ML18102A962

Atlantic Energy 1996 Summary Annual Rept

ML18102A962
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1996
From:	Chesser M, Jo Jacobs ATLANTIC ENERGY, INC.
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ML18102A960	List: ML18102A959 ML18102A961 ML18102A962 ML18102A963
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9704150103 970408 PDR ADOCK 05000272 I

PDR

The future mgeso To you, our shareholders:

More than any other single factor, rapid and dramatic change will characterize the future of our industry. The mounting forces of competition will demand that we become bigger, stronger, and more efficient. We're proud to re/Jort to you that in 1996 we tool< a major step to pre/Jare our company for that future when we announced our plan to merge with Delmarva Power.

• Our /Yroposed merger with Delmarva Power re/m-sents a quantum leap in our ongoing wori< to build a com/Jetitive energy com/Jany. In fact, we believe that we could not have achieved the com/Jetitive advantages we'll enjoy as a merged com/Jany with Delmarva Power if we had forged ahead on our own.

• As Conectiv -

the name we've chosen for our new company -

Ai/antic Energy

] err old L. ] acobs Chainnan of the Board and Chief Executive OfficeT change.

we will serve more than one million customers who live in the center of one of our nation's largest consumer and business markets. Our increased scale will give us the mari<et presence and the financial strength to develop new lines of business and to ex/Jand into a growing region. Just as importantly, Conectiv will achieve cost savings from merger synergies that will total an estimat-ed $500 million over the next JO years. We'll use these sav-ings to strengthen our bottom line and mal<e our cost structure more com/Jetitive.

• Overall, the merger will significantly strengthen our ability to deliver on our primary accountabilities to you, our shareholders, to assure you of reasonable growth and Michael J. Chesser President and Chief 0 /Jeratini; Officer II * * * * * *

• 3 We are hopeful that the problems at Salem Station are coming to an end.

We have, however, taken aggwssive action to insulate ourselves from the kind of negative financial effects Salem Station created last year. First, the BPU settle-ment successfully resolved a major outstanding regulatory issue that held /Joten-tially significant risk for us -

the BPU's review of the ongoing Salem outage.

And second, in December 1996 we reached a /Je1formance-based agreement with PSE&G that limits our financial exposure to poor /x eformance at Salem Station in 1997. Under this unique agreement, we have committed to pay PSE&G $ I 0 million, which represents roughly half of our share of 1997 O&M costs. The rest of our share of the costs will be /Jaid in increments only if the units come on-line and produce electricity. In exchange for the agreement, we have dismissed our law suit against PSE&G.

• Controlling costs and find-ing creative solutions to challenges like the Salem Station outage will be critical success factors in the com/Jetitive environment. We also believe we must find new ways to grow our com/Jany by taking advantage of the freedom we will enjoy A tla ntic Energy in the com/Jetitive marketplace. Our strategy for growth focuses on delivering a wide range of energy-related jJroducts and services that off er excellent value, convenience and service to our customers.

• During 1996 we made real progress in developing some of our new service enter/Jrises. Atlantic Thermal Systems (ATS) -

our heating and cooling subsidiary -

will complete its new Midtown Thermal Control Center in Atlantic City this summer. The $55 mil-lion center will /Jroduce and deliver thermal energy to casino customers along the Boardwalk. Through a new /Jartnership, ATS also recently purchased a district heating loop that serves offices and government buildings in downtown Hanisburg, Pennsylvania.

• Our Energy Services Group is also successfully expanding activities beyond the bounclaries of southern New Jersey. The group is actively /Jursuing business relationshi/Js with large energy users located across the Northeast. As a com/Jetitor in a ra/Jidly ex/Janding niche, this group markets energy efficiency and infrastructure improvement projects to large energy users searching for ways to im/Jrove efficiency and cut costs. In addition to /Jroviding

income prospects.

When we announced the merger in August of 1996 we said we absolutely believe it is the right thing to do for Atlantic Energy.

Our shareholders told us they agreed when on ] anuary 30, 199 7, both Atlantic Energy and Delmarva shareholders voted overwhelmingly to approve our merger. With that important milestone behind us, we will now focus on securing a/Jprovals from our state and federal regulators. We ho/Je to complete the merg-er and set the exciting future of Conectiv in motion by the end of 199 7.

Despite the significant progress we made in positioning Atlantic Energy for future competition, our financial performance in 1996 was disa/Jpointing.

Earnings per share were $1. 12, a 4 3 cent decline from the $1. 5 5 per share recorded in 1995. Results for 1996 reflect several charges and non-recurring extJenses that account for much of the earnings drop. Included in these adjust-ments was a charge of 14 cents for our October 1996 settlements with the New Jersey Board of Public Utilities (BPU), /Jrimarily related to the ongoing outage at the Salem Nuclear Station. We also recorded an 8 cent per share charge for non-recurring items related to our utility and non-regulated businesses. Although these actions reduced earnings, they also set the stage for im/)roved results in 199 7.

• Total energy sales during 1996 reached 8.3 billion kilowatt-hours, a 4 percent increase over last year's mark. While the increase in sales is a favor-able indicator, sales during our critical summer season dropped almost 4 percent from 1995's levels due to unusually cool weather.

• The ongoing outage at the Salem Nuclear Station was by far the most significant factor behind our earnings decline. We estimate that increased outage costs and the regulatory penalty asso-ciated with the station's difficulties reduced earnings 24 cents per share in 1996.

0 /Jeration and Maintenance costs at the station increased $8.9 million over 1995 levels as station operator Public Service Electric and Gas (PSE&G) worked to make necessary repairs and improvements.

• Based on PSE&G's latest restart schedule, Unit 2 is expected to be ready for restart in the second quarter of 199 7. Unit I, following completion of its steam generator replace-ment, is currently projected by PSE&G to be ready in the fall of 1997.

Atlantic Energy 2

Financial Highlights ATLANTIC ENERGY EARNINGS AND DIVIDENDS PAID PER SHARE OF COMMON STOCK 2

1.&l 1.67 1.54 1.5 1.51 Lil

.5 0

92 93 94 95 96

+ -

EARNINGS DIVIDENDS

~------------------

Earnings per share of Common Stock is net income divided by the average number of common shares ourstanding.

Dividends paid pi.>r share is the sum of rlie quarterly dividend payments made in January, A/JTil, July and October.

ATLANTlC ENERGY MARKET PRICE PER SHARE OF COMMON STOCK 25 lJ.ll 11.75 1763 19.15 1713 20 15 10 5

0

• 92 93 94 95 96 This is the closing price of Atlantic Ener1r/s Common Stock on the last trading date each year, as reported by the New York Stock Exchange Com/JOsite Transactions listing.

Ac/antic Energy, Inc. is the parent holding company for Atlantic City Electric Company (Ac/antic Electric), Ac/antic Energy Enterprises, Inc. (AEE) and Ac/antic Energy lntemarional, Inc. (AEII). Ac/antic Electric, a regulated electric utility, is the company's core business and makes up 9 2% of weal asser.s. Ac/antic Electric serves more than 477,000 customers in a 2,700-square-mile area in sowhern New Jersey. More than 99% of the utility's customers are homes and small bHsiness-es. AEE is the holding com/Jany for Atlantic Energy's non-regulated businesses which include gas marketing, thermal heating and cooling, two independent power fn-ojern and in11estments in energy-related technologies. AEII provides consulting services and equipment sales to international markets. Together, the subsidiaries are carrying ow Atlantic Energy's mission to become a competitive energy company that offers rnswmers a full spectrum of produces and services.

J Financial Highlights OI

'Yo 10 Change Change Change 1996

'96-'95 1995

'95.'94 1994

'94-'93 Earnings per Common Share Dividends Paid per Common Share Book Value per Common Share Number of Common Shares Outstanding (Year-end) (000)

Average Actual Return on Average Common Equity Electric Operating Revenues (000)

Operating Expenses (000)

Net Income (000)

Utility Cash Construction Expenditures (000)

Total A ets 1.12 1.54 15.00 52,702 52,502 7.36%

$ 980,255

$ 847,827

$ 58,767

$ 86,805

$2,670,762 KWH Sales of Electricity to Ultimate Customers (000) 8,346,537 Total Ultimate Electric Customer Accounts (Year-end) 477,611 Number of Shareholders -

Common Stock (Year-end) 48,825 Number of Employees (Year-end) 1,526 (27. 7) 1.55 1.54 (2.7) 15.42 (0.2) 52,815 (O.l) 52,532 (25.7) 9.91%

2.8

$ 953,137 5.4

$ 804,600 (28.1) 81,768 (14.0)

$ 100,904 2.0

$ 2,617,888 3.6 8,052,865 0.8 473,588 0.3 48,683 1.3 1,507 9.93 1.41 (21.7) 1.54 0.7 (0.5) 15.50 (0.8)

(2.5) 54,149 2.4 (3.0) 54,155 1.2 9.0 9.09% (22.4)

A\\

4.4

$ 913,039 5.5 3.6

$ 776,834 10.0.

7.4 76,113 (20.1)

(15.9)

$ 119,961 (13.1) 3.0

$ 2,542,385 2.2 (1.4) 8,167,856 1.3 1.0 468,712 1.2 (0.3) 48,850 2.1 (17.1) 1,818 (0.9)

a new source of profitability, the group is creating new customer relationships that will serve as a s/Jringboard for delivering other services like natural gas sup/Jly and, eventually, retail electricity.

• Closer to home, all of our busi-nesses are poised to capitalize on the strong economic growth projected for our Atlantic City market. Several major casino development /Jrojects /Jlanned in the city's Marina District and along the Boardwalk will create significant new demand for power and related energy services. The growth is also ex/Jected to create a boom in our region's employment market, leading to growth in our residential and commercial sectors as well. We are aggressively working to build strong business relationships with all of our new and potential customers in Atlantic City and are developing the capabilities to /Jrovide the right energy solu-tions for their businesses.

• All across the U.S., ra/Jid movement toward deregulation is adding fuel to our industry's com/Jetitive fire. Here in New Jersey, our regulators have proposed a deregulation plan that will be submitted to the New Jersey Legislature and will become the official blue/Jrint for how New Jersey's electric utilities will move into the competitive marketplace. Generally, we believe the BPU's proposal fairly balances customer and shareholder needs by giving consumers choice while providing mechanisms to mitigate the financial im/Jact that open retail com/x tition may create. Under the BPU's

/Jro/Josal, some of New Jersey's homes and businesses will gain the ability to choose their energy su/Jplier as early as 1998, and by 2001, all customers will be able to choose. The current plan provides a mechanism to recover certain over-market costs from customers through a transition charge for up to eight years. The proposal also recognizes the long-term nature of nonutility generation contracts and the need for utilities to recover these charges over the full lives of the contracts.

• On behalf of our Board of Directors, we want to thank you for your continued support of Atlantic Energy. We're truly excited about what the future holds for our company and soon for Conectiv. We firmly believe the aggressive implementation of our strategies for growth and competition will make us successful in our changing industry and create real value for you.

For the Board of Directors, Atlamic Energy 4

5 The future hinges on excellence.

Customer Service Manager Roslyn Baskett isn't waiting for competition in the utility industry -

she's living it today. And the excellence she brings to her job is catching on.

• In a de/Jartment that responds to 4,000 tele/Jhone calls from customers daily, Roslyn sees every service call as a chance to build a relationship with the customer, to show callers that Atlantic Energy is ready to be their energy com/Jany now and in the future. Says Roslyn: "My goal is to convert every service call into a sales opportunity."

Where call volume was once the focus, call quality and customer satisfaction are now all-im/Jortant.

T hat kind of thinking brings a new /Jerspective to customer service-and to customers themselves. "It's not just about numbers," Roslyn says. "It's not Atlantic Energy "Today, customer service em/)loyees view them-selves as cus tamer advocates. The)' lmoiu that building customer loyalty is as important as

/Jroviding customer service."

Roslyn Baskett, Customer Service Manager just about how much time we s/Jend on calls, ancl it's not just about statistics. Our objective is to reach a certain level of quality in every call. "

That goal is why she su/J/Jorts ideas like using at-home re/Jresentatives for off-hours calls, because they give Atlantic Energy a voice when customers need it most.

• Roslyn stresses the value of delivering a consistent message to customers. And, in the spirit of teamwork, she asks employees to critique one another and themselves. "If we can build a reputation for excellence," she says, "if /Jeo/Jle have confidence in Atlantic Energy, they're not going to want to go to anybody else."

• The kind of customer confidence Roslyn and her staff ins/Jires is one of our most im/Jortant assets.

When customers call for information about

/Jroducts like A/Jpliance Shield and Electronic Thermostats, our re/Jresentatives have achieved more than a 90% enrollment rate. Their success demonstrates the qualit)' of Atlantic Energy's offers as well as our sales team's commitment to customer satisfaction.

Dedication to excellence breed.s success, and Michele Costello is declicatecl to succeeding in one of Atlantic Energy's newest lines of business:

Telecommunications Services.

• W ith the explosion of the telecommunica-tions industry, Michele recognized an o/Jportunity to create a new source of revenue that could benefit both shareholders ancl customers. *

"We knew we had exactly what the industry needed, she says. "Long corridors of land stretching across South Jersey, dozens of towers and other structures in place for our own need.s, and employees with an entrepreneurial spirit. "

• We began in 1996 by leasing tower space to cellular telephone companies that need high, unobstructed sites for their equipment, ancl the business succeeded beyond all expectations in its first year.

• Michele is on a quest to make Atlantic Energy "When we see new o/J/Jortunities, we don't sa)'

'We can't do this.' We sa)' 'How are we going to make it ha/J/Jen?' The future of telecommunica-tions is wide open, and the /Jossibilities endless."

Michele Costello, Manager of Telecommunications Services one of the fastes t, smartest, and most effective /Jlayers in the burgeoning telecom leasing field. She ancl her team are working to leverage all of our infrastructure, from towers to rooftops, from rights of way to electric lines.

"Our resources create all sons of /Jossibilities," says Michele. "Our own real estate ancl right-of-way /JeojJle have alread)' done siting ancl acquisition work for telecommunications companies. Ancl our drafting team, engineers,

and environmental professionals have all the other skills we need to succeed in this business."

• As digital /Jersonal communications systems, fiber optic networks, and other new technologies come on line, Michele will continue to look for ways to ca/Jitalize on Atlantic Energy's assets and /JUrsue other profitable o/J/Jortunities in this d)1namic industry.

Atlantic Energy's Excellence Award Program recognizes significant contributions made b)'

individuals or teams to improve /Jroductivit)',

efficienC)'. business service, and results. In 1996, 15 3 emplo)'ees received Excellence Awards.

Ackmric Energy 6

7 The future hinges on relationships.

To remain comJJetitive in the future, Atlantic Energy must build strong relationshi/Js today, es/Jecially with our largest customers. One way we're dee/Jening our relationshi/Js is by custom-fitting our /Jroducts and services to meet customers' needs. *

"Our goal is to be our business customers' single source for energy-related /Jroducts and services," says Major Account Executive Rick Williams. "As our service caJJabilities grow, we're building cus-comer loyalty and new O/J/Jortunities for valuable business. In some cases, like the field of energy services, we're comJJeting with inde/Jendent service com/Janies that are actively JJursuing customers in our markets."

Rick delivered the right solution to Atlantic Community College (ACC) when he introduced Mark Streckenbein, ACC's director of facilities, to our Energy Services Division. Mark needed to im/Jrove the efficiency of the school's Atlantic Energy "Each business customer /wesents a unique chal-lenge, so a cookie-cutter ap/Jroach won't work.

By assembling our best skills and resources, I can give customers a package of energy solu-tions designed to meet their s/Jecific needs."

Rick Williams, Atlantic Energy Major Account Executive lighting and heating and cooling systems -

without deJJleting the school's financial resources. *

"When Atlantic Energy conducted an energy audit and told me they had a jJlan that would cut our energy bill significantly by reducing our energy demand, I was intrigued," Mark exJJlains. "Bue when they said we could /Jay for the /Jroject over eight years with the savings, I knew they had the answer I needed."

• The JJroject called for reJJlacing virtually all of the 4,800 light fixtures at ACC's two cam/Juses, jJlus expanding the school's air conditioning and heating control system.

• Now that the /Jroject is comjJlete, we're looking for more ways to boost the school's energy efficien-cy. "ACC has some exciting growth jJlans on the cable," he says. "I like to think that every dollar we save on energy is another dollar we can /Jut toward build-ing a stronger college.

• Not coincidentally, so do we.

Atlantic Energ-y's Energy Services Division /Jro-vides a full range of services, from basic energy audits to installation of complete energy-efficient systems. The division is cunentl)' hel/Jing more than 70 clients improve their o/Jerating efficiency.

I 1:* * * * * * * *

• When we start working with a new business customer, we want to create a custom fit and profitable relationship right away.

• Take, for exam-ple, R. F. Power Products, a high-tech firm that manufactures radio fre-quency power systems. Months before they moved into new corporate headquarters in Voorhees, New Jersey, we provided them with electrical engineering and design services. *

"The first step in building a new customer relationship is to learn about their business and how they use the electricity we su/Jply," says our Major Account Executive Nathan Berle "That /Jrocess invariably reveals opportunities to leverage our ca/Jabili-ties."

• R.F. Power Products' CEO, Dr. Joseph Stach, would agree.

He was pleased to learn that his energ)' com/Jany could hel/J him build his new manufacturing facility. *

"One of the most critical systems in our "Strong relationshi/Js will become an absolute necessity as customers begin to choose their energy service su/J/Jliers. The customer loyalty we're building today will be a critical asset in the competitive market/Jlace tomorrow."

Nathan Berk, Atlantic Energy Major Account Executive production and testing process is the cooling system that removes the intense heat the power su/J/Jly produces during operation," Stach ex/Jlains.

"I showed Atlantic Energy our /Jlans for the system and they came back with a better design and asked to bid on the engineering job. It made sense to award them the contract since I saw the cooling system as a natural extension of their energy su/J/Jly business."

• The system was installed and operational in time for the new headquarters' year-end o/Jening.

More than a /Jowerful start to a new relationshi/J, the /Jroject was an o/J/Jortunity to gather ex/Jerience meeting the needs of the region's high-tech business sector.

1 t's this kind of proactive thinking that will find Atlantic Energy significant business partners like R. F. Power Products -

and set us a/Jart from the com/Jetition, long into the future.

Last year we won a contract to sell /Jower to Mobil Pipe Lines' ex/xmded pumping facility in Paulsboro, New Jersey. Mobil selected Atlantic Energy over several alternatives based on the competitive /Jrice and services we delivered to the /Jroject.

A1lan1ic Energy 8

9 The future hinges on growth.

Atlantic City's casino and entertainment industry is experiencing a wave of expansion that is transforming the city into a major tourist destination -

and creating a wealth of growth op/Jortunities for A tlantic Energy.

Heightened interest in casino gaming cou/Jled with the mid-1997 com-pletion of the city's new convention center have prom/Jted more than

$5 billion in ongoing or planned investments. Nearly all of the city's 13 casino-hotels have completed or are undergoing major ex/Jansions. And new casino-hotels have been announced by major gaming companies like Mirage Resorts, MGM Grand, and Sun International. Published /Jrojections show that the growth over the next five to seven years will more than double the city's current 10, 600 casino-hotel rooms.

• Atlantic City's good fortune presents many new o/Jportunities for Atlantic Energy. The rapidly grnwing demand Ada nric Energy "The spectacular resorts /Jlanned in Atlantic City

/Jromise to transfonn the casino and tourism mar-l<ets. This renaissance is creating vast o/Jportuni-ties for our own growth, and we are aggressively 1narketing our products and services to businesses across the city."

Larry French, Executive Director of Atlantic Energy's Atlantic City office for energy and related products and services will help strengthen our tradition-al electric utility business and, at the same time, support the expansion of our non-traditional energy service businesses. *

"It's hard to look anywhere in Atlantic City these days and not see a major construction /Jroject under-way," says Larry French, the Executive Director of our Atlantic City office.

"From our vantage point, we see more businesses and homes to serve and a continuous flow of new op/Jortunities to deliver profitable energy solutions to customers."

• Atlantic City's boom will create thousands of new jobs,

ex/Jand the region's housing market, and grow the many businesses that serve the casino industry. Attracted by southern New Jersey's demographics and growth trends, major retailers like Wal-Mart, Home De/Jot, and Best Buy have opened superstores in the region.

Our latest five-year energy sales forecast reflects the strong economic growth ex/Jected in southern New Jersey. Projections indicate that increases in energy consum/Jtion in our region will be signifi-cantly above the national grnwth rate.

II * * * *

• Energy lielpe'd Dr. fo5epH nifactunng f ac1lity wlien

~ * * * *

• We're building on the Atlantic City momentum by approaching every construction project as another step toward creating a more profitable, long-term relationship with our customers. Our goal is to provide fully-integrated energy solutions. For exam/Jle, with the Trump Taj Mahal's recent expansion project, we executed a plan to satisfy their electrical and energy efficiency requirements. And Atlantic Thermal Systems (ATS), our heating and cooling subsidiary, successfully negotiated a contract to operate the Taj Mahal's energy system.

• ATS will be a key com/Jonent in the development of our energy service business in southern New Jersey and beyond. "ATS offers a variety of choices to the commercial and industrial customer," says Frank DiCola, ATS President, "from operating and main-taining existing heating and cooling systems to serving a customer's needs "The cornerstone of Atlantic Thermal Systems' growth strategy is to ca/Jitalize on the trend for businesses to 'outsource' o/Jerations that aren't directly related to their core product or service.

Casinos, hos/Jitals, and universities are a few of the ideal candidates for our services."

Frank DiCola, ATS President from an off-site 'district' thermal energy center."

• ATS's Atlantic City Midtown Thermal Control Center, scheduled for completion in mid-1997,

currently has three casino-hotels under contract. The center will produce steam and chilled water to be /Jiped underground to customers' air condi-tioning, heating, and hot water systems.

• ATS has also established long-term contracts with Atlantic City businesses to operate existing heating and cooling systems. "One of the most com/Jelling values of our service," Frank adds, "is that it allows customers to focus more on their core business and less on energy issues." *

"When we look at the plans for Atlantic City,"

Frank says, "we see real op/Jortunities, and we're aggressively pursuing business relationships with many of the new /Jlayers in town. "

• Atlantic Energy's success in Atlantic C ity is an odds-on favorite.

ATS, in partnershi[J with Eastern Power Cor/J.,

recently entered into an agreement to purchase the Harrisburg Steam Works, Ltd. and related facilities. The district steam loop serves the heat-ing needs of office and government buildings in downtown Harrisburg, Pennsylvania.

Atlantic Energy

L 11 The future hinges on innovation.

Change often necessitates innovation -

and always provides op/>ortunity.

Atlantic Energy is />oised to take advantage of both.

Our recent strategic alliance with Safeguard Scientifics, a highly-regarded and successful investment firm, will hel/> make it possible. The />artnership, EnerTech Ca/>ital Partners, L.P., invests in energy-related and utility-related service and technology com/>anies that are develo/>ing />roducts crucial to the future of the energy industry.

According to one of EnerTech's managing directors, Scott Ungerer, "Atlantic Energy's relationship with Safeguard Scientifics will open a profitable window into leading-edge technology and service ex/>ansion. "

One of EnerTech's initial investments is with lntellon Corporation of Ocala, Florida. lntellon manufactures microchi/>s for home automation

/>roducts that can allow customers and utilities to remotely control Arlaniic Energy "We believe that identifying, understanding, and deploying technology will be a critical success factor in the future."

Scott Ungerer, Managing Parmer, EnerTech home energy use -

that is, products that will make homes "smart. "

Advanced technologies like home automation /Jroducts will see broad a/>J>lication in tomorrow's energy industry. As deregulation becomes more widespread and com/>etition intensifies, Atlantic Energy's competitive edge will be shar/>ened by its strategic investments in energy technology com-panies. *

"We want to make sure we have the skills to invest success-fully. Thus, this partnership with Safeguard Scientifics," says Scott. "We have the ca/>ital resources and the need to utilize leading-edge technologies; they have the skills to hel/> small companies grow and the ex/>erience to help us make />rofitable investments in those businesses."

Cutting-edge technology is im/>ortant to the future success of Atlantic Energy. EnerTech will give us ex/>ertise in evaluating investments -

and in using tech-nologies in the near future.

Looking ahead to the year 2025, Washington,

D.C.-based futurist Joseph F. Coates /Jredicts that everything will be "smart" -

that is, responsive to external or internal environments as a result of embedded microprocessors and sensors in many items.

-rrumfJ Ta1 Malial 1s one of tlie many casino-lioceLs in ~clant1c C1cy cliiic 1s ex/Jaiii:ling its gam-ing ana entertainment f acrl1cies, ere acing significant opportunities for our own bminess growth.

In I 996, Atlantic Energy launched a pilot program that provided customers with a new technology called Power Monitoring Units. PMUs are a high-tech solution to a century-old problem: how to quickly locate and determine the cause of power outages on our thousands of miles of power lines, while reducing the duration and cost of the outages.

• PM Us are an innovative blend of telecommunications and comj)uter technology. These inconspicuous little white boxes plug into a customer's electric and phone outlets and automatically "call" us within one minute after the j)ower goes out.

• By strategicali)> placing PMUs at critical points in our distribution system and observing the pattern of outage calls from the units, we can find the /)roblem and fix it fast.

"When PMUs start signaling a power outage, they "Competition will demand that we im/Jrove o/Jerating efficiency while maintaining high customer satisfaction. Investments in smart technology can hel/J Atlantic Energy accom-plish both. "

Joe LoPorto,

PM U Team Leader immediately give us an accurate /)icture of the magnitude and location of the problem, and the time-consuming and often frustrating job of locating the source of an outage is frequently resolved before our crews ever hit the street," says Joe LoPorto, PMU Team Leader.

• Best of all, the cus-tamers who have PMUs in their homes don't have to call us to report the outage. Their PMUs do all the talking that's necessary to get their power back on.

• In fact, during last summer's Hurricane Bertha, PMU calls hel/)ed us pinpoint the location of an outage in a matter of minutes, significant!)' reducing the time it took to get our customers' lights back on.

Results like these show us that with innovative technology like PMUs we can cut operating costs and im/)rove customer service.

Our new Outage Re/Jorting System increases our ability to res/Jond quicl<ly to calls about out-ages, downed wires, flickering lights, or other

/Jroblems. Customers can use this automated

/Jhone system to report s/Jecific /Jroblems without waiting to s/Jeal< to a representative.

Atlantic Energy 12

13 The future hinges on commitment.

Atlantic Energy has a long-standing reputation for providing quality service to its customers and communities. It's a tradition we intend to continue.

Our employees s/Jecialize in service -

the kind of superior service deliv-ered by Atlantic Energy veteran Ed Town. Ed and his yellow truck are a familiar sight to customers at the southern tip of New Jersey.

• For more than 30 years, Ed's been fixing electrical problems with the kind of service customers remember. As a matter of fact, many ask for Ed by name.

Even as the energy industry changes, Ed finds the shifting demands excit-ing. And he believes every employee can find ways to help Atlantic Energy grow and thrive.

• For exam/Jle, if you're in his neighborhood, you might Atlanric Energy "We can't rubber-stam/J customer service.

Customers are individuals with individual circumstances. We need to keep them in mind with every job we do. That's what makes my job challenging... and fun."

Eel Town, Atlantic Energy Troubleman see Ed spending his free time pedaling a bicycle through the seaside communi-ties of the Jersey Ca/Je, delivering information about Atlantic Energy's outdoor lighting /Jrogram to busy seashore /Jarking lots.

Or you might catch him personally thanking his customers with ice cream gift certificates, as he did after a group of them experienced problems over the summer due to a worn-out underground cable.

• Says Ed: "I can see this com/Jany growing, and I can see all of our jobs growing. Our focus will be on the customer and ca/Jturing new opportunities the future holds."

• Ed Town believes that progressive thinking is contagious, and so does Atlantic Energy. We're dedicated to making commitment like Ed's common/Jlace.

Our customer call center handles u/J to 4,500 calls a clay, 36% of which are "trouble calls,"

re/Jorting problems like loss of /Jower, downed wires, or pole accidents. In 1996, our crews res/Jonded to 75,670 trouble calls.

As Atlantic Energy grows and changes, its commitment to the communities it serves will evolve to meet tomorrow's new challenges. George Muller is one of hundreds of A tlantic Energy em/Jloyee volunteers working for tomor-row today.

• One of our resident computer experts, George is a member of the Technology Advisory Committee for the Pleasantville School District,

one of four area districts selected by Atlantic Energy to be the beneficiary of Netday '96, a volunteer effort that wired schools in New Jersey for access to the Internet.

• Using materials donated by Atlantic Energy, George and a team of em/Jloyee volunteers dedicated a Saturday to work at the Washington Avenue School in Pleasantville, installing wiring in four class-rooms, the library, and a computer room.

• George knows what this "Atlantic Energy and its employees exist in this world as /Jart of a community. We gain things from the community, and we need to give back to it. When we give to kids, we can really make a difference."

George Muller, Manager, Business Integration access will mean to the students. Now they can learn about dissecting frogs.

Or about climates and vegetation in Africa. Or they might gain access to teachers and classrooms across the country or around the world.

"Access to knowledge and information is the /Jower of the future," says George. "That's true for Atlantic Energy and for our customers. Giving kids that access will em/Jower them as they grow. The idea is to prepare them for the world they're going to graduate into. "

• At Atlantic Energy, we know that power comes not just from information -

but from information that's shared with our customers and our communities. That's a mission we're /Jroud to fulfill with the help of employees like George Muller.

Our Volunteer Initiative Program was revitalized in 1996 with a commitment to making a differ-ence in peo/Jle's lives. VIP's 392 empl.oyee and retiree volunteers /Jrovide sup/Jort to /Jrograms like Junior Achievement and the Community FoodBank of New Jersey.

Atlantic Energy 14

15 The future hinges on change.

What does the future hold for the electric utility industry -

and more importantly, for Atlantic Energy?

We believe our industry's future will see ra/Jid, continuous change driven by the forces of open retail competition, technology, and rising customer expectations. To be successful in such a dynamic environment, we must stay on the leading edge of change by making advances in the way we plan and operate our business.

• Merry Harlacher, Vice President for Atlantic Energy, spends a great deal of time these days envisioning the future of the energy industr)'* He is leading the team of Delmarva and Atlantic Energy employees charged with building the structure and business strategy of Conectiv, the new com/Jany our merger will create.

"Our industry will be characterized by fierce com/Jetition among energy service /Jroviders," he says. "Deregulation is making retail competition a Atlantic Energy "Deregulation will fJrovide customers with more choices than ever. The changing environment also gives us the freedom and financial incentive to offer customers in southern New Jerse)' and beyond a groiving list of energy services."

Meredith Harlacher, Vice President for Atlantic Energy reality in many states, and New Jersey's not far behind. Our utility customers will be able to choose who su/J/Jlies their electricity within three to five years.

We've worked closely with the New Jersey Board of Public Utilities to draw u/J a deregulation /Jlan for our state, and we will continue to pursue an outcome that /Jrotects the interests of our shareholders. *

"Even in a com -

/Jetitive retail market, however, our utility will continue to own and maintain the wires and poles that physical!)' connect us to our customers. That con-nection will play a role in our strategy to retain current customers and attract new ones. We're also creating new connections to customers through a line of energy-related /Jroducts and services that, when combined with our tradition-al electric service, will provide excellent value, convenience, and satisfaction to our customers."

In 1996, we in traduced a new service for our residential customers -

home afJ/Jliance re/Jair

/Jrotection. Our AfJfJliance Shield Program offers customers /Jeace of mind if their heating S)'Stem or one of their major afJfJliances should break down.

l * * * * * * * * *

• * *

• 1* * *

• 1*

"Once customers have the ability to choose their su/Jplier, price will be an important factor in their decision," Merry explains. "Over the jJast few years we've successfully improved operating efficiency and cut utility expenses. Our merger with Delmarva is ex/Jected to reduce costs even more and help us achieve economies far beyond what we could do on our own. *

"Cost-cutting alone won't make us a thriving business in the future. We must grow. We're committed to making it hap/Jen by investing in /Jeople, systems, and promising business enterprises that offer strong market and revenue /Jotential. Enerval, our gas marketing division, is a good exam/Jle of the kinds of strategic moves we' ll continue to make. Through Enerval, we're selling natural gas to business customers in several regions of the Northeast. *

"Our shareholders can expect changes in the nature of "Com/Jetition and new technologies will radi-cally change the way we think about and use energy. I can imagine a day when the cake mix we buy includes a discount cou/Jon from an energy company for the energy needed to bake the cake."

Meredith Harlacher, Vice President, A tlantic Energy their investment," says Merry. "G iven the heightened competition in our traditional utility business and the potential for falling energy prices in some sectors, shareholders are likely to see a greater portion of earnings growth and /Jrofitability coming from our ventures into new markets.

"Regulation jJrovided stability for our business and security for our investors. But it was also restrictive. The new competitive environment and /Jending deregulation gives us the o/Jportunity to enter larger markets and the flexibility to develo/J new, /Jrofitable businesses. And that's good news."

• Atlantic Energy has a tradition of rewarding its shareholders for their faith in the com/Jany. We're /Jroud of that tradition and will continue to /JUrsue o/J/Jortunities that give our investors a strong return.

That's one thing that won't change.

To /Jrepare for the day when electricity is traded much like any other commodity, in 1996 we established a bulk power marketing grou/J and are quickl)' ex/Janding our panici/xuion in this growing market.

Ailan1ic Energy 16

17 Atlantic Energy, lnc.'s Board of Directors As of December 31, 1996 (Age/years served as director)

• Michael J. Chesser ( 48/ l)

Mr. Chesser is president and chief operating officer of Atlantic Energy, Inc.,

Atlantic Energy Enterprises, Inc. and Atlantic City Electric Com/Jany. He is a graduate of Georgia Institute of Technology and holds a master's degree in busi-ness a£lminist:ration from Loyola College, Baltimore, Maryland.

Committee Membership: Ex officio member of all committees exce/Jt Audit and Personnel and Benefits.

Director of Atlantic Energy Enter/Jrises, Inc.

Gerald A. Hale (69/14)

Mr. Hale is /Jresident of Hale Resources, Inc., a health care, industrial/

natural resource invesm1ent and management company. He is a director of New Jersey Manufacturers Insurance Com/Jany, New Jersey Business and Industry Association and Hoke, Inc. He is a graduate of Western Michigan University.

Committee Membership: Personnel and Benefits; Retail.

Chairman of Atlantic Energy Enterprises, Inc.

• Matthew Holden, Jr. (65/ 16)

Mr. Holden is the Henry L. and Grace M. Doherty Professor of Government and Foreign Affairs at the University of Virginia. He is a former commissioner of the Federal Energy Regulatory Commission and the Wisconsin Public Service Commission, and former member of the President's Air Quality Advisory Board.

He holds a doctorate in political science from Northwestern University.

Committee Chairman: Audit.

Committee Membership: Personnel and Benefits; Wholesale.

Cyrus H. Holley ( 60/7)

Mr. Holley is president of Management Consulting Services and Oakmont Enterprises, Inc. He was formerly chief operating officer, executive vice /Jresident and a director of Engelhard Corporation. He is a graduate of Texas A&M University.

Committee Chairman: Wholesale.

Committee Membership: Personnel and Benefits.

Director of Atlantic Energy Enterprises, Inc.

• Jerrold L. Jacobs (57/7)

Mr. Jacobs is chairman and chief executive officer of Atlantic Energy, Inc. and Atlantic City Electric Company. He is a graduate of the Newark College of Engineering (New Jersey Institute of Technology).

Committee Membership: Ex officio member of all committees exce/Jt Audit and Personnel and Benefits.

Director of Atlantic Energy Enterprises, Inc.

Atlantic Energy Kathleen MacDonnell ( 48/4)

Ms. MacDonnell is a cor/Jorate vice president of Campbell Sou/J Com/Jany and

/msident of its Frozen and Specialty Foods Grou/J. She also serves as a trustee of the Campbell Soup Company Foundation. She is a graduate of the University of Massachusetts and holds a master's degree in international management from the American Graduate School of International Management.

Committee Chairwoman: Retail.

Committee Membershi/J: Audit; Personnel and Benefits.

Richard B. McGlynn (58/ l l)

Mr. McGlynn is vice /Jresident and general counsel of United Water Resources, Inc. A practicing lawyer for over 30 years, he is a former commissioner of the New Jersey Board of Public Utilities and a former judge in Essex County, New Jersey. He is a graduate of Rutgers Law School and Princeton University.

Committee Membershi/J: Finance and Public Policy; Personnel and Benefits; Retail; Wholesale.

Bernard J. Morgan (60/9)

Mr. Morgan, a banking industry executive, holds a master's degree in business administration from the Wharton School of the University of Pennsylvania.

Committee Chairman: Finance and Public Policy.

Committee Membership: Audit.

Director of Atlantic Energy Enter/Jrises, Inc.

Harold J. Raveche (53/7)

Dr. Raveche is /msident of the Stevens Institute of Technology. He was formerly the dean of science of the Rensselaer Polytechnic Institute. He advises manufac-turing com/Janies, co-chairs a national study on workforce training for the U.S.

Council on Competitiveness and is Chair of the New Jersey Corporation for Advanced Technology. He holds a doctorate in physical chemistry from the University of California, San Diego.

Committee Membership: Audit; Finance and Public Policy; Retail; Wholesale.

Table of Contents Report of Management and Independent Auditors' Report Condensed Consolidated Statement of Income Condensed Consolidated Balance Sheet Condensed Consolidated Statement of Cash Flows Condensed Consolidated Statement of Changes in Common Shareholders' Equity Notes to Condensed Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Investor Information Financial and Statistical Review 1996-1986 Officers Page 19 Page 20 Page 20 Page 21 Page 21 Page 22 Page 25 Page 29 Page 30 Page 32 The following information summarizes Atlantic Energy's financial results for 1996. All the essential information is presented in a more user friendly form. For those of you who require the details, our full financial disclosure is included in the proxy statement for the 1997 annual meeting of shareholders.

Atlantic Energy 18

19 Report of Management The management of Atlantic Energy, Inc. and its subsidiaries (the Company) is responsible for the preparation of the condensed consolidated financial statements presented in this Summary Annual Report. These statements and information are derived from the complete set of financial statements and related information contained in the 1996 Annual Report on Form 10-K and accompanying the 1997 proxy statement for the annual meeting of shareholders, both of which are filed with the Securities and Exchange Commission. Those financial statements are prepared in conformity with generally accepted accounting principles and have been audited by Deloitte & Touche LLP, Certified Public Accountants. For more complete details regarding financial information on the Company, refer to the Form 10-K or the Proxy Statement.

Jerrold L. Jacobs Chairman and Chief Executive Officer Vice President and Chief Financial Officer February 7, 1997 Atlantic Energy Independent Auditors' Report Deloitte&

ToucheuP 0 Deloitte & Touche LLP Certified Public Accountants Two Hilton Court Parsippany, New Jersey 07054 To the Shareholders and the Board of Directors of Atlantic Energy, Inc.:

We have audited the consolidated balance sheets of Atlantic Energy, Inc. and its subsidiaries a of December 31, 1996 and 1995, and the related consolidated statements of income, changes in common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Such consolidated financial statements and our report thereon dated February 7, 1997, expressing an unqualified opinion (which are not included herein) are included in Appendix A to the 1997 proxy statement for the annual meeting of shareholders. The accompanying condensed consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on such condensed consolidated financial statements in relation to the complete consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31, 1996 and 1995 and the related condensed consolidated statements of income and cash flows and changes in common shareholders' equity for each of the three years in the period ended December 31, 1996, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived.

February 7, 1997

,____ ______ From left to right:

i*

Jerrold L. Jacobs I

I Richard B. McGlynn Michael J. Chesser Kathleen MacDonnell

1------- From left to right:

Gerald A. Hale Cyrus H. Holley Bernard J. Morgan Matthew Holden, Jr.

Harold J. Raveche

This expense includes the cost of fuel and power purchased from utility and non utility sources, some of which had pre-viously been deferred.

Includes the cost of Salem restart activities.

This is the net of income and expenses from a number of diverse activ-ities including nonregu-lated businesses.

Investments in nonutili-ty activities are account-ed for here. The 16%

increase over last year primarily reflects invest-ments made by ATS for the Atlantic City ther-mal energy project.

Regulawry assets repre-sent costs incurred by ACE that under BPU regulation may be col-lected from cuswmers in the future. As they are recovered, these costs are recognized as an expense in the income statement.

1 I

L r

I I

I I

I I

I J

Condensed Consolidated Statement of Income (Thousands of dollars except per share amounts)

Operating Revenues -

Electric Operating Expenses:

Energy and Purchased Capacity Operations and Maintenance Depreciation and Amortization Taxes Total Operating Expenses Operating Income Other Income -

Net Interest Charges -

Net Less Preferred Securities Dividend Requirements of Subsidiary Net Income Average Number of Shares of Common Stock Outstanding (In thousands)

Per Common Share:

Earnings Dividends Declared Dividends Paid Condensed Consolidated Balance Sheet (Thousands of dollars)

Assets Electric Utility Plant (Net of accumulated depreciation:

1996 -

$871,531; 1995 -

$794,479)

Total Investments and Nonutility Property Total Current Assets Unrecovered Purchased Power Costs Recoverable Future Federal Income Taxes Unrecovered State Excise Taxes Other Regulatory Assets Other Noncurrent Assets Total Assets Liabilities and Capitalization Common Shareholders' Equity Preferred Stock of Atlantic City Electric Company Cumulative Quarterly Income Preferred Securities Long-Term Debt Total Capitalization (Excluding current portion)

Current Debt and Preferred Stock Maturities Other Current Liabilities Deferred Income Taxes and Investment Tax Credits Other Noncurrent Credits Total Liabilities and Capitalization See notes to the Condensed Consolidated Financial Statements.

1996

$980,255 418,790 201,217 80,845 146,975 847,827 132,428 1,542 63,871 11,332

$ 58,767 52,702 1.12 1.54 1.54 For the Years Ended December 31,

1995 1994

$953,137

$913,039 382,336 341,820 186,439 220,577 78,461 73,344 157,364 141,093 804,600 776,834 148,537 136,205 9,058 12,312 20 61,200 55,688 14,627 16,716

$ 81,768

$ 76,113 52,815 54,149 1.55 1.41 1.54 1.54 1.54 1.54 December 31,

1996 1995

$1,799,395

$1,801,786 250,504 216,284 263,094 248,322 83,400 99,817 85,858 85,858 54,714 64,274 89,453 87,678 44,344 13,869

$2,670,762

$2,617,888

$ 787,394

$ 810,169 73,950 154,750 70,000 829,745 829,856 1,761,089 1,794,775 173,200 118,042 157,542 138,724 480,685 474,987 98,246 91,360

$2,670,762

$2,617,888 Atlantic Energy

Condensed Consolidated Statement of Cash Flo\\\\'s For Years Ended December 31,

This statement shows (Thousands of dollars) 1996 1995 how the company gener-Cash Flows of Operating Activities:

ates and uses cash, cate-Net Income

$ 58,767

$ 81,768 gorizing sources and Deferred Energy and Purchased Power Costs 14,322 (4,714) disbursements of cash Depreciation and Amortization 80,845 78,461 inro 3 major activities -

Deferred Income Taxes -

Net 6,192 25,946 operations, investment Unrecovered State Excise Taxes 9,560 9,560 and financing.

Employee Separation Costs (7,179)

(19,112)

Other-Net 31,977 (23,548)

This line item reflects the Net Cash Provided by Operating Activities 194,484 148,361 21 impact of Dm'- OT under-Cash Flows of Investing Activities:

TOCDm'ed ene>gy costs.

Utility Cash Construction Expenditures (86,805)

(100,904)

Nonutility Construction Expenditures (25,451)

(5,226)

Other-Net (21,616)

(34,240)

Net Cash Used by Investing Activities (133,872)

(140,370) --

Cash Flows of Financing Activities:

Debt Issued, Retired and Matured -

Net 67,214 133,360 Issuance of Cumulative Quarterly Income Preferred Securities 70,000 Stock Issued, Repurchased and Redeemed -

Net (98,876)

(54,126)

Dividends Declared (92,495)

(95, 715)

Other-Net 3,132 9,067 Net Cash Used by Financing Activities (51,025)

(7,414)

Net Increase (Decrease) in Cash and Temporary Investments 9,587 577 Cash and Temporary Investments, Beginning of Year 5,691 5,114 Cash and TemE._orary Investments, End of Year

$ 15,278

$ 5,691 Condensed Consolidated Statement of Changes in Common Shareholders' Equity Common Retained (Thousands of dollars, except share data)

Shares Stock Earnings Balance, December 31, 1993 53,506,786

$ 579,443

$256,549 Common Stock Issued (Net)*

870,159 17,941 Common Stock Repurchased (221,700)

(3,909)

Net Income 76,113 Dividends Declared (83,481)

Balance, December 31, 1994 54,155,245 593,475 249,181 Common Stock Issued (Net)*

1,633 (413)

Common Stock Repurchased (1,625,000)

(29,626)

Net Income 81,768 Dividends Declared (81,208)

Balance, December 31, 1995 52,531,878 563,436 249,741 Common Stock Forfeited (Net)*

(29,399)

(690) 285 Net Income 58,767 Dividends Declared (81,163)

Balance, December 31, 1996 52,502,479

$562,746

$227,630

• Includes amounts associated with adjustments and amortization of unearned compensation made for employee stock plans.

Atlantic Energy See notes to the Condensed Consolidated Financial Statements.

1994

$ 76,113 11,101 73,344 17,863 (40,128) 26,600 (7,213) 157,680 (119,961)

(6,807)

(21,606)

(148,374) 20,508 (18,120)

(92,545) 12,330 (77,827)

(68,521) 73,635

$ 5,114 Unearned Compensation

$ (3,170)

(3, 170) 162 (3,008) 26

$ (2,982)

This expense includes che cost of fuel and power purchased from utility and non utility sources, some of which had pre-11iously been deferred.

Includes che cost of Salem restart acti11ities.

r I

I This is the net of income I

I and expenses from a I

I number of diverse activ-I

.J ities including nonregu-lated businesses.

ln11estments in nonutili-ty actillities are account-ed for here. The I 6%

increase over last year pnmarily reflects in11est-ments made by ATS for L.-----

the Atlantic City ther-ma! energy project.

Regulatory assets repre-sent costs incurred by ACE that under BPU regulation may be col-I leered from customers in

.J rlie future. As chey are recooered, r1iese costs are recognized as an expense in rJie income sratement.

Condensed Consolidated Statement of Income (Thousands of dollars except per share amounts)

Operating Revenues -

Electric Operating Expenses:

Energy and Purchased Capacity Operations and Maintenance Depreciation and Amortization Taxes Total Operating Expenses Operating Income Other Income -

Net Interest Charges -

Net Less Preferred Securities Dividend Requirements of Subsidiary Net Income Average Number of Shares of Common Stock Outstanding (In thousands)

Per Common Share:

Earnings Dividends Declared Dividends Paid Condensed Consolidated Balance Sheet (Thousands of dollars)

Assets Electric Utility Plant (Net of accumulated depreciation:

1996 -

$871,531; 1995 -

$794,479)

Total Investments and Nonutility Property Total Current Assets Unrecovered Purcha ed Power Costs Recoverable Future Federal Income Taxes Unrecovered State Excise Taxes Other Regulatory Assets Other Noncurrent Assets Total Assets Liabilities and Capitalization Common Shareholders' Equity Preferred Stock of Atlantic City Electric Company Cumulative Quarterly Income Preferred Securities Long-Term Debt Total Capitalization (Excluding current portion)

Current Debt and Preferred Stock Maturities Other Current Liabilities Deferred Income Taxes and Investment Tax Credits Other Noncurrent Credits Total Liabilities and Capitalization See notes to the Condensed Consolidated Financial Statements.

For che Years Ended December 3 I,

1996 1995 1994

$980,255

$953,137

$913,039 418,790 382,336 341,820 201,217 186,439 220,577 80,845 78,461 73,344 146,975 157,364 141,093 847,827 804,600 776,834 132,428 148,537 136,205 1,542 9,058 12,312 20 63,871 61,200 55,688 11,332 14,627 16,716

$ 58,767

$ 81,768

$ 76,113 52,702 52,815 54,149 1.12 1.55 1.41 1.54 1.54 1.54 1.54 1.54 1.54 December 3 I,

1996 1995

$1,799,395

$1,801,786 250,504 216,284 263,094 248,322 83,400 99,817 85,858 85,858 54,714 64,274 89,453 87,678 44,344 13,869

$2,670,762

$2,617,888

$ 787,394

$ 810,169 73,950 154,750 70,000 829,745 829,856 1,761,089 1,794,775 173,200 118,042 157,542 138,724 480,685 474,987 98,246 91,360

$2,670,762

$2,617,888 Atlantic Energy

This statement shows how the company gener-aces and uses cash, cace-gorizing sources and disbursements of cash into 3 major activities -

operations, investment and financing.

This line item reflects the 21 impact of~- or under-recovered energy costs.

Atlantic Energy Condensed Consolidated Statement of Cash Flo\\\\'s For Years Ended December 3 J,

(Thousands of dollars) 1996 1995 Cash Flows of Operating Activities:

Net Income

$ 58,767

$ 81,768 Deferred Energy and Purchased Power Costs 14,322 (4,714)

Depreciation and Amortization 80,845 78,461 Deferred Income Taxes -

Net 6,192 25,946 Unrecovered State Exci e Taxes 9,560 9,560 Employee Separation Costs (7,179)

(19,112)

Other-Net 31,977 (23,548)

Net Cash Provided by Operating Activities 194,484 148,361 Cash Flows of Investing Activities:

Utility Cash Construction Expenditures (86,805)

(100,904)

Nonutility Construction Expenditures (25,451)

(5,226)

Other-Net (21,616)

(34,240)

Net Cash Used by Investing Activities (133,872)

(140,370)

Cash Flows of Financing Activities:

Debt Issued, Retired and Matured -

Net 67,214 133,360 Issuance of Cumulative Quarterly Income Preferred Securities 70,000 Stock Issued, Repurchased and Redeemed -

Net (98,876)

(54,126)

Dividends Declared (92,495)

(95, 715)

Other-Net 3,132 9,067 Net Cash Used by Financing Activities (51,025)

(7,414)

Net Increase (Decrease) in Cash and Temporary Investments 9,587 577 Cash and Temporary Investments, Beginning of Year 5,691 5,114 Cash and Temporary Investments, End of Year

$ 15,278

$ 5,691 Condensed Consolidated Statement of Changes in Common Shareholders' Equity (Thousands of dollars, except share data)

Balance, December 31, 1993 Common Stock Issued (Net)*

Common Stock Repurchased Net Income Dividends Declared Balance, December 31, 1994 Common Stock Issued (Net)*

Common Stock Repurchased Net Income Dividends Declared Balance, December 31, 1995 Common Stock Forfeited (Net)*

Net Income Dividends Declared Balance, December 31, 1996 Shares 53,506,786 870,159 (221,700) 54,155,245 1,633 (1,625,000) 52,531,878 (29,399) 52,502,479 Common Stock

$ 579,443 17,941 (3,909) 593,475 (413)

(29,626) 563,436 (690)

$562,746

• Includes amounts associated with adjustments and amortization of unearned compensation made for employee stock plans.

See notes to the Condensed Consolidated Financial Statements.

Retained Earnings

$256,549 76,113 (83,481) 249,181 81,768 (81,208) 249,741 285 58, 767 (81, 163)

$227,630 1994

$ 76,113 11,101 73,344 17,863 (40,128) 26,600 (7,213) 157,680 (119,961)

(6,807)

(21,606)

(148,374) 20,508 (18,120)

(92,545) 12,330 (77,827)

(68,521) 73,635

$ 5,114 Unearned Compensation

$ (3,170)

(3, 170) 162 (3,008) 26

$ (2,982) l

Notes to Condensed Consolidated Financial Statements Atlantic Energy, Inc. (the Company, AEI or parent) is the parent of Atlantic City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE) and Atlantic Energy International, Inc. (AEII), which are wholly-owned subsidiaries. ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy.

ACE's service territory encompasses approximately 2,700 square miles within the southern one-third of New Jersey with a majority of cus-tomers being residential and commercial. AEE is a holding company which is responsible for the management of the investments in the nonutility companies consisting of: Atlantic Generation, Inc. (AGI),

Atlantic Southern Properties, Inc. (ASP), ATE Investment, Inc.

(ATE), Atlantic Thermal Systems, Inc. (ATS), CoastalComm, Inc.

(CCI) and Atlantic Energy Technology, Inc. (AET). AGI and its whol-ly-owned subsidiaries are engaged in the development, acquisition, ownership and operation of cogeneration power projects. AG I's activi-ties, through its subsidiaries, are represented by partnership interests in cogeneration facilities located in New Jersey and New York. ASP owns and manages a commercial office and warehouse facility located in Atlantic County, New Jersey. ATE provides financing management and financing to affiliates and manages a portfolio of investments in lever-aged leases for equipment u ed in the airline and shipping industries. In August 1996, ATE joined with an unaffiliated company to create EnerTech Capital Partners, LP., an equity limited partnership that will invest in a variety of energy-related technology growth companies.

Also, AEE has a 50% equity interest in Enerval, LLC, a company which provides energy management services, including natural gas supply, transportation and marketing. In July 1996, AEI formed a new sub-sidiary, Atlantic Energy International, Inc. (AEII), to provide utility consulting services and equipment sales to international markets.

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: In the consolidated financial statements presented for the Company and its subsidiaries, all significant inter-company accounts and transactions have been eliminated.

Regulation: The accounting policies and rates of ACE are subject to the regulations of the New Jersey Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission (FERC). ACE follows generally accepted accounting principles and financial reporting requirements employed by all industries as specified by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission. However, certain economic effects of the ratemaking process are permitted special accounting treat-ment regarding the timing and recognition of expenses and revenues.

Earnings Per Common Share: This is computed based upon the weight-ed average number of common shares outstanding during the year.

NOTE 2. MERGER AGREEMENT In August 1996, the Boards of Directors of AEI and Delmarva Power &

Light Company (DP&L) jointly announced an agreement to merge the companies into a newly formed Delaware corporation named Conectiv, Inc. (Conectiv). Conectiv will become the parent of Atlantic Energy's subsidiaries and the parent of DP&L and its subsidiaries. On January 30, 1997, shareholders of both companies approved the merger which will give AEI shareholders 0. 75 shares of Conectiv's common stock and 0.125 shares of Conectiv's Class A common stock for each share of AEI common stock held. A number of federal and state regulatory approvals are still required. The Company expects the approval process to be completed by late 1997 or early 1998.

NOTE 3. RATE MATTERS OF ACE ACE has not filed for an increase in base rates since 1990, but recovers fuel and energy costs through its Levelized Energy Clause (LEC).

Changes in LEC rates are shown in the table below.

Date Filed 2/94 4/95 3/96 Changes in Levelized Energy Clause Rates 1994-1996 Amount Requested (Millions)

$ 63.0 37.0 49.7 Amount Granted (Millions)

$ 55.0 37.0 27.6 Date Effective 7/94 7/95 7/96 Atlantic Energy 22

23 Notes to Condensed Consolidated Financial State1nents ACE's LEC is subject to annual review by the BPU and sets June 1 through May 31 as the LEC period.

In the 1994 and 1995 LEC filings, ACE reduced the LEC recovery by

$28 million and $10 million, respectively, by initiating the Southern New Jersey Economic Initiative (SNJEI) which forgoes the recovery of a portion of recoverable fuel and energy costs. ACE elected to discon-tinue the SNJEI in the 1996 filing.

In settlements reached between ACE, the New Jersey Division of the Ratepayer Advocate and the Staff of the BPU, all issues raised with regard to the Salem Nuclear Generating Station (Salem) outage, the generic proceeding regarding double recovery of capacity costs and a 1994 Salem outage were resolved. Under three separate stipulations, ACE provided credits to customers totalling $13 million during the months of January and February, 1997. In addition, an estimated

$29.5 million in replacement power costs from the combined Salem outages will be recoverable in ACE's 1997 LEC proceeding. It was also agreed that the performance of Salem Units 1 and 2 will not be includ-ed in the calculation of any penalty under the BPU's nuclear perfor-mance standards. As a result of these stipulations, ACE's 1996 net income reflects a net of tax charge of $7.6 million.

By its Order dated January 8, 1997, the BPU approved a stipulation related to its generic proceeding for methods of implementing FASB's Statement No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions" (SFAS 106). SFAS 106 required pub-licly held companies to change from the practice of accounting for post-retirement benefits such as medical benefits, hospitalization and life insurance (OPEB) on a cash basis to an accrual basis of accounting.

The Order approved ratemaking mechanisms which would be available for recovery of OPEB expenses consistent with SFAS 106. At December 31, 1996, ACE had $32.6 million of OPEB expenses for which it plans to request recovery under the prescribed mechanisms.

Under the terms of the stipulation, ACE will file a petition requesting ratemaking treatment of these expenses in the second quarter of 1997.

Atlantic Energy NOTE 4. COMMITMENTS AND CONTINGENCIES The current annual funding of ACE's nuclear decommissioning trust fund, as authorized by the BPU, is $6.4 million and is provided for in rates charged to customers. The funding amount is based on estimates of the future cost of decommissioning each of the units, the dates that decommissioning activities are expected to begin and returns to be earned by the fund's assets. In accordance with regulations, updated site-specific studies based on 1995 costs have been performed and sub-mitted for BPU review and approval. ACE will seek to revise the amounts recognized and recovered in rates as a result of the updated studies in future BPU proceedings.

ACE has arrangements with various providers of bulk energy and capacity to satisfy current and future energy requirements. Information regarding these arrangements relative to ACE is shown below:

1996 1995 1994 As a% of Capacity (Year-end) 30%

30%

29%

As a % of Generation 55%

52%

48%

Capacity Charges (Millions)

$195.7

$190.6

$130.9 Energy Charges (Millions)

$145.1

$135.4

$128.6 Minimum future payments for energy and purchased capacity under contract for the five-year period beginning 1997 are performance driven and cannot be reasonably estimated.

ACE owns 7.41 % of Salem Units 1 and 2, operated by Public Service Electric and Gas Company (PSE&G). PSE&G removed Salem Units 1 and 2 from service on May 16, 1995 and June 7, 1995, respectively. Salem Unit 2 is in the final stages of preparation for restart and is currently expected to return to ervice in the second quarter of 1997. Salem Unit 1 is currently expected to return to service in the fall of 1997, after replacement of the unit's four steam generators, which was required in order to correct a generic problem with certain pressurized water reactors.

Removal of the old generators has been completed and installation of the new generators is underway. ACE's share of the cost of purchasing and installing the new steam generators and disposing of the old steam

Notes to Condensed Consolidated Financial Statements generator is estimated between $12.6 million and $14.l million.

ACE entered into a Stipulation Agreement (Agreement) with PSE&G for the purpose of limiting ACE's exposure to Salem's 1997 operation and maintenance (O&M) expenses. ACE will pay to PSE&G $10.0 million of O&M expense as a fixed charge payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any additional contribution is based on the performance and timely return of Salem Units 1 and 2. Any savings derived against 1997 O&M expenditures will offset replacement power costs incurred due to the unavailability of the Salem Units. In exchange for this Agreement, ACE agreed to dismiss the complaint filed in the Superior Court of New Jersey in March 1996 alleging breach of contract and negligence.

Competition is expected to increase for electric energy markets histori-cally served exclusively by regulated utilities. In recent years, changing laws and governmental regulations permitting competition from other utilities and nonregulated energy suppliers have prompted some cus-tomers to use self-generation or alternative sources to meet their electric needs. On January 16, 1997, the BPU issued Draft Phase II of the New Jersey Energy Master Plan (the Plan). In the Plan, the BPU has recom-mended that retail customers in New Jersey have the ability to choose their electric energy supplier beginning in October 1998 using a phase-in plan that will include all retail customers by April 2001. Customers would be able to sign an agreement with a third-party energy supplier and each electric utility, including ACE, would continue to be respon-sible for providing distribution service. Price and service quality for such distribution would continue to be regulated by the BPU. The Plan rec-ommends that beginning October 1998, the costs for bundled electric service, which consists of power generation, transmission, distribution, metering and billing, will need to be unbundled.

Under the Plan, transmission service would be provided by an Independent System Operator which would be responsible for maintain-ing a regional power grid that would continue to be regulated by FERC.

In April 1996, FERC ordered transmission facilities to offer transmission services for wholesale energy transactions to others on a nondiscrimina-tory basis. Tariffs have been established by ACE for these services, which ACE must also apply to its own wholesale energy transactions.

In addition, the Plan addresses the issue of "stranded" costs related to the generating capacity currently in utility rates. High co ts of the jointly-owned nuclear power plants and long-term supply contracts with independent power producers are two significant contributing fac-tors. The report proposes recovery of stranded assets over a four-to eight-year period, through a specific market transition charge. The BPU is to determine the level of cost recovery on a case-by-case basis with no guarantee for 100% recovery of eligible stranded costs. Full recovery is contingent upon a number of conditions, including a pro-posed BPU goal of near-term rate reductions to customers of 5%-

10%.While the Plan states that the independent power contracts must be eligible for stranded cost recovery, it further states utilities are oblig-ated to take all reasonably available measures to mitigate these costs.

The BPU intends to issue final findings and recommendations on elec-tric industry restructuring in New Jersey to the Governor and the State Legislature for their consideration in April 1997. Each electric utility in the state is to file a complete restructuring plan, stranded cost filing and unbundled rate filing no later than July 15, 1997.

In connection with the BPU's Plan, ACE has not yet determined the level of stranded costs or the degree to which these costs will be recov-ered. If the final restructuring plan requires ACE to recognize amounts as unrecoverable, ACE may be required to write down asset values, and such writedowns could be material.

Atlantic Energy 24

25 Manage1nent's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL

SUMMARY

Consolidated operating revenues for 1996, 1995 and 1994 were $980.3 million, $953. l million and $913.0 million, respectively. The increase in 1996 revenues over 1995 reflects an increase in sales and an increase in annual Levelized Energy Clause (LEC) revenues in July 1995 and 1996 of $37 million and $27.6 million, respectively. These increases were offset in part by a $13.0 million revenue credit recorded in September 1996 as a result of stipulation agreements and a decrease in unbilled revenues. The increa e in 1995 revenue over 1994 largely reflects the increase in annual LEC revenues granted in July 1995 and an increase in unbilled revenues.

Consolidated earnings per share for 1996 were $1.12 on net income of

$58.8 million compared to a $1.55 on net income of $81.8 million in 1995 and $1.41 on net income of $76.l million in 1994. The 1996 earnings reflects the impacts of rate refunds, a writedown of nonutility property, losses from nonutility investments and higher operations and maintenance expenses associated with the continuing outage at the Salem Station. Excluding the 1994 special charges of $0.37 per share, 1995 earnings per share decreased from 1994 primarily due to reduced sales of energy.

1996 1995 1994 Earnings Per Share

$ 1.12

$ 1.55

$ 1.41 Dividends Paid Per Share

$ 1.54

$ 1.54

$ 1.54 Book Value Per Share

$ 15.00

$ 15.42

$ 15.50 Annualized Dividend Yield 9.0%

8.0%

8.7%

Return on Average Common Equity 7.4%

9.9%

9.1%

Total Return (Dividends paid plus change in share price)

(3.0)%

18.0%

(11.9)%

Market to Book Value 114%

125%

114%

Price/Earnings Ratio 15 12 13 Year-End Closing Price -

NYSE

$ 17.13

$ 19.25

$ 17.63 Atlantic Energy LIQUIDITY AND CAPITAL RESOURCES Atlantic Energy, Inc.

The Company's cash flows are dependent on the cash flows of its sub-sidiaries, primarily ACE. Principal cash inflows of the Company were as follows:

(Millions)

Dividends from ACE Credit Facility Dividend Reinvestment and Stock Purchase Plan 1996

$82.2 3.1 1995

$81.2 34.5 1994

$83.5 6.7 AEI has a $75 million revolving credit and term loan facility available for general corporate purposes. Under this facility, AEI had $37.6 mil-lion and $34.5 million outstanding at December 31, 1996 and 1995, respectively.

Principal cash outflows of the Company were as follows:

(Millions)

Dividends to Shareholders Advances and Capital Contributions to Subsidiaries*

Common Stock Reacquisitions Loans to Subsidiaries

• Nee of repayments.

Atlantic City Electric Company 1996

$81.2 (1.4)

(7.5) 1995

$81.2 (6. 7) 29.6 7.5 1994

$83.5 25.6 3.9 Cash construction expenditures for 1994-1996 amounted to $307.7 million and included expenditures for upgrades to existing transmission and distribution facilities and compliance with provisions of the Clean Air Act Amendments of 1990. ACE's current estimate of cash con-struction expenditures for 1997-1999 is $283.5 million. Future expen-ditures will reflect necessary improvements to generation, transmission and distribution facilitie. ACE also utilizes cash for mandatory redemptions of Preferred securities and maturities and redemption of

1* * * * * * * *

• Management's Discussion and Analysis of Financial Condition and Results of Operations long-term debt. Optional redemptions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of capital.

Scheduled maturities and sinking fund requirements for long-term debt and Preferred securities aggregate $216.5 million for the five-year peri-od beginning 1997.

ACE finances construction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short-term debt, consisting of commercial paper and notes from banks and through long-term debt. As of December 31, 1996, ACE had authority to issue $150 million of short-term indebtedness, comprised of $100 million of committed lines of credit and $50 million on a when-offered basis. As of December 31, 1996, ACE had $85.1 million of unused short-term borrowing capacity.

In 1996, 1995 and 1994, the redemption and maturity of ACE's securi-ties totalled $111.1 million, $79.2 million and $66.1 million, respec-tively. In the same three-year period, ACE issued and sold an aggregate of $70 million of preferred securities, $105 million of medium term notes and $55 million of first mortgage bonds de ignated as pollution control bonds. The proceeds from these financings were used to refund higher-cost debt and preferred stock and for construction purposes.

ACE may, in the years 1997 through 1999, issue up to $175 million in long-term debt to be used for construction, refundings and repayment of short-term debt.

In October 1996, Atlantic Capital I, a newly formed grantor trust, issued $70 million of 8.25% Cumulative Quarterly Income Preferred Securities (CQIPS) with a stated liquidation preference of $25 each.

Atlantic Capital I, established for the sole purpose of issuing the CQIPS, invested the proceeds in 8.25% Junior Subordinated Deferrable Interest Debentures (Junior Debentures) of ACE. Atlantic Capital I is a grantor trust of ACE and as such, the transactions of the trust are consolidated into the financial statements of ACE. The Junior Debentures are eliminated in consolidation.

Atlantic Energy Enterprises, Inc.

AEE obtains funds for its investments and operating needs through advances from AEI and notes payable from ATE. Management has developed a five-year business plan to expand operations and improve its financial performance. AEE's business strategy reflects the potential investment of approximately $307 million over the next five years.

Funds for AEE capital investments will be provided through issuance of long-term debt and equity investments by AEI.

ATE has obtained funds for its business activities and provides financ-ing to its affiliates through capital contributions from AEI and external borrowings. These borrowings include $15 million principal amount of 7.44% Senior Notes due 1999 and a $25 million revolving credit and term loan agreement. At December 31, 1996, $18.5 million was out-standing under this facility. In August 1996, ATE joined with an unaf-filiated company to create EnerTech Capital Partners, LP., an equity limited partnership that will invest in energy-related technology growth companies. At December 31, 1996 ATE had invested $7.3 mil-lion in this partnership. ATE has loans outstanding to affiliates in the amount of $24. l million.

ATS plans to make $125 million in capital expenditures related to district heating and cooling in Atlantic City, New Jersey. ATS has obtained funds for its project development through a $100 million revolving credit and term loan facility established in August 1996. As of December 31, 1996, $42 million was outstanding under this facility. Construction for the ATS Midtown facility is expected to be completed by mid-1997.

Atlantic Energy 26

27 Manage1nent's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Operating results are primarily dependent upon the performance of ACE.

Revenues Electric operating revenues increased 2.9% and 4.4% in 1996 and 1995, respectively. Components of the overall changes are shown as follows:

(Millions) 1996 1995 Base Revenues

$ (8.9)

$ (1.9)

Refund Credits (13.0)

Levelized Energy Clause 29.3 49.2 Kilowatt-Hour Sales 32.2 (10.0)

Unbilled Revenues

( 17.6) 16.6 Sales for Resale 6.0 (11.9)

Other (0.9)

( 1.9)

Total

$ 27.1

$ 40.l The decrease in 1996 Base Revenues reflects a reduced average realiza-tion per kilowatt-hour sold resulting from less favorable summer weath-er conditions relative to the prior year and the effects of ACE's BPU-approved Off-Tariff Rate Agreements for at-risk customers which totaled $3.5 million or $2.2 million, net of tax. The Refund Credits of $13 million are the result of the stipulation agreements described in Note 3 of the condensed consolidated financial statements.

The changes in Unbilled Revenues are a result of the amount of kilo-watt-hours consumed by, but not yet billed to, ultimate customers at the end of the respective periods, which are affected by weather and economic conditions, and the corresponding price per kilowatt-hour.

The increase in the 1996 Sale for Resale reflects an increase in bulk power market sales outside of the regional power pool.

Billed Sales to Ultimate Utility Customers Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which are affected by economic and weather conditions. Energy sales statistics, stated as percentage changes from the previous year, are shown as follows:

Atlantic Energy 1996 1995 Customer Class Sales Avg.

Use Avg.#

of Cust.

Sales Avg.

Use A2.#

of ust.

Residential 3.2%

2.4%

0.8%

(2.0)% (3.1)%

1.2%

Commercial 3.0 2.0 1.0 1.4 (O.l) 1.5 Industrial 7.1 5.5 1.5 (7.4)

(9.0) 1.7 Total 3.6 2.8 0.8 (1.4)

(2.6) 1.2 The increase in total sales is the result of colder weather experienced during the 1996 winter heating season, a modest increase in weather-adjusted customer consumption, and a greater number of billing days recorded in 1996 compared to the previous year. Casino expansions and construction around Atlantic City, New Jersey were significant con-tributors to commercial sales growth. The increases in current year industrial sales were due primarily to the return of two retail customers that had previously been supplied by independent power producers.

Cost and Expenses Total Operating Expenses increased 5.4% and 3.6% in 1996 and 1995, respectively. Included in these expenses are the costs of energy, pur-chased capacity, operations, maintenance, depreciation and taxes.

Energy expense increased 16.3% in 1996 primarily due to the changes in the LEC permitting ACE to begin recovering $35.3 million in previously deferred energy costs. Production-related energy costs increased 5.3% due to increased sales. Purchased Capacity, the expense of generating capacity owned by others, increased 2.7% and 45.6% in 1996 and 1995, respectively, reflecting added contract capacity.

Operations and maintenance expenses increased a total of 7.9% in 1996 primarily as a result of the additional costs associated with Salem Station restart activities.

Other Income includes the results of the nonutility subsidiaries and parent-only activities. The decrease in 1996 is due to the after-tax impacts of the writedown of the carrying value of ASP's commercial property of $0.8 million, the contingency loss for the sale of a cogener-ation facility of $1.6 million and a $1.1 million loss in AEE's invest-ment in Enerval, LLC.

• Long-term nonutility contracts.

11 46 4

9 42 34%

3547 J.587 J 477

Management's Q~~cussio11

.~l)d Analysis of Financ~~l _\\;9ndi _

.~~4 ~~s.Y:l~ qf Oper.~tions :;;.. < **,

OUTLOOK The electric utility induqry is undergoing fund amental changes through the introduct ion of comretitinn and customer choice. The timing and scope of regulatory changes currently being proposed in New Jersey will have a significant impact on ACE's economic viabi li ty and ability to compete in the energy marketplace. Any legislative ini-ti:itives permitting the orderl y and efficient trnnsition to competition, through such means as market transition charges, t<lX reallocation or enabling amendments to ex isting la\\\\'s, will serve to insure recovery of prudently incurred i1westments.

In anticipation of heightened competition m energy markets, AC E is pursuing a number of initiati ves designed to strengthen its position in the marketplace. The proposed merger and formation of Conectiv provides strategic and operational oprortuniries to better meet the coming com-petitive environment. Those orportunities are derived from increased financial strength, impmvecl m;rnagement, efficiencies of operations, ;md better utilization and coordinatit)n nf existing and future facilities. The proposed merger is part of a wider rrend in the utility industry toward consolidation and str;Hegic p;1rtnerships in order to create larger, stronger companies ready fnr the onset of competition. The receipt nf all requisite regulatory appmv;1ls to consummate the merger is ex pected to be obtained by late 1997 or early 1998, but cannot be assured.

The cost of ACE's rower supply, includi ng the cost of power purchased from independent power prod ucers, <ilong with its retail prices are expected to be critical success factors in a competitive marketpl<ice.

AC E is focus ing on cost and rate control measures as well as the devel-opment of new energy-related products and services. A lternate pricing mechanisms and rate discounts for key rit-risk customers will be neces-sary, and while having a long-term economic benefit, wi ll cause detri-mental impacts on revenues and income in the near term. New value-added products rind services for the retail energy consumer which create customer loyalty and satisfaction will be ri keystone of the Company's strategic business foc us.

AEI's utility business will continue to be affected by regional economic trends and social ini tiatives, as well as the im pacts of abnormal weath-er and inflation. Such regional economic trends are favorable and include the growth of the Atlantic C ity gaming industry, which arpears poised for a "second wave" tif clevelorment. O ngoing requi rements for service, service reliability <md compliance \\\\'ith existing and new e1wi-ronmental regulations,,*ill require capital investment. ACE's planned construction budget is $4 17 million for the five -year period beginning in 1997 with an ex pected reduction in its external cash requirements.

AC E's abi lity to generate cash flows or access the cripita l markets mriy be affected by competiti,*e pressures on revenues and income.

The operational rerformance of ACE's jointly-owned nuclear units, as well as significant changes in the costs to decommission those fac ilities at the encl of their useful lives, will continue to be ri factor in ACE's financial results. ACE will attempt to mi tigate such factors whenever possible. ACE has entered into a r erforma nce-based agreement with PSE&G, the operator of the Salem Stat ion. to limit its exposure for operations and maintenance exr enses in 1997. To the extent that ACE derives a savings in 1997 O&M expenditures, those sa,*ings,~*ill offset unrecoverecl replacement power costs incurred <is a result of the una va ilability of the Salem units.

AEI's utility business will cuntinue to be the rrimary factor influencing the Comrany's overall financial r erformance. Ho\\\\*e,*er. gro\\\\"th in new business ventures such ;1s A rlanric Therm ;1l Systems and en;1hling strate-gic alliances like Enernl, LLC, \\\\'ill require the efficient deYelopment of entrepreneuriril expertise and financial resources to be successful.

, *'..

• r.. *** -

29 Investor Information (As of December 31, 1996)

Where should I send inquiries concerning my investment in Atlantic Energy or Atlantic Electric?

The company serves as recordkeeping agent, dividend disbursing agent and also as transfer agent for common stock and Atlantic Electric's pre-ferred stock. Correspondence concerning such matters as the replacement of dividend checks or stock certificates, address changes, dividend rein-vestment and stock purchase plan inquiries or any general information about the company should be addressed to:

Atlantic Energy, Inc.

Investor Records P.O. Box 1334 Pleasantville, New Jersey 08232 Telephone (609) 645-4506 or (609) 645-4507 Requests for the transfer of common stock certificates should be forwarded to:

Continental Stock Transfer & Trust Company 2 Broadway, 19th Floor New York, NY 10004 Telephone (212) 509-4000 Preferred stockholders should continue to contact Atlantic Energy with regard to the transfer of their stock.

When are dividends paid?

The proposed record dates and payable dates are as follows:

Record Dates Payable Dates March 24, 1997 April 15, 1997 June 16, 1997 July 15, 1997 September 22, 1997 October 15, 1997 December 22, 1997 January 15, 1998 The following table indicates dividends paid per share in 1996 and 1995 on common stock:

First Quarter Second Quarter Third Quarter Fourth Quarter Annual Total 1996

$.385

.385

.385

.385

$1.54 1995

$.385

.385

.385

.385

$1.54 Dividends paid on common stock in 1996 and 1995 were fully taxable. Some state and local governments may impose personal property taxes on shares held in certain corporations. Shareholders residing in those states should con-sult their tax advisors with regard to personal property tax liability.

Who is the trustee and interest paying agent for Atlantic Electric's bonds?

First mortgage bond recordkeeping and interest disbursing are performed by The Bank of New York, 101 Barclay Street, New York, New York 10286.

Recordkeeping and interest disbursing for pollution control bonds are performed by Summit Bank, 210 Main Street, 1st Floor, Hackensack, New Jersey 07602.

Does the company have a Dividend Reinvestment and Stock Purchase Plan ("Plan")?

Yes. The Plan allows shareholders of record and interested investors to auto-matically invest their cash dividend and/or optional cash payments in shares of the company's common stock. Other services available to Plan participants include certificate safekeeping and automatic investment. Holders of record of common stock or interested investors wishing to enroll in the Plan should contact Investor Records at the address listed. In addition, shareholders whose stock is held in a brokerage account may be able to participate in the Plan.

These shareholders should contact their broker or Investor Records for more information.

Where is the company's stock Usted?

Common stock of Atlantic Energy and the preferred securities of Atlantic Capital I are listed on the New York Stock Exchange. The trading symbol of the company's common stock is ATE; however, newspaper listings generally use At!Enrg or AtlanEngy. The trading symbol of the preferred securities is ATEPr and is generally listed in the newspaper as AtlaCap QUIPS.

The high and low sale prices of the common stock reported in The Wall Street Journal as New York Stock Exchange -

Composite Transactions for the peri-ods indicated were as follows:

First Quarter Second Quarter Third Quarter Fourth Quarter 1996 High Low

$20.000 18.750 18.500 18.875

$16.625 16.000 17.000 17.000 Is additional information about the company available?

High

$19.000 19.625 19.875 20.125 1995 Low

$17.750 17.875 18.125 19.000 A full set of financial statements is included in Atlantic Energy's 1997 proxy statement. The annual report to the Securities and Exchange Commission on Form 10-K and other reports containing financial data are available to share-holders. Specific requests should be addressed to:

Atlantic Energy Financial Services Department 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 Telephone (609) 645-4483 or (609) 645-4655 FAX (609) 645-4132

30 Financial&Statistical Review 1996-1986.-

~-;_

1996 199S 1994 1993 1992 1991 1990

--*---W-**-*------

Atlantic Energy, Inc. -

Investor Infonnation Operating Revenues (000)

Net Income (000)

Average Number of Common Shares Outstanding (000)

Earnings per Average Common Share Total Assets (Year-end) (000)

Long-Tenn Debt and Cumulative Preferred Securities Subject to ~fandatory

$ 980,255 58,767 52,702 1.12

$ 2,670,762 Redemption (Year-end) (000)

$ 1,051,945 Capiwl Lease Obligations (Year-end) (000) 39,914 Dividends Declared on Common Stock Dividend Payout Ratio 1.54 138%

$ 9S3,137

$ 913,039

$ 865,67S

$ 816,825

$ 808,374

$ 740,894 81,768 76,113* $

9S,297 $

86,210 8S,63S 68,879 S2,81S 54,149 52,888 51,S92 49W8 45,S90 l.5S 1.41 * $

1.80 t.67 l.7S 1.51

$ 2,617,888

$ 2,S42,38S

$ 2,487,S08

$ 2,219,338

$ 2.151,416 $ 2,006,010

$ l,032,l03

$ 940,788 40,886 42,030 l.S4 l.S4 99%

109%

$ 952,101 $ 842,236

$ 807.347

$ 747,877 45,268 49,303 S\\093 57,971 l.53S 8S%

l.S 15 $

1.495 90%

85%

1.47 97%

1989 1988 1987

$ 723,216

$ 687,335

$ 635,657 80,964 72,171 73,765 43,268 l.87

$ 1,864,461 39,186 36,622 l.84 $

2.01

$1,660,286

$ 1,499,38 I

$ 725,329

$ 594,461 $ SZZ,81S 33,146

$ 32,880 37,694 l.42S l.3 7 $

l.3575 75%

7S%

66%

$ 6C4,716

$ 54,946 36,532 I.SO

$1,401,064

$ 534.Em

$ 37,603 1.305 87%

Book Value rer Share (Year-end)

Price/Earnings Ratio (Year-end)

Times Fixed Charges Earned 15.00 lS.42 IS.SO

$

• IS.62 15.17 14.84 14.36 14.27 13.58 12.86 l r18 (Pre-tax, Atlantic Electric)

Common Shareholder.; (Year-end)

Employees (Year-end) (a)

Atlantic City Electric Company (Principal subsidiary)

Facilities for Service Total Utility Plant (000)

Additions to Utility Plant (000)

Generating Capacity (Kilowatts)

(Year-end) (b) (c)

Maximum Utility System Demand (Kilowatts)

Capacity Reserve at Time of Peak

(%of installed generation)

Energy Supply (mwh):

Net Generation Purchased and Interchanged

=*_Total __ Sy~em L?ad 15 12 13 12 14 12 11 10 9

8 12 2.69 48,825 1,526 3.34 48,683 l,S07 3.21 48,8SO 1,818

$ 2,670,926

_ $ 2,S96,265 $ 2,507,922 88,659

$ 103,399 I 26,367 2,385,700 1,774,000 25.6%

5,430,774 5,250,098 10,680,872 2,3S l,700 2,042,000 l2.8%

S,698,996 4,723,701 10,422,697 2,327,700 1,834,000 19.4%

6,081,778 4,439,228 10,521,006 3.54 47,832 1,835 3.76 46,524 2,023 3.68 43,802 2,032 2.94 42,295 2,055

$ 2,402,415

$ 2,279,107

$ 2,175,601

$ 2,027,138

$ 14 1,927

$ 134,326

$ 177,298 $ 170,772 2,307,700 1,962,000 11.2%

6,02S,861 3,7S3,433 9,779,294 2, 160,700 1,796,000 16.9%

5,77S,098 3,553,247 9,328,34S 2,090,700 1,959,700 1,911,000 1,741,CXXJ 5.2%

10.9%

6,300,891 6,267,559 3,124,024 2,606,067 9,424,915 8,873,626 3.19 43,383 2,021 3.06 44.473 2,092 3.68 45,586 2,148

$ 1,846,122

$1,712,614

$ 1,602,801

$ 147,886

$ 130,281 $ 105,521 1,879,700 1,700,000 9.6%

6,260,942 2,597,623 8,8S8,S6S 1,807,700 1,636,000 9.5%

5,863, l I 9 2,567,871 8,430,990 l,660,700 1,609,000 3.1%

6,157,938 1,773,837 7,931,775 2.99 47.1 n 2,168

$1,503,010

$ 109,303 1,660,700 1,459,('(()

12.1%

S,966.({()

1,454,~2 1 7.42 1.001

Financial &Statistical Review 1996-1986 1996 Electric Sales to Ultimate Customers (mwh):

Residential Commercial Industrial All Others Total (d) 3,587,352 3,493,694 1,214,005 51,486 8,346,537 Residential Electric Service (Average per customer)

Amount of Electricity Used During the Year (kwh) 8,566 1995 3,476,540 3,391,319 1,133,788 51,218 8,052,865 1994 3,546,789 3,344,675 1,224,721 51,671 8,167,856 1993 3,495,722 3,259,541 1,261,069 50,080 8,066,412 1992 3,276,330 3,100,133 1,229,211 49,464 7,655,138 1991 3,370,327 3,147,318 1,368,329 49,626 7,935,600 8,131 8,440 1990 3,267,606 3,063,069 1,376,423 49,769 7,756,867 1989 1988 3,265,918 3,213,010 2,917,162 2,741,976 1,380,832 1,339,005 53,872 56,289 7,617,784 7,350,280 8,460 1987 3,040,410 2,592,232 1,323,567 58,191 7,014,400 8,281 1986 2,839,114 2,401,199 1,222,981 58,120 6,521,414 7,982

• Revenue for a Year's Service

$ 1,071.52 12.51¢ 8,368

$1,037.88 12.40¢ 8,638

$1,003.30 11.62¢ 8,608

$ 969.86 11.27¢

$ 903.91

$ 906.66 8,251

$ 844.37 10.23¢ 8,382

$ 840.34 10.03¢

$ 838.70

$ 808.14

$ 791.09 Revenue per Kilowatt-Hour Ultimate Customer Data (Average customers)

Residential With Electric Heating

• Residential Without Electric Heating Total Residential

.Commercial Industrial All Others Total Ultimate Customers (d)

Operating Revenues (000)

Electric Service:

Residential Commercial industrial All Others Total from Electric Service Unbilled Revenues - Net Sales for Resale 82,436 336,330 418,766 55,440 1,012 518 475,736 82,759 332,695 415,454 54,883 997 517 471,851 82,612 327,985 410,597 54,094 980 518 466,189 82,385 323,722 406,107 52,988 971 522 460,588 11.12¢ 82,206 320,744 402,950 51,996 990 524 456,460 10.74¢ 81,838 317,486 399,324 51,077 998 524 451,923 81,479 314,529 396,008 50,274 1,002 537 447,821 9.91¢ 80,409 78,805 309,245 300,974 389,654 379,779 49,509 48,398 1,008 1,014 549 552 440,720 429,743

' Other Electric Revenues

$ 448,738 369,364 105,734 11,317 935,153 (8,200) 48,459 7,080

$ 431,206 352,432 99,074 11,163 893,875 9,445 42,438 8,021

$ 953,779

$ 411,954 332,145 101,093 10,905 856,097 (7,239) 54,370 9,998

$ 393,866 315,089 100,812 10,575 820,342 28 36,576 8,853

$ 865,799

$ 364,232 299,866 97,475 10,548 772,121 1,203 35,884 7,723

$ 816,931

$ 362,050 292,349 102,202 10,136 766,737 3,229 30,404 8,112

$ 808,482

$ 334,375 271,688 96,766 9,668 712,497 (4,055) 24,115 8,448

$ 741,005

$327,443 256,199 94,634 9,901 688,177 7,215 18,196 9,765

$ 723,353

$ 318,520 240,890 91,661 9,935 661,006 6,716 11,476 8,137

$ 687,335 Total Operating Revenues (d)

$ 982,492

$ 913,226

• Reflects special charges, primarily for employee separation coses. (a) Atlantic Energy consolidated group. Prior to 1994, numbers reflect ACE employees only. (b) Excludes capacity allocated to a large industrial customer prior to 1994. (c) Includes unit purchases and sales of capacity under contracts with certain other utilities and nonutilities. (d) Includes sales to affiliates within the Atlantic Energy consolidated group.

9.76¢ 75,900 291,253 367,153 46,775 1,015 554 415,497 9.91¢ 72,640 283,062 355,702 45,359 1,022 554 402,637

$ 296,712

$ 281,393 222,129 84,476 10,199 613,516 385 214,230 80,037 10,230 585,890 (1,813) 12,840 13,045 8,916 7,594

$ 635,657

$ 604,716 Atlantic Energy 31

32 Officers of Atlantic Energy, Inc. and Subsidiaries All information as of December 31, 1996 (Age/years of service)

ATLANTIC ENERGY, INC. OFFICERS Jerrold L. Jacobs (57/35)1.2 Chairman and Chief Executive Officer Michael J. Chesser (48/3)1.2 President and Chief Operating Officer Michael]. Barron (47/2)'

Vice President and Chief Financial Officer Frank E. DiCola ( 49/3)

Vice President James E. Franklin II (50/3)'

Vice President, Secretary and General Counsel Meredith I. Harlacher, Jr. (54/31)'

Vice President Ernest L. Jolly (44/16)

Vice President Henry K. Levari, Jr. ( 48/25)'

Vice President Marilyn T. Powell ( 49/3 )1 Vice President Scott B. Ungerer (38/15)

Vice President Louis M. Walters ( 44/18)

Treasurer 1 Director of Atlantic City Electric Company 2 Director of Atlantic Energy Enterprises, Inc.

Subsidiaries of Atlantic Energy, Inc. include:

Atlantic City Electric Company Atlantic Energy Enterprises, Inc.

Atlantic Energy International, Inc.

Subsidiaries of Atlantic Energy Enterprises, Inc. include:

ATE Investment, Inc.

Atlantic Generation, Inc.

Atlantic Southern Properties, Inc.

Atlantic Thermal Systems, Inc.

CoastalComm, Inc.

Atlantic Energy Technology, Inc.

Equity Investments include:

EnerTech Capital Partners, LP.

Enerval, LLC Atlantic Energy ATLANTIC CITY ELECTRIC COMPANY OFFICERS Jerrold J. Jacobs Chairman and Chief Executive Officer Michael J. Chesser President and Chief Operating Officer Michael J. Barron Sr. Vice President and Chief Financial Officer James E. Franklin II Sr. Vice President, Secretary and General Counsel Meredith I. Harlacher, Jr.

Sr. Vice President, Power System Ernest L. Jolly Sr. Vice President, Energy Supply (acting)

Henry K. Levari, Jr.

Sr. Vice President, External Affairs Marilyn T. Powell Sr. Vice President, Marketing/Distribution

]. David McCann (45/24)

Vice President, Strategic Customer Support Louis M. Walters Vice President, Treasurer and Assistant Secretary Robert H. Fiedler (50/28)

Vice President, Distribution (acting)

ATLANTIC ENERGY ENTERPRISES, INC. OFFICERS Michael J. Chesser President & Chief Operating Officer Frank E. DiCola Sr. Vice President and Treasurer Scott B. Ungerer Sr. Vice President James E. Franklin II Secretary James C. Weller ( 4 7 /3)

Vice President and Assistant Secretary ATLANTIC ENERGY INTERNATIONAL, INC. OFFICERS Peter M. Jansson (39/17)

President James E. Franklin II Secretary

I'll U"ln I 11-ENERCY Energizing your future 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130 609.645.4500 h ttp://www.aenergy.com

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