ML18093A738

Philadelphia Electric Co Annual Rept,1987.

ML18093A738
Person / Time
Site:	Peach Bottom, Salem, Hope Creek, Limerick, 05000000
Issue date:	12/31/1987
From:	Everett J PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
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ML18093A737	List: ML18093A736 ML18093A738 ML18093A739 ML18093A740 ML18093A741
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NUDOCS 8803210500
Download: ML18093A738 (46)

Text

Results of Operations 1987-1985 Financial Highlights  % Change  % Change 1987 1987-1986 1986 1986-1985 1985 l~ Electric Operating Revenues (OOO's) $ 648,173 11.2 $ 582,961 .6 $ 579,733 Operating Expenses

., (OOO's) $ 533,500 9.4 $ 487,507 .6) $ 490,327 l

Net Income (OOO's) $ 73,765 34.2 $ 54,946 19.l $ 46,150 Earnings Per Common Share $ 4.03 34.3 $ 3.00 17.6 $ 2.55 Dividends Paid Per Common Share $ 2.65 1.9 $ 2.60 2.8 $ 2.53 Total Assets (OOO's) $1,499,362 7.0 $1,401,064 6.2 $1,319,027 Cash Utility Construction Expenditures (OOO's) $ 102,324 10.9 $ 92,283 (1.8) $ 94,017 Sales of Electricity (KWH) (OOO's) 7,014,400 7.6 6,521,414 5.2 6,199,672.

Price Paid Per KWH-(All Customers) 8.833¢ (2.2) 9.033¢ (4.7) 9.481¢ Total Customer Accounts (Year-end) 421,251 3.3 407,776 3.2 395,205 Number of Shareholders-Common Stock (Year-end) 45,586 (3.3) 47,133 (3.1) 48,635 Number of Atlantic Electric Employees (Year-end) 2,148 ( .9) 2,168 3.3 2,099 Book Value $ 25.71 5.5 $ 24.37 1.7 $ 23.96 Certain prior year amounts have been restated for the effects of SFAS 90, consolidation of subsidiaries and capitalization of leases.

(in dollars) (year-end dollars) 4 40 3 30 2 20

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'83 '84 '85 '86 '87 '83 '84 '85 '86 '87 Atlantic Energy Atlantic Energy Earnings and Dividends Market Price Per Share Paid Per Share of of Common Stock Common Stock c Earnings

• Dividends Paid 1

To Our This is our first Annual Report to you as Atlantic Energy shareholders, and 1987 Shareholders has been great for starters! We've set new records for earnings, dividends and customer growth.

Earnings reached a new record of $4.03 per share. This compares very favorably with last year's restated results of $3.00 per share. The 1986 restatement resulted from the implementation in 1987 of SFAS 90, relating to the regulatory treatment of certain types of property abandonments and disallowances.

, For thirty-five consecutive years, dividends paid per share have increased. Total dividends paid in I 1987 amounted to $2.65 per share. Last June, the Board of Directors increased the regular quarterly dividend rate to 67¢ per share, making the annual rate $2.68 per share. And, in December, the Board declared an extra cash dividend of 5¢ per share, payable with the regular dividend on January 15th this year. The extra dividend action was taken in view of the very good results of 1987.

The driving force behind this performance has been our utility subsidiary, Atlantic Electric, and the growth in its service territory. The utility's energy sales grew by 7.6% over the past year, exceeding the 7 billion kilowatt-hour level for the first time. Peak J. D. Feehan E. D. Huggard demand in 1987 increased by 10.3 % over the record set in 1986. Over 12,000 new customers were added to the Atlantic Electric system-another new record!

Our rates have been relatively stable since 1984. Adjusting for inflation, our prices have declined in real terms, and we believe that has contributed to an increase in the average energy use by our customers.

We continue to benefit from our diversified mix of fuel sources and power plants.

In 1987, coal and nuclear power provided 76% of our total energy requirements.

The Hope Creek nuclear unit and the two Susquehanna nuclear units performed very well. And for 1987, Susquehanna Unit 2 was the best operating unit of its type in the world.

Power generation from our nuclear units would have been stronger were it not for developments at the Peach Bottom Station, which is operated by Philadelphia Electric Company. The Nuclear Regulatory Commission shut Peach Bottom down in March 1987, following incidents of unacceptable conduct by power plant operators.

To date, the NRC and the Institute of Nuclear Power Operations, a nuclear utility peer group, have had problems with PE's proposed plans for restart. It is apparent that there will be more changes that PE will have to make. We have called upon PE management and PE's special board committee to effectively and properly respond to the concerns expressed by the NRC, INPO and others, in an effort to return the plant to service safely and promptly. The New Jersey Public Advocate has just asked the Board of Public Utilities to determine whether the New Jersey utilities should continue to recover their Peach Bottom costs through base rates. We will keep you posted on these most important developments.

In February 1987, the BPU authorized a net decrease in revenues of $15.9 million:

base rate revenues were increased by $31.4 million, reflecting the costs of the new Hope Creek unit and the 1987 reduction in the Federal income tax rate. That increase was more than offset by the $47.3 million decrease in levelized energy clause revenues.

Energy clause revenues were further decreased by $2.4 million in April.

As part of its February 1987 Order, the BPU established a nuclear plant perfor-mance standard. This standard provides for penalties and incentives for overall capacity factors below and above a 70% benchmark. We had expressed concern about the specifics of the standard during the rate proceeding. Others shared our view: the bond rating agencies cited the performance standard as a major factor which led them to lower our bond ratings to the high, single-A category in 1987.

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.. With the reduced level of nuclear generation in 1987, the first application of the standard is expected to result in a failure to recover some portion of our replace-ment power costs. The provision for some disallowance has been reflected in our

., 1987 results, but the actual amount of disallowance may be fixed by the BPU in con-nection with our pending rate case. Last September, we requested a net increase in r revenues of $49 .8 million, reflecting an increase in energy adjustment revenues and the effects in 1988 of the lower Federal income tax rate. The administrative law judge has filed her initial decision, and a final BPU order is expected in early 1988.

The vitality of Atlantic Electric's service territory is expected to provide the oppor-tunity for continuing strong financial performance. Since the 1987 peak load was at a level that we had not expected to top until 1990, we have made short-term power purchase arrangements which will help bridge the gap until additional generating capacity becomes available on a long-term basis.

Our long-term plans include the purchase of power from non-utility sources. In 1987, the BPU approved a pricing structure which we're using in negotiating long-term contracts for buying up to 700 megawatts of capacity. The availability of power from these non-utility sources will be coordinated with other, more traditional utility resources to assure reliability and meet customers' requirements as efficiently as possible.

Atlantic Electric's progress is the direct result of hard work by a family of dedicated employees. They've made 1987 the safest year in recent history; streamlined the organizational structure to improve the timeliness and quality of service; and found new ways to handle growth, get the job done, and control costs. The future successes of our utility will be realized with efforts such as these.

Our holding company structure became effective last November. We expect that the activities of our non-utility subsidiaries will develop at a prudent pace. It should be a few years before they can contribute significantly to consolidated earnings.

Atlantic Generation is developing non-utility projects through a partnership role in Cogeneration Partners of America. CPA is marketing cogeneration services and projects to wholesale and retail customers located in various states. CPA's progress in its very early stages has been encouraging. Atlantic Southern Properties, formerly Atlantic Housing, has a property in Atlantic County which may be developed for use by the utility and other commercial customers. And ATE Investment is just getting started.

The development of Atlantic Energy and the enhancement of our strategic options reflect the varied skills and untiring personal commitment of a very fine group of Directors. Eleanor Daniel, who has served on the Board for more than 12 years, will

.i be retiring this April. She has provided her vast experience in economics, business

,I and finance to the direction of the Company. With that experience, she has blended gracious wisdom, contributing greatly to our progress, and the joy of our work.

This past year has been a prosperous and exciting one. New records were set for operating and financial performance. We've made our corporate structure more flexible, recognizing that the traditional monopoly of electric utilities is giving way to regulatory change and new forms of competition. We have come to a turning point:

Reflecting on our success as Atlantic Electric, we have adjusted our course to navigate the currents of change in the utility industry. We are also beginning to explore new, unregulated opportunities, though we'll never lose sight of home.

For the Board of Directors, J.D. Feehan E.D. Huggard Chairman of the Board President and Chief Executive Officer February 9, 1988 3

Year in Utility Review Operations A new utility system peak of 1,609 megawatts was recorded in July, representing a 10.3% increase over the prior year's record. Energy sales increased by 7.6%, to a record 7 billion kilowatt-hours.

Coal and nuclear generation provided 76% of total energy needs in 1987. Compared to oil, the coal and nuclear mix saved customers more than $85 million in fuel costs.

The new Hope Creek unit performed very well in its first full year's operation, with an overall capacity factor of 78%.

During 1987, Susquehanna Unit 2 was the best operating unit of its type in the world.

Cash construction expenditures totaled $102.3 million. Approximately 40% of the total was for expansion and improvements to the transmission and distribution systems, reflecting the recent and anticipated growth in the service territory. Other major expenditures for production plant wen~ related to service life extension pro-grams, improved operating efficiency and pollution control.

.A 500kv transmission_ line crossing the Delaware River was returned to service in November, after having been knocked down by a tanker in March. A major com-munications effort advised our customers that the loss of the line could result in prob-lems with meeting system load. The supportive response from customers helped us control loads through the peak season.

A test bum of Refuse Derived Fuel was conducted at the B.L. England Station in October. A decision not to use RDF followed test results which indicated that it could adversely affect the reliability of Atlantic Electric's units.

Successful bidding for additional short-term transmission capacity enabled Atlantic Electric to import low-cost power from other utilities, saving customers about

$1 million.

A pilot program, completed in October, tested the feasibility of remote control of home air conditioning and water heating equipment. This method ofload control can now be coordinated with other supply- and demand-side options for meeting customer growth.

Community Relations and Customer Service Atlantic Electric reorganized its customer service section and established new customer service regions. These changes will allow for more comprehensive and timely customer service.

Over 5,300 home energy audits were completed and over 1,900 customers took advantage of Atlantic Electric's seal-up programs.

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Atlantic Electric received special commendation from the National Career Develop-ment Association for its commitment to equal employment opportunity.

About 150 employees were trained as part of the Gatekeeper Program, which was developed to help those with direct customer contact identify the special problems of senior citizens and coordinate assistance for them.

Atlantic Electric's Good Neighbor Fund, working through the Salvation Army, assisted over 1,500 needy families with their winter heating_ bills.

The Volunteer Initiative Program, established in 1987, has helped to increase the volunteer efforts of employees in community service. The program matches the skills and interests of volunteers with the needs of service organizations in the area.

Regulatory and Financial Matters A net base rate increase of $31.4 million was authorized in February. The increase, primarily for the new Hope Creek generating unit, was partially offset by the effects in 1987 of lower Federal income tax rates.

Levelized energy clauses were reduced in 1987, with a $4 7.3 million decrease in February, and an additional $2.4 million decrease in April.

In March, the Nuclear Regulatory Commission shut down Peach Bottom Station, operated by Philadelphia Electric Company, following incidents of improper con-duct by plant operators.

With favorable market conditions for long term, tax-exempt financing, Atlantic Electric converted $18.2 million of its adjustable rate pollution control bonds to a fixed rate of 7% % in April.

Ratings on Atlantic Electric debt obligations were lowered by the bond rating agencies to the high single-A category.

In July, Atlantic Electric refunded an interim tax-exempt financing with $4.4 million of 8% % pollution control bonds.

In August, the BPU approved procedures used by Atlantic Electric in negoti-ating the purchase of up to 700 megawatts of capacity and energy from various non-utility projects.

In September, Atlantic Electric requested a net revenue increase of $49.8 million, comprised of an increase in levelized energy clause revenues of $60.9 million, off-set by a decrease in base rate revenues of about $11 million due to the reduction in Federal income tax rates.

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Viewpoints A11:1antic Eiectric's service territory was redefined tlhiis year into fo111111' separate The following text presents highlights of a recent c11.11stomer serYice ll'egions, so tlh!at Executive Committee* session at which corporate customers' needs developments and plans were reviewed co1.11lcll be me1t more effectiYely. 'if'lh!e Major Strategic Issues following pages o1!11ell' a look at tlhie bea1111ty Huggard: Several developments over the past year suggest the major and clrnaracter of issues which we'll face in 1988 and beyond. First of all, the strong growth each of tlhiese foa.nr which we've seen in our utility service area should continue. That d!stinct!Ye regions.

growth will present opportunities for future strong financial performance, but it also brings the challenge to control costs and secure- additional generating capacity.

In addition, we want to press on with development of the holding com-pany structure. We've worked hard to get the necessary regulatory approvals. Now we're shifting our efforts to building the new business units which will support and complement the utility.

Service Territory Growth Jacobs: Our recent growth has not been confined to Atlantic City and the surrounding area. We're seeing growth throughout the service ter-ritory, particularly in the residential and commercial sectors. We expect that Atlantic Electric's growth rate will be higher than most other nearby utilities for another few years.

This growth will be aided by the completion of several transportation links. A high speed rail line connecting Philadelphia with Atlantic City is expected to be completed sometime in 1989. It should open up new possibilities for workers and visitors all along the corridor. Completion of major sections of Route 55 will connect our central region with the major highways to Philadelphia and shore points, also opening up new areas for growth.

The Need for Additional Generating Capacity Jacobs: We've been careful to avoid an excess capacity problem in the past, and so our recent records for energy sales and peak load have accel-erated the need for additional capacity. But we plan to meet the require-ments in ways that are economical and moderate our investment costs.

Parent: That's right. We've looked at the capacity situation and broken it down into several components, based upon different time horizons.

• Executive Committee members are: E.D. Huggard, President and Chief Executive Officer; and Vice Presidents: M.J. Harlacher, J.L. Jacobs, M.A. Jarrett, B.A. Parent and J.G. Salomone.

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Recently, we've been pursuing arrangements with neighboring utilities for capacity purchases which will help us meet reserve capacity require-ments established by the PJM power pool. These contract arrangements are scheduled to last just a few years, to bridge the gap until new generating capacity is projected to be available.

• Cogeneration Parent: Cogeneration can produce power more efficiently, at lower costs, than some other types of power plants. In conventional power plants, the steam that passes through the turbine generator is condensed and then recycled through the boiler. Some valuable heat energy is lost in the process. With cogeneration, however, the exhaust steam is applied The River Region directly for heating or some other end-use. We've had first-hand experi-harbors some of ence with cogeneration for more than 40 years at our Deepwater Station.

South Jersey's oldest and most historic Companies can build cogeneration facilities suited to specific steam communities. This requirements, produce electricity for their own purposes, and have plenty region's sandy of economic generating capacity left over to sell to the utility. There soil has traditionally is some cogeneration potential in our service territory. Since we can attracted some of use the capacity and could benefit from the cost advantages, we are the country's largest actively pursuing opportunities to purchase power from cogeneration glass manufacturers. facilities.

Commercial fishing and Harlacher: In 1987, we got BPU approval to negotiate power purchase agriculture are also strong businesses contractsfor up to 700 megawatts of cogeneration capacity. Negotiations in this part of the should be completed by the first half of 1988, and some of the cogenera-Garden State, which tion power could be on-stream by 1990 or 1991.

produces the popular Both the amount and the timing of cogeneration projects are impor-

"Jersey Tomato." tant We are doing some contingency planning right now, looking at what might have to be built in case the cogeneration plans change or the various projects are delayed.

Jarrett: Several years ago, a law was passed in New Jersey establishing a Certificate of Need process. In essence, no major construction or expan-sion of a generating plant by a public utility can begin without getting a Certificate of Need. The legislature wanted to avoid the possible burdens on ratepayers which could be caused by excess generating capacity.

That's a goal we've always had. We're mindful of our ultimate obliga-

., tion to serve our customers and we're working to explore all reasonable

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alternatives in meeting load growth. Some of those alternatives may pan out; others may not. There will come a time when we'll have to say that the pursuit of reasonable and realizable alternatives to utility construc-tion has been exhausted. At that time, it will be critical to commence some construction; otherwise, the prospects for not meeting our customers' energy demands may tum into reality.

We are working vigorously to pursue least cost methods of meeting customer growth. That will serve our customers well. It will also help shareholders, because our investment in new generating capacity will be carefully measured.

• Other Ways of Providing for Growth Harlacher: Large-scale cogeneration and utility-built capacity are just some of the resources which are expected to help meet our growth. Small cogeneration units on customers' premises, conservation and load management are going to play a role in our customers' energy future.

This means getting more involved with the customers' end-uses of elec-trical energy. In some ways, it has opened up new areas of customer ser-vice for us.

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• From the Customers' Perspective Jarrett: We've learned a lot from our energy sales experience, customer attitude surveys and the successes and failures of various conservation programs. What we've seen in recent history is that increases in the real price of electricity sharpened our customers' focus on conservation efforts. They have improved their home insulation, caulked windows and doors, and opted for more efficient appliances.

Salomone: The price of electricity has declined in real terms and our customers have responded by increasing their average energy usage. In other words, our price stability has allowed them to opt for higher levels of comfort and convenience.

Harlacher: Our five-year Demand Side Management Plan has been set The Central Region is the largest and! most up to explore ways to encourage efficiency and reduce peak load. We've diversified of Atlantic placed continuing emphasis on weatherization efforts, offering free home Electrric's customer energy audits and seal-up programs. In 1987, we completed a pilot load seNice regions. it control program. By using radio signals to adjust the times when home includes parts of six air conditioning and water heating are used, we reduced the coincident

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7I peak load without appreciably affecting our customers' comfort. We can now coordinate direct load control programs into our future plans, and reduce the need for more costly methods of handling growth.

and supports a IUlnique mix of agriculture amd teclhnoioglf. This I Parent: Our main objective is to develop conservation and load manage- region's products and

,/I ment practices which are cost beneficial for our customers. The process services include isn't perfect. It involves market testing and some trial-and-error. Since compact discs, com*

starting out on our demand side efforts, we have had to revisit some pro- puterized weighing equipment, petroleum grams to improve them. Still, we believe that these initiatives will help I

I refining and plharma-I us in several ways: in reducing load; in more efficient energy usage; and

~~1 ceutical production.

in having a stronger relationship with our customers.

Ill is also an impoirtamt

• Competition, Regulation and Utility Industry Changes area for fruit and Jarrett: That good relationship with customers is particularly important, uegetab!e farming.

with the changes going on in our industry. For years, there has been the traditional competition from alternative energy sources like oil or natural gas for home heating. Now, however, we're also seeing the development of non-utility power producers who are making electricity for sale to utilities or large electrical customers. The federal legislation, PURPA, has allowed non-utilities to become power producers without the exten-I I sive cost-based regulation which the traditional utilities have had. Other regulatory concerns, here on the state level, have also given support to developments which involve power production and transmission by non-utilities.

Salomone: That's true. What some would call deregulation, others might call changes in regulation to advance open market forces. And, the primary reason to do so relates to cost. But cost is only one of the issues that has to be tested in this changing regulatory environment.

Some other aspects which must stand the test in the public eye include reliability, safety and environmental impact. As a public utility, we have done a good job in providing reasonably-priced power while balancing those other concerns. The cost issue continues to be the dominant factor, and we have to reserve judgment on how new entrants into power production will deal with those other responsibilities. Market entry by others is a factor to be dealt with. That's because, like most utilities in the Northeast, our utility's costs reflect fuel mix, recent construction to meet growth and plant additions to protect the environment These costs present competitive opportunities for non-utility developers.

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Jacobs: The degree of entry by others, such as cogenerators, into the power business is a function of several factors. Cost is one. Another is that cogeneration development is linked to the need for that second form of energy output, such as steam. Cogeneration facilities often involve industrial 'hosts' which do have those large thermal requirements. In the case of Atlantic Electric, we've had a relatively low mix of industrial customers. So, from that viewpoint, unlimited cogeneration development might not be a significant competitive concern.

Parent: It's one thing for a non-utility to build a power plant; it's another to deliver the power where it's needed. Competition for, and expansion of, transmission capacity will depend on relative cost and The Ocean Region's availability. One important factor which will shape future developments growth, the highest in in this area is the difference in price to the customer between power our service area, bought from the traditional utility source, and power bought from some has been stimulated by the hotel and other producer. As far as our electric system is concerned, there's prac-casino industry in tically no excess transmission capacity available right now. Additional Atlantic City. Seaside transmission capacity would have to be built. The cost of building and areas play host to using new transmission facilities would have to be factored into the millions of tourists 'delivered cost' of independently produced power. That would reduce the each year and to relative attractiveness of such power. We are keeping alert to the early special events like signals of change, and will preserve our ability to import power cost-the Miss America effectively, while responding to the regulatory developments which Pageant. This region's may anse.

business activities Jarrett: I'd like to talk about customer attitudes for a minute. These range from harvesting attitudes are important because they shape some very important deci-cranberries to produc*

sions: whether customers are getting value for what they pay; whether ing world-famous the service is satisfactory; and whether they want to get service elsewhere.

fine china.

We've done a lot in terms of establishing good customer relations. Our surveys indicate that customers are price-sensitive: they would like our rates to be lower, but they think that we charge fair prices for the value they receive. They also indicate that prompt response to service requests is a high priority. This goes back to the care and attention toward customers that we emphasize.

Salomone: Look at what's been happening in the airline and telephone industries. The options provided by those deregulated industries have often involved trade-offs in cost and availability or convenience of ser-vice. I don't honestly believe that the same customer criteria prevail in the case of electricity. Our customers want power for light, heat and manufacturing when they flip the switch. They will not want to 'wait in line' for electricity.

That gives some indication of the difficult balance that comes into play for regulated utilities and regulators. For years, with traditional utility regulation, customers have benefited from a good balance of cost, reliability and quality of service. As the competitive forces are stimulated in our business and the emphasis shifts even more on cost, there will be different types of discussions about reliability and service. It may be several years yet before these issues are assessed and resolved in the broad, public perspective.

• Holding Company Reorganization Huggard: These regulatory and competitive changes really formed the basis for our decision to set up a holding company structure. Providing electrical energy to our customers has been, and will continue to be, our primary business. The new structure enables us to respond to the changes 12

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in the utility industry, and gives us an opportunity to participate as other, non-regulated companies might.

We'll continue to pursue low cost power for customers in a business environment where the form and substance of regulation are changing.

We're planning conservative diversification to enhance the stability and growth of earnings and dividends.

Parent: Right no\\) our Atlantic Generation subsidiary is getting involved in cogeneration projects through its partnership interest in Cogenera-tion Partners of America. The two other partners in CPA have impor-tant experience in cogeneration development and energy supply. Our business plan for this effort is proceeding along well. Through CPA's efforts, we expect to provide some portion of the new cogeneration which Combining Victorian will be developed in our utility's service area. But CPA's activities aren't charm with sortie of confined to southern New Jersey. It is marketing its services and the New Jersey's fh1est beaches, the Cape development of a variety of smaller cogeneration projects in several states.

Region h~s long b~en The business activities of Atlantic Generation and CPA give us oppor-a favorite for tourism tunities to benefit from providing energy and generating capacity in the in the state. located non-regulated arena. . .

in the southern tip of Salomone: The ATE Investment subsidiary is expected to participate New Jersey, this in financial transactions which will produce attractive returns without region has quickly assuming a disproportionate amount of risk. We're still in the early phases become.desirable for of starting this business, but I expect that several investments will be made residential living. A during 1988. We'll also be looking at ways that the investment subsidiary "nice place to visit" can complement the utility's business and reduce its expenses. lhas become a grea.t Jarrett: Atlantic Southern Properties currently has a project which it may place to live for over develop for use by the utility and prospective commercial customers. As 80,000 y~ar-rounc!I we've mentioned, southern New Jersey has a lot of growth potential, and residents.

we expect to put our experience to good use in developing real estate opportunities.

Jacobs: There are two important points we should reinforce as far as holding company developments are concerned. First, we're not going to stray far from our familiar path. The regulated electric utility business is a good one to be in. Furthermore, the regulatory authorizations we

• got from the New Jersey BPU and the Securities and Exchange Com-mission echo our conservative approach to diversification.

The second point is that we're sowing the seeds for future growth. It's fair to say that, over the first several years, the contributions of the non-utility subsidiaries to corporate earnings will be very modest. But the growth of the non-regulated subsidiaries and their earnings contributions should complement the utility's progress. By the fifth year as a holding company enterprise, we believe that the non-regulated subsidiaries should be making a noteworthy contribution to total earnings. And, if that doesn't materialize, rest assured that we'll trim our sails accordingly.

Some Closing Remarks Huggard* All of the indications are that the electric utility industry is changing. It's in our interest to anticipate some of these changes and prepare to use them for the benefit of customers and shareholders alike.

Time will tell which changes are good and which will last.

We're very fortunate with the position we have: a very strong, healthy core business with prospects for continuing growth; a new corporate structure which is well-suited to responding to the developments we've been talking about; and management and employees who are equal to, and excited about, the great possibilities which lie ahead.

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Atlantic Elecbic's Service Territory

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Representing the southern one-third of the state of New Jersey, Atlantic Electri.c's service temtory is situated near such major cities as New York, Philadelphia, Baltimore and Washington, D. C. The majority of its customers are residential and commercial Tourism and its related commercial activities play a major part in the economy of the eastern shore. On the western side, fanning, agricultural and light industrial customers continue as a significant economic base.

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Atlantic Elecbic's Customers At-A-Glance RESIDENTIAL Total residential kilowatt-hour sales increased 7.1% in 1987 and (billions of kwh) average use per residential customer rose 3.7%. In 1987, the average 4 I_

number of residential customers increased 3.2% and now comprises over 88% of Atlantic Electric's total customer accounts. Over 11,400 new residential dwellings were connected in 1987, with the majority located in the coastal area.

Est. 1987-2002 Annual Growth 1987 2002 Rate 0 '83 '84 '85 '86 '87 2002 average customer Energy (billion kwhrs) 3.040 4.230 2.23% use (000 kwh) 7.7 7.9 7.6 8.0 8.3 8.2

%of 44 Peak(Mw) 857 1140 1.92% total sales 43 43 44 43 45 COMMERCIAL Atlantic Electric's average number of commercial customers increased (billions of kwh) 3.1% to 46,775. Overall, commercial sales rose 8.0%. With the 4 addition of a twelfth hotel/casino in 1987, sales to that class increased 9.2% over 1986 levels and represented 6.0% of 1987 total energy 3

sales.

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Est. 1987-2002 Annual Growth

--1: i-: 1-j 1-il-! 11 11 I 1987 2002 Rate 0 '83 '84 '85 '86 '87 2002 average customer Energy (billion kwhrs) 2.592 3.829 2.64% use (000 kwh) 46.8 49.3 51.9 52.9 55.4 67.8

% of Peak(Mw) 586 868 2.65% total sales 35 35 37 37 37 41 INDUSTRIAL & OTHER Sales to industrial and other customers increased 8.2% in 1987 from (billions of kwh) 1986 levels. Industries in Atlantic Electric's service area include glass, 4 chemicals and allied products, rubber and plastic products, food products, petroleum refining and machinery. Atlantic Electric's 1,015 3

industrial customers, whose average use per customer increased by 9.0% in 1987, are located primarily in the inland and western sections of Atlantic Electric's service territory. 2 n n~

1987 2002 Est. 1987-2002 Annual Growth Rate 1

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'87 2002 average customer Energy (billion kwhrs) 1.382 1.290 (0.46%) use (000 kwh) 1200.4* 1179.7* 1181.3* 1196.7' 1304.0' 1211.9*

% of Peak(Mw) 166 153 (0.54%) total sales 22 21 20 19 20 14

• Industrial customers only.

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Index to Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operation 19 Report of Management 23 Report of the Audit Committee 23 Auditors' Opinion 23 Consolidated Statement of Income 24 Consolidated Statement of Cash Flows 25 Consolidated Balance Sheet 26 Consolidated Statement of Changes in Common Shareholders' Equity 28 Notes to Consolidated Financial Statements 29 18

Atlantic Management's Discussion and Analysis of Energy, Inc.

and Subsidiaries Financial Condition and Results of Operation OVERVIEW past several years has been to support the 5% investment in the Hope Atlantic Energy's primary subsidiary is, and will continue to be, Creek Generating Station. The construction program and the forecast Atlantic Electric. Operations of the nonutility companies have begun of related construction expenditures is reviewed regularly and is modestly following a strategy to make prudent investments where designed to meet customers' demand for electric energy service for the potential for future returns is promising. Atlantic Southern the present and the future. The current forecast of peak load growth Properties has purchased commercial real estate and is continuing for 1988 through 1992 is 1.9% per year. This forecast reflects a to develop this site as well as developing plans to attract future tenants. continuing commitment to promote energy conservation among Atlantic Generation entered into a partnership arrangement to con- customers, and alternatives to conventional energy supply, including struct, own and operate cogeneration facilities. ATE Investment has cogeneration. In response to customers' needs, the construction pro-been fonned to manage the capital resources of Atlantic Energy, and gram includes elements to improve or replace existing production to engage in limited, passive investment opportunities. plant, and upgrading the transmission and distribution system.

Earnings for 1987 amounted to $4.03 per share compared to $3.00 Financing Program in 1986 and $2.55 in 1985, as restated. Since earnings for each of Atlantic Electric finances its construction program, as well as nonnal these years were primarily attributable to the operations of the utility operating needs, through a combination of internally generated business, the remainder of the analysis will focus on Atlantic Electric. funds, short tenn debt used on an interim basis, long tenn debt and UTILITY OPERATIONS shareholder investment Flexibility in financing needs is complemented The nature of Atlantic Electric's operations is capital intensive. A by maintaining lines of credit with lending institutions, which aggregated significant amount of funds are invested in property and plant to $115 million at December 31, 1987.

generate, transmit and distribute electric energy service to customers. The aggregate dollar amounts of major financings for the past At December 31, 1987, gross investment in property and plant was three years are summarized (in millions of dollars) as follows:

approximately $1.6 billion. As a utility, Atlantic Electric is generally 1987 1986 1985 subject to regulation by the Board of Public Utilities (BPU). Atlantic Electric seeks to maintain a level of rates which will allow it to meet First Mortgage Bonds $4.4 $220.0 $70.0 daily working capital requirements, long tenn obligations, and to Common Stock .4 .4 11.2 provide a fair return on investment to its shareholder, while main- Capital Contributions .9 taining service reliability.

Total $5.7 $220.4 $81.2 Construction Program During 1987, cash construction expenditures aggregated $102 million, The 1987 financings consisted of the sale of $4.4 million of First which is an 11% increase from the $92 million expenditure level Mortgage Bonds, 8% % Pollution Control Series A of 1987. Proceeds experienced in 1986 and a 9% increase from the $94 million level were used to repay maturing notes payable. Issuance of Common in 1985. A major element of the construction program during the Stock was accomplished through the Employee Stock Ownership Plan (in millions of dollars) (in percent) 250 *100

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'83 '84 '85 '86. '87 '83 '84 '85 '86 '87 Atlantic Energy Atlantic Energy Cash Requirements and Year End Capitalization Internal Generation of Funds o Common Equity a Construction and Other

• Preferred Stock a Maturities, Retirements and Sinking Funds :i Long Term Debt a Internal Cash Generation

• Short Term Debt

• Excludes certain optional retirements 19

L. _________J Management's Discussion and Analysis of Financial Condition and Results of Operation (continued)

(ESOP) prior to the effective date of the restructuring. Capital contri- Revenues butions represent the proceeds of Atlantic Energy financings, which Operating revenues increased 11.2% in 1987 to $648.2 million consisted of Common Stock issued under Atlantic Electric employee compared to $583.0 million in 1986. The 1986 level of revenues benefit programs. represented a .6% increase compared to 1985. These overall increases The 1986 financings included the sale of two series of First Mortgage reflect the net results of changes in base revenues, Levelized Energy Bonds: $125 million of the 8%% Series and $95 million of the 8% Clause revenues and kilowatt-hour sales as shown below:

Series. Part of the proceeds of these financings was used to redeem outstanding indebtedness which had been issued at higher interest (Thousands of Dollars) 1987 1986 rates. The 1986 Common Stock issuances related to Atlantic Electric Base and Unbilled Revenues $30,647 $ 7,527 shares issued through the ESOP. Levelized Energy Clause (33,849)

(9,725)

The 1985 financings included the sale of $70 million of an 11112%

Kilowatt-hour Sales 44,290 29,550 Series of First Mortgage Bonds, $10.8 million of Common Stock issued by Atlantic Electric through its Dividend Reinvestment Plan, Total $65,212 $ 3,228 and $.4 million of Common Stock issued through the ESOP. The timing and amount of security issuances are guided, in part, by Atlantic Future changes in operating revenues will reflect the results of Energy's capital structure goals and the capital requirements of its customers' rate changes, general economic conditions in the service subsidiaries. Capitalization ratios for Atlantic Energy as of December area, and the results of load management and conservation programs.

31 for the last five years are set forth in the accompanying chart.

Approximately 34% of the cash requirements for construction, Sales maturities, sinking funds, optional retirements and redemptions Changes in kilowatt-hour sales are generally due to changes in the associated with long term debt and preferred stock, and for other average number of customers and average customer use, which is capital purposes of Atlantic Energy and its subsidiaries during the affected by weather conditions.

period 1985-1987 was generated from operations after deductions for Energy sales statistics, stated as percentage changes from prior dividends and working capital needs, but exclusive of changes in years, are shown below:

temporary cash investments. Excluding the early retirement of all Increase (Decrease) from Prior Year of the 12%% Series First Mortgage Bonds and a portion of the 11%%

and ll1/2% Series First Mortgage Bonds of Atlantic Electric in 1986, Customer Class 1987 1986 approximately 45% of cash requirements during the period 1985- Average Average Average Average 1987 was generated internally. Sales Use # of Cust. Sales Use # of Cust.

Provisions of Atlantic Electric's charter, mortgage and debenture Residential 7.1% 3.7% 3.2% 7.6% 4.4% 3.0%

agreements can limit, in certain cases, the amount and types of Commercial 8.0 4.7 3.1 4.5 1.9 2.5 additional financing which may be used. At December 31, 1987 Industrial 8.2 9.0 (.7) 1.5 1.3 .2 Atlantic Electric estimates additional funding capacities at $278.6 Other .1 .1 .8 .8 million for First Mortgage Bonds, or $408.0 million for Preferred Total 7.6 4.2 3.2 5.2 2.2 3.0 Stock, or $135.9 million for unsecured debt. These amounts are not necessarily additive.

(in billions of kilowatt*hours) (limes coverage) 7.0 5

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'83 '84 '85 r1 r1

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'83 '84 '85 '86 '87 Atlantic Electric Atlantic Electric Total Energy Sales Pre Tax Interest Coverage Ratio 20

Atlantic Energy, Inc.

and Subsidiaries The increases in total kilowatt-hour sales in 1987 and 1986 are largely The cost of energy is recovered through base rates and through the attributable to the number of new customers added to the system. operation of LECs. LECs utilize projected energy costs and include The growth of electricity consumption within the service territory is provisions for prior period under or over recovery of these costs.

related to improving economic conditions, enhanced in part by the The recovery of energy costs is made through levelized monthly rates hotel/casino industry, and the relative stable price of electricity in the over the period of projection. Any under or over recovery of costs is last few years. deferred on the consolidated balance sheet as an asset or liability Overall, the combined effects of the changes in sales and rates has as appropriate. These deferrals are recognized in the consolidated resulted in an increase in revenues per kilowatt-hour of 2.9% in 1987 income statement during the period in which they are subsequently compared to 1986, and a decrease of3.6% in 1986 compared to 1985. recovered through the LECs. During 1987, the cost of energy was Costs and Expenses impacted by higher than projected kilowatt-hour sales. In addition, the shut down of the Peach Bottom Station and the temporary loss Total operating expenses increased 9.4% in 1987 compared to 1986. of a major transmission line caused Atlantic Electric to incur incre-The 1986 operating expenses represented a decrease of .6% compared mental purchased power and interchange expenses.

to 1985. Excluding depreciation and taxes, operating expenses During 1987, Atlantic Electric went from being in an over recovered increased to $353.4 million in 1987, an increase of 7.5% from 1986, position to an under recovered position. At December 31, 1987 $23.8 which had decreased 1.3% from 1985. million is shown on the consolidated balance sheet as Deferred Energy Net Energy Costs reflect the amount of energy produced, the Costs in contrast to December 31, 1986 where $13.2 million is shown various fuel and purchased power sources used to produce it, as well on the consolidated balance sheet as Deferred Energy Revenues.

as the operation of the levelized energy clauses (LECs). Atlantic Electric's Information on the sources and costs per kilowatt-hour of energy is annual fuel, interchange and purchased power costs reflect changes in shown in the accompanying graph and table.

availability of low-cost generation from both owned and purchased Operation and maintenance costs include the costs of both wholly-sources, as well as changes in the needs of other utilities participating owned and jointly-owned generating units. At wholly-owned units, in energy interchange. Net Energy Costs for the three years ended Atlantic Electric has instituted programs to upgrade these facilities to December 31, (in thousands of dollars) include the following: improve efficiency and extend the service life of the generating units.

1987 1986 1985 In 1987, these expenses increased as the result of the commercial operation of Hope Creek, and planned unit overhauls. Additionally, Fuel $125,271 $111,384 $133,437 operating and maintenance costs are subject to price increases Interchange 23,990 19,387 17,272 relating to materials, supplies and services, and include wages and Deferred Costs (ll,628) 5,865 employee benefits.

Total $137,633 $130,771 $156,574 (in cents) 10 50 8

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'84 '85 '86 '87 '83 '84 '85 '86 n

'87 Atlantic Electric Atlantic Energy Average Booked Revenue AFDC as a Percent Per Kilowatt-Hour of Net Income 21

Atlantic Management's Discussion and Analysis of Energy, Inc.

and Subsidiaries Financial Condition and Results of Operation (continued)

Changes in depreciation expense generally represent changes in charges, and the Equity Funds portion, shown under Other Income the value and mix of electric utility plant in service and the respective was $3.2 million in 1987 compared to $17.0 million in 1986 and $11'.2 in-service dates, including the Hope Creek Unit in 1987. million in 1985. The 1987 decrease is due to decreases in the average Interest charges before the Allowance for Borrowed Funds Used balances of construction work in progress due to placing the Hope During Construction rose to $47.9 million in 1987 compared to $46.l Creek Generating Station in service.

million in 1986 and $41.6 million in 1985. These increases reflect OUTLOOK the net effects of principal amounts and interest rates of debt out-standing in the period. A total of $294.4 million of long term debt Atlantic Electric has positioned itself to remain flexible in responding was issued during the 1985-1987 period as described under "Financing to the external forces that may affect it. This strategy is evident in Program" above at rates ranging from 8% to 111/2 %. In the same the utility operations in the diversity of power supply sources, which period, maturities included $10 million of 3% % Series First Mortgage include investments in both wholly-owned generating facilities, as Bonds in 1985, $45 million of floating rate notes in 1986 and $10 well as ownership interests in jointly-owned facilities, purchased power million of 4 1/2 % Series of First Mortgage Bonds in 1987. In addition, contracts, and a diversity in fuel mix including coal, nuclear, oil

$63.75 million, $36.675 million and $48.785 million principal and natural gas.

amounts, respectively, of the 12%%, 11%% and lll/z% Series of First There are external forces which Atlantic Electric may be unable to Mortgage Bonds were retired in 1986. In January 1987, an additional influence. Long term liquidity and financial flexibility depend in part

$.3 million principal amount of the 11%% Series was reacquired. The upon receiving fair treatment from utility regulators in rate proceed-increase in short term interest expense in 1987 reflects higher average ings. The ability to finance operating and capital needs is dependent balances and higher average rates. The decrease in short term interest upon regulatory treatment and the ability to maintain good credit ratings.

expense in 1986 from 1985 reflects lower average balances and The continued unavailability of the Peach Bottom Station, and the lower average rates. Increases in other interest expense in 1987 is regulatory treatment ultimately decided by the BPU, could have a material attributed to interest on over recovery of fuel costs in prior periods. adverse effect on the consolidated financial results of Atlantic Electric The embedded cost of long term debt at December 31, 1987, was and Atlantic Energy.

9.0%, compared to 8.9% in 1986 and 9.6% in 1985. Atlantic Electric Atlantic Energy is now in a position to take advantage of oppor-expects to use short term debt to finance the construction and working tunities for investment and growth through its nonregulated sub-capital needs on an interim basis, replacing it with long term issues sidiaries. A program of prudent evaluation of such opportunities is as permanent financing. now coupled with the opportunity to finance such investments outside The Allowance for Funds Used During Construction (AFDC) includ- the regulated business. The Board of Directors and management ing both the Borrowed Funds portion, which is used to reduce interest are reviewing strategies for investment opportunities that offer the potential to increase shareholder value.

(in billions of ki/owall*hours) 8 4

lT%f lr(4%}i

'83 '84 '85 '86 '87 Coal~D----=2~.0~2¢~kw~h:___ ___'.:2~.0~1~¢k~wh'..'.___ _----;1~.9~5~¢k~wh._.__ ____:l~.8~0~¢k~w~h_ _ __.!.:l.8~5~¢k~w~h-Nuclear ;:::;rn----;;-;;-"8;;-6--------=:':*9~7_ _ _ _-----:10".o:--".o_ _ _ _ __,..8"-"9'--------=-*9~3,____

on~o~----,5~.o~o_ _ _ _--;5~.6~6_ _ _ _--:5~.2~0:------'---4~.o~9,___ _ _ _~3.~47,___ _

Natural Gas

• 6.56 6.93 5.50 3.80 3.55 Interchange

• 5.21 6.02 3.65 2.48 3.07 Yearly Average ----;;2~.57,4-------;2~.4;;;3------:2~.1~7'--------'1"'.:.8~1'------~l.~92'----

Atlantic Electric Total Sources and Costs of Energy 22

Reports of Management and the Audit Committee Report of Management The Company has established a system of internal accounting and The management of Atlantic Energy, Inc. is responsible for the financial controls and procedures designed to insure that the financial financial statements presented herein. These financial statements records reflect the transactions of the Company and that assets are were prepared by management in conformity with generally accepted safeguarded. This system is examined by management on a continuing accounting principles. In preparing the financial statements, manage- basis for effectiveness and efficiency and is reviewed on a regular basis ment made informed judgments and estimates relating to events and by an internal audit staff that reports directly to the Audit Committee transactions being reported. of the Board of Directors.

The financial statements have been examined by Deloitte Haskins & Report of the Audit Committee Sells, Certified Public Accountants. The auditors provide an objective, The Board of Directors has oversight responsibility for determining independent review as to management's discharge of its responsibilities that management has fulfilled its obligation in the preparation of insofar as they relate to the fairness of reported operating results financial statements and the ongoing examination of the Company's and financial condition. Their examination includes procedures believed system of internal accounting controls. The Audit Committee, which is by them to provide reasonable assurance that the financial statements composed solely of outside directors, meets regularly with manage-are not misleading and includes a review of the Company's system of ment, Deloitte Haskins & Sells and the internal audit staff, without internal accounting and financial controls and a test of transactions. management present, to discuss accounting, auditing and financial Company management recognizes its responsibility for fostering reporting matters. The Audit Committee reviews the program of audit a strong ethical climate in which the corporation's affairs are conducted work performed by the internal audit staff. To insure auditor inde-according to the highest standards of personal and corporate conduct. pendence, both Deloitte Haskins & Sells and the internal audit staff This responsibility is characterized and reflected in the Company's code have complete and free access to the Audit Committee.

of ethics and business conduct policy.

Auditors' Opinion Deloitte Haskins+Sells Certified Public Accountants One World Trade Center New York, New York 10048 To the Shareholders and the Board of Directors of Atlantic Energy, Inc.:

We have examined the consolidated balance sheets of Atlantic Energy, In our opinion, the accompanying consolidated financial statements Inc. and subsidiaries as of December 31, 1987 and 1986 and the present fairly the financial position of the companies at December 31, related consolidated statements of income, changes in common 1987 and 1986 and the results of their operations and their cash shareholders' equity, and of cash flows for each of the three years in flows for each of the three years in the period ended December 31, the period ended December 31, 1987. Our examinations were made 1987, in conformity with generally accepted accounting principles in accordance with generally accepted auditing standards and, accord- applied on a consistent basis, after restatement for the changes, with ingly, included such tests of the accounting records and such other which we concur, in the method of accounting for abandonments and auditing procedures as we considered necessary in the circumstances. disallowances of plant costs and in the method of accounting for lease obligations as described in Note 1 to the financial statements.

January 29, 1988, except for the last paragraph of Note 10 as to which the date is February 9, 1988 23

Atlantic Consolidated Statement of Income Energy, Inc.

and Subsidiaries For the Years Ended December 31 (Thousands of Dollars) 1987 1986 1985 Operating Revenues-Electric $648,173 $582,961 $579,733 Operating Expenses:

Net Energy Costs 137,633 130,771 156,574 Operations 163,842 153,014 132,823 Maintenance 51,899 44,820 43,378 Depreciation and Amortization 51,080 42,515 41,985 New Jersey Gross Receipts Taxes 70,323 69,797 71,100 Federal Income Tax Expense 48,916 36,754 36,308 Other Taxes 9,807 9,836 8,159 Total 533,500 487,507 490,327 Operating Income 114,673 95,454 89,406 Other Income:

Allowance for Equity Funds Used During Construction 1,436 8,336 5,216 Miscellaneous Income-Net 6,645 3,165 1,502 Total 8,081 11,501 6,718 Application of SFAS 90:

Plant Abandonments and Disallowances-Net 2,545 (15,571) (11,061)

Applicable Income Taxes (720) 6,512 2,974 Net Effect of SFAS 90 1,825 (9,059) (8,087)

Income Before Interest Charges 124,579 97,896 88,037 Interest Charges:

Interest on Long Term Debt 44,547 46,146 39,604 Interest on Short Term Debt 2,070 408 2,144 Other Interest Expense 1,291 (465) (163)

Total Interest Charges 47,908 46,089 41,585 Allowance for Borrowed Funds Used During Construction (1, 761) (8,684) (5,980)

Net Interest Charges 46,147 37,405 35,605 Preferred Stock Dividend Requirements of Subsidiary 4,667 5,545 6,282 Net Income $ 73,765 $ 54,946 $ 46,150 Average Number of Shares of Common Stock Outstanding (in thousands) 18,311 18,266 18,069 Per Common Share:

Earnings $ 4.03 $ 3.00 $ 2.55 Dividends Declared $ 2.715 $ 2.61 $ 2.555 Dividends Paid $ 2.65 $ 2.60 $ 2.53 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

24 r - - ---------

f

Atlantic Consolidated Statement of Cash Flows Energy, Inc.

and Subsidiaries For the Years Ended December 31 (I'housands of Dollars) 1987 1986 1985 Cash Flows From Operating Activities:

Net Income $ 73,765 $ 54,946 $ 46,150 Deferred Purchased Power Costs (16,910) (15,700) (14,680)

Deferred Energy Costs and Revenues (36,984) 8,711 22,190 Preferred Stock Dividend Requirements of Subsidiary 4,667 5,545 6,282 Noncash items affecting operating activities:

Depreciation and Amortization 51,080 42,515 41,985 Allowance for Funds Used During Construction (3,197) (17,020) (11,196)

Investment Tax Credit Adjustments-Net (l,552) 4,585 7,261 Deferred Federal Income Taxes-Net 19,807 32,184 15,729 Net Effect of Application of SFAS 90 (l,825) 9,059 8,087 Net (Increase) Decrease in Other Working Capital* 19,865 14,439 (25,107)

Other-Net 7,962 (207) 2,147 Net Cash Provided by Operating Activities 116,678 139,057 98,848 Cash Flows Used by Investing Activities:

Cash Utility Construction Expenditures (102,324) (92,283) (94,017)

Leased Property (10,261) (6,252) (8,660)

Property Abandonment Costs 1,806 (5,922) (5,215)

Nonutility Property and Equipment (558) (6,470)

Investment in Partnership (3,001)

Other-Net (7,715) 1,925 (489)

Net Cash Used by Investing Activities (122,053) (109,002) (108,381)

Cash Flows From Financing Activities:

Sale of Long Tenn Debt 4,400 220,000 70,000 Retirement & Maturity of Long Tenn Debt (10,337) (214,854) (10,000)

Pollution Control Funds Released (Held) by Trustee 5,022 (2,399) 7,718 Increase in Short Tenn Debt 50,800 12,900 Proceeds from Capital Lease Obligations 10,261 6,252 8,660 Common Stock Issued 2,320 548 11,515 Redemption and Conversion of Preferred Stock (7,454) (9,499) (12,203)

Dividends on Preferred Stock (4,667) (5,545) (6,282)

Dividends on Common Stock (49,741) (47,682) (46,220)

Debt Costs and Other 6,435 (6,146) 905 Net Cash Provided (Used) by Financing Activities 7,039 (46,425) 24,093 Net Increase (Decrease) in Cash And Temporary Investments 1,664 (16,370) 14,560 Cash and Temporary Investments, beginning of year 7,876 24,246 9,686 Cash and Temporary Investments, end of year $ 9,540 $ 7,876 $ 24,246

• Excluding cash and temporary investments.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

25

Consolidated Balance Sheet December31 (Thousands of Dollars) 1987 1986 Assets Electric Utility Plant:

In Service:

Production $ 800,206 $ 557,257 Thansmission 217,741 206,198 Distribution 389,619 367,932 General 78,756 70,709 Total 1,486,322 1,202,096 Less Accumulated Depreciation 388,329 350,873 Net 1,097,993 851,223 Construction Work in Progress 73,153 257,688 Land Held for Future Use 5,632 5,623 Leased Property-Net 37,694 37,603 Electric Utility Plant-Net 1,214,472 1,152,137 Nonutility Property and Investments:

Pollution Control Construction Funds 109 5,426 Nonutility Property and Equipment-Net 8,232 7,889 Other Investments 2,376 282 Total 10,717 13,597 Current Assets:

Cash and Working Funds 9,540 7,876 Accounts Receivable:

Utility Service 43,190 41,825 Miscellaneous 10,686 13,230 Allowance for Doubtful Accounts (1,600) (1,600)

Unbilled Revenues 24,973 24,588 Fuel (at average cost) 22,994 22,899 Materials and Supplies (at average cost) 20,749 20,538 Prepayments 9,497 9,474 Deferred Energy Costs 11,628 Total Current Assets 151,657 138,830 Deferred Debits:

Property Abandonment Costs 11,794 13,476 Unrecovered Purchased Power Costs 65,270 48,360 Deferred Energy Costs 12,179 Unamortized Debt Costs 25,686 27,240 Other 7,587 7,424 Total Deferred Debits 122,516 96,500 Total Assets $1,499,362 $1,401,064 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

26

Atlantic Energy, Inc.

and Subsidiaries December31 (Thousands of Dollars) 1987 1986 Liabilities and Capitalization Capitalization:

Common Shareholders' Equity:

Common Stock, no par value; 50,000,000 shares authorized $ 285,430 $ 283,054 Retained Earnings 186,294 162,270 Total Common Shareholders' Equity 471,724 445,324 Preferred Stock of Atlantic Electric:

Not Subject to Mandatory Redemption 40,000 41,154 Subject to Mandatory Redemption 18,500 24,800 Long Term Debt of Atlantic Electric 489,265 494,972 Total Capitalization 1,019,489 1,006,250 Current Liabilities:

Preferred Stock Redemption Requirement 5,050 5,050 Long Term Debt due within one year 10,000 10,000 Capital Lease Obligations due within one year 679 630 Short Term Debt 63,700 12,900 Accounts Payable 37,484 25,431 Taxes Accrued 7,969 8,867 Interest Accrued 10,118 9,509 Dividends Declared 14,270 13,195 Customer Deposits 3,383 3,408 Deferred Taxes 12,714 14,153 Deferred Energy Revenues-Net 13,177 Other 25,967 19,381 Total Current Liabilities 191,334 135,701 Deferred Credits and Other Liabilities:

Deferred Investment Tax Credits 66,612 68,164 Deferred Income Taxes 168,010 146,044 Obligations under Capital Leases 37,015 36,973 Other 16,902 7,932 Total Deferred Credits and Other Liabilities 288,539 259,113 Commitments and Contingent Liabilities (Note 10)

Total Liabilities and Capitalization $1,499,362 $1,401,064 27

Atlantic Consolidated Statement of Changes in Energy, Inc.

and Subsidiaries Common Shareholders' Equity Common Retained (Thousands of Dollars) Shares Stock Earnings Balance, January 1, 1985 as previously reported 17,821,346 $270,882 $161,629 Cumulative effect of retroactive application of SFAS 90 (6,553)

Balance, January 1, 1985 as restated 17,821,346 270,882 155,076 Common stock issued 435,663 11,516 Net income, as restated 46,150 Capital stock expense 53 Common stock dividends (46,220)

Balance, December 31, 1985 18,257,009 282,451 155,006 Common stock issued 16,646 551 Net income, as restated 54,946 Capital stock expense 52 Common stock dividends (47,682)

Balance, December 31, 1986 18,273,655 283,054 162,270 Common stock issued 72,864 2,340 Net income 73,765 Capital stock expense 36 Common stock dividends (49,741)

Balance, December 31, 1987 18,346,519 $285,430 $186,294 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

28

Atlantic Notes to Consolidated Financial Statements Energy, Inc.

and Subsidiaries NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization The application of SFAS 90 to Atlantic Electric resulted in the Effective November 1, 1987, Atlantic Energy, Inc. became the parent recognition of a loss for the disallowance by the BPU of certain costs company of Atlantic City Electric Company (Atlantic Electric) pursuant relating to Atlantic Electric's investment in Unit No. 1 of the Hope to an Agreement and Plan of Merger (Plan) approved by shareholders Creek Generating Station; recognition of a loss and subsequent on April 22, 1987. Under the Plan each common share of Atlantic accretion of discount, for an indirect disallowance of certain costs Electric was converted on a share-for-share basis into common shares relating to Unit No. 1 of the Hope Creek Generating Station excluded of Atlantic Energy. On the effective date, a corporate restructuring from earning a return (in accordance with the provisions of a Cost took place under which Atlantic Generation, Inc., Atlantic Housing, Containment Agreement); and recognition of a loss and subsequent Inc. Oater named Atlantic Southern Properties, Inc.) and ATE Investment, accretion of discount, for each of several plant abandonments referred Inc., previously subsidiaries of Atlantic Electric, became subsidiaries to under Property Abandonment Costs.

of Atlantic Energy. Deepwater Operating Company, which operates The following tables illustrate the effects of the application of SFAS certain generating facilities, remains a wholly-owned subsidiary of 90 for the years ended December 31, 1986 and 1985 (dollar amounts Atlantic Electric. in thousands, except per share amounts):

Principles of Consolidation 1986 1985 The consolidated financial statements include the accounts of Atlantic Effects of SFAS 90:

Energy and its subsidiaries, all of which are wholly-owned. All significant Direct Disallowance $(22,433) $

intercompany accounts and transactions have been eliminated in Indirect Disallowance 3,218 (6,911) consolidation. Atlantic Generation is a one-third partner in Cogenera-Plant Abandonments (5,442) tion Partners of America (a partnership), and accounts for such invest-ment by recognizing its distributive share of the results of operations Accretion of Discount 3,644 1,292 of the partnership. The results of operations of the nonutility com- Income Taxes 6,512 2,974 panies are not significant and are classified under Other Income in Total $ (9,059) $ (8,087) the Consolidated Statement of Income. Certain prior year amounts have been restated to reflect the consolidation of subsidiary companies Earnings per share as previously reported $ 3.50 $ 3.00 in conformity with the current year reporting. Effects of SFAS 90 (.50) (.45)

Restatement of Previously Reported Financial Information Earnings per share as restated $ 3.00 $ 2.55 In December 1986, the Financial Accounting Standards Board issued Statement of Financial Accounti,ng Standards No. 90-Regulated Retained earnings as of January 1, 1985 has been reduced by approxi-Enterprises-Accounting for Abandonments and Disallowances of mately $6.553 million to reflect the effects of SFAS 90 on years prior Plant Costs (SFAS 90), which is an amendment of previously prescribed to 1985.

accounting standards for the types of events enumerated. SFAS 90 is In addition to the above, Atlantic Electric was also required to record effective for fiscal years beginning after December 15, 1987, but earlier capital leases, effective January 1, 1987. The financial statements adoption is permitted. As discussed in Note 11 to the Financial presented have been restated to include property under capital leases Statements included in Atlantic Electric's 1986 Annual Report to and related obligations. Adoption of this standard had no effect on Shareholders, Atlantic Electric could not predict the impact of SFAS net income for the years presented since the total of the amortization 90, pending the outcome of certain proceedings then in progress of property under capital leases and the interest component of the before the State of New Jersey, Board of Public Utilities (BPU), periodic payments equals the rental expense recognized for rate-especially with respect to the Hope Creek Generating Station. The making purposes.

BPU issued an Oral Decision on February 20, 1987 and a Summary Order on February 27, 1987 on Hope Creek and related issues. In Regulation the first quarter of 1987, Atlantic Electric elected to adopt SFAS 90. The accounting policies and rates of Atlantic Electric are subject Consistent with the provisions of SFAS 90, previously issued financial to the regulations of the State of New Jersey, Board of Public Utilities statements of Atlantic Electric were restated to reflect the application (BPU) and in certain respects to the Federal Energy Regulatory of the new standard. Commission (FERC). All significant accounting policies and practices SFAS 90 requires that a loss be recognized if the carrying amounts used in the determination of rates are also used for financial reporting of abandoned assets exceed the present value of future revenues to be purposes.

generated by those assets. The standard also requires that any dis-allowance of the cost of a newly completed plant, including an indirect disallowance which provides no return on investment of any portion of the plant, be recognized as a loss.

29

L Notes (continued)

Operating Revenues Federal Income Taxes Revenues are recognized when electric energy services are rendered, Deferred Federal Income Taxes are provided on all significant current and include estimates for amounts unbilled at the end of the period transactions for which the timing of reporting differs for book and for energy used subsequent to the last billing cycle. tax purposes. Investment tax credits, which are used to reduce current Electric Utility Plant federal income taxes, are deferred on the consolidated balance sheet and recognized in book income over the life of the related property.

Property is stated at original cost Generally the plant is subject to a first mortgage lien. The cost of property additions, including replace- Property Abandonment Costs ment of units of property and betterments, is capitalized. Included These costs are stated at their net present value and consist principally in certain additions is an Allowance for Funds Used During Construc- of Atlantic Electric's investment in Hope Creek Unit No. 2, a nuclear tion (AFDC) which is defined in the applicable regulatory system of generating unit which was cancelled in 1981, offshore nuclear units accounts as the cost during the period of construction of borrowed which were cancelled in 1978, unrecovered nuclear fuel advances funds used for construction purposes and a reasonable rate on other associated with uranium supply contracts which were terminated in funds when so used. AFDC has been calculated using a semi-annually 1985 and study costs associated with a proposed plant site. Since no compounded rate of 8.95% for 1987 and 1986, and 8.5% for 1985. return was granted by the BPU on these costs, the excess of the Deferred Energy Costs and Revenues carrying value of the assets over their discounted present value was recognized as a loss at the date of abandonment Such discount is Atlantic Electric has Levelized Energy Clauses which are based on being restored to income by accretion over the amortization period projected energy costs and include provisions for prior period under allowed for ratemaking.

or over recoveries. The recovery of energy costs is made through The Hope Creek Unit No. 2 investment is being amortized over a levelized monthly charges over the period of projection. Any under 15-year period that began in 1983. The investment in the offshore or over recoveries are deferred in balance sheet accounts as an asset nuclear units is being amortized over a 20-year period that began in or liability as appropriate. These deferrals are recognized in the 1979. Unrecovered nuclear fuel advances are being amortized over Consolidated Statement of Income during the period in which they 15 years, beginning in 1986. The study costs are being amortized are subsequently recovered through the clauses. over 10 years beginning in 1986.

Depreciation Unrecovered Purchased Power Costs Atlantic Electric provides for straight-line depreciation based on the Atlantic Electric has agreements for the purchase of 125 megawatts estimated remaining life of transmission and distribution property of capacity and related energy from Pennsylvania Power & Light and, based on the estimated average service life, for all other depreciable Company (PP&L) under two Capacity and Energy Sales Agreements property. Depreciation applicable to certain nuclear plant includes (the PP&L Agreements). The PP&L Agreements provide for the amounts provided for decommissioning. The overall composite rate purchase of capacity and energy from PP&L's Susquehanna Unit 1 of depreciation was approximately 3.8% for 1987, and 3.7% for 1986 and Unit 2 through September 30, 1991, and then from certain PP&L and 1985. Accumulated depreciation is charged with the cost of coal-fired units through September 30, 2000. Through September 30, depreciable property retired together with removal costs less salvage 1991, the estimated costs to be incurred for purchases of capacity and and other recoveries. associated energy from the Susquehanna Units will exceed the Atlantic Southern Properties provides depreciation, using the levelized costs to be recovered from customers. Such unrecovered straight-line method for real property over a thirty-one and one-half costs will be accumulated and deferred. Such costs are included in year life, and the double declining balance method for equipment the consolidated balance sheet as Unrecovered Purchased Power Costs.

over lives ranging from five to seven years. Related deferred taxes have been provided. The level of rates approved Nuclear Fuel by the BPU is designed to recover these deferred costs and associated Fuel costs associated with Atlantic Electric's participation in jointly- carrying charges during the balance of the 17-year period.

owned nuclear generating stations, including a provision for estimated Other spent fuel disposal costs, are charged to fuel expense based on the Debt premium, discount and expenses of Atlantic Electric are units of thermal energy produced, and included in Net Energy Costs. amortized over the life of the related debt. Costs associated with debt reacquired by refundings are amortized over the life of the newly issued debt as permitted by the BPU. Gains and losses relating to other reacquired debt are recognized currently.

30 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---- --------

Atlantic Energy, Inc.

and Subsidiaries

-1 NOTE2. FEDERAL INCOME TAXES Federal income tax expense is less than the amount computed by applying the statutory rate on book income subject to tax for the following reasons:

Years Ended December 31 (Thousands of Dollars) 1987 1986 1985 Net Income $ 73,765 $ 54,946 $ 46,150 Preferred Stock Dividend Requirements of Subsidiary 4,667 5,545 6,282 Federal Income Tux Expense (as below) 49,429 31,399 33,343 Book Income Subject to Tux $127,861 $ 91,890 $ 85,775 Statutory Income Tux Rate 39.95% 46% 46%

Income Tux Computed at the Statutory Rate $ 51,080 $ 42,269 $ 39,457 Items for which deferred taxes are not provided:

Difference between Tux and Book Depreciation 2,825 2,842 2,801 Allowance for Funds Used During Construction (1,055) (7,684) (5,029)

Capitalized Overheads 485 (1,431) (1,209)

Investment Tux Credits (2,409) (3,859) (2,178)

Other (1,497) (738) (499)

Total Federal Income Tux Expense $ 49,429 $ 31,399 $ 33,343 Effective Income Tux Rate 39% 34% 39%

The Components of Federal Income Tux Expense are as follows:

Federal Income Tuxes Currently Payable $ 30,076 $ 790 $ 12,956 Application of SFAS 90:

Deferred Income Tuxes 720 (4,679) (2,974)

Investment Tax Credits (1,833)

Total 720 (6,512) (2,974)

Deferred Federal Income Tuxes:

Liberalized Depreciation 14,422 17,756 11,899 Unbilled Revenues (2,766) (834) 1,415 Unrecovered Purchased Power Costs 6,268 7,222 6,753 Deferred Energy Costs 4,523 (2,551)

Costs associated with Reacquired Debt (949) 10,078 Other (1,691) (2,038) (1, 787)

Deferred Investment Tux Credits (1,552) 4,585 7,261 Employee Stock Ownership Plan Credits 378 352 371 Total Deferred Federal Income Tux Expense 18,633 37,121 23,361 Total Federal Income Tux Expense 49,429 31,399 33,343 Less Federal Income Tuxes Included in Other Income (207) 1,157 9 Less SFAS 90 Income Tuxes 720 (6,512) (2,974)

Federal Income Tuxes Included in Operating Expenses $ 48,916 $ 36,754 $ 36,308 Federal income tax returns for 1981 and prior years have been examined The Financial Accounting Standards Board has issued a Statement by the Internal Revenue Service (IRS) and federal income tax liabilities for of Financial Accounting Standards entitled "Accounting for Income all years through 1976 have been determined and settled. The IRS has Tuxes" which is effective for years after 1988. The statement changes proposed certain deficiencies in taxes for the years 1977 through the recording methodology relating to deferred income taxes to a 1981. The Company has protested the proposed deficiencies and is liability approach. The principal impact of this change to the Company of the opinion that the final settlement of its federal income tax liabilities relates to the recording of changes in tax rates on a current basis, for these years will not have a material adverse effect on its results of and the recording of deferred tax liabilities not previously recorded operations or financial position. by Atlantic Electric. The Company expects the impacts of this change At December 31, 1987, the cumulative amount of deferred income to be lessened due to rate regulation, and in the opinion of manage-taxes which have not been provided on timing differences, principally ment, would not have a material effect on results of operations or depreciation, amounted to approximately $75 million. financial position.

31

L ______ -- --

Notes (continued)

NOTE 3. RATE MATTERS OF ATLANTIC ELECTRIC Base Rate Case Proceedings Unit 2. Also, Atlantic Electric agreed to increase the 1985 deferral of In February 1985, the BPU granted Atlantic Electric an increase of $7.5 million of Deferred Energy Costs to $12.179 million. Recovery approximately $24.0 million relating to the purchase of capacity and of this deferral is subject to the litigation discussed in Note 10 and energy from PP&L's Susquehanna Unit 2. later review by the BPU.

In April 1985, Atlantic Electric filed a petition requesting a net In February 1987, the BPU ordered a net decrease in annual increase of $91.85 million to be implemented in two phases. The first energy clause revenues of $47.3 million effective February 27, 1987.

phase request, for $63.3 million, related to increased operations and The Order includes approximately $7.0 million of fuel savings maintenance costs, and capital investment. In April 1986, the BPU associated with Hope Creek and $7.2 million due to the effects of issued an Order relating to the first phase granting an increase in compression, which allows for the distribution of the reduction over annual revenues of approximately $13.6 million. The BPU Order the remaining months of 1987. On April 23, 1987, the BPU ruled reflects an overall rate of return of 11.42%, with a return on common that energy revenues be decreased by an additional $2.4 million, to equity of 14.10%. The second phase request related to Atlantic reflect interest on 1986 over recoveries of fuel expenses and the Electric's 5% ownership in the Hope Creek Generating Station. disallowance of certain replacement power costs associated with The BPU issued an Oral Decision on February 20, 1987 relating 1985 Peach Bottom outages. This reduction was compressed into to the second phase request granting a net increase in base rate the remainder of 1987. These issues had been deferred in the revenues of approximately $31.4 million. The net increase consists of February 20, 1987 decision. In that decision, the BPU also established approximately $38. 775 million primarily associated with the costs of a performance standard for the five nuclear units in which Atlantic owning and operating the Hope Creek Generating Station, and a Electric has minority ownership interests. The performance standard decrease of approximately $7.366 million associated with the sets an annual overall target capacity factor of 70% with incentives changes in corporate federal income taxes resulting from the Tax for performance in excess of 80% and penalties for performance Reform Act of 1986. In its decision, the BPU disallowed $22.433 below 60%. Under the penalty provisions, a portion of Atlantic million of costs associated with the construction of Hope Creek and Electric's replacement power costs would not be recoverable through fixed a level of investment for ratemaking purposes at $217.4 million customer rates.

compared to a target cost of $200.3 million. Although Atlantic On September 25, 1987, Atlantic Electric filed petitions for a net Electric is allowed to recover the $217.4 million cost of this invest- increase in annual levelized energy clause revenues of $60.9 million.

ment, 20% of the excess, or $3.4 million, has been excluded from This increase reflects 1987 actual fuel and energy costs and projected rate base for purposes of computing a return on the investment. costs for 1988 being higher than were projected in 1986 to establish On September 25, 1987, Atlantic Electric filed a motion with the existing rates. It also includes the effects of the removal of the com-BPU to reduce base rates by $11.0 million primarily to reflect the pression of 1987 levelized energy clause reductions, and the applica-lower corporate federal income tax rate to be in effect for 1988 tion of the nuclear units performance standard provisions. In this filing, resulting from the Tax Reform Act of 1986. Atlantic Electric estimated that the aggregate 1987 capacity factor for the nuclear units would approximate 50.2%. This approximation Energy Clause Proceedings was primarily based on the continued unavailability for the remainder Atlantic Electric's energy clauses are reviewed annually by the BPU. of 1987 of the Peach Bottom Station due to a Nuclear Regulatory In February 1985, the BPU granted an increase of approximately Commission imposed shutdown of the station on March 31, 1987.

$4.8 million. As part of that decision, $1.639 million of the costs Subsequent unplanned outages at the Salem and Hope Creek units -

associated with an extended outage of Salem Unit 1 during 1983 have reduced the original estimate. The actual capacity factor in were excluded from recovery. Atlantic Electric also agreed to defer 1987 was approximately 45.5%. Based on the application of the per-

$7.5 million of Deferred Energy Costs, relating to costs associated formance standard to the 1987 nuclear units' performance, Atlantic with certain nuclear unit outages in 1984. Electric estimated, and has provided for, approximately $4.8 million In January 1986, the BPU ordered a reduction in energy revenues of replacement costs that would not be recoverable from customers.

of $44.0 million. As part of that decision, Atlantic Electric agreed to Application of provisions of the nuclear unit performance standard expense $3.975 million of replacement power costs associated with are subject to the findings of the BPU and Atlantic Electric cannot maintenance and repair outages at Peach Bottom Unit 2 and Salem predict the final outcome of the proceedings in this matter.

NOTE 4. RETIREMENT PLAN Atlantic Electric and its subsidiary have a noncontributory defined pensions. The companies adopted the new standard effective benefit retirement plan covering substantially all their employees. January 1, 1987. The new standard did not have a significant effect Benefits are based on an employee's years of service and average on the determination of pension costs. Pension costs for 1987, 1986 final pay. The companies' policy is to fund pension costs within the and 1985 were iJ.pproximately $4.2 million, $4.3 million and $6.5 guidelines of the minimum required by the Employee Retirement million, respectively. Approximately 80% of these costs were charged Income Security Act, and the maximum allowable as a tax deduc- to operating expense and the remainder, which was associated with tion. In December 1985, the Financial Accounting Standards Board construction labor, was charged to the cost of new utility plant.

adopted a new accounting standard for employers' accounting for 32 r--------- -- ------------ --- --- - -- --------------- ---;

Atlantic Energy, Inc.

and Subsidiaries Net pension costs for 1987 included the following components: Approximately 57% of plan assets are invested in equities, 28% in fixed income securities and 15% in other investments.

(Thousands of Dollars)

The weighted average discount rate and anticipated rate of Service cost-benefits earned during the period $ 5,579 increase in future compensation levels used to determine the pro-Interest cost on projected benefit obligation 11,664 jected benefit obligation as of December 31, 1987 were 8.25% and Actual return on plan assets (3,399) 6%, respectively. The corresponding rates as of January 1, 1987 were Net amortization and deferral (9,634) 7.5% and 6%. The expected long term rate of return on plan assets used in determining the pension cost for 1987 was 8%.

Net periodic pension costs $ 4,210 In addition to providing pension benefits, the companies provide certain health care and life insurance benefits for retired employees.

A reconciliation of the funded status of the plan as of December 31, Substantially all employees may become eligible for those benefits if 1987 is as follows: they reach retirement age while working for the companies. Benefits are provided through insurance companies and other plan providers (Thousands ofDollars) whose premiums and related plan costs are based on the benefits Fair value of plan assets $162,081 paid during the year. In December 1986, the companies established a Projected benefit obligation 152,050 trusteed plan to begin funding for these post employment benefits.

The companies made contributions of $3.2 million and $2.9 million Excess of plan assets over projected benefit obligation 10,031 to the trust for 1987 and 1986, respectively. Funding on behalf of Unrecognized net transitional asset (2,927) active employees is based on the aggregate cost method over their Unrecognized net gain (7,104) service lives and is equivalent to normal cost For current retirees, funding is based on current actual experience and amortization of Prepaid or accrued pension cost $ expected benefits over the remaining life expectancy of the retiree Accumulated benefit obligation: group. The actuarial present value of accumulated post employment Vested benefits $108,408 benefits under the plans was $28.l million at January 1, 1987. The cost of these benefits were $3.2 million, $2.9 million and $1.0 million Non-vested benefits 5,671 for 1987, 1986 and 1985, respectively.

Total $114,079 NOTE 5. JOINTLY-OWNED GENERATING STATIONS Atlantic Electric participates with other utilities in the construction plant at December 31, and includes an allowance for funds used and operation of several electric production facilities. during construction.

The amounts shown represent Atlantic Electric' s share of each Electric Plant Construction Generation in Service Work in Progress Energy Company's Station Source Share 1987 1986 1987 1986 1987 1986 (Thousands of Dollars) (mwh)

Keystone Coal 2.47% $ 8,198 $ 8,074 $ 614 $ 285 292,801 286,415 Conemaugh Coal 3.83 14,171 12,558 387 1,100 395,456 402,874 Peach Bottom Nuclear 7.51 93,904 91,690 8,369 4,285 225,446 878,791 Salem Nuclear 7.41 167,523 162,960 3,192 4,006 914,095 919,915 Hope Creek Nuclear 5.00 223,505 804 236,055 362,886 53,766 The Hope Creek Station successfully completed its power ascension related to Atlantic Electric's ownership interests in the stations.

program and was released to the Pennsylvania-New Jersey-Maryland Current recovery of these spent nuclear fuel disposal costs is provided power pool for dispatch. Public Service Electric & Gas Company, as part of Atlantic Electric's energy clause.

the operator of the station, declared the unit commercial in February Atlantic Electric provides its own financing during the construction 1987 upon receipt of a BPU Order. period for its share of the jointly-owned plants and includes its share The operators of the Salem and Peach Bottom Nuclear Generating of direct operations and maintenance expenses in the Consolidated Stations entered into contracts with the United States Department Statement oflncome.

of Energy for spent nuclear fuel disposal, requiring the payment of fees 33

Notes (continued)

NOTE 6. NONUTILITY COMPANIES Atlantic Southern Properties owns and operates commercial real estate the expected benefits from filing a consolidated federal income property. Atlantic Generation is a one-third partner in Cogeneration tax return. The net assets of the nonutility companies included in Partners of America. ATE Investment was formed to manage the consolidated balance sheet approximate $9.l million, consisting investments for Atlantic Energy. None of the companies had operating principally of Atlantic Southern Properties' commercial real estate results in 1985 or 1986. For 1987, the companies had combined ($6.8 million) and Atlantic Generation's partnership investment losses of $549,000, net of income tax credits of $670,000, due to ($2.2 million).

(

NOTE 7. CUMULATIVE PREFERRED STOCK OF ATLANTIC ELECTRIC Atlantic Electric has authorized 799,979 shares of Cumulative Preferred relating to outstanding shares at December 31 is shown in the table Stock, $100 Par Value, 2,000,000 shares of No Par Preferred Stock below (dollars in thousands, except par values and current redemp-and 3,000,000 shares of Preference Stock, No Par Value. Information tion prices).

Current 1987 1986 Redemption Series Par Value Shares Amount Shares Amount Price Not Subject to Mandatory Redemption:

4% $100 77,000 s 7,700 77,000 $ 7,700 $ 105.50 4.10% 100 72,000 7,200 72,000 7,200 101.00 4.35% 100 15,000 1,500 15,000 1,500 101.00 4.35% 100 36,000 3,600 36,000 3,600 101.00 4.75% 100 50,000 5,000 50,000 5,000 101.00 5% 100 50,000 5,000 50,000 5,000 101.00 5%% Convertible 100 11,535 1,154 7.52% 100 100,000 10,000 100,000 10,000 103.01 Total $40,000 $41,154 Subject to Mandatory Redemption:

9.96% $100 88,000 s 8,800 96,000 $ 9,600 $ 105.34

$8.25 None 77,500 7,750 82,500 8,250 106.14

$9.45 None 70,000 7,000 120,000 12,000 Total 23,550 29,850 Less portion due within one year 5,050 5,050 Total $18,500 $24,800 Cumulative Preferred Stock Not Subject to Mandatory Redemption redeemed on any sinking fund date without premium. Atlantic Elec-is redeemable soley at the option of Atlantic Electric. tric redeemed 5,000 shares at par in 1987 and 1986, respectively.

The remaining shares of the 5%% Convertible Series were called for Beginning November 1, 1986, and annually thereafter, 40,000 shares redemption on April 30, 1987 at the scheduled redemption price of the $9.45 No Par Preferred Stock Series must be redeemed through of $101.50. the operation of a sinking fund at a redemption price of $100 per share.

On August 1 of each year 8,000 shares of the 9.96% Series must At the option of Atlantic Electric, not more than an additional 40,000 be redeemed through the operation of a sinking fund at a redemption shares may be redeemed on any sinking fund date, without premium, price of $100 per share. As of December 31, 1987, Atlantic Electric up to 50,000 shares in the aggregate. Atlantic Electric redeemed had redeemed the maximum 40,000 optional shares as allowed under 50,000 and 80,000 shares at par in 1987 and 1986, respectively. As optional redemption provisions. of December 31, 1987, Atlantic Electric had redeemed the maximum On November 1 of each year, 2,500 shares of the $8.25 No Par 50,000 optional shares.

Preferred Stock Series must be redeemed through the operation The annual minimum sinking fund provisions of the above series of a sinking fund at a redemption price of $100 per share. At the option aggregate $5.05 million for 1988, $4.05 million for 1989 and $1.05 of Atlantic Electric, not more than an additional 2,500 shares may be million for 1990 through 1992.

34

Atlantic Energy, Inc.

and Subsidiaries NOTE 8. LONG TERM DEBT OF ATLANTIC ELECTRIC Long term debt of Atlantic Electric consists of the following:

Maturity December31 Series Date 1987 1986 (Thousands ofDollars)

First Mortgage Bonds:

41/2% January 1, 1987 s $ 10,000 3%% April 1, 1988 10,000 10,000 41/2% April 1, 1989 2,775 2,775 41/2% March 1, 1991 10,000 10,000 41/z% July 1, 1992 10,350 10,350 4%% March 1, 1993 9,540 9,540 11%% November 1, 1993 13,025 13,325 5Ys% February 1, 1996 9,980 9,980 8% November 1, 1996 95,000 95,000 8%% September 1, 2000 19,000 19,000 8% May 1, 2001 27,000 27,000 71/2% April 1, 2002 20,000 20,000 7%% June 1, 2003 29,976 29,976 7%% Pollution Control January 1, 2005 6,500 6,500 6%% Pollution Control December l, 2006 2,500 2,500 11%% Pollution Control May 1, 2011 39,000 39,000 101/z% Pollution Control Series B July 15, 2012 850 850 7%% Pollution Control Series A April 15, 2014 18,200 18,200 101/z% Pollution Control Series C July 15, 2014 23,150 23,150 11 l/z% October 1, 2015 21,215 21,215 8%% May 1, 2016 125,000 125,000 8% % Pollution Control July 15, 2017 4,400 Total 497,461 503,361 Debentures:

51.4% February 1, 1996 2,267 2,267 7%% May 1, 1998 2,619 2,619 Total 4,886 4,886 Unamortized Premium and Discount-Net (3,082) (3,275)

Total 499,265 504,972 Less portion due within one year 10,000 10,000 Total $489,265 $494,972 35

Notes (continued)

On January 1, 1986, Atlantic Electric redeemed $6.0 million of its in amounts in each case sufficient to redeem $100,000 principal 12%% Series bonds through the operation of the sinking fund and amount plus, at the election of Atlantic Electric, up to an additional optional redemption provisions. On June 12, 1986, Atlantic Electric $100,000 principal amount in each year. By December 31, 1987, Atlantic redeemed all of the remaining principal amount, $57. 750 million at Electric had reacquired and cancelled $1,033,000 and $881,000 a redemption price of 109.92%. The aggregate costs of the reacqui- principal amount of the 51.4 % and 7114 % Debentures, respectively, sition were $3.288 million, net of related income taxes. These costs, towards its requirements for 1988 and subsequent periods.

including unamortized debt expenses related to the issuance of the Effective April 15, 1987, Atlantic Electric exercised its option to debt and other expenses, and the related deferred income taxes, are convert the Pollution Control Series A due 2014 from an adjustable being amortized over thirty years beginning in June 1986. rate into a fixed rate of 7%%.

On November 5, 1986, Atlantic Electric tendered for all of the out- Regular redemption prices are currently in effect for each series standing principal of the 11%% Series due 1993 and the lF/2% Series of first mortgage bonds, except for certain pollution control series due 2015 at redemption prices of 112.570% and 121.125% of the for which redemption is restricted prior to specified dates. Also, certain principal amount, respectively. At December 31, 1986, principal amounts pollution control series contain future sinking fund requirements.

of $36.675 million and $48. 785 million, respectively, were reacquired. Redemption of certain series of the first mortgage bonds are restricted The aggregate cost of these redemptions was $8. 75 million, net of prior to specified dates if the redemption is for the purpose of refunding related income taxes. These costs, including unamortized debt expenses at effective interest costs to Atlantic Electric ofless than specified rates.

related to the issuance of the debt and other expenses, and the related Current sinking fund requirements of $650,000 in connection with deferred income taxes, are being amortized over ten years beginning certain first mortgage bonds outstanding may be satisfied by certification November 1986. of property additions as provided for in the related mortgage indentures.

In January 1987, Atlantic Electric reacquired an additional $300,000 The aggregate amount of debt maturities, in addition to sinking fund principal amount of the 11%% Series relative to the November 5, requirements, of all long term debt outstanding at December 31, 1987 1986tender. are $10.0 million in 1988, $2.775 million in 1989, $10.0 million in Deposits in sinking funds for retirement of debentures are required 1991, and $10.35 million in 1992. No outstanding long term debt on February 1 of each year through 1995 for the 51.4 % Debentures,

• matures in 1990.

and on May 1 of each year through 1997 for the 7114 % Debentures NOTE 9. SHORT TERM DEBT AND COMPENSATING BALANCES As of December 31, 1987, Atlantic Electric had bank lines of credit $46. 7 million in commercial paper and $17.0 million in notes payable.

of $115 million of which $102 million was available for use. Atlantic Atlantic Electric had $12.9 million of short term debt outstanding at Electric is required, with respect to $31 million of these credit lines, December 31, 1986 consisting of $8.5 million of commercial paper to maintain average compensating balances in demand deposits which and $4.4 million of pollution control obligations (PCOs). The PCOs are not significant nor legally restricted. Atlantic Electric is in compli- represent two separate interim pollution control financings at respective ance with such compensating balance arrangements. With respect to the interest rates of 4.7% and 5.5%. These PCOs matured and were remaining available credit lines, Atlantic Electric pays commitment refinanced in July 1987. Atlantic Electric had no outstanding short fees (generally Ys%) for which charges amounted to $149,000 in 1987, term debt at December 31, 1985. Additional information regarding

$248,000 for 1986, and $235,000 for 1985. At December 31, 1987 short term debt (excluding the PCOs) follows:

Atlantic Electric had $63. 7 million of short term debt consisting of 1987 1986 1985 (Thousands of Dollars)

For the year ended-Maximum amount of total short term debt at any month-end:

Commercial Paper $46,700 $10,500 $55,700 Notes Payable to Banks $17,000 $ 5,000 $10,000 Average amount of short term debt (based on daily outstanding balances):

Commercial Paper $22,497 $ 2,256 $19,905 Notes Payable to Banks $ 3,327 $ 123 $ 4,239 Weighted daily average interest rates on short term debt:

Commercial Paper 6.9% 6.3% 7.9%

Notes Payable to Banks 7.1% 6.8% 8.1%

36

Atlantic Energy, Inc.

and Subsidiaries NOTE 10. COMMITMENTS AND CONTINGENCIES Construction Program Purchase Power Agreements Atlantic Electric's cash construction expenditures for 1988 are estimated Atlantic Electric has an arrangement for a limited term purchase of at approximately $117 million. Current commitments for the con- energy and capacity from Allegheny Power System which is subject struction of major production and transmission facilities amount to to annual extensions. It also has agreements to purchase certain approximately $52.4 million of which it is estimated approximately capacity and energy output from Pennsylvania Power & Light Company.

$23.0 million will be expended in 1988. These amounts exclude the The BPU order which approved rates for the PP&L agreements allowance for funds used during construction and customer prescribes a revenue reduction formula in the event that the Susque-contributions. hanna Units fail to meet a combined minimum performance standard Insurance Programs established by the stipulation which could subject Atlantic Electric, under the most adverse circumstances, to a revenue reduction not Atlantic Electric is a member of certain insurance programs which to exceed $15.0 million per unit per year.

provide coverage for property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek Stations Nuclear Plant Outages are insured against property damage losses up to $1.4 billion per site The BPU has deferred consideration of $12.179 million of replacement under these programs. power costs associated with certain nuclear outages relating to generator In addition, Atlantic Electric is a member of an insurance program failures at Salem Station. The co-owners of the station have instituted which provides insurance coverage for the cost of replacement power litigation against the supplier of the affected equipment Atlantic Electric during prolonged outages of nuclear units caused by certain specific cannot predict the outcome of this matter or its ultimate effect, but conditions. Under the property and replacement power insurance in the opinion of management, it would not materially affect the results programs, Atlantic Electric could be assessed retrospective premiums of operation or financial position.

in the event the insurers' losses exceed their reserves. As of December The New Jersey Public Advocate filed a motion, dated January 27, 31, 1987, the maximum amount of retrospective premiums Atlantic 1988 with the Office of Administrative Law in a separate proceeding Electric could be assessed for losses during the current policy year involving Public Service Electric & Gas Company (PS) requesting, in was $9.35 million under these programs. substance, that hearings be conducted to determine whether PS should In the event of a nuclear incident at any of the facilities covered by continue to collect its costs for Peach Bottom through its rates for the federal government's third-party liability indemnification program service and, in the interim, to make rates connected with Peach Bottom Atlantic Electric could be assessed up to $2.34 million per incident, subject to refund. On February 4, 1988, the BPU announced that it but not more than $4.67 million in a calendar year in the event more would consider the Public Advocate's motion regarding Peach Bottom.

than one incident is experienced. Currently, Congress is considering On February 9, 1988, the Public Advocate filed a comparable motion several proposals which would affect the amount of the assessment with the BPU with respect to Atlantic Electric and Peach Bottom, and under this program. At this time, Atlantic Electric is unable to predict in a separate motion, has requested that the BPU consolidate both the outcome of these proposals or their effects on the Company. the Atlantic Electric and PS Peach Bottom proceedings. Atlantic Electric Atlantic Electric is also a member of several utility industry-owned currently estimates that, with respect to its ownership interest in mutual insurance companies providing various other liability insur- Peach Bottom, base rate revenues could amount to approximately ance coverages as part of Atlantic Electric's overall insurance programs. $30 million annually. With the unavailability of the Peach Bottom units, As of December 31, 1987, under these policies the maximum amount replacement power costs could amount to approximately $20 million of retrospective premiums Atlantic Electric could be assessed for losses annually. The future disallowance of all or a substantial portion of during the current policy year was $4.5 million. base rate revenues or replacement power revenues could have a material adverse impact on the consolidated financial results of Atlantic Electric and the Company. It is not possible at this time to predict when the Peach Bottom Station will be returned to service or the regulatory treatment that will be ultimately decided by the BPU.

37

Atlantic Notes (continued) Energy, Inc.

and Subsidiaries NOTE 11. LEASES Atlantic Electric leases various types of property and equipment for use in its operations. Certain of these lease agreements are capital leases consisting of the following at December 31:

1987 1986 (Fhousands of Dollars)

Production plant $13,521 $13,521 General plant 1,740 1,740 Total 15,261 15,261 Less accumulated amortization 5,690 5,059 Net 9,571 10,202 Nuclear Fuel 28,123 27,401 Leased property-net $37,694 $37,603 Atlantic Electric has a contractual liability to purchase nuclear fuel Operating expenses for 1987, 1986, and 1985 include leased for the Salem and Hope Creek Generating Stations from Pearl Nuclear Fuel costs of approximately $10.8 million, $7.8 million Fuel Corporation. The asset and related obligation are reduced and $7.7 million, respectively, and rentals and lease payments for as the fuel is burned, and are increased for additional purchases. all other capital and operating leases of $5.1 million, $4.0 million Nuclear fuel requirements for Peach Bottom Generating Station and $4.5 million, respectively. Excluding the nuclear fuel obligation, are being provided by the operating company through a fuel purchase future minimum rental payments for all noncancellable lease agree-contract. Atlantic Electric is responsible for payment of its share ments are not significant to Atlantic Electric's operations.

of fuel consumed and related operating costs and interest expense.

NOTE 12. QUARTERLY FINANCIAL RESULTS (unaudited)

Quarterly financial data presented below for 1986 has been restated Preferred Dividends in the determination of net income Goss).

from the amounts previously reported by Atlantic Electric to give effect Quarterly financial data, reflecting all adjustments necessary in the to the application of SFAS 90. In addition, the Net Income (Loss) opinion of the Company for a fair presentation of such amounts, amounts, as reported by Atlantic Energy, differ from those reported are as follows:

by Atlantic Electric due to the classification of Atlantic Electric's Net Operating Operating Income Earnings Quarter Revenues Income (Loss) Per Share (Thousands of Dollars Except Per Share Amounts) 1987 1st $142,094 $ 22,715 $14,186 $ .78 2nd 152,962 26,764 15,176 .83 3rd 208,446 46,748 34,938 1.91 4th 144,671 18,446 9,465 .52

$648,173 $114,673 $73,765 $4.0301 1986 1st $136,520 $20,339 $12,545 $ .69 2nd 134,433 20,858 13,710 .75 3rd 179,310 37,826 30,258 1.66 4th 132,698 16,431 (1,567) (.09)

$582,961 $95,454 $54,946 $3.0001 (1) The individual quarters do not add due to the increasing average number of common shares outstanding at the end of each quarter.

The Earnings Per Share previously reported in 1986 by Atlantic The revenues of Atlantic Electric are subject to seasonal fluc-Electric for the first through fourth quarters were $.65, $. 71, $1.62 tuations due to increased sales and higher residential rates during and $.52, respectively. the summer months.

38 II I

I lI

Atlantic Investor Infonnation Energy, Inc.

and Subsidiaries Where should I send inquiries concerning my investment in Is additional information about the Company available?

Atlantic Energy, Inc.? The annual report to the Securities and Exchange Commission on The Company serves as recordkeeping agent, dividend disbursing Fonn 10-K and other reports containing financial data are available agent and also as 'Iransfer Agent for Common Stock. Correspondence to shareholders. Specific requests should be addressed to Investor concerning such matters as the replacement of dividend checks or Records, at the address shown.

stock certificates, address changes, transfer of Common Stock When are dividends paid?

certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general infonnation about the Company should be addressed to: The proposed record dates and payable dates for dividends on Common Stock are as follows:

Atlantic Energy, Inc.

Investor Records Record Dates Payable Dates P.O. Box 1334 1199 Black Horse Pike March 17, 1988 Aprill5, 1988 Pleasantville, New Jersey 08232 June 16, 1988 July 15, 1988 Telephone (609) 645-4506 or (609) 645-4507 September 15, 1988 October 14, 1988 Ms. S.M. Dodd, Secretary, is the corporate officer responsible for all December 15, 1988 January 16, 1989 investor services.

The following table indicates dividends paid in 1987 and 1986 on Does the Company have a Dividend Reinvestment and Common Stock:

Stock Purchase Plan?

Yes. The Plan allows shareholders and employees to automatically 1987 1986 invest their cash dividend and/or optional cash payments in shares First Quarter $ .655 $ .645 of the Company's Common Stock. Holders of record of Common

. Stock interested in enrolling in the Plan should contact Investor Second Quarter .655 .645 Records at the address above. Third Quarter .67 .655 Fourth Quarter .67 .655 Where is the Company's stock listed?

Annual Total $2.65 $2.60 Common Stock is listed on the New York, Pacific and Philadelphia Stock Exchanges. The trading symbol of the Company's Common Dividends paid on Common Stock in 1987 and 1986 were fully taxable.

Stock is ATE; however, newspaper listings generally use Atl Enrg.

The high and low sales prices of the Common Stock as reported Who is the trustee and interest paying agent for Atlantic in the Wall Street Journal as New York Stock Exchange-Composite Electric's Bonds and Debentures?

'Iransactions for the periods indicated were as follows: First Mortgage Bond recordkeeping and interest disbursing are perfonned by Irving '!rust Company, One Wall Street, New York, 1987 1986 New York 10015. Debenture recordkeeping and interest disbursing High Low High Low are perfonned by First Fidelity Bank, N.A., 765 Broad Street, Newark, New Jersey 07101.

First Quarter 41% 36% 36% 28 1/.i Second Quarter 37% 32% 38% 32112 Who can I contact regarding the Preferred Stock of Third Quarter 361/2 3l3/.i 46% 33% Atlantic Electric?

Fourth Quarter 351/z 28% 41% 37 Atlantic Electric serves as recordkeeping agent, dividend disbursing agent and 'Iransfer Agent for its Preferred Stock. Inquiries regarding such matters can be directed to the address listed above.

39

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Atlantic Summary Financial and Energy, Inc.

and Subsidiaries Statistical Review 1987-1983 1987 1986 1985 1984 1983 Atlantic Energy, Inc.

Investor Information Operating Revenues $ 648,173 $ 582,961 $ 579,733 $ 549,531 $ 517,142 Net Income $ 73,765 $ 54,946 $ 46,150 $ 56,433 $ 59,717 Average Number of Shares Outstanding (Thousands) 18,311 18,266 18,069 17,581 16,923 Earnings per Average Common Share $ 4.03 $ 3.00 $ 2.55 $ 3.21 $ 3.53 Total Assets (Year End) $1,499,362 $1,401,064 $1,319,027 $1,253,083 $1,170,995 Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year End) $ 522,815 $ 534,822 $ 521,612 $ 473,462 $ 459,366 Capital Lease Obligations $ 37,694 $ 37,603 $ 38,857 $ 41,722 $ 39,228 Dividends Declared on Common Stock $ 2.715 $ 2.61 $ 2.555 $ 2.45 $ 2.32 Dividend Payout Ratio 66% 87% 99% 75% 65%

Book Value Per Share (Year End) $ 25.71 $ 24.37 $ 23.96 $ 23.90 $ 23.20 Price Earnings Ratio (Year End) 8 12 11 8 7 Times Fixed Charges Earned (pre-tax,Atlantic Electric) 3.68 2.99 3.06 3.62 4.14 Shareholders and Employees (Year End)

Common Shareholders 45,586 47,133 48,635 47,446 48,299 Employees (Atlantic Electric) 2,148 2,168 2,099 2,012 1,995 Atlantic City Electric Company (Principal Subsidiary)

Fadlities for Service Total Utility Plant (Thousands) $1,602,801 $1,503,010 $1,438,643 $1,351,392 $1,265,393 Additions to Utility Plant (Thousands) $ 105,521 $ 109,303 $ 105,213 $ 95,388 $ 83,673 Pole Miles of 'Iransmission and Distribution Lines 7,055 7,015 6,977 6,958 6,925 Generating Capacity (Kilowatts) (a) (b) 1,660,700 1,660,700 1,605,700 1,594,200 1,594,200 Maximum Utility System Demand-kw 1,609,000 1,459,000 1,432,000 1,298,800 1,346,700 Capacity Reserve at Time of Peak (% of Instal. Gen.) 3.1% 12.1% 10.8% 18.5% 15.5%

Energy Supply (Thousands of kwh):

Net Generation 6,157,938 5,966,600 5,817,254 6,237,724 5,913,196 Purchased and Interchanged-Net 1,483,685 1,131,900 1,049,393 393,175 579,488 Total System Load 7,641,623 7,098,500 6,866,647 6,630,899 6,492,684 Electric Sales (Thousands of kwh)

Residential 3,040,410 2,839,114 2,638,121 2,646,813 2,545,351 Commercial 2,592,232 2,401,199 2,298,895 2,150,464 2,019,468 Industrial 1,323,567 1,222,981 1,204,971 1,197,392 1,225,637 All Others 58,191 58,120 57,685 59,122 60,978 Total 7,014,400 6,521,414 6,199,672 6,053,791 5,851,434 Residential Electric Service (Average per Customer)

Amount of Electricity used during the year (kwh) 8,281 7,982 7,643 7,866 7,715 Revenue for a year's service $ 838.08 $ 780.43 $ 778.77 $ 783.47 $ 735.66 Revenue per Kilowatt-hour 10.12¢ 9.78¢ 10.19¢ 9.96¢ 9.54¢ Customer Data (Average)

Residential With Electric Heating 75,900 72,640 68,871 65,261 62,272 Residential Without Electric Heating 291,253 283,062 276,305 271,207 267,642 Total Residential 367,153 355,702 345,176 336,468 329,914 Commercial ' 46,775 45,359 44,256 43,615 43,152 Industrial 1,015 1,022 1,020 1,015 1,021 Other 554 554 554 544 549 Total Customers 415,497 402,637 391,006 381,642 374,636 Total Service Locations 444,819 430,565 417,625 407,277 398,526 Operating Revenues (Thousands)

Energy Revenues:

Residential $ 307,704 $ 277,601 $ 268,814 $ 263,612* $ 242,705 Commercial 231,498 211,023 209,880 190,435 175,520 Industrial 89,261 78,404 80,392 79,123 76,109 All Others 10,409 10,152 10,315 10,405 10,133 Total Energy Revenues 638,872 577,180 569,401 543,575 504,467 Unbilled Revenues-Net 385 (1,813) 3,076 (1,340) 5,671 Other Electric Revenue 8,916 7,594 7,256 7,296 7,004 Total $ 648,173 $ 582,961 $ 579,733 $ 549,531 $ 517,142 Certain prior year amounts have been restated for the effects ofSFAS 90, consolidation of subsidiaries and capitalization of leases.

(a) Excludes capacity allocated to a large industrial customer.

(b) Includes unit purchase of capacity under contracts with Pennsylvania Power & Light Company (commencing in 1983) and Delmarva Power & Light Company (1983 and 1984).

40 l

Officers of Atlantic Energy, Inc.

and Subsidiaries Officers of Atlantic Energy, Inc.

E. DOUGLAS HUGGARD BRIAN A. PARENT President and Chief Vice President Executive Officer J.G. SALOMONE MEREDITH I. HARLACHER, JR. Vice President Vice President and Treasurer JERROLD L. JACOBS SABRINA M. DODD Vice President Secretary MICHAEL A. JARRETT J. DAVID McCANN Vice President Assistant Secretary and Assistant Treasurer The President and Vice Presidents of Atlantic Energy, Inc. make up the Executive Committee and also the Boards of Directors for each of Atlantic Energy's subsidiaries.

Officers of Atlantic City Electric Company (at January 1, 1988)

Years of Years of Service Service E. DOUGLAS HUGGARD 32 THOMAS E. FREEMAN 7 President and Vice President-Chief Executive Officer Human Resources JERROLD L. JACOBS 26 JOSEPH T. KELLY, JR. 37 Executive Vice President Vice President-Interconnection Operations MEREDITH I. HARLACHER, JR. 22 Senior Vice President- JAMES J. LEES 17 Planning and Regulatory Affairs Vice President-MICHAEL A. JARRETT 12 Rates Senior Vice President- BERTRAM LeMUNYON 28 Corporate Services Vice President-Power Delivery BRIAN A. PARENT 20 Senior Vice President- HENRY K. LEVARI, JR. 16 Utility Operations Vice President-Corporate Planning J.G. SALOMONE 11 and Performance Senior Vice President-Finance and Accounting J. DAVID McCANN 15 Vice President, Treasurer JOHN M. CARDEN 20 and Assistant Secretary Vice President-Customer Service MORGAN T. MORRIS, III 18 Vice President-LANCE E. COOPER 5 Administrative Services Vice President-Control and Assistant Treasurer HENRY C. SCHWEMM, JR. 18 Vice President-SABRINA M. DODD 2 Production Secretary Officers of Atlantic Generation, Inc.

HARVEY N. MORRIS FELIXJ. ROSPOND President Secretary & Treasurer Officers of Atlantic Southern Properties, Inc.

M.A. JARRETT J.M. CARDEN J.D.McCANN President Vice President Secretary & Treasurer Officers of ATE Investment, Inc.

J.G. SALOMONE L.E.COOPER J.D.McCANN President Vice President Secretary & Treasurer 41

Directors of Atlantic Energy, Inc.

ELEANOR S. DANIEL E. DOUGLAS HUGGARD Self-employed, Vice President and director of President and Chief Executive Officer several real estate corporations of the Company JOHN D. FEEHAN IRVING K. KESSLER Chairman of the Board of the Company Retired, Former Executive Vice President, RCA Corporation JOS. MICHAEL GALVIN, JR.

President and Chief Executive Officer of RICHARD B. McGLYNN Salem County Memorial Hospital Counselor-at-Law, Attorney with the firm of Stryker, Tams & Dill GERALD A. HALE President of HHH, Inc., an investment MADELINE H. McWHINNEY and management company President of Dale, Elliot and Company, a management consulting firm providing MATTHEW HOLDEN, JR. services to the banking industry

• Professor of Government and Foreign Affairs, University of Virginia Director Committees EieanorS.

Daniel D John D.

Feehan D D [l D D D Jos. Michael Galvin, Jr. [] D D Gerald A.

Hale D [] D D Matthew Holden, Jr. D D D E. Douglas Huggard D D D [J Irving K.

Kessler [J [J D []

r-----.

Richard B.

McGlynn D ' '

lI ___ JI D D Madeline H. !I McWhinney LJ D D Committee Chairman Ci Committee Membership n Ex Officio Membership i*

1,.

42

Directors of Atlantic Energy, Inc.

front row (l tor): J.D.

Feehan, R.B. McGlynn middle row (l tor): JVJ.H.

McWhinney, G.A. Hale, l.K. Kessler back row (l to r):

E.D. Huggard, E.S.

Daniel, J.M. Galvin, Jr.,

M. Holden, Jr.

~; MONOPOLY game equipment used ~ith Jermission

!! ~from Parker Brothers ©1935, 1985. .

~,Photography: Kelly/Mooney, Joseph Mulligan

• ... :Design: Mueller & Wister, Inc.