ML19031A135

Submit 1977 Annual Report by Atlantic City Electric Company

ML19031A135
Person / Time
Site:	Salem
Issue date:	03/13/1978
From:	Atlantic City Electric Co
To:	Office of Nuclear Reactor Regulation
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Download: ML19031A135 (28)

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DEADLINE RETURN DATE RECORDS FACILITY BRANCH

Cover Contents Advance Notice The photograph on our cover shows the Delaware River crossing of the newly constructed Keeney-Salem 500 KV line. The tower structures pictured form part of a two and one-half mile crossing of the Delaware River at a point five miles south of the Delaware Memorial Bridge. Seven towers, the tallest of which stands 428 feet above the water, support six spans of transmission lines over the river that links Dela-ware Valley ports with the rest of the world. The Keeney-Salem 500 KV line has a total length of 25 miles and con-nects Salem Nuclear Generating Station with Keeney Sub-station in D elaware. Construction of the line was completed in 1977. The line is also part of the Pennsylvania-New Jersey-Maryland Interconnection shown on the back cover.

Letter to Shareholders The Company Earnings and Dividends Fuel Energy Sales and Revenues Construction Program Financing Conservation Environment Safety and Public Relations Employees Community Activities Financial Statements Management's Discussion and Page 2

4 4

5 5

5 7

7 9

9 10 11 12-20 Analysis of the Statements of Income 21 1977-1967 Statistical Profile and Summary of Operations 22-23 Price Range and Dividends Paid on Stock 24 Transfer Agents 24 Directors and Officers Inside Back Cover The 1978 Annual Meeting of Shareholders will be held Tuesday, April 25, 1978, at the Company's Data Processing Center, Blac k Horse Pike and Fire Road, near Pleasantville, New Jersey. A Notice of Meeting will be mailed in March to those shareholders entitled to vote.

Results of Operations 1977-1973 0 ~~!~!!~J!!~~~

1977 1976 1975 1974 1973 Sales of Electricity (Billions of Kilowatt-hours) 4.979 4.664 4.378 4.376 4.429 Electric Operating Revenues (Millions)......

$ 235.0

$ 212.0

$ 199.1

$ 176.6 132.9 Net Income (Millions)...................

27.4 30.8 28.3 27.0 22.9 Earnings per Share.....................

2.06 2.60 2.41 2.54 2.40 Dividends Paid per Share................

1.62 1.56 1.51 1.50 1.4688 Gross Additions to Utility Plant (Millions)...

48.7

$ 41.7 46.7 71.2 67.9 Generating Capacity (Kilowatts)...........

1,414,700 1,334,700 1,334,700 1,278,700 1,013,500 Utility System Peak Load (Kilowatts).......

1,176,000 1,030,300 1,069,400 1,004,400 1,051,400 Average Annuai Residential Kilowatt-hour Use 7,653 7,320 7,018 6,982 7,303 Electrically Heated Dwelling Units (Year-end) 45,389 42,878 41,026 38,146 34,870 Customer Service Installations (Year-end)...

352,205 343,147 336,105 330,758 320,834

To Our Shareholders:

There are many accomplishments that will be reported throughout this Annual Report about the successful opera-tions of your Company in 1977. However. the most important financial result was not good-ea rnings declined.

Earnings available for Common Stock amounted to $2.06 per average share outstanding in 1977 compared to $2.60 per share in 1976 when there were fewer average shares outstanding.

The major factors that caused the decline in earnings were increased depreciation expenses, higher taxes, increased labor costs, and other increased expenses resulting primarily from inflation.

Depreciation expense in 1977 amounted to S 19.4 million, up I I r;(. Total taxes were $43.2 million, up SS million-this I 3.2 r{ increase in taxes had the effect of reducing earnings per share by -+7.3c a share. The effects of increased labor costs, the increased costs of material and supplies and general inflation is demonstrated by the $7.2 million increase in Operation and Maintenance Expenses (exclud-ing fuel and interchange) during 1977.

The State of Pennsyh*ania enacted a gross receipts tax in December, I 977 which \\\\'as made retroactive to January I,

1977. lt amounted to $1 million for Atlantic Electric-howcvcr, we expect to join \\*Vith other utility companies in a suit agaimt Pennsylvania which will contest the legality of the tax.

Notwithstanding our aggressh*e programs to combat higher expenses, it became evident in late 1976 that an increase in electric rates would be necessary in 1977 to enable Atlantic Electric to earn an adequate return on the investment of shareholders. On February 11, 1977 we filed a request for a $16.5 million rate increase with the New Jersey Board of Public Utilities. Unfortunately the rate increase was not effective until January 27. 1978 and we were only granted an $8 million increase. Consequently. we 2

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

plan to file a court appeal of the rate decision in the Superior Court of New Jersey. We will keep shareholders advised of this matter. We also arc preparing a request for an addi-tional rate increase-timely rate relief will be needed in 1978 if financial results arc to show an upward trend.

Unless we get adequate rate relief in the future, we will have to make further curtailments in our construction program and consider other serious retrenchments.

Progress was achieved during 1977 in many areas of operations of the Company:

Despite inflation of more than 11 % during the two-year period 1975-1977 the average price paid per kilowatt-hour by Atlantic Electric's customers only increased about 4%! Even if an adequate, timely rate increase had been granted in 1977 the price paid per kilowatt-hour would have been about 4L(* lower than inflation growth!

Major construction was completed-The first unit of Salem Nuclear Generating Station was placed in commer-cial operation. This not only provides Atlantic Electric with additional generating capacity to meet the electric energy needs of its customers, but it also provides the benefit to the Company and its customers of lower cost energy-the total cost of generating electric energy (including construction costs and fuel) is less through nuclear than any other fuel.

Increases in Kilowatt-hour Sales and in Revenues-It's important to distinguish between orderly growth. which we welcome. and accelerated growth. which we oppose. Order!

growth is needed if the economy of Southern New Jersey is to prosper. Our concern about growth has caused us to be a leading promoter of conservation.

Kilowatt-hour sales increased 6.8 7c in 1977-7.3 C/c growth was recorded in the residential category, and 6.2 o/c and 6. 7 S'c in commercial and industrial categories respectively.

Atlantic Electric experienced increases of 11 o/c in resi-dential revenues, l 0.5 r;;, in commercial and 12.2 r;'c in industrial in 1977. Some of this growth is indicative Qf an upswing in certain sections of the area's economy; a significant amount resulted from the very cold weather in the early months and hotter than normal weather in the summer of 1977.

Dividend Rei1westment and Stock Purchase Plan contrib*

uted funds towards cash requirements-We raised $2.3 million in 1977 through the sale of 102,417 shares of Common Stock under this Plan. It's gratifying to know that so many of our shareholders and employees have sustained

confidence in Atlantic Electric and are investing on a continuing basis.

Several aspects of our Safety and Public Relations Pro-grams were improved-We've been conducting programs on electrical safety throughou our service area for students as well as for other groups. We also work closely with local police and fire departments and present safety seminars in trade schools for apprentice electrician trainees.

Through our public relations program we strive to make the public aware of the realities of the energy situation such as ( l) the need for increased use of coal and nuclear fuel; (2) the need to conserve energy; (3) the prospects for impending energy shortages; and (4) the fact that the age of inexpensive energy is over.

We had hoped that 1977 would be the year that an effective National Energy Policy would be adopted. Unfor-tunately, the legislation proposed was more of a revenue producing bill with extremely onerous provisions regarding electric utilities. However, through the efforts of many, including the electric utility industry and shareholders, a more effective energy bill will be developed by the joint Senate-House Committee.

Dividends on Common Stock have been paid for 53 consecutive years and increases in the dividend payment have occurred each year for the past 25 years. The Board of Directors and Management intend to make every effort to continue this record. We arc fully aware of the need to provide an adequate return to our investors and to provide a measure of protection from inflation. We know that many shareholders are retired and depend upon dividends to sustain them.

Although earnings per share were diluted as a result of the greater average number of shares of Common Stock outstanding in L 977, the sale of the additional shares

( 1,000,000 shares sold in October, 197 6) enabled Atlantic Electric to strengthen its capitalization structure and the funds obtained($ L 9.3 million) helped pay for construction of new generating stations and other electrical facilities required to serve Atlantic Electric's customers.

1978 promises to be a year of challenge for the people of Atlantic Electric and we plan to make it a year of important progress which will set the pace for more prosperous years to follow. Several of our major objectives are:

1. Continue to control operating expenses to the extent possible to minimize increases in the cost of electricity in Southern New Jersey.

2. Obtain an adequate rate increase which together with operating efficiencies will result in higher earnings, increased dividends and an improved financial rating.

3. Effect the continued use of additional energy-efficient appliances, promote conservation and load management.

4. Firm up the generating capacity program for the future.

Although we have been able to defer many capital expenditures in recent years as a result of the slowdown in the economy and conservation, we continue to anticipate orderly but sustained growth in Southern New Jersey in the future. Atlantic Electric will be called upon to provide a reliable, adequate energy supply to meet the growth. We must retain our financial strength and flexibility if we are to sell securities at reasonable financing costs in order to build the required facilities, and at the same time continue to provide existing shareholders with a reasonable return on their investment. We can assure you that your management will continue to make every effort to strengthen the Company and get public and regulatory understanding of the importance of our need to obtain timely, adequate rate relief. As a shareholder you can add your voice to ours-your support can provide a necessary extra ingredient to assure a brighter future for all.

For the Board of Directors, a.c.~

A. C. Linkletter Chairman of the Board President 3

j

The Company and The Area It Serves Located in an area close to the major metropolitan centers of Philadelphia and New York, Atlantic Electric provides electric service to the southern one-third of the State of New Jersey. Its 2,700 square mile territory boasts popular seaside resorts, fine residential communities and cities, excellent shopping centers and other commercial business centers, and diversified industrial and agricultural areas.

Atlantic Electric is an investor-owned electric utility serving more than 352,000 customers in an area with a year-round population of 961,000. Approximately 32% of the holders of Common Stock are also customers of Atlantic Electric-the Company thus feels a strong obli-gation to the area it serves and to the best interests of its customers and shareholders alike. The Company has 43,826 shareholders of Common Stock and 2, 113 holders of Preferred Stock. As of year-end 1977, 10,702,557 shares of Common Stock were outstanding.

Earnings Declined-Dividends Increased Earnings available for Common Stock amounted to $2.06 per average share outstanding in 1977 as compared to

$2.60 in 1976 when there were fewer ave.rage shares out-standing. Dividends paid on Common Stock during 1977 amounted to $1.62 per share, compared with $1.56 paid in 1976. Earnings per share are the lowest since 1971 and their depressed level is attributable to a number of adverse factors including increased depreciation, higher taxes and inflation-generated increases in labor costs and in other operation and maintenance expenses.

4

100 Construction 75 Expenditures (Cash)

(Millions of Dollars)

Types of Fuel and Fuel Costs Atlantic Electric has achieved substantial stabilization in electric rates in recent years. Although the cost of all forms of energy (including electricity) is expected to continue to I

rise, there is hope for some stabilization of fuel costs in the

, short term for the Company through increased production of energy with nuclear fuel. During 1977 approximately 18 % of the electric energy used by our customers was produced by nuclear fuel-the estimate for 1978 is 24%.

Coal and oil produced 43 % and 39% of the 1977 kilowatt-hours respectively-the estimates for 1978 are 42 % for

!coal and 34% for oil.

I Increases Recorded in Number of Electrically Heated Homes

• Kilowatt-hour Sales and Revenues The number of electrically-heated dwelling units has increased steadily over the years. During 1977, 2,511 such units were added to the Company's lines; the total included 2,358 newly constructed homes and 153 units which were converted from other types of fuel. By the end of 1977 there were 45,389 electrically heated dwelling units in our service area. Residential customers with electric heat repre-1 sent 14% of our residential customers. Significantly, during 1977, residential customers with electric heating used 28 % of our total residential kilowatt-hour sales and pro-

<.iuced 23.5% of residential revenue.

Much colder than normal weather conditions during the first quarter of 1977 and hotter than normal weather during the 1977 summer season were principal reasons for 50 25 0

1973 1974 1975 1976 1977 the 315.3 million increase in kilowatt-hour sales for the year. We estimate that over half of the kilowatt-hour sales growth was related to abnormal weather conditions and the remaining growth attributable to new load being added to the Company's lines.

Electric Operating Revenues in 1977 amounted to $235 million, up 10.8% from the prior year. Growth registered was 11 % in the residential category and 10.5 % and 12.2 %

in commercial and industrial respectively.

Construction of New Facilities Continued One of the daily challenges facing a utility such as Atlantic Electric is that of providing the capacity to meet the present and future needs of its customers. As the demand for electric energy increases, additional generation, trans-mission and distribution facilities must be built if Atlantic Electric's customers are to continue to receive the reliable service on which they depend. In addition to providing new facilities to meet increased demand, we must also replace obsolete and worn out equipment. Even in the absence of load growth, the Company would still be required to carry out a significant construction program just to replace current facilities as they become worn out.

The Company's construction expenditures, including nuclear fuel, amounted to $42 million in 1977. Allowance for Funds Used During Construction totaled another $6.7 million. Of the 1977 expenditures, $26. 9 million was for production facilities and $21.8 million was used for sub-stations, and transmission, distribution and general facilities.

It is estimated that cash construction expenditures will amount to approximately $66.7 million for 1978.

5

The first unit at the Salem Nuclear Generating Station was placed in full commercial operation on June 30, 1977.

Atlantic Electric's share of this 1,090,000 kilowatt unit is 80,000 kilowatts. Unit No. 2 at Salem is scheduled for completion in 1979. The Company's share of this second unit is 83,000 kilowatts.

The Company is also participating in the construction of two nuclear units at the Hope Creek Generating Station located adjacent to the Salem Station. Ownership interest in these units, the first of which is scheduled for completion in 19-84 and the second in 1986, totals 107,000 kilowatts.

The Company also expects to have ownership interest totaling 460,000 kilowatts in four proposed floating nuclear generating units to be constructed under the direction of Public Service Electric and Gas Company. The first unit was scheduled for service in 1985, the second in 1987 and the remaining two in the early 1990's. As this report went to press, Public Service was in the process of negotiating with Offshore Power Systems, which is to construct the units, for a three year delay in delivery of the units. Atlantic Electric's current load projections indicate that new generating capacity must be available in the mid 1980's and it has commenced a study to determine how it will meet this requirement.

To provide these facilities and others needed to meet forecasted increases in demand, Atlantic Electric must always look ahead. Construction of major generating plants can take as long as ten to twelve years from the time the need is clearly defined until the plant is placed in commer-cial operation. Needless delays in application and licensing 6

Percent ol Kilowatt-Hours 80 % -~~~~~~~~~~~~~~~~~~~~~~~~~

1973 procedures result in costly increases in the already lengthy lead times. Given the pressing need for development of future energy supplies, neither Atlantic Electric nor its customers can afford to waste time-a truly valuable resource. Atlantic Electric must provide the plant and equipment necessary to meet future demand for electricity when it occurs, a demand which, including conservation, is expected to grow at an average rate of 3.9% per year for the next ten years.

Funds from External Sources are Required The production, transmission and distribution of electricity requires large investments in plant and equipment. Because of this investment and because of the highly capital-intensive nature of the industry, Atlantic Electric must raise millions of dollars each year to maintain its ongoing construction program.

In December, 1977, Atlantic Electric raised $10 million from the issuance and sale through a private placement of 100,000 shares of an $8.25 series of No Par Preferred Stock. The proceeds were used to fund part of the cost of the Company's construction program and for repayment of its short-term debt incurred to provide interim financing of construction costs. Also in December, $15 million of Unsecured Notes were issued bearing an interest rate of 7.9 % per year and having a term of five years. The funds

• received from the sale of the Notes were used to pay $15 I million of 9.90% Notes which matured on December 15, I 1977.

I Of the $66.7 million 1978 cash construction require-Produced From Various Fuels 1974 1975 1976 1977 1978 1979 1980 ments, it is anticipated that 43 % will be generated from internal sources and 4% will be provided from the sale of Common Stock through the Dividend Reinvestment and Stock Purchase Plan. The balance of 53 % is to be financed temporarily through short-term bank loans and commercial paper borrowings. However, should economic and market conditions during 1978 present a favorable situation for the issuance of long-term securities, the Company would consider the sale of such securities.

During 1977, $2.3 million was obtained through the issuance of 102,41 7 shares of Common Stock under the Company's Dividend Reinvestment and Stock Purchase Plan. This plan makes it possible for shareholders and employees to purchase additional shares of Common Stock directly from the Company at a price based on the average high and low market prices of Atlantic Electric's Common Stock on the investment date. In January, 1978, the Board of Directors authorized an additional I 00,000 shares of Common Stock for issuance under the Plan. At year end 1977 there were about 7,000 participants in the Plan.

Conservation-Control of Peak Demands Conservation and control of peak demands continue to be two of the focal points of Atlantic Electric's efforts to minimize increases in the cost of electric energy to custo-mers and simultaneously improve the prospects for earning a reasonable return on investment.

The Company took a bold step forward in energy con-servation and its efforts to suppress the summer peak demand when it became the first electric utility in the nation 7

I

<* I..

to enforce a minimum acceptable efficiency ratio for air conditioners. This program was approved by the New Jerse Board of Public Utilities and permits us to refuse to connect electric service to a new building or home with air conditioning equipment having an energy efficiency ratio of less than 7.0. We believe that this vigorously addresses itself to the problem of the sale and use of inefficient air conditioners, which is a major cause of the undesirable peald demand.

A continuing phase of Atlantic Electric's program is to provide customers with specific information regarding conservation and peak demand control-the Company has encouraged weather protection of homes, proper mainte-nance of heating equipment, use of major appliances during periods of lower energy demand and other energy saving methods.

The Company has always advocated and promoted extensive use of insulation and thermal treatment in elec-trically-heated homes, thereby setting a standard for other heating sources to move up to. If gas and oil heated homes had been built to such standards, vast amounts of energy could have been saved throughout New Jersey and the nation. The Company hopes that its recently adopted National Energy Watch (NEW) program will be the catalyst behind a further movement to encourage builders to improve thermal treatment in homes under construction.

The program also applies to owners of existing homes and encourages them to install energy efficient equipment and appliances in their homes. The National Energy Watch, based on guidelines provided by the Edison Electric Insti-8

1977 Revenue Dollar SOURCES OF REVENUE DISPOSITION OF REVENUE Residential

$.47 $.35 Fuel

.31

.18

.17

.15 - Cost of Invested Funds Other Revenue -

.05

.12-Materials & Supp lies

.10- Labor tute, is an award and certification program aimed at enhancing the marketability of homes that save energy.

While Atlantic Electric did make progress in peak demand control and conservation we still experienced a new record peak load of 1, 17 6,000 kilowatts in July 1977.

We estimate that about 58,000 kilowatts of this peak was caused by the hotter and more humid than normal weather conditions. The 197 6 peak load was 1,030,300; the previous record peak load of 1,069,400 was experienced in 1975.

The Environment and the cost of its Protection Atlantic Electric has been a leader in Southern New Jersey in advocating and promoting environmental protection and fulfilling its obligation to provide adequate, reliable electric service at a reasonable cost while doing its utmost to protect the quality of life of this area. We believe our Company has, over the years, been one of the most respon-sible citizens of Southern New Jersey and has prudently weighed the pressing energy needs of the people with their ability to meet the higher cost of energy, while at the same time doing its best to protect the environment for future generations.

The New Jersey Department of Environmental Protection (D.E.P.) and the Federal Environmental Protection Agency (E.P.A.) have determined that the B.L. England Gener-ating Station meets the requirements of New Jersey thermal water quality standards. Atlantic Electric is cooperating with these agencies by conducting biological studies at the B.L. England and Deepwater Generating Stations to

.08 -

Cost of Replacing Equi pment

.02 I Reinvested Funds Total $1.00 $1.00 Total determine the effects of once-through condenser cooling on fish.

The D.E.P. also has approved the concept of continued coal burning in Units 1 and 2 of the B.L. England Generating Station with the installation of additional precipitator equipment. A final decision regarding the modifications which will be required and the costs involved is expected to be made early in 1978.

Safety and Public Relations Programs were Improved Atlantic Electric is conducting programs on electric safety throughout its service area. Specially-trained linemen appear at schools throughout our service area to educate students who are unaware of the potential hazards of electricity and the respect it demands. The Safety Depart-ment often dispatches its personnel to fire departments-both professional and volunteer-to show films and discuss the proper way to extinguish electrical fires. Discussions often center on actions taken by veteran Company linemen in confronting hazardous situations in their daily work experience. Several trade schools have held safety seminars for the benefit of their apprentice electricians to better acquaint them with safe methods of handling electrical tools and electrical fixtures. The demand for the safety program has been increasing and we are gratified that the public is so eager to learn more about electrical safety.

The Speakers Bureau, comprised of employees of the Company, continues to be an important part of our program to communicate with those interested in the challenges and controversial issues which affect their 9

/

electric supply. The Bureau made 197 presentations during 1977.

The ongoing safety and health program within the Company also was strengthened during 1977 in our efforts to prevent accidents and help employees to recognize potentially dangerous situations both on and off the job.

Our Employees-A Key to Successful Operations Over the years Atlantic Electric has developed a good working relationship with its employees. Without a highly trained, capable and efficient work force, we could not continue to reliably provide electricity to a million people in Southern New Jersey. The varied and diverse roles performed by our people range from the familiar and visible linemen and meter readers to the "behind-the-scenes" employees, such as power plant operators, engineers, drafts-men and clerical personnel. No matter what their job title, each of the 1,739 employees of Atlantic Electric plays an important and necessary role in the overall operation of the Company. Following the culmination of negotiations with union representatives, a new two-year agreement was entered into in December, 1977. A general wage increase each year and improved benefits were granted to employees by the Company. The increase and benefits will add approximately $2.6 million to the Company's 1978 payroll costs and $2. 8 million to 1979 costs.

Atlantic Electric has implemented an improved Customer Relations and Service Training Program which brings to employees who interact with the public a greater knowledge of various departments in the Company. The program has an all-encompassing curriculum of some 18 subjects which 10

This capita lization chart clearly reflects two of our long-range goa ls which have been achieved - a reduced debt ratio and increased shareholder equ ity. T hese are key factors in deter-mining fina ncial rat ings.

will assist employees in becoming more articulate in their dealings with customers and help them develop knowledge which will enable our employees to better serve our customers. The program consists of 28 classroom sessions covering more than 100 hours0.00116 days <br />0.0278 hours <br />1.653439e-4 weeks <br />3.805e-5 months <br /> and includes examinations.

Community Activities President John D. Feehan has accepted the Delaware Valley Council's 1977 Corporate Award on behalf of Atlantic Electric in recognition of its "People Helping People" program. The program encourages employees to become involved in community activities. The Delaware Valley Council, currently in its 22nd year, concerns itself with the orderly economic development of the 15-county Delaware Valley Region, which includes our service area. The Council is comprised of business executives, professional people, community leaders and public officials.

Mr. Feehan also accepted awards from the New Jersey Science Teachers Association and the New Jersey Council for the Social Studies in recognition of the Company's work in the field of education. As one of the co-sponsors of the Science-Energy Conferences, we have tried to improve "energy awareness". Company officials and outside speakers meet in all day sessions with student and faculty representa-tives from area high schools to discuss energy matters from the basics of electric generation to alternate energy sources for the future. We have taken a leadership role in the Science-Energy Conferences for four years.

PITTSBURGH Year-End Capitalization

~

Long-term Debt 50%

Common Sloe~---~

0 % ~~~~~~~~~~~~~~~~

1973 1974 1975 1976 1977 ALBANY v~

NEW YORK Serving One-third of the State of New Jersey 11

Statements of Income and Retained Earnings OPERATING REVENUES-ELECTRIC (Note 9)

OPERATING EXPENSES :

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

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

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

Other Operation and Maintenance....................................

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

Taxes Other Than Federal Income Taxes...............................

Federal Income Tax Expense (Notes 1 and 6)..........................

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

OPERA TING INCOME OTHER INCOME:

Allowance for Funds Used During Construction (Note 1):

Debt and Equity (Prior to January 1, 1977)..........................

Equity (After December 31, 1976).................................

Miscellaneous Non-Operating Income Less Income Deductions.............

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

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

INTEREST CHARGES:

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

Amortization of Debt Expense and Premium-Net.......................

Interest on Short-Term Debt........................................

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

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

Allowance for Funds Used During Construction-Debt, after December 31, 1976(Note1).....................................

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

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

RETAINED EARNINGS AT BEGINNING OF YEAR....................

DIVIDENDS DECLARED:

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

Dividends on Common Stock (per share 1977-$1.62, 1976-$ 1.58).......

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

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

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

EARNINGS PER SHARE OF COMMON STOCK (Note 4)

See Notes to Financial Statements 12 Year Ended December 31 1977 1976

$234,994,695

$212,027,442 82,734,593 3,735,245 17,781,985 29,262,922 19,368,780 29,069,476 13,188,156 195,141,157 39,853,538 3,906,318 (24,754) 3,881,564 43,735,102 18,489,133 62,993 433,725 162,104 19,147,955 2,771,148 16,376,807 27,358,295 84,027,439 111,385,734 5,549,678 17,235,204 22,784,882 88,600,852 10,629,930

$2.06 69,233,774 4,819,194 13,497,991 26,333,575 17,394,673 26,341,778 11,495,656 169,116,641 42,910,801 7,456,612 385,583 7,842,195 50,752,996 18,948,850 52,023 800,563 155,864 19,957,300 19,957,300 30,795,696 74,165,678 104,961,374 5,483,936 15,449,999 20,933,935 84,027,439 9,747,012

$2.60

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

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

Principal Non-Cash (Credits) to Income :

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

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

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

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

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

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

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

Funds from Outside Sources:

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

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

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

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

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

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

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

Total Source of Funds APPLICATION OF FUNDS Gross Additions to Utility Plant.......................................

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

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

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

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

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

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

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

Investments in Subsidiary Companies (Note 2)............................

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

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

NET INCREASE (DECREASE) IN COMPONENTS OF WORKING CAPITAL*

Current Assets:

Cash and Cash Items..............................................

Accounts Receivable..............................................

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

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

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

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

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

Current Liabilities:

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

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

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

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

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

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

• Excludes Short-Term Debt, Notes and Debentures Maturing in 1977 and 1976.

See Notes to Financial Statements Year Ended December 31 1977 1976 27,358,295 19,368,780 1,037,980 (6,677,466) 7,866,279 2,850,249 (166,944) 51,637,173 15,000,000 3,349,523 10,000,000 24,446 28,373,969 22,750 80,033,892 48,733,032 (6,677,466) 42,055,566 5,549,678 17,235,204 15,400,000 512,000 (2,802,950) 2,084,394 80,033,892 2,253,616 94,824 3,388,800 1,028,650 319,558 (3,262,031) 3,823,417 (193,576) 3,661,828 35,621 (1,764,850) 1,739,023 2,084,394

$ 30,795,696 17,394,673 (7,456,612) 4,697,375 6,419,859 132,117 51,983,108 2,500,000 20,790,854 23,290,854

• 3,262,031 (126,801)

$ 78,409,192

$ 41,701,515 (7,456,612) 34,244,903 5,483,936 15,449,999 10,592,000*

25,000 13,650,000 1,161,473 (2,198,119)

$ 78,409,192 (993,958) 1,366,882 (2,082,246) 68,9 15 134,299 3,262,031 1,755,923 2,526,763 336,836 (291,120) 1,381,563 3,954,042

$ (2,198,119) 13

Balance Sheets Assets ELECTRIC UTILITY PLANT (Note 1) :

In Service:

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

Transmission Distribution...................................................

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

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

Less Accumulated Depreciation................................

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

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

Nuclear Fuel, Less Accumulated Amortization at December 31, 1977 of $1,037,980...............................

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

INVESTMENTS :

Investment in Subsidiary Companies, at Equity (Note 2)..................

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

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

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

CURRENT ASSETS :

Cash (Note 5)...................................................

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

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

Accounts Receivable:

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

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

Allowance for Doubtful Accounts..................................

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

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

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

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

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

DEFERRED DEBITS:

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

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

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

Total Assets...........................................

See Notes to Financial Statements 14 December 31 1977 1976

$324,354,058 106,353,003 210,656,415 15,821,460 657, 184,936 151,570,215 505,614,721 86,700,308 8,346,184 600,661,213 2,955,832 638,231 499,645 4,093,708 4,993,103 2,700,000 335,886 15,123,741 1,390,018 (200,000) 18,271,502 8,295,918 2,026,355 52,936,523 2,028,635 2,894,087 4,922,722

$662,614, 166

$254,882,314 100,078,636 197,834,649 15,961,996 568,757,595 137,204,449 431,553,146 133,754,943 7,830,430 573,138,519 5,538,846 635,231 422,792 6,596,869 4,708,804 600,000 466,569 13,546,972 2,871,963 (200,000) 14,882,702 7,267,268 1,706,797 3,262,031 49,113,106 2,150,559 2,058,703 4,209,262

$633,057,756

Liabilities and Shareholders' Equity SHAREHOLDERS' EQUITY (Note 3):

Cumulative Preferred Stock.........................................

Common Stock, Par Value $3:

Authorized Shares, 14,000,000 Outstanding Shares 1977-10,702,557; 1976-1 0,556,372..............

Premium on Common Stock......................................

Total Common Stock........................................

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

Capital Stock Expense (not being amortized )...........................

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

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

LONG-TERM DEBT (Note 12).......................................

CURRENT LIABILITIES:

Current Portion of Long-Term Debt..................................

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

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

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

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

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

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

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

DEFERRED CREDITS :

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

Accumulated Deferred Investment Tax Credits (Notes 1 and 6)............

Accumulated Deferred Income Taxes (Notes 1 and 6)...................

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

Reserve for Storm Damage.........................................

Other Reserves...................................................

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

COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)

Total Liabilities and Shareholders' Equity........................

See Notes to Financial Statements December 31 1977 1976

$ 89,554,045 32,107,671 102,695,631 134,803,302 24,446 (1,848,1 77) 88,600,852 31 1,134,468 290, 120,223 4,047,067 2,915,418 6,016,229 3,564,494 5,784,550 3,534,269 25,862,027 597,960 15,221,703 18,306,228 381,557 450,000 540,000 35,497,448

$662,614,1 66

$ 80,066,045 31,669,116 99,700,474 131,369,590 (1, 723,230) 84,027,439 293,739,844 275,635,523 15,000,000 4,240,643 2,440,353 2,354,401 3,528,873 5,644,728 5,914,005 39,123,003 51 7,448 12,371,454 10,439,949 230,535 450,000 550,000 24,559,386

$633,057,756 15

Notes to Financial Statements NOTE 1: SIGNIFICANT ACCOUNTING POLICIES:

REGULATION-The accounting and rates of the Company are subject to the requirements of the Board of Public Utilities of the State of New Jersey_ (B_PU) and in certain respects to the Federal Energy Regulatory Comm1ss1on, formerly the Federal Power Commission (FPC).

ELECTRIC UTILITY PLANT-Property is stated at original cost (cost to the person first devoting the plant to public service). Generally the plant is subject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, is capital-ized. Included in certain additions is an Allowance for Funds Used During Construction (AFDC) which is defined in the applicable regulatory systems of accounts as the net cost, during the period of construction, of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. In February, 1977, the FPC issued an order relating to AFDC and revising the Uniform System of Accounts.

Such order was effective January 1, 1977, and provides a formula for determining the maximum allowable AFDC rate. In addition, the order requires the segregating of AFDC into two component parts; borrowed funds (debt) and other funds (equity). Since January 1, 1977, the debt component has been included in the Interest Charges section of the Statement of Income as a credit, while the equity component continues to remain as a credit to Other Income. The Company has not reclassi-fied AFDC into its debt and equity components for periods prior to January 1, 1977, since the FPC order does not require reclassification.

Further, the Company believes that such a reclassification would be inappropriate since this would imply that the prior periods were com-parable when, in fact, prior to January 1, 1977, separate AFDC rates were not required and were not calculated for the cost of debt and equity funds. The Company does not expect any adverse effects on the results of its operations as a result of this order. The 1977 rate for calculating AFDC was 8%, which is less than the maximum allowed under the FPC formula and is the same rate used in 1976.

DEPRECIATION AND MAINTENANCE-The Company provides for de-preciation on the basis of the estimated service lives of depreciable property on a straight-line basis. The over-all composite rate of de-preciation was approximately 3.3% and 3.2% for the years 1977 and 1976 respectively. In addition to the provision for depreciation, income is charged with the cost of labor, material, supervision and other expenses incurred in making repairs and minor replacements and in maintaining the properties in efficient condition. Accumulated deprecia-tion is charged with the cost of depreciable property units retired, together with removal costs less salvage and other recoveries.

DEBT EXPENSE AND PREMIUM-Debt issuance expense and premium are being amortized over the lives of the issues to which they pertain.

NUCLEAR FUEL-The Company's amortization of the Salem nuclear fuel is based on a rate using the number of units of thermal energy produced over the estimated total thermal units to be produced during the life of the fuel, plus a factor representing the estimated costs applicable to a "throwaway" cycle. The "throwaway" cycle assumes perpetual storage of spent fuel plus associated charges and includes no credit for the reprocessing of spent fuel materials.

16 Nuclear fuel requirements for Peach Bottom Units No. 2 and 3 are being provided by the operating company for Peach Bottom through a fuel purchase contract. Presently, such costs are calculated using a zero net salvage value. The Company is responsible for payment of its proportionate interest (7.51 %) of the cost of the fuel consumed and of certain operating costs and interest expense during the term of the contract.

All nuclear fuel costs are charged to Fuel Expense.

FEDERAL INCOME TAXES-Deferred Federal income taxes are provided in amounts equal to the tax effect of the difference between tax de-preciation computed on depreciable property added after 1973 using accelerated methods under the ADR System and the straight-line method using asset guideline periods. Tax reductions relating to the differences between book depreciation and straig~t-line asset guide-line depreciation are reflected in Federal income tax expense currently as allowed by the current ratemaking policy of the BPU. In addition, the Company provides deferred Federal income taxes relating to the use of the repair allowance provisions of ADR. Investment tax credits are deferred on the balance sheet and are restored to income over the life of the related property.

PENSION PLAN-The Company and Deepwater, referred to in Note 2, have in effect a noncontributory insured retirement annuity plan cover-ing all regular employees. The cost of the plan, determined under the aggregate cost actuarial method for the years 1977 and 1976 respec-tively, amounted to $3,076,000 and $2,544,000 for the Company (in-cluding $678,000 and $582,000 charged to construction) and $498,000 and $414,000 for Deepwater. Based on an actuarial study as of Decem-ber 31, 1976, the fund assets were in excess of the vested benefits computed under the plan. The Company's plan is in compliance with the Employee Retirement Income Security Act of 1974.

NOTE 2: INVESTMENT IN SUBSIDIARY COMPANIES:

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

$2,101,000 at December 31, 1977 and 1976 respectively. The assets of Deepwater consist almost wholly of working capital in which the equity of the Company is fairly represented by its investment in Deep-water. The net production costs of Deepwater (after deducting charges to E. I. duPont deNemours & Company) are charged to the Company.

These costs are included in the Company's accounts classified as to operation, maintenance and taxes.

On November 30, 1977, the Company sold the stock of its wholly-owned subsidiary, Overland Realty, Inc. (Overland). Prior to the sale of Overland's stock, certain properties and related liabilities of Overland were transferred to Atlantic Housing, Inc. (Atlantic), a wholly-owned subsidiary of the Company. The effect on net income resulting from the sale of Overland's stock was not material and was recorded in Other Income. The Company's investment in Atlantic, at December 31, 1977, amounted to $654,832. At December 31, 1977, Atlantic had

$2,140,693 invested in land and mortgages of which $1,780,032 is invested as a 20% undivided interest as tenant in common in a future generating station and industrial site. This site is subject to a mortgage of which the Company is liable for the payment of $780,000 principal amount and interest under a suretyship agreement.

NOTE 3: CAPITAL STOCK:

CUMULATIVE PREFERRED STOCK, Par Value $100 Authorized 799,979 Shares Issued and Outstanding Series:

4% Series-77,000 Shares 4.10% Series-72,000 Shares 4.35% Series-15,000 Shares 4.35% 2nd Series-36,000 Shares 4.75% Series-50,000 Shares 5% Series-50,000 Shares 5'l's% Convertible Series-94,609 Shares (1977) 99,729 Shares (1976) (8) 7.52% Series-100,000 Shares 8.40% Series-100,000 Shares (C) 9.96% Series-200,000 Shares (D)

Total Cumulative Preferred Stock PREFERRED STOCK, No Par Authorized 2,000,000 Shares Issued and Outstanding:

$8.25 Series (Cumulative)-100,000 Shares issued December 22, 1977 (E)

Premium on Preferred Stock Total Preferred Stock December 31 1977

$ 7,700,000 7,200,000 1,500,000 3,600,000 5,000,000 5,000,000 9,460,900 10,000,000 10,000,000 20,000,000 79,460,900 10,000,000 89,460,900 93,145

$89,554,045 1976

$ 7,700,000 7,200,000 1,500,000 3,600,000 5,000,000 5,000,000 9,972,900 10,000,000 10,000,000 20,000,000 79,972,900 79,972,900 93,145

$80,066,045 Preference Stock, without par value, 3,000,000 Shares authorized, none outstanding.

(A) Prior to the date specified, no shares may be redeemed through certain refunding operations.

Current Redemption Price Per Share

$105.50 101.00 101.00 101.00 101.00 100.00 104.50 106.77 115.00 109.26 108.25 Refunding Restricted Prior to (A)

Feb. 1, 1979 Aug. 1, 1984 Nov. 1, 1987 (8) The 5'l's% Convertible Series is convertible (subject to adjustment in certain events) into Common Stock at the rate of 3.5 shares of Com-mon Stock for each share of the Preferred (331,132 shares of authorized Common Stock are reserved for the conversion of the Series).

(C) On February 1, 1985, and annually thereafter, 4,000 shares of the 8.40% Series must be redeemed through the operation of a sinking fund at a redemption price of $100.00 per share.

At the option of the Company, an additional 4,000 shares may be redeemed on any sinking fund date, without premium, up to 32,000 shares in the aggregate.

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

(E) On November 1, 1983, and annually thereafter, 2,500 shares of the 8.25% No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of the Company, an additional number of shares, not to exceed 2,500 may be redeemed, on any sinking fund date, without premium.

COMMON STOCK-Issues of common stock in 1977 consist of the following:

Dividend Reinvestment and Stock Purchase Employee Stock Ownership Plan Conversion of Preferred Stock Total Shares 102,417 25,848 17,920 146,185 Premium on Common Stock was credited in 1977 with the amount of $2,995,157 representing the excess of proceeds over the par value of shares of Common Stock issued, sold and converted. At December 31, 1977, the Company had reserved 162,159 shares of Common Stock under its Dividend Reinvestment and Stock Purchase Plan which became effective in 1976 and 224,152 shares of Common Stock under its Employee Stock Ownership Plan which became effective in 1977.

17

Notes to Financial Statements NOTE 4: EARNINGS PER SHARE:

Earnings per share of Common Stock has been computed by dividing net income net of applicable preferred stock dividend requirements

($5,484,691 in 1977 and $5,483,936 in 1976) by the average common shares outstanding during the year.

NOTE 5: SHORT*TERM BORROWINGS AND COMPENSATING BALANCES:

The Company had arrangements for short-term borrowings as follows:

Maximum amount of short-term 1977 1976 borrowings outstanding at any month end during the year........... $9,600,000

$19,300,000 Average amount outstanding during the year........................... $5,619,000

$11,629,000 Average interest rate on above..........

Weighted average interest rate on short-term borrowings outstanding during the year:

Notes Payable to Banks............

Commercial Paper................

5.8%

6.8%

5.7%

6.3%

7.2%

5.5%

The unused lines of credit available at December 31, 1977 and 1976 were $50,000,000. Demand deposits are maintained with lending banks certain of which are deemed to constitute compensating bal-ances which are not legally restricted. Based on lines of credit and loans outstanding at December 31, 1977 and 1976 respectively, such compensating balances approximated $2,000,000 and $2,500,000.

NOTE 6: FEDERAL INCOME TAXES:

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

Year Ended December 31, 1977 1976 Net Income......................... $27,358,295

$30,795,696 Federal Income Tax Expense (as below)..

14,129,924 11,824,751 Book Income Subject to Tax........... $41,488,219

$42,620,447 Income Tax at Statutory Rate (48%).... $19,914,345

$20,457,815 Less:

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

1,788,210 3,655,710 Allowance for Funds Used During Construction....................

3,205,184 3,579,174 Capitalized Overheads..............

796,260 729,801 Investment Tax Credits-Used.......

378,974 288,882 Accelerated Amortization-Deferred Taxes..................

103,260 161,852 Amortization-Repair Allowance......

211,478 85,000 Other............................

(698,945) 132,645 Total Federal Income Tax Expense

$14,129,924 $11,824,751 18 Federal income tax expense is comprised of the following:

Federal Income Tax.................. $ 1,850,404 $

378,422 Deferred Taxes (as below)............

7,866,279 4,697,375 Investment Tax Credit-Earned........

3,850,447 6,708,741 Investment Tax Credit-Used.........

(378,974)

(288,882)

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

13,188,156 11,495,656 Federal Income Tax-Other Income (Note 2).........................

941,768 329,095 Total Federal Income Tax Expense...... $14,129,924

$11,824,751 The provision for Deferred Federal income taxes, net, results from the following timing differences:

Liberalized Depreciation.............. $ 4,137,707 $ 3,264,227 Repair Allowance....................

4,062,510 1,920,000 Accelerated Amortization and Repair Allowance Amortization............

(314,738)

(246,852)

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

(19,200)

(240,000)

$ 7,866,279 $ 4,697,375 Investment tax credit earned in 1977 includes $621,000 representing the Company's use of the additional 1 % investment tax credit avail-able under the Tax Reduction Act of 1975. Such amount was used to purchase 25,848 shares of the Company's Common Stock (See Note 3).

At December 31, 1976 Investment Tax Credits of approximately

$2,697,000 were available for carryforward. All available credits have been utilized in 1977. Federal income tax returns have been settled through 1971.

NOTE 7: LEASES:

Rentals incurred in 1977 and 1976 were approximately $3,600,000 and

$3,500,000 respectively.

Certain of the Company's leases meet the conditions for capitaliza-tion under the criteria established by FASB No. 13 and ASR No. 225 but in accordance with rate making treatment are accounted for as operating leases. Such leases, if capitalized, would have increased the Company's assets and liabilities by approximately $18,600,000 and would not have had a material impact on the Company's net income.

Future minimum rental commitments under noncancelable leases as of December 31, 1977 are approximately as follows:

Capital Operating 1978-$ 2,400,000

$ 600,000 1979-2,400,000 550,000 1980-2,400,000 500,000 1981-2,400,000 400,000 1982-2,400,000 300,000 Thereafter-27,200,000 1,100,000 Total

$ 3,000,000 2,950,000 2,900,000 2,800,000 2,700,000 28,300,000 The total minimum rental commitments for capital leases as of December 31, 1977 are applicable to combustion turbine generating units (69%), fuel storage facilities (19%) and general plant (12%).

Minimum rental commitments for operating leases are applicable to steam production (55%) and general plant (45%).

Lower Thermostats Do Mean Lower Energy Bills For each degree lower than 70° that you set your thermostat, you use 3 % less energy... compared to the price you'll pay for higher thermostat settings.

Lower thermostats in the winter (and higher thermo-stats in the summer) mean lower energy bills.

NOTE 8: COMMITMENTS AND CONTINGENCIES:

Construction expenditures, including nuclear fuel but excluding pro*

duction plant, are estimated at $41,000,000 for 1978. Commitments for the construction of production plant amount to approximately

$110,000,000 of which it is estimated that $26,000,000 will be ex*

pended in 1978.

The Price*Anderson Act places a liability limit of $560 million on each nuclear generating unit for public liability claims that could arise from a nuclear incident. In the event of any such incident, all owners of nuclear generating units licensed to operate would be required to contribute toward satisfaction of such claims. The Company, as a co-owner of the Peach Bottom and Salem Stations, has partially insured for this exposure by purchasing, through the principal owners, private insurance in the maximum available amount of $140 million. The remainder is provided by the owners of licensed nuclear generating units and by indemnity agreements with the Nuclear Regulatory Com-mission. Accordingly, in the event of a nuclear incident, which was not covered by the $140 million private insurance, the Company could be assessed an amount equal to its ownership participation times

$5 million for each reactor owned, approximately $375,000 per reactor, not to exceed $10 million per reactor per year, times the Company's ownership or approximately $750,000 per reactor.

The Company has an ownership interest in the Construction of off-shore Nuclear Generating Stations and its investment in such projects at December 31, 1977 was $4,055,574. The Department of Energy of the State of New Jersey has questioned the schedule and some safety aspects of such units. Also the Department has suggested to the BPU that it should consider possible adverse rate treatment of amounts invested in excess of the Company's current investment. Deferral of the completion of construction of the offshore units, or possible relo-cation, is now being considered by the joint owners.

NOTE 9: RATE INCREASES:

Effective February 5, 1976, the PUC granted the Company an increase in rates which would have the effect of increasing the annual revenues of the Company by approximately $9.3 million, or 4.7%, when applied to the billing determinants for 1975, the test year.

Effective January 27, 1978, the BPU granted the Company an increase in rates which would have the effect of increasing the annual revenues of the Company by approximately $8.0 million, or 3.8% when applied to the billing determinants for 1976, the test year.

NOTE 10: QUARTERLY FINANCIAL RESULTS (UNAUDITED):

Quarterly financial data (not examined by independent certified public accountants) which reflect all adjustments (which consist of only normal recurring accruals) necessary in the opinion of the Company for a fair presentation of such amounts are as follows:

Earnings Earnings Operating Operating Net For Common Per Quarter Revenues Income Income Stock Share Thousands of Dollars 1976 1st

$ 51,074

$ 9,752

$ 6,673

$ 5,302

$.56 2nd 48,861 9,130 6,063 4,692

.49 3rd 61,739 15,363 12,104 10,733 1.13 4th 50,353

~ 5,956 4,585

.44

$212,027

$42,910

$30,796

$25,312

$2.60*

1977 1st

$ 57,935

$ 8,956

$ 6,179

$ 4,812

$.45 2nd 52,338 9,025 6,325 4,959

.47 3rd 70,320 14,083 10,746 9,380

.88 4th 54,402 7,790 4,108 2,723

.25

$234,995

$39,854

$27,358

$21,874

$2.06*

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

• The individual quarters do not add to the total, due to the increasing average number of common shares outstanding at the end of each quarter.

NOTE 11: REPLACEMENT COSTS (UNAUDITED):

The impact of the rate of inflation experienced in recent years has resulted in replacement costs of productive capacity that are signif-icantly greater than the historical costs of such assets reported in the Company's Financial Statements. The Company's ability to maintain its productive capacity in the future will be contingent upon its ability to finance the needed additions. This, in turn, will depend on the Com-pany's ability to obtain adequate and timely rate relief. In compliance with reporting requirements, estimated replacement cost information is disclosed in the Company's annual report to the Securities and Exchange Commission on Form 10-K.

19

Notes to Financial Statements NOTE 12: LONG-TERM DEBT:

December 31 Long-Term Debt consists of:

1977 1976 First Mortgage Bonds:

2'l's% Series due (June 1) 1979..................................................

$ 3,000,000

$ 3,000,000 23,4 % Series due (July 1) 1980...................................................

4,600,000 4,600,000 2'l's% Series A due (Nov. 1) 1980.......................... _........... _.........

18,400,000 18,400,000 31/4 % Series due (March 1) 1982.................................................

4,620,000 4,620,000 31/4 % Series due (Jan. 1) 1983..................................................

4,050,000 4,050,000 9V4% Series due (May 1) 1983...................................................

35,000,000 35,000,000 3% Series due (March 1) 1984..................................................

5,000,000 5,000,000 3% % Series due (March 1) 1985.................................................

10,000,000 10,000,000 41/2% Series due (Jan. 1) 1987..................................................

10,000,000 10,000,000 3'l's% Series due (April 1) 1988..................................................

10,000,000 10,000,000 41/2% Series due (April 1) 1989..................................................

5,000,000 5,000,000 41/2% Series due (March 1) 1991.................................................

10,000,000 10,000,000 41/2% Series due (July 1) 1992..................................................

15,000,000 15,000,000 43/s% Series due (March 1) 1993.................................................

15,000,000 15,000,000 5Vs% Series due (Feb. 1) 1996..................................................

10,000,000 10,000,000 8'l's% Series due (Sept. 1) 2000.................................................

20,000,000 20,000,000 8% Series due (May 1) 2001....................................................

27,000,000 27,000,000 71/2% Series due (April 1) 2002..................................................

20,000,000 20,000,000 73,4 % Series due (June 1) 2003..................................................

30,000,000 30,000,000 7%% Pollution Control Series due (Jan. 1) 2005....................................

6,500,000 6,500,000 63/s% Pollution Control Series (a) due (Dec. 1) 2006.................................

2,500,000 2,500,000 265,670,000 265,670,000 Debentures:

5V4% Sinking Fund Debentures due (Feb. 1) 1996...................................

3,862,000 3,901,000 7V4 % Sinking Fund Debentures due (May 1) 1998...................................

4,000,000 4,361,000 7,862,000 8,262,000 Notes:

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

15,000,000 288,532,000 273,932,000 Add: Unamortized Premium (Note 1)................................................

1,588,223 1,703,523

$290, 120,223

$275,635,523 Deposits in sinking funds for retirement of debentures are required on February 1 of each year, from 1978 through 1995 for the 51/4 % deben-tures, and on May 1 of each year from 1978 to 1997 for the 71/4 % debentures, in amounts in each case sufficient to redeem $100,000 principal amount plus, at the election of the Company, up to an additional $100,000 principal amount in each year. At December 31, 1977, the Company had reacquired and cancelled $438,000 principal amount of the 51/4 % debentures and $500,000 principal amount of the 7% % debentures toward its requirements for 1978 and subsequent periods.

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

Accountants' Opinion Haskins & Sells 550 Broad Street Certified Public Accountants Newark, New Jersey 07102 Atlantic City Electric Company:

We have examined the balance sheets of Atlantic City Electric Company as of December 3 I, 1977 and 1976 and the related statements of income and retained earnings and changes in financial position for the years then ended. Our exam-ination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying financial statements present fairly the financial position of the Company at December 31, 1977 and 1976 and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

January 31, 1978 20

Management's Discussion and Analysis O

---

of the Statements of Income -------~-~}J_

G~-~f_

~R~_t~w_gr_J£ The Statements of Income reflect the results of past operations and is not intended as any representation as to results of operations for any future period.

The following Summary reflects the year-to-year changes, increase or (decrease), in the principal items of the State-ments of Income.

Comparison of*

1977 and 1976 1976 and 1975 Operating Revenues.....................................

$22,968 10.8 %

$12,948 6.5%

Fuel........................................... * *. * *

• 13,501 19.5 (2,411)

(3.4)

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

(1,084)

(22.5) 1,964 68.8 Power Production-Operation and Maintenance...............

4,284 31.7 3,230 31.5 Other Operations and Maintenance.........................

2,929 11.1 1,702 6.9 Depreciation...........................................

1,974 11.4 549 3.2 Taxes Other than Federal Income Tax Expense...............

2,727 10.4 2,948 12.6 Federal Income Tax Expense..............................

1,693 14.8 2,807 32.3 Other Income..........................................

(3,961)

( 50.5) 96 Net Interest Charges....................................

(3,580)

(17.9)

(261)

( 1.2)

• Amounts stated in thousands.

OPERA TING REVENUES-Increases arc principally attributable to increases in energy sales in 1977 and 1976, a rate increase in early 1976 and increased fuel clause revenues in 1977, resulting from higher fuel costs incurred in l 977 by the Company.

FUEL-The 1977 increase is principally due to higher generation, which increased fuel consumption and to increasing fuel costs in 1977. Stabilization of fuel prices in l 976, resulted in lower fuel costs in 1976. Fuel cost charges arc reflected in fuel clause revenues two months later.

INTERCHANGE-The Company was a net importer of interchange energy in I 977 and 1976. Decreases in interchange (credits) reflect the Company's ability to sell (export) interchange energy while increases in inter-change (debits) reflect the Company's ability to acquire (import) such energy at a lower cost than if the Company had generated the energy.

POWER PRODUCTION-OPERATION AND MAINTENANCE-The increases in 1977 and 1976 are principally attributable to increased operational charges and major maintenance at our jointly-owned facilities, and to higher operational and maintenance costs at our wholly-owned facilities.

OTHER OPERATION AND MAINTENANCE-lncreases in 1977 and 1976 are due principally to higher transmission and distribution maintenance expenses and increased administration and general costs. The increased charges continue to result from inflationary pressures, including higher costs of material, supplies and wages.

DEPRECIATION-The increase in 1977 is principally attributable to the Salem Nuclear Generating Unit being placed in service in June. The 1976 increase reflects the normal growth in the Company's Electric Plant in Service.

TAXES OTHER THAN FEDERAL INCOME TAX EXPENSE-These taxes are principally taxes on the Company's gross receipts. The increases in 1977 and 1976 arc a direct result of increases in the Company's operating revenues. Also, in 1977, the commonwealth of Pennsylvania enacted a gross receipts tax applicable to foreign utilities which own generating stations in the commonwealth.

FEDERAL INCOME TAX EXPENSE-The increases in 1977 and 1976 are due principally to increased tax deferrals (normalization) relating to accelerated deprecia-tion and the repair allowance. In l 976, the investment tax credit also increased, reflecting the higher availability of such credit.

OTHER INCOME-Other Income (principally Allow-ance for Funds Used During Construction (AFDC))

decreased in 1977 primarily as a result of the exclusion of the debt portion of AFDC from Other Income (See Note l of the Notes to Financial Statements) and the transfer of the Salem Nuclear Generating Unit into service in June.

NET JNTEREST CHARGES-The decrease in 1977 is principally due to reductions in the amount of long and short term borrowings outstanding during 1977 and to the inclusion of the debt portion of AFDC (credit) as an clement of Interest Charges (Sec Note I of the Notes to the Financial Statements). The decrease in 1976 is as a result of lower interest rates and a reduction of short-term debt.

21

22 Statistical Review and

____ __ Summary of Operations 1977-1967_

Facilities for Service Total Utility Plant (Thousands).............................. $

Gross Additions to Uti lity Plant (Thousands)................... $

Pole Miles of Transmission and Distribution Lines...............

Generating Capacity (Kilowatts) 111 > * ** **

Maximum Utility System Demand-Kw.........................

Source of Energy (Thousands of Kwh )

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

Purchased and Interchanged-Net............................

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

Electric Sales (Thousands of Kwh) 1977 753,269 48.733 6,735 1,4 14.700 1, 176,000 5,293,0 19 224, 169 5,517, 188 Residential..............................................

2,221.250 Commercial.............................................

1,478,559 Industrial...............................................

1,220.260 All Others..............................................

58,866 Total............................................

4,978,935 G ross Revenue (Thousands of Dollars)

E nergy Sales Residential............................................ $

I 09,818 Commercial...........................................

73.354 Industrial.............................................

40,885 All Others............................................

5,63 I Total............................................

229,688 Other Electric Revenue....................................

5.307 Total............................................ $

234,995 Residential Electric Service (Average per Custome r)

Amount of Elect ricity used during the year ( Kwh )................

Amount paid for a year's service............................. $

Price paid per Kilowatt-hour................................

Customer Service Locations-Electric (Year-End ).................

Population Served........................................

Summary of Operations (Thousands of Dollars)

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

Operating Expenses 7,653 378.36 4.94 (-

352,205 961,000 23 4,995 Fuel.................................................

82,735 Interchange...........................................

3,735 Power Production......................................

17, 782 Other Operating and Maintenance Expenses..................

29,263 Depreciation..........................................

19.369 Taxes................................................ _ __

4_2-'-, 2_5_7 Total Operating Expenses............................ _ _ 1_9_5-'-, 1_4_1 Operating Income................................

39,854 Other Income and Deductions-Net.......................... _ _ --=-.3"-',8c...:8_1 Income before interest charges.......................

43,735 Interest Charges-Net..................................... _ __

1_6-'-,3_7_7 Net Income.....................................

27,358 Dividends Paid or Accrued on Preferred Stock................... _ __

5_,__,4_8_5 Earnings for Common Stock......................... =$= =2=1=,8=7=3 Average Shares of Common Stock Outstanding....................

10,629,930 Earnings Per Share of Common Stock............................

$2.06 Dividends Declared Per Share of Common Stock...................

$ 1.62 Dividends Paid on Common Stock (Cash)........................

$ 1.62 (a) Excludes capacity allocated to a large industrial customer.

1976

$ 7 10,343 4 1,702 6,696 1.,334,700 1,030,300 4,9 18,906 324, 196 5,243, 102 2,070,766 1,392,029 1,143, 170 57,667 4,663,632 98,904 66,354 36,43 8 5,406 207, I 02 4,925

$ 2 12,027 7,320 349.64 4.78¢ 343, 147 937,000

$ 21 2,027 69,234 4,8 19 13,498 26,333 17,395 37,83 7 169, 116 42,9 11 7,842 50,753 19,957 30,796 5,484 25,31 2 9,747,0 12

$2.60

$1.58

$ 1.56 1975

$ 675,617 46,745 6,645 l,334,700 1,069,400 4,7 15,357 190,852 4,906,209 1,938,724 1,346,2 16 1,036,755 56,465 4,378, 160 J

90,956 63,544'.

34,974 4,88 1 194,355 4.724 199,0791 7,0 18 329.251 4.691 336, I 05j 9 15,0001 199,079 71,645 2,855 10,267 24,632 16,846 32.08 3, 15 8,3281 40,75 1 7,747 48,4981 20,2 18 28,280-5,484 22,796 9,470,073

$2.41

$1.52

$ 1.5 l

~~~~~r~ER~!~~J~

1974 1973 1972 197 1 1970 1969 1968 1967

$ 637,250

$ 572,555

$ 511,274

$ 455,956

$ 404,364

$ 357,863

$ 324,561

$ 300,435 7 1,220 67.864 58,434 54, 151 48,200 35,306 25,406 17,063 6,580 6,506 6,408 6,333 6,252 6, 187 6, 109 6,038 1,278,700 1,013,500 965,900 897,600 82 1,400 757,800 700,800 678,500 1,004,400 1,051,400 920,400 829,300 755,500 721,800 67 1,600 563,900 4,65 1,334 4,236,083 4,07 1,225 4,262,062 4,294,352 4,227,31 5 3,929,222 3,598,431 229, 197 665.558 45 8,050

-74,395

-358,203

-566,932

-6 15,766

-574,707 4,880,53 1 4,90 1,64 1 4,529,275 4, 187,667 3,936, 149 3,660,383 3,313,456 3,023,724

~

1,882,560 1,899, 122 1,741,895 1,624,793 1,520,939 1,375,546 1,253,772 l, 140,797 1,298,858 1,351,974 l, 183,668 1,059,498 977,2 10 879,9 16 821.5 38 742,486 l, 136,9 35 1,119,478 1,061,932 990,363 954, 111 9 11, 138 80 1,664 755,624 57.477

58. 129 64.5 31 88,963 10 1,703 11 6.02 1 9 1,467 8 1.966 4,375,830 4,428,703 4,052,026 3, 763.6 17 3,553,963 3,282,62 1 2,968,44 1 2,720,873 78,5 12 59,856 5 1,544 42,623 36,979 32,672 29,850 27,673 55,7 13 42,804 35,868 28,648 23,933 20,584 18,9 12 17,345 33,565 22,008 19,350 16,529 13,036 11,303 9.738 9,225 4,207 3,86 1 3,763 3,9 19 3,795 3,753 3,302 3,054 171,997 128,529 110,525 9 1,7 19 77,743 68,312 6 1,802 57,297 4,6 14 4,365 4, 128 3.687 3,6.+8 3,731 3,688 3.737

$ 176,6 11

$ 132,894

$ 114,65 3 95,406 8 1,39 1 72,043 65,490 6 1,034 6,982 7,303 7,008 6,793 6,542 6,072 5,685 5,3 13 29 1.2 1 230. 19 207.37 178. 19 159.06 144.22 135.34 128.88 4.17¢

3. 15¢ 2.96¢ 2.62¢ 2.43¢ 2.38¢ 2.38 ('

2.43 ¢ 330,758 320,834 309,393 297,437 288,538 282,274 279,976 274,360 894,000 865,000 828,000 796,000 773,000 753,000 733,000 7 14,000

$ 176,6 11

$ 132,894 11 4,653 95,406 8 1,39 1 72,043 65.490 6 1,034 73, 167 37, 144 29,944 28, 705 22,457 15,69 1 13,057 11,928 5,862 8, 155 3,979

( 8 15 )

(2,94 1)

(3, 165 )

(3, 130)

(2,742) 11,360 8,8 10 8,060 6,686 5, 111 5,074 3,97 1 3,30 1 2 1,730 2 1, 11 9 19,388 17,462 15,692 14, 194 13.123 12, 176 12.946 11,749 11, 190 I 0,355 9,632 9,043 7,892 7,479 16,203 16,616 I 5,359 10,603 11, 129 12,292 12,748 I I,935 14 1,268 I 03,593 87,920 72,996 61,080

53. I 29 47,66 1 44,077 35,343 29,30 1 26,733 22,41 0 20,3 I l 18,9 14 I 7,829 I 6,957 l 0,755 8,745 6,647 5,164 3,520 1,773 I,097 45 0 46,098 38,046 33,380 27,574 23,83 I 20,687 I 8,926 17,407 19,088 I 5, 129 13,297 11.64 1 9,276 6,302 6,226 5,700 27,0 10 22,9 I 7 20,083 15,933 14,555 14,385 12,700 l I,707 4.233 2,652 2,456 1,900 1,900 1,900 I,672 1,3 I 3 22.777 20,265 17,627 14.033 I 2.655 I 2,485 I 1,028 10,394 8,973,400 8,453,400 7,8 I 0,073 7,436,740 6,920,073 6,8 17,083 6,270,000 6,270,000

$2.54

$2.40

$2.26

$ 1.89

$ 1.83

$ l.83

$ 1.76

$1.66

$ 1.50

$ 1.4766

$ 1.43 16

$ 1.3 7

$ l.345

$1.3 1

$ 1.27

$ l.23

$ 1.50

$ 1.4688

$ 1.4 I 44

$ l.36

$ 1.34

$ l.30

$ 1.26

$ 1.22 This A nnual Report has been prepared for the purpose o f providing general and stat istica l information concerning the Company and not in connection with any sale, offer for sale or sol icitation of an offer to buy any secu rities.

23 Printed in l '.S. A.

~rice Range of Stock and Dividends Paid on Stock Common Stock The Common Stock of the Company is traded on the New York Stock Exchange (principal market) and the Philadel-phia Stock Exchange. The reported high and low sales prices of the Common Stock on the New York Stock Exchange for each quarterly period during 1977 and 1976 are listed below.

First Quarter...........................

Second Quarter.........................

Third Quarter..........................

Fourth Quarter.........................

Cumulative Preferred Stock 1977

$24.375 24.00 24.625

23. 125 1976

$19.75 18.875 20.25 24.375 1977

$2 1.375 21.50 22.25 20.375 Low 1976

$17.125 17.125 18.50 20.00 The 5Ys % Cumulative Convertible Preferred Stock (par value $100) of the Company is traded on the New York Stock Exchange. The reported high and low sales prices of such Preferred Stock for each quarterly period during 1977 and 1976 are listed below. No other series of Cumulative Preferred Stock is listed on a Stock Exchange.

High Low First Quarter...........................

Second Quarter.........................

Third Quarter..........................

Fourth Quarter.........................

Common Stock 1977

$82.00 83.50 84.75 80.00 1976

$72.00 71.50 73.00 83.50 1977

$8 1.00 76.50 80.00 75.00 1976

$67.25 64.00 69.50 72.50 The Company has paid cash dividends on its Common Stock in each year since 1919. The quarterly cash dividends paid per share was 381h ¢ for the first three quarters of 1976 and 401h ¢ for the fourth quarter of 1976 and 401h¢ in 1977.

Cumulative Preferred Stock During 1977 and 1976 the Company paid quarterly cash dividends on each series of Cumulative Preferred Stock as listed below:

TRANSFER AGENTS For Common Stock Irving Trust Company 1 Wall Street New York, N.Y. 10015 Series 4%

4.10%

4.35 %

4.75 %

5%

5Ys %

7.52%

8.40%

9.96%

First National Bank of South Jersey Atlantic City, N.J. 08404 For Cumulative Preferred Stock Chemical Bank 20 Pine Street New York, N.Y. 10015 For Cumulative Convertible Preferred Stock Irving Trust Company New York, N.Y. 10015 24 1977 Quarterly Rate

$1.00 1.025 1.0875 1.1875 1.25 1.46875 1.88 2.10 2.49 REGISTRARS For Common Stock Morgan Guaranty Trust Company of New York New York, N.Y. 10015 Guarantee Bank Atlantic City, N.J. 08404 For Cumulative Preferred Stock Irving Trust Company New York, N.Y. 10015 For Cumulative Convertible Preferred Stock Morgan Guaranty Trust Company of New York New York, N.Y. 10015 1976 Quarterly Rate

$1.00 1.025 1.0875 1.1875 1.25 1.46875 1.88 2.10 2.49 SHARE LISTINGS Common Stock of the Company is listed on the New York Stock Exchange and the Philadelphia Stock Exchange. The 5'Vs % Cumu-lative Convertible Preferred Stock of the Company is listed on the New York Stock Exchange.

ATLANTIC CITY ELECTRIC COMPANY 1600 PACIFIC AVE.,

ATLANTIC CITY, NEW JERSEY 08404

Directors Eleanor S. Daniel Self employed. Former Assistant Vice President of the Mutual Life Insurance Company of New York (Senior Economic Adviser).

Alfred C. Linkletter Consultant.

Chairman of the Board of Directors of the Company.

Richard M. Dicke Counselor at Law. Senior Partner of the law firm of Simpson Thacher

& Bartlett.

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

Mack C. Jones Retired Engineer.

Q16cers John D. Feehan President and Director William S. Cowart, Jr.

Senior Vice President Frederick Lange Senior Vice President Richard M. Wilson Senior Vice President and Director Charles F. Morgan Vice President, Secretary and Treasurer David V. Boney Vice President-Customer and Community Services John F. Born Vice President-Electric Operations Mr. William W. White, who died December 19, 1977, had served as Director of this Company since November 25, 1970 and as Chairman of the Board of Directors since April 11, 1972.

For the Electric Utility Industry his untimely death cuts short a career of distinguished and devoted service to the preservation and strength-ening of the American Free Enterprise System.

For Atlantic City Electric Company, its Board of Directors and Officers, the passing of an accom-plished leader and a colleague who gave unstint-ingly of his wise counsel and extraordinary busi-ness talents, contributing lastingly to the work and John M. Miner Senior Executive Vice President of The Fidelity Bank.

Frank H. Wheaton, Jr.

President of Wheaton Industries.

Manufacturer of glass and plastic containers.

Richard M. Wilson Senior Vice President of the Company.

Frank J. Ficadenti Vice President-Engineering, Research and Development Edwin L. Gerber Vice President-Personnel and Public Relations Ernest D. Huggard Vice President-Control and Assistant Treasurer Jerrold L. Jacobs Vice President-Production Michael A. Jarrett Assistant Vice President-Corporate Services Martin R. Meyer Assistant Secretary and Assistant Treasurer progress of the Company, is a grievous loss.

Mr. White was honored not only by us, his associates, but throughout the area and his home area of Rutland, Vermont, for his generosity, in-tegrity, affableness and untiring energy. He was held in the highest esteem by us and by a host of others for his many fine qualities as a good citizen and as a gentleman.

The Company joins his many friends and asso-ciates in expressing their profound sorrow at his passing and in heartfelt tribute to his a~complish ments and his memory.

Electric 1600 PACIFIC AVE.,

ATLANTIC CITY, N.J. 08404

..... 1 I

L-------------------- -------,

PENNSYLVANIA 1977 marked the 50th Anniversary of PJM the Pennsylvania-New Jersey-Maryland Interconnection in which Atlantic Electric participates. PJM serves an area of about 48,700 square miles with a population ex-ceeding 21,000,000. The PJM is the most mature, sophisticated energy pool in the nation and links more than 500 generating units.

utilities which comprise PJM help to enhance electric reliability through power pooling and through efficient use of the gen-era ting units. P JM companies continually interchange electricity among one another to achieve the lowest cost energy to all.

The generating units are put on the line at the direction of the control center to optimize reliability and economy. These cost-cutting practices resulted in savings to the participating com-VIRGINIA

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

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LEGEND 1 Area Served by Atlantic City Electric Company 500 KV lines 345 KV lines panies totaling $183 million in 1976 and a similar amount in 1977. PJM members passed these savings on to their customers. Power pooling has resulted in PJM companies being able to reduce the number of generating stations which need to be constructed and thus help slow the upward trend in the price of electricity. The map above only portrays higher voltage transmission lines (about 1,300 circuit miles). The P JM is comprised of more than 5,600 cir-cuit miles of transmission lines. Greater electric dependability coupled with economy has been and will always be the hallmark of PIM-America's First Power Pool.