remain financially viable and sound. Substantial amounts of money will be needed to finance the construction of new generating,

transmission, distribution and other service facilities as wel I as to pay for fuel and other operating expenses. The new facilities are necessary to meet the steady growth of our customers' demands and to replace equipment as it wears out. Here is a summary of events in 1979 related to our efforts to obtain adequate rate relief:

-On June 27, 1979 the New Jersey Board of Public Utility Commissioners (BPU) approved a $10 million increase in the Company's base rates, effective July 1, 1979. This was the result of the final segment of a two-part rate request originally filed in March, 1978.

-On August 6, 1979 we filed a request with the BPU to raise the Levelized Energy Adjustment Charge.

Effective December 1, 1979, the BPU granted us a

$64.3 million increase to recover unexpectedly high 1979 fuel costs and to meet anticipated energy expenses in 1980. This was our first energy adjust-ment charge increase in 20 months. The principal cause of the major change in the Levelized Energy Adjustment Charge has been the spiraling cost of oil used in our generating units. During 1979 the cost per barrel of oil increased 98%. Oil was used to produce 35% of the electric energy generated for our customers during 1979, coal produced 37%,

nuclear fuel produced 23% and natural gas pro-duced 5%.

-On November'30, 1979 we filed an application for an increase in our base rates in the amount of $85.7 million to be received in two parts over a 15 month period. Our request calls for $45.2 million by July 1, 1980 with the balance becoming effective before March 1, 1981.

A number of steps are being taken to conserve fuel, control energy costs and improve reliability through changes and improvements in operating procedures at our generating stations. We were able to obtain some natural gas in 1979 for use in a steam unit and in a combustion turbine at Deepwater Generating Station.

The gas displaced foreign oil (about 60% Iranian), and it saved our customers about $1.7 million. Unfortunately, natural gas cannot be expected to be available over the long-term, and current national policy will prevent any long-term use of gas in boilers to generate electric energy.

Late in 1979 we conducted a 30 day test of burning a mixture of coal and oil in one of the Deepwater Station boilers and the results are being evaluated.

A long-term contract has been signed assuring a reliable supply and some stability in the price of coal we burn at our B. L. England Generating Station. In view of the fact that the Iranian situation threatens the supply of oil, plans are being formulated to burn coal in some of the generating units at the Deepwater Station.

While adding nothing to reliability, another factor serving to escalate customer bills is the New Jersey Gross Receipts and Franchise Tax. This tax alone accounts for about $8 million of the $64.3 million rise in the energy adjustment charge. This added burden only serves to compound the effects of inflation and tremen-dous fuel costs. Efforts are being made to have legisla-tion enacted in New Jersey which would limit the gross receipts and franchise tax which we must collect from our customers.

We have agreed to participate in an alternative fuel program to be sponsored by the United States Depart-ment of Energy which would convert coal to liquid fuel and gas. A number of eastern utility companies will be participating in this research project. A demonstration plant, capable of producing as much as 12,000 barrels of synthetic liquid fuel each day, should be ready for operation by 1984. The plant is to be constructed in Morgantown, West Virginia and part of the fuel it produces will be used for testing and evaluation as a boiler and combustion turbine fuel to produce elec-tricity. We also have initiated a research and develop-ment program involving the installation, testing and evaluation of solar hot water heaters.

Utilities and governments must continue to investi-gate all potential alternate sources of energy. Yet we must also be realistic. Based on current scientific knowledge, it does not appear that alternate energy sources will provide substantial amounts of reliable electric energy during this century.

Although efficient fuel utilization has always been a prime goal of Atlantic Electric, the rapid increase of oil prices has caused an even greater emphasis on im-proved generating unit efficiency. While the controls and reviews instituted in previous years have been maintained, we have embarked on a new program to further reduce the fuel we use to make electricity for our customers. An 0 perator Incentive Program, adopted early in 1979, has proven successful. Its major goals were to reduce the amount of fuel used per unit of electricity generated by 2% from the prior year and to improve the reliability of our generators.

One form of aid for those on fixed incomes is the Lifeline Credit Program which was approved by the State of New Jersey in August, 1979. Lifeline provided

$1.6 million in discounts to more than 20,000 elderly and handicapped electric customers in Southern New Jer-sey who qualified under the program. The discount, currently $50 on electric and $50 on gas bills (or $100 on electric if they do not have gas), is to rise to $125 in October, 1980. An increase in the tax on the gross revenue of the casino hotels in Atlantic City provided the funds for this aid.

What Price Oil?

Up66%*

Up66%

Up~%

Up~%

Up69%

These communications carried important messages to our customers.

(Based on a Residential Bill for 500 KWH)

$50-40-30-

$25.79 $25.94 $26.30 $27.32

$20.99 20-10-5.81 0-Dec.

1973 11.38 9.84 Dec.

Dec.

1974 1975 Increased Fuel Cost Effect 8.46 9.50 Dec.

Dec.

1976 1977

$31.25 10.17 Dec.

1978 Qn Customers' Electric Bills at Year-End.

$37.38 15.12 Dec.

1979 Total amount of bill Total fuel represented in the bill Cents 60-*

50-40-30-20-10-0-

(Cents per gallon or equivalent)

Dec.

Dec.

Dec.

Dec.

Dec.

Dec.

Dec.

1973 1974 1975 1976 1977 1978 1979 Average Cost of Fuels Oil coal Nuclear

• Gas 9

Reliable electric service is the product of dedicated employees and dependable equipment.

10 Our Employees-The People Who Serve "Reliability of service"-such few words to describe a twenty-four-hour-a-day, seven-day-a-week responsi-bility. Our employees are dedicated to providing reliable service at the lowest possible cost to our customers.

They are constantly aware of our customers' depen-dence on electricity at all hours and take this responsi-bility seriously. This was evident on February 19, 1979 when one of the worst snow storms in our area in many years disrupted electrical service to almost one-fourth of our customers. Our operating and customer service employees worked long hours to restore service as quickly as possible. We know it was appreciated since we received many compliments about the performance of employees during the storm.

Under the two year agreement entered into between the Company and the International Brotherhood of Electrical Workers, a general wage increase of 8.3%

became effective as of December 10, 1979. An additional general wage increase of 7.77% becomes effective December 8, 1980. This increase, together with im-proved benefits will add approximately $3.3 million to the Company's 1980 payroll costs.

Two new incentive programs were instituted in 1979to encourage improved productivity and safety among employees.

In addition to the Operator Incentive Program de-scribed on page 9, a new Safety Incentive Program was conducted for both physical and non-physical workers.

Prizes were awarded to employees who met personal and departmental safety goals.

The Company is pleased with the safety record achieved by employees in 1979. First, and most important, there were no fatalities in 1979. We recorded the best safety record (statistically) in more than ten years. The accident incidence rate was 4.28, about 16%

better than the prior year. There was a 47% decline in the number of hours lost as a result of disabling injuries. We have worked hard to improve our safety record and have shown gradual but consistent improvement. During 1979 the number of motor vehicle accidents increased from the prior year, although most were minor in nature-we will be taking steps in 1980 to improve that record.

We are proud of our family of 1,900 employees. Their total payroll and benefit costs amounted to $50. 7 million in 1979-a significant contribution to the economy of our area.

While 30% of our employees have more than 25 years of service, over 50% have been with us less than 10 years.

In light of the many challenges we face, fully one-fourth of our employees participated in some type of company-sponsored training program in 1979.

SUPPORT FACILITIES WHICH AID RELIABILITY A new Company Transportation Center was dedicated in October 1979 and houses the Transportation, Heavy Hauling and Communications Departments. Located in Cologne, next to our Central Stores Center, the new facility will more efficiently provide the vital service of keeping all of Atlantic Electric's vehicles, communica-tions systems and heavy construction equipment in tip-top condition.

Construction of a new building which will contain all of the operations of our Meter Department has been started recently. This facility also will be located next to the Central Stores Center.

Our Atlantic City Operations Building was sold in November to Atlantic County for use by Atlantic Com-munity College. We've occupied this building since the turn of th e century and will lease back a portion of the building to house operating personnel until a new and more efficient facility is constructed.

In December we entered into an agreement for the sale of our Main Office Building, located in the midst of the casino-related construction area. Construction of a new facility on the site of the Customer Service and Engineering Centers, Pleasantville will enable achieve-ment of one of our long-term objectives-consolidation of important administrative functions.

In a boiler cyclone, a stud-welder applies his craft during a scheduled maintenance outage at B. L. England Generating Station.

A new transportation center was opened in 1979, and provides the Company with a modern facility for vehicle maintenance.

Relocation of overhead electric wires was required so that one of the Company 's industrial customers could transport some large equipment.

11

This artist's representation of Southern New Jersey portrays the uniqueness of our service area... a blend of important industrial and commercial complexes, productive farms, pop-ular resort areas and unique forest preserves.

12 The Area We Serve...

One Third of the State of New Jersey For close to a century, Atlantic Electric has had the privilege of providing the Southern New Jersey area with reliable electricity. Ours is a region of great diversity and potential, and is close to some of the largest metropolitan areas in the Nation.

We continued to meet our obligation to serve new customers as well as provide service to meet the needs of current customers. During the year, 7,335 new dwell-ing units were added to our lines; 6,708 of these were single family dwelling units. The number of electric heat installations in our service area continued to increase.

There were 3,152 such installations in 1979, including 3,018 newly constructed homes and 134 units which were converted from other types of fuel.

Th e number of commercial and industrial customers we serve increased by 561 during the year. Although this growth in numbers was experienced, total kilowatt-hour sales to the commercial and industrial sector decreased

.04% during the year. And, for the first year since 1974, the average annual kilowatt-hour use by our residential customers declined from the prior year. This can be attributed to the weather and to the conservation efforts of our customers.

During 1979, our Company experienced a utility system peak load of 1, 193 megawatts compared with 1, 177 megawatts the prior year.

Projections for growth in demand show an average annual rate of 4.2% for the next five years, but over the long-haul an average of 2.9% for the next fifteen years.

Casino hotels and related area development will account for about 20% of the increase in demand over the next ten years. Three casino hotels are currently in operation and several more are expected to begin operating in 1980.

Atlantic Electric continues to positively interact with the communities that we serve through a College Presi-dents' Roundtable, monthly Roundtable discussions with consumers, and a newly instituted County Round-table which provides a forum for an exchange of ideas and opinions between a Company Officer and the leaders and residents of counties in our service area.

One of the most unique events of our year occurred in December when Atlantic Electric presented a play entitled The Idea of Edison which was shown on New Jersey Public Television (NJPTV) and presented to other audiences in Southern New Jersey. The script was prepared and produced by us in collaboration with NJPTV, to celebrate the 100th anniversary of Edison's invention of the incandescent light. This joint production was one of the first projects of its kind in New Jersey.

Our efforts to improve communications with our customers, shareholders and employees were wide-ranging over the past year. Energy Rush Hour and Energy Adjustment Information campaigns were launched, using both print and broadcast media, to emphasize our advocacy of load management and to increase awareness of the dramatic change in the world oil situation which so aggravated our fuel costs in 1979 and beyond.

NEWS LINE, a new and expanded employee news-paper, has enhanced internal communications by giving our people an understanding of Company policies and good employee relations.

In October, we held an Open House at B. L. England Station and, over the course of two days, played host to approximately 3,500 visitors. The combination of the tour and slide program provoked a lively question and answer session. Schools were invited the first day with the second being opened to the public at large. In light of the heightened public interest in energy matters another Open House is planned for 1980. We believe it is critically important that the public understand the tre-mendous investment and effort that goes into providing them with reliable and economic electric energy day-in and day-out.

Reliable electric energy does not come from wishful dreams about new, exotic or magical energy sources that will solve our problems over-night. It comes from the studied and steady application of modern tech-nology over an extended period of time. It comes from the commitment of vast amounts of capital and facilities not only for today's customer but for the future. Reliable electric energy comes from dedicated people doing hard work, work which is sometimes dirty and sometimes difficult. Atlantic Electric, its Directors, management and employees are dedicated to providing safe and reliable electric energy to the people of Southern New Jersey at the lowest reasonable cost with acceptable environmental impact while providing a fair return to the owners (the shareholders) for their investment in this Company.

There She Is... Atlantic City's resurgence as the Queen of Resorts continues to stun visitors. Approximately $2.5 billion of new construction was underway at year-end 1979.

These all-electric condominiums, in Longport, are an example of the variety of types of homes comprising growth in residential development in our service area.

The new $50 million headquarters building of The National Aviation Facilities Experimental Center, where research will be done on air traffic safety and efficiency.

13

Common Stock, Price Range and Dividends The Common Stock of the Company is traded on the New York Stock Exchange (Principal Market) and the Philadelphia Stock Exchange. The high and low sales prices of the Common Stock as reported in the Wall Street Journal as New York Stock Exchange-Composite Transactions for the periods indicated were as follows:

Dividends Paid 1979 1978 Per Share High Low High Low 1979 1978 First Quarter 197/s 18 23 20 43 112<!:

40112<!:

Second Quarter 197/s 17112 22 112 20%

43 112<!:

41 112<!:

Third Quarter 203/a 18%

237/s 20 7/s 43 112<!:

41 112<!:

Fourth Quarter 19%

163/4 21 7/s 17%

46<!:

43 V2<!:

10-K Report Available The Annual Report to the Securities and Exchange Commission on Form 10-K is available to shareholders and may be obtained by writing to the Company: Attention: Mr. C. F. Morgan, Sen ior Vice President.

Information for Investors 1979 1978 1977 1976 1975 Number of holders of Common Stock (year-end)........

48,194 44,490 43,826 42,516 39,279 Total cash dividends paid per share on Common Stock..

$1.765

$1.67

$1.62

$1.56

$1.51 Pay-out ratio...........................................

75%

76%

79%

60%

63%

Book value per share (year-end)........................

$21.63

$21.27

$20.71

$20.25

$19.34 Price Earnings Ratio (year-end).........................

7 8

11 9

7 Times fixed charges earned (before income taxes).......

3.64 3.66 3.14 3.14 2.84 For your convenience, listed below are the proposed 1980 record dates and payable dates, for dividends on Common Stock:

Record Dates Payabl e Dates March 13, 1980 September18, 1980 Apri I 15, 1980 October 15, 1980 June 12, 1980 December 18, 1980 July 15, 1980 January 15, 1981 Shareholder Records: Communications regarding stock transfer requirements or lost certificates should be directed to the appropriate Transfer Agent. Changes of address, inquiries on dividends or matters concerning the Dividend Reinvestment and Stock Purchase Plan should be addressed to:

Atlantic City Electric Company Shareholder Records Department 1600 Pacific Avenue Atlantic City, New Jersey 08404 or telephone Area Code 609-645-4506 or 4507.

TRANSFER AGENTS For Common Stock Irving Trust Company 1 Wall Street New York, N.Y. 10015 First National Bank of South Jersey Atlantic City, N.J. 08404 For Cumulative Preferred Stock Chemical Bank 20 Pine Street New York, N.Y. 10015 For Cumulative Convertible Preferred Stock Irving Trust Company New York, N.Y. 10015 14 REGISTRARS For Common Stock Irving Trust Company 1 Wall Street New York, N.Y. 10015 Guarantee Bank Atlantic City, N.J. 08404 For Cumulative Preferred Stock Irving Trust Company New York, N.Y. 10015 For Cumulative Convertible Preferred Stock Morgan Guaranty Trust Company of New York New York, N.Y. 10015 SHARE LISTINGS Common Stock of the Company is listed on the New York Stock Exchange and the Philadelphia Stock Exchange. Th e 5%%

Cumulative Convertible Preferred Stock of the Company is listed on the New York Stock Exchange.

Record-keeping and Dividend Disbursing Agent Atlantic City Electric Company.

See address on this page.

48¢ Residential Commercial I

31 Q; Industrial Other Revenue I

17¢ I

4¢

• 1979 Revenue Dollar Where it came from Report of Management Fuel I

35¢ Taxes 19¢ Cost of Invested Funds Materials and Supplies Labor I

15¢ Iii Depreciation Reinvested Fu nds 8¢ I

2¢ -

Where it went The financial statements presented herein have been prepared by management in conformity with *Generally Accepted Accounting Principles applicable to rate-regulated public utilities. Such Accounting Principles are consistent in all material respects with the accounting prescribed by the Federal Energy Regulatory Commission and the New Jersey Department of Energy, Board of Public Utilities. In preparing the financial statements, management makes informed judgments and estimates relating to events and transactions that are currently being reported.

In an effort to insure the integrity and objectivity of the financial data presented, the Company has established a system of internal accounting and financial controls and procedures. Such system is designed to insure that the books and records refl ect the transactions of the Company and that established policies and procedures are followed. Th e Company's system of internal accounting control is examined by management on a con ti nu ing basis for effectiveness and efficiency. Further, th e system of internal accounting control is reviewed on a regu lar basis by an internal audit staff that reports directly to the Audit Committee of the Board of Directors.

The financial statements have been examined by Deloitte Haskins & Sells, Certified Public Accountants, whose report thereon appears below. The independent auditors provide an objective, independent review as to management's discharge of its responsibilities insofar as they relate to the fairness of reported operating results and financial condition. Their examination includes procedures believed by them to provide reasonable assu ranee that the financial statements are not misleading and includes a review of the Company's system of internal accounting and financial controls and a test of transactions.

The Board of Directors, acting through its Audit Committee, which is composed solely of outside directors, has oversight responsibility for determining that management has fulfilled its obligation in the preparation of financial statements and the ongoing examination of the Company's system of internal accounting control. The Audit Committee meets regularly with management, Deloitte Haskins & Sells and the internal audit staff to discuss accounting, auditing and financial reporting matters. T he Audit Committee reviews the program of audit work performed by the internal audit staff. To insure the auditors' independence, both Deloitte Haskins & Sells and the internal audit staff have complete and free access to the Audit Committee.

Auditors' Opinion Deloitte Haskins & Sells Certified Public Accountants Atlantic City Electric Company:

550 Broad Street Newark, New Jersey 07102 We have examined the balance sheets of Atlantic City Electric Company as of December 31, 1979 and 1978 and the re-lated statements of income and retained earn ings and of changes in financial position for each of the five years in the period ended December 31, 1979. Our examinations were made in accordance with generally accepted auditing standards a.nd, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying financial statements present fairly th e financial position of the Company at December 31, 1979 and 1978 and the results of its operations and the changes in its financial position for each of the five years in the period ended December 31, 1979 in conformity with generally accepted accounting principles applied on a consistent basis.

January 31, 1980 15

1--

Statements of Income and Retained Earnings 1979 OPERATING REVENUES-ELECTRIC (Notes 1 and 3)..............................

OPERATI NG EXPENSES:

Energy (Note 1 ):

Fuel.......................................

Interchange................................

Deferred Costs.............................

Net Energy..............................

Power Production-Operation and Maintenance Other Operation and Maintenance............

Depreciation (Note 1)........................

Taxes Other Than Federal Income Taxes (Note 11)...................................

Federal Income Tax Expense (Notes 1 and 2)..

Total Operating Expenses................

OPERATING INCOME..........................

OTHER INCOME:

Allowance for Funds Used During Construction (Note1 )...................................

Allowance fo r Equity Funds Used Du ri ng Construction (Note 1)......................

Miscellan eous Non-Operating Income Less Income Deductions.........................

Total Other Income......................

INCOME BEFORE INTEREST CHARGES........

INTEREST CHARGES:

Interest on Long Term Debt..................

Amortization of Debt Expense and Premium-Net Interest on Short Term Debt..................

Other Interest Expense.......................

Total Interest Charges....................

Allowance for Debt Funds Used During Construction (Note 1)......................

Net Interest Charges.....................

NET INCOME..................................

RETAINED EARNINGS AT BEGINNING OF YEAR DIVIDENDS DECLARED:

Dividends on Cumulative Preferred Stock......

Dividends on Common Stock (per share 1979-1975, $1.79, $1.70, $1.62, $1.58 and

$1.52).....................................

Total Dividends Declared.................

RETAINED EARNINGS AT END OF YEAR.......

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING..............................

EARNINGS PER SHARE OF COMMON STOCK (Note 1).....................................

See Notes to Financial Statements 16

$283,106 100,472 19,098 (20,340) 99,230 24,717 36,145 22,590 35,860 17,886 236,428 46,678 3,669 1,611 5,280 51,958 18,094 41 1,632 493 20,260 (2,609) 17,651 34,307 94,052 128,359 6,039 21,623 27,662

$100,697 11,980

$2.36 Year Ended December 31,

1978 1977 1976 (In Thousands)

$255,058 84,735 2, 171 86,906 20,716 31,719 21,614 31,999 18,956 211,910 43,148 3,238 112 3,350 46,498 18, 179 40 230 288 18,737 (2,303) 16,434 30,064 88,601 118,665 6,241 18,372 24,613

$ 94,052 10,791

$2.21

$234,995 82,735 3,735 86,470 17,782 29,263 19,369 29,069 13, 188 195,141 39,854 3,906 (25) 3,881 43,735 18,489 63 434 162 19, 148 (2,771) 16,377 27,358 84,028 111,386 5,550 17,235 22,785

$ 88,601 10,630

$2.06

$212,027 69,234 4,819 74,053 13,498 26,334 17,395 26,342 11,495 169, 117 42,910 7,457 386 7,843 50,753 18,949 52 801 155 19,957 19,957 30,796 74,166 104,962 5,484 15,450 20,934

$ 84,028 9,747

$2.60 1975

$199,079 71,644 2,855 74,499 10,268 24,632 16,846 23,394 8,689 158,328 40,751 7,230 517 7,747 48,498 18,403 25 1,695 95 20,218 20,218 28,280 65,765 94,045 5,484 14,395 19,879

$ 74,166 9,470

$2.41

Statements of Changes in Financial Position SOURCE OF FUNDS Funds from Operations:

Net Income........................................

Principal Non-Cash Charges (Credits) to Income:

Depreciation.....................................

Amortization of Nuclear Fuel.....................

Allowance for Funds Used During Construction...

Federal Income Taxes-Deferred-Net.............

Investment Tax Credit Adjustments-Net..........

Other-Net......................................

Total Funds from Operations...................

Funds from Outside Sources:

Long Term Debt...................................

Sale of Common Stock.............................

Sale of Preferred Stock.............................

Capital Stock Purchase Plan........................

Increase in Short Term Debt........................

Total Funds from Outside Sources..............

Hope Creek Transfer-Net..........................

Other Sources-Net................................

Total Source of Funds..........................

APPLICATION OF FUNDS Gross Additions to Utility Plant.......................

Allowance for Funds Used During Construction.......

Property Abandonment Costs.........................

Net............................................

Dividends on Preferred Stock.........................

Dividends on Common Stock.........................

Retirement and Maturity of Long Term Debt...........

Conversion of Preferred Stock........................

Redemption of Preferred Stock.......................

Decrease in Short Term Debt.........................

Property Abandonment Costs.........................

Investments in Subsidiary Companies.................

Increase (Decrease) in Working Capital...............

Total Application of Funds......................

NET INCREASE (DECREASE) IN COMPONENTS OF WORKING CAPITAL

• Current Assets:

1979

$ 34,307 22,590 732 (6,363) 6,281 4,354 308 62,209 24,934 14 39,475 64,423 619

$127,251

$ 72,773 (6,363)

(12) 66,398 6,039 21,623 3,222 1,331 1,600 12 391 26,635

$127,251 Cash and Cash Items............................... $ 1,064 2,392 3,240 3,030 2,211 Accounts Receivable...............................

Fuel...............................................

Materials and Supplies.............................

Prepayments.......................................

Deferred Energy Costs.............................

Other..............................................

Total..........................................

Current Lia bi I ities:

Accounts Payable..................................

Taxes Accrued.....................................

Interest Accrued...................................

Deferred Energy Costs.............................

Accumulated Deferred Taxes-Deferred Energy Costs....................................

Other..............................................

Total..........................................

Net Increase (Decrease) in Working Capital...........

18,540 30,477 1,789 (7,509) 146 (4,989) 8,528 5,877 3,842

$ 26,635 Year Ended December 31, 1978 1977 1976 (In Thousands)

$ 30,064

$27,358

$30,796 21,614 1,376 (5,541) 8,116 4,963 (200) 60,392 5,023 5,024 1,252

$ 66,668

$ 58,073 (5,541)

(4,888) 47,644 6,241 18,372 228 1,729 4,888 135 (12,569)

$ 66,668

$(3,334) 3,906 753 1,450 242 3,017 983 4,601 32 4,989 4,981 15,586

$(12,569) 19,369 1,038 (6,677) 7,866 2,850 (167) 51,637 15,000 3,350 10,000 24 28,374 23

$80,034

$48,733 (6,677) 42,056 5,550 17,235 15,400 512 (2,803) 2,084

$80,034

$ 2,253 95 3,389 1,029 319 (3,262) 3,823 (193) 3,662 35 (1,765) 1,739

$ 2,084 17,395 (7,457) 4,697 6,420 132 51,983 2,500 20,791 23,291 3,262 (127)

$78,409

$41,702 (7,457) 34,245 5,484 15,450 10,592 25 13,650 1, 161 (2, 198)

$78,409

$ (994) 1,367 (2,082) 69 134 3,262 1,756 2,527 336 (291) 1,382 3,954

$ (2,198)

• Excludes Short Term Debt, Notes and Current Maturities of Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption.

See Notes to Financial Statements 1975

$28,280 16,846 (7,230) 3,962 3,736 472 46,066 51,500 51,500 (793)

$96,773

$46,745 (7,230) 39,515 5,484 14,395 15,125 23,650 895 (2,291)

$96,773

$(2,812) 158 2,392 (71) 207 (2,106)

(2,232)

(1,633) 252 (32) 1,472 59

$ (2,291) 17

Balance Sheets Assets ELECTRIC UTILITY PLANT (Notes 1 and 4):

In Service:

Production.....................................................................

Transm ission...................................................................

Distribution....................................................................

General........................................................................

Total.........................................................................

Less Accumu lated Depreciation.............................................

Net......................... * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

• Construction Work in Progress....................................................

Nuclear Fuel.....................................................................

Less Accumulated Amortization.............................................

Net....................... *. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

• Electric Utility Plant-Net.....................................................

INVESTMENTS:

Investment in Subsidiary Companies, at Equity (Note 5)............................

Land Purchase Contracts.........................................................

Other............................................................................

Total Investments.............................................................

CURRENT ASSETS:

Cash (Note 8)....................................................................

Temporary Cash Investments.....................................................

Special Deposits and Working Funds..............................................

Accounts Receivable:

Utility Services.................................................................

Miscellaneous..................................................................

Allowance for Doubtfu l Accounts................................................

Fuel (at average cost).............................................................

Materials and Supplies (at average cost)...........................................

Prepayments.....................................................................

Deferred Energy Costs (Note 1)...................................................

Total Current Assets..........................................................

DEFERRED DEBITS:

Property Abandonment Costs (Note 1)............................................

Unamortized Debt Expense (Note 1)...............................................

Other............................................................................

Total Deferred Debits.........................................................

TOTAL ASSETS............................................................

See Notes to Financial Statements 18 December 31,

1979 1978 (In Thousands)

$333,860 125,075 243,961 17,333 720,229 187,608 532,621 132,684 17,162 3,146 14,016 679,321 3,437 813 681 4 931 2,829 1,800 1,130 19,776 3,036 (200) 22,264 12,776 4,480 18,540 86,431 4,684 1,727 2,358 8,769

$779,452

$328,563 120,362 226,657 16,764 692,346 169,361 522,985 97,538 12,589 2,414 10,175 630,698 3,081 794 561 4,436 3,657 1,038 17,409 3,011 (200) 19,024 9,746 2,269 55,954 4,888 1,878 2,007 8,773

$699,861

Liabilities and Capitalization CAPITALIZATION:

Common Shareholders' Equity:

Common Stock (Note 6)........................................................

Premium on Capital Stock......................................................

Capital Stock Purchase Plan..................... *...............................

Capital Stock Expense..........................................................

Retained Earnings..............................................................

Total Common Shareholders' Equity.........................................

Cumulative Preferred Stock Not Subject to Mandatory Redemption (Note 6).........

Cumulative Preferred Stock Subject to Mandatory Redemption (Note 6).............

Long Term Debt (Note 7).........................................................

Total Capitalization (less long term debt due, and cumulative preferred stock subject to mandatory redemption, within one year).........................

CURRENT LIABILITIES:

Current Portion:

Cumulative Preferred Stock Subject to Mandatory Redemption (Note 6)...........

Long Term Debt (Note 7).......................................................

Notes Payable to Banks (Note 8)..................................................

Commercial Paper (Note 8).......................................................

Accounts Payable................................................................

Customer Deposits...............................................................

Taxes Acc rued...................................................................

Interest Accrued..................................................................

Dividends Declared...............................................................

Deferred Energy Costs (Note 1)...................................................

Accumulated Deferred Taxes-Deferred Energy Costs (Notes 1 and 2)................

Other............................................................................

Total Current Liabilities.....................................................

DEFERRED CREDITS:

Customer Advances for Construction..............................................

Accumulated Deferred Investment Tax Credits (Notes 1 and 2)......................

Accumulated Deferred Income Taxes (Notes 1 and 2)..............................

Operating Reserves...............................................................

Other Deferred Credits............................................................

Total Deferred Credits......................................................

COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)

TOTAL LIABILITIES AND CAPITALIZATION.................................

See Notes to Financial Statements December 31,

1979 1978 (In Thousands)

$ 36,589 128,285 40 (1,781) 100,697 263,830 46,401 37,600 263,448 611,279 800 23,000 7,500 31,975 6,819 3,240 3, 108 3,743 7,100 8,528 12,752 108,565 792 24,539 32,703 755 819 59,608

$779,452

$ 32,749 107, 171 25 (1,832) 94,052 232,165 47,732 39,200 286,781 605,878 800 3,000 5,030 2,819 10,617 3,597 6,292 4,989 8,103 45,247 726 20,185 26,422 740 663 48,736

$699,861 19

Notes to Financial Statements NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:

REGULATION-The accounting and rates of the Com-pany are subject to the requirements of the State of New Jersey, Department of Energy, Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission (FERG).

ELECTRIC UTILITY PLANT -Property is stated at origi-nal cost (cost to the person first devoting the plant to public service). Generally the plant is subject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, is capitalized. Included in certain additions is an Allow-ance for Funds Used During Construction (AFDC) which is defined in the applicable regulatory systems of accounts as the net cost, during the period of construc-tion, of borrowed funds used for construction purposes and a reasonable rate on other funds when so used.

Effective January 1, 1977, in accordance with a FERG order, AFDC is computed and shown in the Statements of Income as other income (equity) and borrowed funds (debt). AFDC has not been reclassified in the financial statements into equity and debt components for years prior to January 1, 1977, since prior period financial data would not be comparable. AFDC has been calculated using a rate of 8% for all years reported. Such rate is less than the maximum allowed under the FERG order forthe years 1979, 1978 and 1977.

DEFERRED ENERGY COSTS-The Company has a Levelized Energy Clause (LEG) which utilizes projected energy costs which are based on a thirteen-month period ending December 31, 1980 and include prior period under or over recoveries. Under this Clause, the recovery of energy costs is made through levelized monthly charges over the period of projection. Any under or over recoveries are deferred in balance sheet accounts as a current asset or current liability as appropriate. Such deferrals are recognized in the State-ments of Income in the period in which they are subsequently recovered through the clause.

DEPRECIATION AND MAINTENANCE-The Company provides for depreciation on the basis of the estimated service lives of depreciable property on a straight-line basis. Depreciation applicable to nuclear plant provides for estimated cost of dismantling or decommissioning.

The overall composite rate of depreciation was approxi-mately 3.3% for 1979, 1978 and 1977, and 3.2% for 1976 and 1975. In addition to the provisions for depreciation, income is charged with the cost of labor, material, supervision and other expenses incurred in making repairs and minor replacements and in maintaining the properties in efficient condition. Accumulated deprecia-tion is charged with the cost of depreciable property units retired, together with removal costs less salvage and other recoveries.

NUCLEAR FUEL-The Company's amortization of the Salem nuclear fuel is based on a rate using the number of units of thermal energy produced over the estimated total thermal units to be produced during the life of the fuel, plus a factor representing the estimated future costs (storage and disposal) for the disposition of spent nuclear fuel.

20 Nuclear fuel requirements for Peach Bottom Units No.

2 and 3 are being provided by the operating company for Peach Bottom through a fuel purchase contract. Pres-ently, such costs are calculated using a zero net salvage value. The Company is responsible for payment of its proportionate interest (7.51%) of the cost of the fuel consumed and of certain operating costs and interest expense during the term of the contract.

The costs of nuclear fuel consumed is included in the Statements of Income as a charge to Fuel Expense.

FEDERAL INCOME TAXES-Deferred Federal Income Taxes are provided in amounts equal to the tax effect of the difference between tax depreciation computed on depreciable property added after 1973 using accele-rated methods under the ADR System and the straight-line method using asset guideline periods. Tax reduc-tions relating to the differences between book deprecia-tion and straight-line asset guideline depreciation are reflected in Federal Income Tax Expense currently as allowed by the current ratemaking policy of the BPU. In addition, the Company provides deferred Federal In-come Taxes relating to the deferral of energy costs and to the use of the repair allowance provisions of ADR (See Note 2). Investment tax credits are deferred on the balance sheet and are restored to income over the life of the related property.

PENSION PLAN-The Company and Deepwater, refer-red to in Note 5, have in effect a noncontributory insured retirement annuity plan covering all regular employees.

The cost of the plan, determined under the aggregate cost actuarial method was as follows:

Company Cost*

Amount Including Charged to Deepwater Construction Cont ruction Cost (In Thousands) 1979....

$3,740

$857

$609 1978....

3,529 799 573 1977....

3,076 678 498 1976....

2,544 582 414 1975....

2,164 510 362

• Excludes Deepwater Based on an actuarial study as of December 31, 1978, the vested benefits computed under the Plan were in excess of pension fund assets by approximately

$2,181,000. The Company's Plan is in compliance with the Employee Retirement Income Security Act of 1974.

PROPERTY ABANDONMENT COSTS-These costs, principally the Company's investment in four off-shore nuclear units which were cancelled by Public Service Electric & Gas Company in December 1978, are being

amortized for book purposes, with the concurrence of the BPU, over a 20 year period subject to the BPU's final order with respect to disposition of these costs.

EARNINGS PER SHARE-These earnings have been computed for Common Stock by dividing net income less applicable preferred stock dividend requ irements

($6,065,900, $6,253, 193, $5,484,691, $5,483,936 and

$5,483,936 in 1979 to 1975, respectively) by the average common shares outstanding during the year.

NOTE 2. FEDERAL INCOME TAXES:

OTHER-Capital Stock expense is being amoritzed on a ratable basis over 20 years.

Debt issuance expense and premium are being amor-tized over the lives of the issues to which they pertain. In conformity with allowed BPU ratemaking accounting, all gains or losses relating to reacquired debt are recognized currently.

Certain prior-year amounts have been reclassified to conform with current classifications.

Federal income tax expense applicable to current operations is less than the amount computed by applying the statu-tory rate on book income subject to tax for the following reasons:

Year Ended December 31,

1979 1978 1977 1976 1975 (In Thousands)

Net Income...........................................

$34,307

$30,064

$27,358

$30,796

$28,280 Federal Income Tax Expense (as below)................

18,868 19,064 14, 130 11,825 8,772 Book Income Subject to Tax...........................

$53,175

$49,128

$41,488

$42,621

$37,052 Income Tax at Statutory Rate (46%-1979, 48%-Prio r)....

$24,461

$23,581

$19,914

$20,458

$17,785 Less:

Excess of Tax over Book Depreciation (flow-through portion)...............................................

89 666 1,788 3,656 3,844 Allowance for Funds Used During Construction.......

2,888 2,659 3,205 3,579 3,470 Capitalized Overheads...............................

1,041 927 796 730 745 Investment Tax Credits-Used.......................

735 610 379 289 426 Other...............................................

840 (345)

(384) 379 528 Total Federal Income Tax Expense...............

$18,868

$19,064

$14,130

$11,825

$ 8,772 Federal Income Tax Expense is comprised of the following:

Federal Income Tax Currently Payable.................

$ (1,550)

$ 5,414 8, 116 6,036 (610) 18,956 108

$19,064

$ 1,850 7,866 3,851 (379) 13,188 942

$14,130 378 991 Deferred Federal Income Taxes (as below)..............

14,383 Investment Tax Credit-Earned.........................

5,788 Investment Tax Credit-Used..........................

(735)

Federal Income Tax Expense...........................

17,886 Federal Income Tax-Other Income....................

982 Total Federal Income Tax Expense...............

$18,868 Deferred Federal Income Taxes result from the following timing differences:

Deferred Credits:

Liberalized Depreciation...............................

Repair Allowance......................................

Property Abandonment Costs..........................

Amortization-Accelerated Depreciation, Repair Allow-ance and Property Abandonment Costs...............

Other.................................................

Total............................................

Current Liabilities:

Deferred Energy Costs.................................

Other.................................................

Total Deferred Federal Income Taxes-Net.........

$ 3,830 2,967 6

(516)

(6) 6,281 8,528 (426)

$14,383

$ 3,925 2,994 1,467 (391) 121 8, 116

$ 8, 116

$ 4,138 4,062 (315)

(19) 7,866

$ 7,866 4,697 6,709 (289) 11,495 330

$11,825

$ 3,264 1,920 (247)

(240) 4,697

$ 4,697 3,962 4,162 (426) 8,689 83

$ 8,772

$ 2,256 1,845 (139) 3,962

$ 3,962 Investment tax credit earned in 1979 and 1978 includes $699,000 and $463,000 respectively, representing the Company's use of the additional investment tax credit available under the Tax Reduction Act of 1975.

21

Notes to Financial Statements NO TE 3. RA TE INCREASES:

During the period indicated below, rate increases have been approved by the BPU designed to increase annual revenues fro m electric service, based in each case on the applicable test year, as follows:

Increase Date of Amount Date Amount In Test Petition Requested Effective Approved Revenue Year (Millions)

(Millions)

August, 1975.................................

$28.0 February 5, 1976

$ 9.3 4.7%

1975 February, 1977...............................

16.5 January 27, 1978 8.0 3.8 1976 March, 1978 (preliminary)....................

35.7 July 19, 1978 14.8 6.2 1978 March, 1978 (final )...........................

July 1,1979 10.0 4.0 1978 On November 28, 1979 the BPU approved an increase in the Company's LEC from 0.0322<1:/ kwh to 1.1019<1:/ kwh,

effective Decem ber 1, 1979. This will represent an estimated increase of $64,300,000 in revenues over the thirteen-month period end ing December 31, 1980 (See Note 1 of Notes to Financial Statements).

On November 30, 1979 the Company filed an application with the BPU for a rate increase of $85,700,000, based upon a projected 1980 test year. The requested amount represents an increase of approximately 25% of estimated 1980 revenues. The Company proposed an in itial increase of $45,200,000 to be effective by July 1, 1980 and that the balance of $40,500,000 be acted upon by the BPU on or before February 28, 1981. The Company cannot presently predict either the amounts, if any, of the increase which might be granted or the tim ing of the decisions by the BPU.

NOTE 4. JO/NTL Y-OWNED GENERA TING STATIONS:

The Company's ownership interests in jointly-owned generating stations at December 31 are as follows:

Station Keystone..............

Conemaugh...........

Peach Bottom.........

Salem.................

Hope Creek...........

Company's Share 2.47%

3.83%

7.51 %

7.41 %

5.00%

Electric Plant Construction Work In Service In Progress (a) 1979 1978 1979 1978 (In Thousands)

(In Thousands)

$ 5,594

$ 5,605 90 69 10,358 9,837 679 925 60,413 60,413 3,256 1,757 75,029 71,219 49,937 44,243 49,534 34,721 (a) Amounts shown include allowance for funds used during construction.

The Company provides its own financing for its proportionate share of the cost of each station and includes its share of direct expenses in its statements of income. The dollar amounts shown above represent only those portions of the units owned by the Company.

NOTE 5. INVESTMENT IN SUBSIDIARY COMPANIES:

The Company's investment in Deepwater Operating Company (Deepwater), a wholly-owned subsidiary which operates generating and process steam units owned by the Company, was $2,641,000 and $2,301,000 at December 31,

1979 and 1978, respectively. The assets of Deepwater principally consist of working capital in wh ich the equity of the Company is fairly represented by its investment in Deepwater. The net production costs of Deepwater (after deducting contract charges) are charged to the Company. These costs are included in the Company's accounts classified as to operation, maintenance and taxes.

The Company also has an investment in Atlantic Housing, Inc. (Housing), a wholly-owned subisidary, which amounted to $796,480 and $779,692 at December 31, 1979 and 1978 respectively. Housing's principal investment is a 20% undivided interest as tenant in common in a future generating station and industrial site.

NOTE 6. CAPITAL STOCK:

COMMON STOCK-As of December 31, 1979 and 1978, the Company's Common Stock included 14,000,000 authorized sh ares of Common Stock ($3 par value), of which 12, 196,486 and 10,916,308 shares, respectively, were outstanding.

Shares of common stock issued in 1979 and 1978 consisted of the following :

Sale of Common Stock...................................

Dividend Reinvestment and Stock Purchase................

Employee Stock Ownership Plan..........................

Conversion of Preferred Stock............................

Total.................................................

1979 1978 1,000,000 184,889 48,710 46,579 1,280, 178 126,680 26,547 60,524 213,751 Premium on Capital Stock was credited in 1979 and 1978 with $21,114,141 and $4,382,108 respectively, representing the excess of proceeds over the par value of shares of Common Stock issued, sold and converted. At December 31,

1979, there were 100,590 shares of Common Stock authorized for issuance pursuant to its Dividend Reinvestment and 22

Stock Purchase Plan which became effective in 1976 and 148,895 shares of Common Stock authorized for issuance pursuant to its Employee Stock Ownership Plan which became effective in 1977. At December 31, 1979, 224,029 shares of Common Stock were reserved for the conversion of 5%% Convertible Series of Preferred Stock.

CUMULATIVE PREFERRED STOCKS-The Company has authorized 799,979 shares of Cumulative Preferred Stock, Par Value $100, and 2,000,000 shares of cumulative preferred stock, No Par Value. Unissued shares may, or may not, possess mandatory redemption characteristics upon issuance. In certain circumstances, if dividends on issued Cumulative Preferred Stock are in arrears voting rights for the election of a majority of the Board of Directors becomes operative.

Cumulative Preferred Stock Not Subject to Mandatory Redemption:

$100 Par Value-Cumulative and Non-participating shares issued and outstanding:

Series:

4%

77,000 Shares...........................

4.10% 72,000 Shares...........................

4.35% 15,000 Shares...........................

4.35% 36,000 Shares...........................

4.75% 50,000 Shares...........................

5.0%

50,000 Shares...........................

5-718% Convertible Series 64,007 Shares (1979)....................

77,316 Shares (1978)....................

7.52% 100,000 Shares..........................

Total......................................

December 31,

1979 1978 Premium on Capital Stock (In Thousands)

$ 7,700

$ 7,700

$93 7,200 7,200 1,500 1,500 3,600 3,600 5,000 5,000 5,000 5,000 6,401 7,732 10,000 10,000

$46,401

$47,732 Current Redemption Price Per Share

$ 105.50 101.00 101.00 101.00 101.00 100.00 103.00 106.77 Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of the Com-pany upon payment of the redemption price plus accumulated and unpaid dividends to the date fixed for redemption.

The 5-718% Convertible Series is convertible (subject to adjustment in certain events) into Common Stock at the rate of 3.5 shares of Common Stock for each share of Preferred.

Cumulative Preferred Stock Subject to Mandatory Redemption:

Current Refunding Par December 31,

Redemption Restricted Value 1979 1978 Price Per Share Prior to (In Thousands)

Issued and Outstand ing:

Series:

8.40% 100,000 Shares..............

$100

$10,000

$10,000

$115.00 9.96% 184,000 Shares (1979).......

100 18,400 108.21 Aug. 1, 1984 200,000 Shares (1978).......

100 20,000

$8.25 100,000 Shares..............

None 10,000 10,000 107.83 Nov. 1, 1987 38,400 40,000 Less Portion due within one year.......

800 800 Total..........................

$37,600

$39,200 On February 1, 1985, and annually thereafter, 4,000 shares of th e 8.40% Series must be redeemed through the operation of a sinking fund at a redemption price of $100.00 per share. At the option of the Company, an additional 4,000 shares may be redeemed on any sinking fund date, without premium, up to 32,000 shares in the aggregate.

On August 1, annually 8,000 shares of the 9.96% Series must be redeemed through the operation of a sinking fund at a redemption price of $100.00 per share. At the option of the Company, an additional 8,000 shares may be redeemed on any sinking fund date, without premium, up to 40,000 shares in the aggregate. In August 1979, the Company redeemed 16,000 shares at par.

On November 1, 1983, and annually thereafter, 2,500 shares of the $8.25 No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100.00 per share. At the option of the Company, an additional number of shares, not to exceed 2,500 may be redeemed, on any sinking fund date, without premium.

The minimum sinking fund provisions of the above series aggregate $800,000 in each of the years 1980, 1981 and 1982, and $1,050,000 in 1983 and 1984.

23

Notes to Financial Statements NOTE 7. LONG TERM DEBT:

First Mortgage Bonds:

2-7/8% Series due (June 1) 1979............................................

2-3/ 4% Series due (July 1) 1980.............................................

2-7/8% Series A due (Nov. 1) 1980..........................................

3-1/4°io Series due (March 1) 1982...........................................

3-1/4% Series due (Jan. 1) 1983.............................................

9-1 /4% Series due (May 1) 1983.............................................

3% Series due (March 1) 1984...............................................

3-1 /4% Series due (March 1) 1985...........................................

4-1/ 2% Series due (Jan. 1) 1987.............................................

3-7/8% Series due (April 1) 1988............................................

4-1 /2% Series due (April 1) 1989............................................

4-1 /2% Series due (March 1) 1991...........................................

4-1 / 2% Series due (July 1) 1992.............................................

4-3/8% Series due (March 1) 1993...........................................

5-1 /8% Series due (Feb. 1) 1996.............................................

8-7 /8% Series due (Sept. 1) 2000............................................

8% Series due (May 1) 2001.................................................

7-1 / 2% Series due (April 1) 2002............................................

7-3/4% Series due (June 1) 2003............................................

7-5/8% Pollution Control Series due (Jan. 1) 2005............................

6-3/8% Pollution Control Series due (Dec. 1) 2006...........................

Debentures:

5-1 /4% Sinking Fund Debentures due (Feb. 1) 1996..........................

7-1 /4% Sinking Fund Debentures due (May 1) 1998..........................

Notes-7.90% Notes due (Dec. 15) 1982.........................................

Add Unamortized Premium (Note 1)...........................,.................

Deduct Series due within one year..............................................

December 31 1979 1978 (In Thousands) 4,600 18,400 4,620 4,050 35,000 5,000 10,000 10,000 10,000 5,000 10,000 15,000 15,000 10,000 20,000 27,000 20,000 30,000 6,500 2,500 262,670 3,612 3,800 7,412 15,000 1,366 286,448 23,000

$263,448 3,000 4,600 18,400 4,620 4,050 35,000 5,000 10,000 10,000 10,000 5,000 10,000 15,000 15,000 10,000 20,000 27,000 20,000 30,000 6,500 2,500 265,670 3,732 3,902 7,634 15,000 1,477 289,781 3,000

$286,781 Deposits in sinking funds for retirement of debentures are required on February 1 of each year from 1980through 1995 for the 5-1 /4% debentures, and on May 1 of each year from 1980 to 1997 for the 7-1 /4% debentures, in amounts in each case sufficient to redeem $100,000 principal amount plus, at the election of the Company, up to an additional

$100,000 principal amount in each year. At December 31, 1979, the Company had reacquired and cancelled $488,000 principal amount of the 5-1 /4% debentures and $500,000 principal amount of the 7-1 /4% debentures toward its requirements for 1980 and subsequent periods.

Annual sinking fund requirements of $1,246,700, in connection with certain first mortgage bonds outstanding, are being satisfied by certification of property additions as provided for in the related mortgage indentures.

In January 1980, the Company issued $75,000,000 principal amount of new First Mortgage Bonds 12-5/8% Series due 201 O. The proceeds will be used in connection with the Company's ongoing construction program, the retirement of indebtedness and for other corporate purposes.

24

NOTE 8. SHORT TERM DEBT AND COMPENSATING BALANCES:

The Company had arrangements for short term debt as follows:

Maximum amount of short term debt outstanding at any month-end during the year:

Notes Payable to Banks Commercial Paper......

Average daily amount of short term debt outstanding during the year:

Notes Payable to Banks Commercial Paper......

Weighted daily average interest rate of short term debt du ring the year:

Notes Payable to Banks Commercial Paper......

Weighted average interest rates for short term debt outstanding at year-end:

Notes Payable to Banks Commercial Paper......

1979 1978 (Dollars in Thousands)

$ 7,500

$31,975

$ 2,260

$ 9,352 13.0%

12.4%

14.7%

13.2%

$7,000 88

$1,599 8.5%

7.9%

The unused lines of credit available at December 31,

1979 and 1978 were $20,525,000 and $40,000,000, re-spectively. Demand deposits are maintained with lend-ing banks, *certain of which are deemed to constitute compensating balances which are not legally restricted.

Based on lines of credit and loans outstanding at December 31, 1979 and 1978 respectively, such com-pensating balances approximated $1,581,000 and

$1,550,000.

NOTE 9. COMMITMENTS AND CONTINGENCIES:

Construction expenditures, including nuclear fuel but excluding production plant, are estimated at $71,000,000 for 1980. Commitments for the construction of produc-tion plant amount to approximately $245,000,000 of which it is estimated that $45,000,000 will be expended in 1980.

The Price-Anderson Act places a liability limit of

$560,000,000 on each nuclear generating unit for public liability claims that could arise from a nuclear incident. In the event of any such incident, all owners of nuclear generating units licensed to operate would be required to contribute toward satisfaction of such claims. The Com-pany, as a co-owner of the Peach Bottom and Salem Stations, has partially insured for this exposure by purchasing, through the principal owners, private insur-ance in the maximum available amount of $160,000,000.

The remainder ($400,000,000) is provided by a combina-tion of a mandatory program of retrospective premiums to be assessed against owners of nuclear reactors after a nuclear incident (up to $5,000,000 per incident but not more than $10,000,000 in any calendar year, for each licensed nuclear reactor in the United States) and by indemnity agreements with the Nuclear Regulatory Commission. Accordingly, in the event of a nuclear incident involving any licensed nuclear reactor in the United States which was not covered by the $160,000,000 private insurance, the Company could be assessed, based on the three nuclear reactors now in service, a maximum amount in relation to its own~rship participa-tion (approximately $1, 100,000 for any such incident but not more than $2,200,000 in any year).

Due to the suspension of construction of the Forked River Nuclear Generating Station and the resultant delay in the commercial operation of that unit, the Company has terminated negotiations with Jersey Central Power &

Light regarding the purchase of a 10% ownership in the Forked River unit. The Company and Pennsylvania Power & Light Company (PPL), have entered into an agreement whereby the Company will purchase 5.94% of the net capacity and energy output of each of two PPL 1050 MW nuclear generating units, scheduled to be placed in service January 1982 and January 1985, respectively. The purchase of power from PPL will commence with commercial operation of the stations and continue through September 30, 1991. Also, the Company on December 11, 1979, signed an agreement with Delmarva Power & Light Company (DPL) for the purchase of 50 MW of power from the output of DPL's coal-fired Indian River Station, which is scheduled to be placed in service during the fall of 1980. The purchase of 50 MW of power from DPL will commence with commer-cial operation of the station and continue through May 31, 1985. In addition, the Company, on October 10, 1979, signed a letter of intent with DPL for a 25% ownership in the 500 MW coal-fired Vienna No. 9 Generating Station, which is scheduled to be placed in commercial operation in 1987.

NOTE 10. LEASES:

Rents, principally charged to operations, amounted to:

$4, 182,000, $3,805,000, $3,600,000, $3,500,000 and

$3,380,000 for the years 1979 to 1975, respectively. In accordance with ratemaking treatment, the Company's capital leases are accounted for as operating leases.

Such leases, if capitalized, would have increased the Company's assets and liabilities by approximately

$17,000,000 and would not have had a material impact on the Company's net income.

Future minimum rental commitments under capital leases and noncancelable operating leases as of Decem-ber 31, 1979 are approximately:

Year Capital 1980......

1981......

1982......

1983......

1984......

Thereafter

$ 2,000 2,000 2,000 2,000 2,000 24,100 Operating (In Thousands)

$500 400 300 300 100 800 Total

$ 2,500 2,400 2,300 2,300 2,100 24,900 The total minimum rental commitments for capital leases as of December 31, 1979 are applicable to combustion turbine generating units (69%), fuel storage facilities (19%) and general plant (12%). Minimum rental commitments for operating leases are applicable to steam production (55%) and general plant (45%).

25

Notes to Financial Statements NOTE 11. SUPPLEMENTARY INCOME STATEMENT INFORMATION:

Operating expenses include taxes and other items not separately identified in the Statements of Income, as follows:

Taxes Other Than Income Taxes:

Real and Personal Property Taxes...........

State Gross Sales, Excise and Franchise Taxes and Miscellaneous State and Local Taxes..............................

Social Security Taxes-Federal and State....

Total..................................

Maintenance Expenses.........................

1979

$ 1,266 33,149 1,445

$35,860

$20,565 Year Ended December 31,

1978 1977 1976 (In Thousands) 646 825 890 30,165 27,209 24,548 1,188 1,035 904

$31,999

$29,069

$26,342

$17,217

$15,038

$11,663 Charges to income for royalties and advertising are less than 1% of gross revenue.

NOTE 12. QUARTERLY FINANCIAL RESULTS (UNAUDITED):

1975 861 21,652 881

$23,394

$ 8,867 Quarterly financial data which reflect all adjustments (which consist of only normal recurring accruals) necessary in the opinion of the Company for a fair presentation of such amounts are as follows:

Operating Operating Net Earnings For Earnings Quarter Revenues Income Income Common Stock Per Share (In Thousands) 1979 1st......................

$ 65,532

$10,578

$ 7,503

$ 5,965

$.51 2nd.....................

62,526 9,413 6,418 4,883

.41 3rd......................

85,001 17, 148 13,833 12,328 1.02 4th......................

70,047 9,539 6,553 5,065

.42

$283,106

$46,678

$34,307

$28,241

$2.36 1978 1st......................

$ 60,575

$ 8,603

$ 5,274

$ 3,705

$.35 2nd.....................

58,198 8,240 4,991 3,422

.32 3rd......................

75,238 16,708 13,374 11,811 1.09 4th......................

61,047 9,597 6,425 4,873

.45

$255,058

$43,148

$30,064

$23,811

$2.21 The revenues of the Company are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months.

26

I I

Management's Discussion and Analysis of the Statements of Income The Statements of Income reflect the results of past operations and are not intended as any representation as to results of operations for any future period.

The following summary reflects the year-to-year changes, increase or *(decrease), in the principal items of the Statements of Income (amounts stated in thousands):

Comparison of 1979 and 1978 1978 and 1977 Operating Revenues........................................

$28,048 11.0%

$20,063 8.5%

Net Energy.................................................

12,324 14.2 436 0.5 Power Production-Operations and Maintenance.............

4,001 19.3 2,934 16.5 Other Operations and Maintenance..........................

4,426 14.0 2,456 8.4 Depreciation................................................

976 4.5 2,245 11.6 Taxes Other than Federal Income Taxes.....................

3,861 12.1 2,930 10.1 Federal Income Tax Expense................................

{1,070)

(5.6) 5,768 43.7 Other Income...............................................

1,930 57.6 (531)

(13.7)

Net Interest Charges........................................

1,217 7.4 57 0.4 OPERATING REVENUES-Increases are principally at-tributable to increases in energy sales in 1979and1978, rate increases in January and July of 1978 and July and December of 1979.

NET ENERGY:

FU EL-Although generation increased 1.8% in 1979, the significant increase in fuel of $15,737,000 (18.6%)

is principal ly attributable to an increase in the cost of fuel.

INTERCHANGE-Interchange reflects the net cost of energy interchanged to and from other utilities within the PJM. The almost eight-fold increase in 1979 of

$16,927,000 generally reflects the Company's ability to acquire (import) energy at a lower cost than if the Company had generated the energy. The Company was also a net importer of energy in 1978.

DEFERRED COSTS-These costs represent energy costs incurred by the Company which were not re-covered in 1979 under the Company's LEG (see Note 1 of Notes to Financial Statements). Accordingly, such costs have been deferred on the Company's balance sheet to be recovered in future periods.

POWER PRODUCTION-OPERATION AND MAINTENANCE-The increases in 1979 and 1978 are principally attributable to increased operational charges and major maintenance at our jointly-owned facilities and to higher operational and maintenance costs at our wholly-owned facilities.

OTHER OPERATION AND MAINTENANCE-Increases in 1979 and 1978 are due principally to higher transmis-sion and distribution maintenance expenses and in-creased administration and general costs. The in-creased charges continue to result from inflationary pressures, including higher costs of material, supplies and wages.

DEPRECIATION-The increases in 1979 and 1978 are principally attributable to higher depreciable plant bal-ances and, as to 1978, the placing in service of the Salem Nuclear Generating Unit in June of 1977.

TAXES OTHER THAN FEDERAL INCOME TAX EXPENSE-These taxes are principally taxes on the Company's gross receipts. The increases in 1979 and 1978 are a direct result of increases in the Company's operating revenues.

FEDERAL INCOME TAX EXPENSE-The decrease in 1979 includes the effect of a lower statutory tax rate in 1979. See Note 3 of Notes to Financial Statements for a reconciliation of actual Federal Income taxes to such taxes computed at statutory rates.

OTHER INCOME-Other Income, principally AFDC,

increased in 1979 as a result of higher equity AFDC resulting from higher construction work in progress balances. The decrease in 1978 results primarily from the exclusion of the debt portion of AFDC from other income (See Note 1 of Notes to Financial Statements) and the transfer of the Salem Nuclear Generating Unit into service in June, 1977.

NET INTEREST CHARG ES-The increase in 1979 is principally attributable to increases in short term debt incu rred in connection with the Company's construc-tion program.

27

Supplementary Information Concerning the Effects of Changing Prices (Unaudited).

The following supplementary information is supplied in accordance with the requirements of the Financial Accounting Standards Board for the purpose of providing certain information about the effects of changing prices. It should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.

Constant dollar amounts in the statement that follows represent historical costs stated in terms of average 1979 dollars. The current cost amounts shown reflect changes in specific prices of utility plant from the date such plant was acquired to 1979, and differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general.

Statement of Income From Continuing Operations Adjusted for Changing Prices Year Ended December 31, 1979 Operating Revenues..............

Operating Expenses:

Net Energy....................

Depreciation (Note d)...........

Other Operating & Maintenance Income Tax Expense...........

Interest Expense...............

Other Income..................

Income from Continuing Operations (changing price columns exclude a reduction to net recoverable Actual at Historical Cost

$283,106 99,230 22,590 86,162 17,886 17,651 5,280 248,799 cost) (Notes a and e)........... $ 34,307 Increase in Specific Prices of Utility Plant Held During the Year (Note b)..................

Reduction to Net Recoverable Cost (Note e).......................

Effect of Increases in General Price Level..........................

Subtotal.........................

Gain from Decline in Purchasing Power of Net Amounts Owed (Note e).......................

Net..............................

In Constant Dollars Average 1979 Dollars (In Thousands)

$283,106 99,581 44,378 86,162 17,886 17,651 5,280 270,938

$ 12,168

$ (50,664) 47,551

$ (3,113)

At Current Cost Average 1979 Doi lars

$283,106 99,602 49,536 86,162 17,886 17,651 5,280 276, 117 6,989

$101,964 (147,449)

(45,485) 47,551 2,066 (a) Including a reduction to net recoverable cost, the results of continuing operations on a constant dollar basis would have been a loss of $38,496,000 for 1979.

(b) At December 31, 1979, current cost of utility plant, net of accumulated depreciation, was $1,257,311,000, while historical cost or net cost recoverable through depreciation was $679,321,000.

(c) Constant dollar costs were determined by converting historical costs of utility plant and certain other items into average 1979 dollars by using the Consumer Price Index for All Urban Consumers (CPl-U). The current cost of utility plant was measured by using th e Handy-Whitman Index of Public Utility Construction Costs applied to historical costs by vintage years.

In compliance with Statement of Financial Accounting Standards No. 33, items in the income statement, other than depreciation and amortization of nuclear fuel were not adjusted.

(d) The estimated data for utility plant, comprising plant in service, construction work in progress, plant held for future use and nuclear fuel, determined using the indices specified above, are not indicative of the value of existing utility plant nor of the Company's future capital requirements. The actual replacement of existing utility plant will take place over many years and not necessarily in the same manner as the presently existing assets.

28

The accumulated provisions for depreciation and amortization under both constant dollar and current cost methods described above were estimated for each major class of utility plant-nuclear, fossil or other production; transmission; distribution and general plant. The method used was to multiply the respective cost data by a percentage representing the expired life of existing facilities of each class at December 31, 1979. Depreciation and amortization expen se for both methods were determined using the rates and methods used for computing book depreciation and amortization applied to utility plant balances re-expressed in terms of constant dollars and current costs.

(e) Under rate-making prescribed by the regulatory commissions to which the Company is subject, only the historical cost of utility plant is recoverable in revenues as depreciation. Therefore, the excess of the cost of utility plant stated in terms of constant dollars or current cost over the historical cost of plant is not presently recoverable. Due to this feature, the value of utility plant under both methods must be reduced to net recoverable cost which is historical cost. While the rate-making process gives no recognition to the current cost of replacing utility plant, based on past practices the Company believes it wi II be al lowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.

To properly reflect the economics of rate regulation in the Statement of Income from Continuing Operations, the reduction of net utility plant should be offset by the gain that results from the decline in purchasing power of the net amounts owed by the Company. During a period of inflation, holders of monetary assets such as cash and receivables suffer a loss of general purchasing power while holders of monetary liabilities, generally long term debt, experience a gain because debt will be repaid in dollars having less purchasing power. The Company's gain from the decline in purchasing power of its net amounts owed is primarily attributable to the substantial amount of debt and cumulative preferred stock subject to mandatory redemption which has been used to finance utility plant. This gain, however, should not be considered as providing funds to the Company. Since depreciation on utility plant is limited to the recovery of historical costs, as explained above, the Company does not have the opportunity to realize the holding gain and is limited to recovery only of its embedded cost of debt capital.

(f) Fuel inventories, the cost of fossil fuels used in generation, have not been restated from their historical cost.

New Jersey regulation controls fuel costs through the operation of a levelized energy clause such that recovery is ultimately limited to actual cost. For this reason fuel inventories are effectively monetary assets.

Five Year Comparison of Selected Supplementary Financial Data Adjusted for Changing Prices (In Thousands of Average 1979 Dollars)

Operating Revenue'!'..............................

Historical cost information adjusted for general inflation Income from continuing operations (excluding reduction to net recoverable cost).............

Income per common share (after dividend requirements on preferred stock).............

Net assets at year-end at net recoverab le cost...

Current cost information Income from co ntinuing operatio ns (exc ludi ng red uction to net recoverable cost).............

Income per common share (after dividend requirements on preferred stock).............

Excess of increase in general price level over increase in specific prices (after reduction to net recoverable cost)......................

Net assets at year-end at net recoverable cost...

General Information Gain from decline in purchasing power of net amounts owed...............................

Dividends declared per com mon share":.........

Market price per common share at ye a r-e nd~....

Average consumer price index..................

• (Trended)

Years Ended December 31, 1979

$283,106 12, 168

.51 293,444 6,989

.08 45,485 293,444

$ 47,551 1978

$285,211 1.79 1.90

$ 17.1 25

$ 20.128 218.5 (est.) 195.4 1977

$282,900 1.95

$ 27.689 181.5 1976

$271,717 2.02

$ 30.436 170.5 1975

$269,843 2.06

$ 23.212 161.2 29

Statistical Review and Summary of Operations 1979-1969 Facilities for Service 1979 1978 1977 1976 Total Utility Plant (Thousands)................

870,075 802,473 753,269

$ 710,343 Gross Additions to Utility Plant (Thousands)...

72,773 58,073 48,733 41,702 Pole Miles of Transmission and Distribution Lines 6,831 6,786 6,735 6,696 Generating Capacity (Kilowatts) (a)............

1,384,700 1,414,700 1,414,700 1,334,700 Maximum Utility System Demand-Kw...........

1, 192,600 1, 177,400 1, 176,000 1,030,300 Source of Energy (Thousands of Kwh)

Net Generation...............................

5,397,338 5,625,988 5,293,019 4,918,906 Pu re hased and Interchanged-Net.............

464, 143 130,037 224,169 324,196 Total...................................

5,861,481 5,756,025 5,517,188 5,243,102 Electric Sales (Thousands of Kwh)

Residential...................................

2,411,732 2,377,202 2,221,250 2,070,766 Commercial..................................

1,580,384 1,586,097 1,478,559 1,392,029 Industrial.....................................

1,255,304 1,250,636 1,220,260 1, 143, 170 All Others....................................

60,799 60,705 58,866 57,667 Total...................................

5,308,219 5,274,640 4,978,935 4,663,632 Gross Revenue (Thousands of Dollars)

Energy Sales Residential.................................

135, 178 121,440 109,818 98,904 Commercial................................

88,819 80,539 73,354 66,354 Industrial...................................

47,590 42,185 40,885 36,438 All Others..................................

6,624 5,973 5,630 5,406 Total...................................

278,211 250,137 229,687 207, 102 Other Electric Revenue........................

4,895 4,921 5,308 4,925 Total...................................

283, 106 255,058 234,995

$ 212,027 Residential Electric Service (Average per Customer)

Amount of Electricity used during the year (Kwh) 7,849 7,951 7,653 7,320 Amount paid for a year's service...............

439.92 406.18 378.36 349.64 Price paid per Kilowatt-hour...................

5.61 c 5.11 <

4.94c 4.78" Customer Service Locations-Electric (Year-End).

371,362 362,131 352,205 343, 147 Population Served............................

1,015,000 990,000 961,000 937,000 Summary of Operations (Thousands of Dollars)

Operating Revenues-Electric.................

283, 106 255,058 234,995

$ 212,027 Operating Expenses Fuel........................................

100,472 84,735 82,735 69,234 Interchange................................

19,098 2, 171 3,735 4,819 Deferred Energy (Costs)....................

(20,340)

Power Production...........................

24,717 20,716 17,782 13,498 Other Operating and Maintenance Expenses.

36,145 31,719 29,263 26,334 Depreciation................................

22,590 21,614 19,369 17,395 Taxes......................................

53,746 50,955 42,257 37,837 Total Operating Expenses...............

236,428 211,910 195,141 169, 117 Operating Income.....................

46,678 43,148 39,854 42,910 Other Income and Deductions-Net............

5,280 3,350 3,881 7,843 Income before interest charges........

51,958 46,498 43,735 50,753 Interest Charges-Net.........................

17,651 16,434 16,377 19,957 Net Income...........................

34,307 30,064 27,358 30,796 Dividends Paid or Accrued on Preferred Stock 6,066 6,253 5,485 5,484 Earn ings for Common Stock...........

28,241 23,811 21,873 25,312 Average Shares of Common Stock Outstanding..

11,979,607 10,790,977 10,629,930 9,747,012 Earnin gs Per Share of Common Stock...........

$2.36

$2.21

$2.06

$2.60 Dividends Declared Per Share of Common Stock.

$1.79

$1.70

$1.62

$1.58 Dividends Paid on Common Stock (Cash)........

$1.765

$1.67

$1.62

$1.56 (a) Excludes capacity al located to a large industrial customer.

30

o*A!t~n!i££t~~!1c IN SOUTHERN NEW JERSEY 1975 1974 1973 1972 1971 1970 1969

$ 675,617

$ 637,250

$ 572,555

$ 511,274

$ 455,956

$ 404,364

$ 357,863 46,745 71,200 67,864 58,434 54, 151 48,200 35,306 6,645 6,580 6,506 6,408 6,333 6,252 6,187 1,334,700 1,278,700 1,013,500 965,900 897,600 821,400 757,800 1,069,400 1,004,400 1,051,400 920,400 829,300 755,500 721,800 4,715,357 4,651,334 4,236,083 4,071,225 4,262,062 4,294,352 4,227,315 190,852 229,197 665,558 458,050

-74,395

-358,203

- 566,932 4,906,209 4,880,531 4,901,641 4,529,275 4,187,667 3,936,149 3,660,383 1,938,724 1,882,560 1,899,122 1,741,895 1,624,793 1,520,939 1,375,546 1,346,216 1,298,858 1,351,974 1, 183,668 1,059,498 977,210 879,916 1,036,755 1, 136,935 1,119,478 1,061,932 990,363 954, 111 911,138 56,465 57,477 58,129 64,531 88,963 101,703 116,021 4,378, 160 4,375,830 4,428,703 4,052,026 3,763,617 3,553,963 3,282,621 90,956 78,512 59,856 51,544 42,623 36,979 32,672 63,544 55,713 42,804 35,868 28,648 23,933 20,584 34,974 33,565 22,008 19,350 16,529 13,036 11,303 4,881 4,207 3,861 3,763 3,919 3,795 3,753 194,355 171,997 128,529 110,525 91,719 77,743 68,312 4,724 4,614 4,365 4,128 3,687 3,648 3,731

$ 199,079

$ 176,611

$ 132,894

$ 114,653 95,406 81,391 72,043 7,018 6,982 7,303 7,008 6,793 6,542 6,072 329.25 291.21 230.19 207.37 178.19 159.06 144.22 4.69" 4.17" 3.15" 2.96" 2.62" 2.43" 2.38¢ 336,105 330,758 320,834 309,393 297,437 288,538 282,274 915,000 894,000 865,000 828,000 796,000 773,000 753,000

$ 199,079

$ 176,611

$ 132,894

$ 114,653 95,406 81,391 72,043 71,644 73,167 37,144 29,944 28,705 22,457 15,691 2,855 5,862 8,1 55 3,979 (815)

(2,941)

(3,165) 10,268 11,360 8,810 8,060 6,686 5, 111 5,074 24,632 21,730 21,119 19,388 17,462 15,692 14, 194 16,846 12,946 11,749 11, 190 10,355 9,632 9,043 32,083 16,203 16,616 15,359 10,603 11, 129 12,292 158,328 141,268 103,593 87,920 72,996 61,080 53,129 40,751 35,343 29,301 26,733 22,410 20,311 18,914 7,747 10,755 8,745 6,647 5,164 3,520 1,773 48,498 46,098 38,046 33,380 27,574 23,831 20,687 20,218 19,088 15, 129 13,297 11,641 9,276 6,302 28,280 27,010 22,917 20,083 15,933 14,555 14,385 5,484 4,233 2,652 2,456 1,900 1,900 1,900 22,796 22,777 20,265 17,627 14,033 12,655 12,485 9,470,073 8,973,400 8,453,400 7,810,073 7,436,740 6,920,073 6,817,083

$2.41

$2.54

$2.40

$2.26

$1.89

$1.83

$1.83

$1.52

$1.50

$1.4766

$1.4316

$1.37

$1.345

$1.31

$1.51

$1.50

$1.4688

$1.4144

$1.36

$1.34

$1.30 This An nual Report has been prepared for the purpose of providing general and statistical information concerning the Company and not in connection with any sale, offer for sale or solicitation of an offer to buy any securities.

Printed in U.S.A.

31

Directors:

Eleanor S. Daniel Self employed. Vice President and Director of several real estate corporations.

Richard M. Dicke Counselor at law. Senior Partner of the law fi rm of Simpson Thacher and Bartlett.

John D. Feehan President and Chief Executive Officer of the Company.

Joseph M. Galvin, Jr.

Executive Director and Chief Executive Officer of Salem County Memorial Hospital.

Mack C. Jones Engineer. Retired.

Alfred C. Linkletter Consultant, Chairman of the Board of Directors of the Company.

John M. Miner Senior Vice President of Crocker National Bank.

Frank H. Wheaton, Jr.

President of Wheaton Industries. Manufacturer of glass and plastic containers.

Richard M. Wilson Senior Vice President of the Company.

The Company was awarded the 1979 Nicholson Award by the National Association of Investment Clubs for "Best 1978 Annual Report for the Individual Investor".

32 Board of Directors Committee Listings Mr. Linkletter, Chairman of the Board, serves as an ex-officio member of all committees and Mr. Feehan, President, serves as an ex-officio member of all com-mittees except the Audit Committee.

Audit Committee John M. Miner, Chairman Eleanor S. Dan iel Joseph M. Galvin, Jr.

Mack C. Jones Corporate Development Committee Frank H.Wheaton,Jr.,Chairman Eleanor S. Daniel Mack C. Jones John M. Miner Energy, Operations and Research Committee Mack C. Jones, Chairman Richard M. Dicke Richard M. Wilson Finance Committee John M. Miner, Chairman Eleanor S. Daniel Richard M. Dicke Mack C. Jones Pension and Insurance Committee Richard M. Dicke, Chairman John M. Miner Frank H. Wheaton, Jr.

Richard M. Wilson Personnel Committee Richard M. Dicke, Chairman Eleanor S. Daniel Frank H. Wheaton, Jr.

Shareholder, Community and Government Relations Eleanor S. Daniel, Chairman Joseph M. Galvin, Jr.

Frank H. Wheaton, Jr.

Richard M. Wilson Dividend Reinvestment and Stock Purchase Plan The Company continues to offer a Dividend Reinvest-ment and Stock Purchase Plan which enables share-holders and employees to automatically invest their cash dividends in Company Stock, and also make optional cash payments without paying brokerage com-missions or service charges. About 185,000 shares were purchased through the Plan in 1979 with proceeds to the Company in excess of $3.4 million. There were 9,122 participants in the Plan at year-end. To enroll, please contact our Shareholder Records Department.

Regional Information Meeting Atlantic Electric held a Regional Information Meeting for Southern New Jersey Shareholders on November 27,

1979. President and Chief Executive Officer John D.

Feehan spoke to the 150 persons in attendance on a number of topics affecting the Company. Chairman of the Board Alfred C. Linkletter and other Directors and Officers were in attendance and offered expert com-mentary on such topics as rate relief, dividends, nuclear power, construction and fuel costs and casino-hotel development.

Michael A. Jarrett Vice President-Corporate Services David V. Boney Vice President-Customer and Community Services Ernest D. Huggard Vice President-Control John D. Feehan President and Chief Executive Officer William S. Cowart, Jr.

Senior Vice President Joseph G. Salomone Controller Frank J. Ficadenti Senior Vice President William F. Symons Vice President-Personnel and Public Relations Joseph T. Kelly, Jr.

Assistant Vice President-Rates and Regulations Officers Jerrold L. Jacobs Vice President-Production Brian A. Parent Assistant Treasurer and Assistant Secretary John F. Born Vice President-Electric Operations Charles F. Morgan Senior Vice President and Treasurer Richard M. Wilson Senior Vice President Martin R. Meyer Secretary and Assistant Treasurer

BULK RATE U.S. POSTAGE PAID ATLANTIC CITY ELECTRIC COMPANY

,, :" ~~

Atlciilttc Electric 1

• L..... SERVING A MILLION PEOPLE

. IN SOUTHERN NEW JERSEY 1600 Pacific Avenue Atlantic City, N.J. 08~04

.