ML18101A643

Atlantic Energy,Inc Annual Rept 1994.

ML18101A643
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1994
From:	Huggard E, Jo Jacobs ATLANTIC ENERGY, INC.
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ML18101A636	List: ML18101A635 ML18101A637 ML18101A638 ML18101A639 ML18101A643
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IN 1994 ATLANTIC ENERGY SET IN MOTION A BOLD STRATEGIC PLAN THAT WILL TRANSFORM THE VERY NATURE OF OUR CORPORATION.

WE 1RE BUILDING A PROFOUNDLY DIFFERENT KIND OF ENERGY COMPANY*** ONE THAT IS COM-PETITIVE , GROWTH-ORIENTED AND FOCUSED ON SERVING ALL THE ENERGY NEEDS OF OUR CUS-TOMERS. AT THE HEART OF OUR PLAN ARE SIX MUTUALLY SUPPORTIVE STRATEGIC ELEMENTS.

THESE ELEMENTS OF TRANSFORMATION WILL SERVE AS OUR BUILDING BLOCKS AS WE CRE-ATE AN ATLANTIC ENERGY THAT WILL COMPETE AND WIN IN THE NEW ENERGY MARKETPLACE.

'SHAPING THE FUTURE nn II the right elements are in place to transform Atlantic Energy into the kind of company that will win in the competitive energy industry. A dy-namic organization is developing, in which the skills and creativity of all our employ-ees are focused on building an endless stream of opportunities to satisfy our custom-ers' needs.

We' re capitalizing on the new freedom in the competitive market, and we are venturing far beyond our traditional role of selling generic kilowatt-hours. There are tremendous opportunities for growth in the non-regulated side of our business , and we're investing in ventures that will deliver value to our cus-tomers as well as our shareholders .

We haven't overlooked the fact that price wins the day in the competitive world and our people are finding innovative ways to use our generation and transmis-sion investments to deliver competitively priced power to our customers. Underpin-ning these initiatives are strategies to foster a business and regulatory community that will support our growth and join us in our work to shape a new energy market-place.

Transformation is just the first step in our mission. Strong competitors never rest. They 're always finding ways to improve their products and market share.

The Atlantic Energy we're building will have the momentum and ability to respond quickly to the ever-changing demands of our markets.

We're proud of how far we ' ve come over the last year, and we like the way our future is taking shape.

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BUILDING A SUPPORTIVE GOVERNMENTAL AND s

REGULATORY ENVIRONMENT ome partic ipants in the electric uti li ty industry view the changes taking place in our business as threatening. We fi nd these changes exhilarating and are busy discovering new opportun ities for growth they ' ve created.

The aggressive business agenda we ' ve set will be supported by an eq uall y progressive pl an to shape new reg ulatory, governmental and financ ial enviro nments .

We've establ ished ourse lves as an advocate for constructive change in our industry. We ' re shari ng our visio n for the new industry and offering solutions to get us there. We saw some prom ising resul ts in 1994. Two inno-vative reg ul atory changes that we successfu ll y impl emented have helped us offer more com petitive rates to our largest customers .

Today, our external environment is a hybrid of Woodrow Wilson-era regula-tions and 21st century competitiveness. An orderly transition between the two worlds will be in the best interests of everyone involved. New Jersey's utility regulators agree, and they are address ing the issue head-o n. The New Jersey Board of Publi c Utili ties brought together a diverse team of our state's energy indu stry play-ers, with Atl antic Energy taki ng a leadership role, to craft new rul es that re-flec t today's vastl y di ffe rent indu stry.

The changes occurring in our industry have heightened the importance of strong relationships with the leaders in our financial and investment communities.

We are in constant communication with these groups, keeping them up-to-date on what we' re doing to make our company a so lid value for in vestors.

We know we can't achieve our vision without the support of others. We' re introducing the powerful concept of part-nerships into relationships that have tra- "We've established ou1fselves as an advocate fo1f sound and constructive diti onall y been adversari al. The old regu-change in ou1f industry. We a1fe not content to sit bacl~ and watch ou1f lato ry fra mework fo rced us to think in 1 terms of "winn ers and losers" - a mind- wo1f1d tmnsfo1fm arnund us and hope fo1f the best. Instead, we 1fe stepping set th at tend s to limit the fie ld of pos- fo1fWa1fd and taking a 1eade1fship rnle in shaping new policies and 1fegula-sibl e so luti ons. As we carry out our agend a fo r transform ation, we will seek tions that will bene fit OU1f custome1fs and communities ."

Sharon E. Schulman, Department Head-External Affairs, Atlantic Electric common ground and offer so luti ons th at create better outco mes fo r everyo ne.

We put thi s concept into acti on when we helped fo und the Stockton Alli ance - a partnership of New Jersey's major businesses and environm ental organi zat ions. Co-c haired by Pres ident and CEO Jerry Jacobs, the alli ance has pu shed areas of disagreement as ide and has engaged in co nstructive di a-logue with some very positi ve res ults. During 1994 the group presented joint pro posals to New Jersey's governor on several key busin ess and environmen-tal iss ues, including the state's master develop ment pl an.

To strengthen our positi on in our local communiti es, we' re building so lid relati onships with loca l govern ment and co mmun ity leaders. Keepin g close ties with our comm uniti es helps us respond quickly to our regio n' s en-ergy needs. Part of thi s initi ati ve inclu des buil di ng a grass-roo ts empl oyee network th rough whi ch valuable communi ty-related info rm ation can be shared across our organization. Our employees have traditionall y been leaders in their comm unities and thi s will be just one more way to strengthen the bond between Atlantic Energy and the communities we serve.

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\FOSTERING A VIBRANT REGIONAL ECONOMY fl s southern New Jersey's electric utility, we play a unique role in supporting the vitality of our reg ion' s eco nomy. By pro vidin g exce llent prod -

ucts and services to our bu siness customers, we can help them gro w stro nger and more competiti ve. And a health y bu siness environm ent, in turn ,

sup po rts the fa mili es who li ve and wo rk here.

As competitive pressures come to bear on our utility business, it will be-come vital fo r us to strengthen and ex pand the regional market for energy services.

We' re carrying out this strategy by helping ex isting businesses become more com-petiti ve and by attracting new businesses and jobs to the region. We' re also mobiliz-ing the region's businesses and governments to partner with us to revi tali ze urban areas, and develop programs to improve our schools and communities.

Our economic development staff works with businesses throughout our ser-vice area, helping them overcome a variety of business challenges, from interpreting complex environmental codes to helping start-up companies find the ideal locati on and gain access to low-interest loans.

Businesses need all the help they can get to keep the costs of ex pansion dow n. Our economic developm ent rate is helpin g gro wing firm s all ove r our region to get firml y on their feet. To date, "Th e strength of our business is directly tied to the vitality of our the rate has supported the ex pansion of region's economy. 'We've developed a comprehensive business develop- more th an 750,000 square feet of offic e, ment program that is attracting new businesses to the region as well as warehouse and manufacturin g space and th e creati on of 530 full-tim e jobs. That helping the ones that are already here become more profitable ." tran slates into growth in our business, an Kenneth C. LeFevre, Director-Economic Development, Atlantic Electric estimated $2. 5 milli on in annual revenue so far.

Atl antic City continues to be the hub of economic expansion in so uth-ern New Jersey. We' re supporting the growth on all leve ls. Durin g 1994 we opened a new reg ional offic e in th e downtown area to better se rve the city's ever-growing energy requirements. We' re in on the ground fl oor of numerous hotel-casin o ex pansion projects to en sure th at our cas ino customers make the best choices to meet all their energy needs. We' re also working with the city on many of the redevelopment and beautification proj ects that are underway , lend-ing valu abl e engineerin g and consulting support. In co njuncti on with the city's spec ial improvement di strict, we've in stalled more than l,000 deco rative street li ghts to make the city safer and more attracti ve to visitors.

We' re enjoying business growth in our inland and western regions as well.

Dur ing 1994 numerou s wareh ousin g and manu fact uring fi rms entered our re-gio n, attracted by excell ent roadways that provide cri tica l access to the entire east coast. With support fro m our econo mi c devel opment program s and a bold adverti sin g ca mpaign , firm s fr om citi es such as Baltim ore and Phil adelphi a have found the move to South Jersey worth it.

Io

DEVELOPING INNOVATIVE BUSINESS ENTERPRISES 0 ur partnerships won't be confi ned to our core utili ty business. We ' re expanding our so urces of revenue and strengthening our growth po-tential by investing in non-regulated enterprises that wi ll penetrate promising new energy-related markets.

During 1994 we committed additional financial and staffing resources to our non-regulated sub sidiary, At lantic Energy En terpri ses (AEE), to de-velop new businesses and markets. And over the next few years we will continue expan ding ou r non-regulated activi ti es . Our phil osoph y for growth is founded on th e sound principles of staying close to what we know best, building one success upon another and having the right people in place to make positive thin gs happen.

Our business development strategy targets three sectors of the industry:

who lesale energy suppl y, energy-related systems and services and energy tec h-nolog ies. As we grow in each of these areas, we wi ll first draw on the skills, ex peri ence and techni ca l expertise we've built in our own bu siness. We' ll also fo rm strateg ic alli ances with other businesses to gai n access to new prod-ucts, se rvices and markets.

Our subsidiary, Atl an tic Ther-mal System s (ATS ), is aggressively de- "The changes taking place in ou1f indust1fy a1fe opening up tremendous veloping its market for heating and cool-business oppo1ftunities that we're wo1fking to captu1fe. We'1fe expanding ing services as well as other energy man -

agement and facility operations function s. ou1f non-utility activities by pu1!suing eme1fging ene1fgy-1felated businesses In ad dition to de ve lopi ng heatin g and that offe1f strong potential fo1f grnwth and earnings ."

cooling system s capable of serv ing single Scott B. Ungerer, President and COO, Atlantic Energy Enterprises faci liti es or whole city blocks, ATS is marketing services that will help customers find the most efficient energy so lu-tions fo r their businesses. During 1994 ATS saw its first project go commer-cial when it began suppl ying heatin g and coo lin g services to th e new Warner Brothers Studio Store, located on the Boardwalk in Atlantic City. Al so in 1994 ATS began construction of a fac ility that wi ll produce heated and chill ed water for the new Atlanti c City Convention Center's heating and coo lin g systems.

Atlanti c Generation Inc. (A GI), our non-utility power generation sub-sidiary, wi ll continue its acti viti es in the independent power production arena.

Its third project, a 46.5-megawatt gas-fired cogeneration unit, went into opera-tion in 1994. AGI is also worki ng to increase its presence in the rap idl y ex -

panding wholesale power market.

We believe there is a strong potential for growth in the energy technology industry. To capture a share of the market, we recently formed Energy Technology In vestments (ETI), a division of AEE, to invest in technology companies that provide energy-related products and services. Initially, ETI will look to acquire controlling interest in mature companies that have an established market base. ETI 's long-term strategy call s for in vestments in emerging technology companies, with a primary financial objective of reali zing strong capital appreciation.

E I

FORGING PROF I TABLE CUS T OMER PARTNERSH I PS 0 ur relationships with our customers have traditionally been based on a matter of geography - if you live or operate a business in south-ern New Jersey, then you buy your power from our utility , Atlantic Electric. In the future things won't be quite so simple.

As we emerge from the protective walls of regu lation, our customer relationships are becoming much more dynamic and complex. To crea te a loyal and profitab le customer base, we're building so lid partnership with our customers. Our contribution to the re lationship will be a stream of products and services that, above all else, deli vers value beyond our customers' expec-tations.

One way we ' re creating this va lue is by turni ng our focus outward and collaborating with our customers to bui ld thei r future success. That means going far beyond the rig id boundaries of our old ro le of power suppli er - a job that has traditional ly ended at our customer's meter. We ' re blurring the lines between us and our customers by getting in side their facilities , talking to them about their business, understanding their problems and working with them so we both learn more about how they use energy. We ' re using what we di scover to design long-term partnership plans, tailored to each customer's unique needs.

As we help them improve their efficiency and strengthen their bottom line, we strengthen ours as well.

As an example, we ' re developing a plan with a large commercial cus-tomer that offers a host of innovat ive se rvices and agreements, incl uding a lon g- term he ating and cooling agree-

"Success in the cowipetitive ma1fketplace will come frnm building wiutually ment , replacement of old, inefficient beneficial pa1!tne1fships with oulf custome1fs , frnm the laFgest industrial equipment , and the in stall ation of a mon ey-sav ing energy manage ment sys-custow1e1f to the single homeowne1f. We'll do this by fiFst unde1fstanding tem. Agreements like this are a perfect what's impoFtant to these custome1fs and then by mal\?ing offe1fs that fit for us and our customers - we expand our level of business, and our cus tom-delive1f value. We'll 1fespond to thei1f Fequests quickly and in a way that ers are able to leave their energy con-demonstrates that thei1f p7!io1fities a1!e ou1f p7!io1fities." cerns to a tru sted expert.

Marilyn T. Powell, Vice President-Marketing, Atlantic Electric As we expand our portfolio of

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ offerings we're also discoverin g ways to turn our existing sk ill s and reso urces into new market opportunities. In 1994 we began marketing a mai ntenan ce and repair service for customer-owned high-voltage equipment. We started selling this service after we learned that many of our customers don ' t want to take on this job themse lves. Thi s new service has earned high mark s from our large co mmercia l and indu stri al customers.

Keeping our customer partnerships strong and profitab le will be a co ntinu ous process. Our customers' needs and expectat ions are constantly changing, and we intend to move right with them . To be fast on our feet, we're creating a new marketing process th at will help us respond quickl y to unique requests from our customers, and help us make innovative offers to th e mar-ketplace that not onl y meet but exceed expectations. Our long-term goa l is to directly allocate all of our resources to activities that deliver the hi ghest value to our cu tomers. When that day comes, we'll be well on our way to becoming a customer-dri ven organization.

OPTIMIZING OUR POWER SYSTEM T o be successfu l in the new energy marketplace, we've got to se ll our core product - electricity - at co mpetiti ve prices .

We're buildin g an energy suppl y portfolio - consist in g of our fu ll y and jointly owned generating units and power purchase contracts - that wi II co mpete effectively in this market. Our goal is to create a flexible, diversified portfolio with a cost structure th at's competiti ve in the open market.

To reduce the cost of power produced at our generating units, we're aggres-sively negotiating with fuel suppliers for more attractive prices. This strategy has already reduced our 1995 natural gas expense by about $2 mill ion. Working with our union leaders, we've also cut labor costs at our pl ants by increasing the flex-ibility of our labor force.

The power we purchase from independent power producers (IPPs) now rep-resents a full 25 percent of our portfolio. Keeping these costs competitive is a key element of our strategy. We' ve s~ccessfully renegotiated two IPP contracts, bringing their associated energy costs more in line with market prices. To date, our efforts in this area wi ll save our customers at least $80 million over the life of the contracts.

We're trimmin g our overall energy costs even further by stepping up our participation in the wholesale power market. Our expanded bulk power marketing team is making more aggress ive purchase and sa le arrangements, capturing the best prices the market has to offer. As a res ult of our hei ghtened efforts in th e wholesale market, we expect to achieve an add iti onal $5 milli on in savi ngs during 1995.

Becoming more competitive also means using our power deli very system more effecti vely. We're taking a more strategic, incremental approach to the expan-sion of our transm ission, distribution and substation facilities, no longer automati-ca ll y making large cap ital in ves tments th at are capab le of handling 20 to 30 years of additional growth. Thi s new cap ital in vestment strategy has helped us "Our power system strategy puts together the right mix of competitively reduce ou r projected five year capital ex - priced power, innovative operating policies and new technologies to deliver penditures by more than $ 100 mill ion.

Advanced technologies will play an great value to our customers. :And that's just what it will tal'?e to be increasingly important role in helping us get strong in the new energy marketplace ."

the most out of our power system. For Robert F. Fatzinger, Manager-Power Delivery, Atlantic Electric example, we' re exploring the use of small power generators, strateg icall y placed in our service area. The units can allow us to by-pass heavil y used portion s of our power netwo rk durin g peak periods and , in turn , help us delay the construction of costly new faci lities.

We ' re also investin g in an enhanced power network management sys-tem , sc hedul ed fo r compl etion in 1997, that will give us more and better infor-mation about what' s go in g on in our deli very system. Looking to the future, new power system techn ologies will create a direct com puter link to our cus-tomers, helping us bring an array of advanced products and services right into th eir homes .

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'CREAT I NG A WINNING BUSINESS CULTURE 7 he power to transform our company comes fro m our heart and soul ,

our peopl e. Our empl oyees are the catalyst fo r creatin g an Atl antic Energy th at will compete and win in the emerging energy market.

We are building a new work environment where our employees can exce l in the midst of change and co ntinu ously ari sing opportuniti es. We' re culti vating skills and capabilities th at will give us the power to move into new and di verse directions. We ' re findin g ways to beco me more effi cient, more fl ex ibl e, and we' re pl ac ing greater emphas is on team work and superi or lead-ership .

Our leaders are setting the pace fo r change. During 1994 we worked to develop a leadership team that shares a common vision of our future and is read y to achieve it with the help of all empl oyees . Recogni zing the power of open and hones t communicati on, our leaders initi ated a forum , call ed Face To Face, where empl oyees share th ei r views and ideas with man agement and get answers to tough qu esti ons about our company and their jobs. The forum has proven to be an ideal pl ace fo r our leaders to build relati onships and fo r everyone to talk about the many iss ues is "The key to building a new o1fgani:l:ation ene1fgi:l:ing ou1f employees . fac in g our company and our indu stry.

We'1fe building the tools, the envirnnment and the will to help us take that Th ro ugh th e transformati on pro-cess, we ' re creating a more effi cient and g1feat leap frnm a 1fegulated utility to a t1fuly competitive company." foc used core utility business. We' re link-Ernest L. Jolly, Vice President-Atlantic Transformation, Atlantic Electric in g every ac ti vity we' re engaged in, along with every doll ar we spend , to one of our strateg ic obj ect ives . We' re holdin g on to ac ti viti es th at support our strateg ies and lett in g go of the ones th at no longer appl y in a co mpetiti ve organi zati on. Every acti vity and process we carry with us into the future will be co nstantl y imp roved to ensure its effec ti veness . Ultimately, thi s meth od will full y ali gn us with the customers and markets we serve.

We' re also tak ing fun cti ons that are criti ca l to our success, such as marketin g an d power deli ve ry, and compl etely redesigning them. We' re lit -

erall y startin g with a clean shee t of paper to create new pro cesses th at are foc used on our customers and have the strength to handl e th e demand s of a dy nami c and competiti ve bu siness enviro nm ent.

In additi on, we ' re usin g tec hn ology to imp rove our wo rk orga ni za-ti on. For exampl e, we've started givin g our fie ld crews the same powerful computer technology that's created efficiencies in our offi ce environments fo r years. Routine fi eld repairs th at once generated mounds of paper wo rk can now be scheduled, completed, recorded and perm anentl y fil ed without usin g a single shee t of paper. That saves money, tim e and imp roves se rvice to our custom ers .

Team work is the fo undati on of all our acti vities. Every day we learn more about how committed and energized teams of people can build powerful solutions to challenges . When we give our empl oyees the best tools, the ri ght environm ent and supporti ve leade rship, all we have to do is stand bac k and watch the mag ic happen!

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DEFINING TRANSFORMAliION 7 ransformation - It's a word said a lot these days around Atlantic Energy. We use it when we talk about the unprecedented changes taking place in the electric utility industry. We also use it to describe the work we're doing to become a winning competitor in the new energy marketplace.

The forces of competition have been working at the fringes of our industry for years, starting with the creation of independent power producers in 1978, to today 's experimentation with open energy markets in some areas of the country.

Over the years we' ve recognized these changes and have adapted our strat-egies and operations accordingly. Although we've made a great deal of progress toward becoming a more competitive business, we never let go of our traditional utility mind-set.

All that changed in 1994. We took an even harder look at where our indus-try is headed and concluded that simply making slight course corrections will not position us to succeed in a competitive marketplace. To be among the winners, we must transform ourselves into a new kind of corporation: one with new form and dimensions ; one that is driven by a single mission - to serve our customers beyond their expectations.

Early in the year, we set in motion AE2000, a ground-breaking initiative to achieve our new vision. We assembled teams of some of the brightest and most innovative thinkers in our company, drawing from every area and level of our corpo-ration. More than 300 people in all, including members of our board of directors, were charged with creating a new strategic direction for Atlantic Energy .

Through this process, we examined who we are as a corporation and affirmed our core va lues. We identified future challenges and opportuniti es and assessed how we' ll stack up against "We are committed to winning in the competitive marketplace. 7o achieve the competition. We looked outside to that goal, we've built a new strategy that wi11 transform our company - learn from some of the best in the com -

starting from our very core - into a competitive business that is aggres- petitive wo rld and studied other indus-tries that have experienced deregulation.

sive, market-focused and driven by our customers' needs. " Through the entire process we kept a Michael J. Chesser, Chief Operating Officer, Atlantic Electric steady eye on the most important factor of all - our customers.

What we created is a strategy to build a new energy company that meets a wide range of customer needs. In the process, we will take full advan-tage of our strong customer relationships and talented work force.

We have identified six mutually supportive strategic elements that we will use as our basic buildin g blocks as we transform ourselves into a fully competitive organization .

The six elements of transformation are:

• create a winning business culture

• optimize the use of our power system

• forg e strong partnerships with our customers

• pursue new business and profit opportunities

• foster a vibrant regional economy

• build a supportive governmental and regulatory environment Using these strategic building blocks, we will create a firm foundation in the competiti ve energy marketplace. In the pages that follow, we' ll give you a glimpse of the shape of things to come at Atlantic Energy.

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! QQ.4 IN REVIEW

' SPEED~ B I LLING S Y STEM SAVES MONEY The old principle that time is money nati ve to coa l, tire chips produce fewer today 's work place. The young women had guided a team of Atlantic Electric emp loy- emissions. On an annual bas is, up to 2.5 mil - a chance to exp lore all areas of the com-ees to develop a quicker customer billing lion tires could be burned in unit #1, translating pany and find out what it' s like to work in system . The team fou nd a way to cut the into about $500,000 in fuel savings. some very unu sual settings . Some explored time it takes to ma il the bill afte r a underground cab le ducts and rode in customer's meter is read from three ro ugh terrain vehicles across marshes days to just one. Tha t quicker turn - to inspect power lines. Judging from around means revenue comes in faster.

Initiated in September, the new sys-r---------------0 l!'.~~:*:~--~--~ their enthusiasm, these young women will make great additions to our 21st tem is expected to save the company century work force .

more than $325,000 each year in in-terest payments and labor costs, and is just another example of how teamwork is paying off at Atlantic Electric.

B - E NGL AN D STATI ON MAKES EMPLOYEES A YOUR ATLANTIC ELECTRIC WINS NATIONAL ARBOR DA Y AWARD Atl an ti c Electric earned th e Na -

tion al Arbor Day Foundation's 1994 Tree Line USA Award. One of on ly BR TvVO HIT S FOR THE E NVIRON M ENT eigh t U.S. utilities receiv in g the In Dece mber At lantic Electr ic award, the company was recognized comp leted construction of a flue gas by th e fo und atio n for ach iev in g ex -

desulfurization system at B.L. Engl and cellence in its tree mainten ance, tree Station 's Unit #2 on time and under planting and ed ucation al programs .

budget. Commo nl y ca ll ed a scru b- At lantic Elect ri c's fo restry depa rt -

ber, the $8 1 million system will re- ment maintain s safe tree clearance move more than 90 percent of the along the company's 11,000 miles of unit 's sul fur diox ide emissions and is overhead power lines. During the last a key part of Atl antic Electric 's long- two years, they have planted 2,500 term strategy to meet the standards of Move To South j ersey. It's Worth It. line-compatible trees in place of the Clea n Air Act. The new system That 's just one of the bold messages fast -growi ng, hazardous varieties.

works much li ke a large shower, scrubbing we sent to Philadelphia -area businesses Atlantic Electric's forestry personnel also the unit's fl ue gas with a limestone and wa- through our 1994 economic development con du ct ed uc ationa l programs that teach ter mixture. The scrubbing process will cre- communications campaign. The award- the public about th e value of trees in our ate an es ti mated 40,000 tons of co mm er- winning ads were designed to inform out- towns and cities.

cial-grade gypsum as a by -p roduct, whi ch of-state business leaders - in no uncer-wi ll be so ld to a regional wall board manu- tain terms - of the many financial advan-facturer rather than land -fi ll ed. tages of doing business in southern Ne w ATLANTIC CITY WELCOMES NEW Speak in g of landfill s, one of New Jersey. The ads succeeded in getting CAST OF CHARACTERS Jersey's biggest waste pro bl ems is dis - people to sit up and take notice. Jn fact, carded, worn-out tires. Last fa ll , Atlanti c they prompted a spirited debate between Daffy Du ck and Bugs Bunn y came to Electric co nducted a test at B.L. England Atlantic Electric and Philadelphia Mayor At lantic City in Jul y when Warner Broth-that cou ld help the tire waste problem, im- Ed Rendell. ers ope ned its Studio Sto re on the Board-prove the enviro nm ent and save money. walk. Our sub sidiary, Atlantic Thermal During a two month period, 3,000 tons of Systems, is suppl ying heatin g and coo lin g tire chips, mixed with coa l in varying pro- OUR DAUGHTERS SPEND A DA Y AT WORK services to the facility, housed in the Trump portions, were burned in the plant' s unit #1. Plaza. But That 's Not All Folks ... The new The results of the test burn , the first of its In Apri l, 130 young women spent the store is ju st one examp le of the broader kind in New Jersey, are currently being re- day at At lantic Electric as part of th e na- array of retail and entertainm ent choices viewed. All indications point to a success- tional Take Our Daughte rs to Work Day. coming to the resort. Pl anet Hollywood is ful project and a possibl e long-term supple- The participants learned about different ca- sc hed ul ed to expand its orbit into the city mental fuel source at B.L. England Station. reer opportuniti es and saw first-hand the im- later thi s year.

In addition to being a less expensive alter- portant and diverse role s women play in

l Growth is happening in the western region of our service area as well. One of the nation's fastest growing industrial parks is located in Gloucester County. During 1994, 15 new companies leased or purchased a total of 510,000 square feet of space at the park, creating approxi -

matel y 500 jobs and new sources of electric reven ue for Atlantic Electric .

New Business and Growth Opportunities Our non-utility busi-nesses also incurred one-time charges in 1994. Non -utility results reflect a write down of the commercial real estate owned by Atlanti c Southern Properties, our real estate subsidiary, translating into a

$.03 per share charge.

Exc ludin g one-time charges, non-uti Iity subsidiaries contributed $.03 per share, a $.04 drop from last year's mark. move quickly into new areas, in January 1995 we placed them The decline in net income is primarily attributed to the impact under a new subsidiary, Atlantic Energy Enterprises (AEE).

of higher deferred income tax expense in 1994. AEE is already on the move. We are creating a joint venture You don't grow by standing st ill. During 1994 we made between AEE and Cenergy, a subsidiary of Northern States stro ng moves to expand the business acti vity of our subs idiaries. Power, to develop natural gas and electric energy products and We believe that sign ifi cant opportunities for our growth li e in services, including power marketing opportun ities. This the non-regulated sector, and we have a strategy in place to strategic partnership will give us the ability to offer ex isting as capture that growth. well as new customers a full menu of energy options, including We took on a greater role in the operation of Atlantic natural gas and fuel oil.

Generation Inc. (AG I) when we reorganized Cogeneration The new competitive era in our industry wi ll certainly be as Partn ers of America (CPA), our joint venture with Co lumbi a exciting as it is challenging. As we pursue our vision of Gas . AGI is now directly responsible for the operation of the becoming a full service energy company, we will have the partnership ' s generation projects. AGI's third project, the opportunity to venture into new and diverse areas of our Vineland Cogeneration Project went into operatio n in June. industry. Throughout our long history, we have demonstrated In May we created At lantic Thermal Syste ms (ATS), a time and again that we are up to any task before us, and this will subsidi ary that will pro vide heatin g and coo ling energy se rvices be no exception.

to co mm ercial and industrial fac iliti es. ATS is currently We're confident our new organization and business strategy constructing an energy center that will serve the new At lantic will make us winners and we commit to you that we 'll continue City Convention Center under a 30-year contract. to work in your best interests.

To give our non-utility ventures the flexibility they need to FOR THE BOARD OF DIRECTORS:

E . D. HUGGARD , Chairman of the Board J. L. JAcoss, President & Chief Executive Officer

TO O UR SHAREHOLDERS :

/994 will be regarded by many as a year of transition for the electric utility industry. For Atlantic increase in revenues, higher costs for purchased power and one-time charges, primarily for employee severance programs. Earn-Energy, however, 1994 has been a year of vast transformation . ings from operations, excluding those one-time charges were $1. 78 lt's the year we set into motion a bold strategy to create a in 1994.

growing, market-driven energy company that will win in the new competitive era. Lowering Utility Costs Albert Einstein once said, "Our past thinking has created It takes good business sense and the will to make tough challenges that can ' t be solved by that same level of thinking. " decisions to achieve cost reductions without cutting corporate We adopted that principle last year when we set out to trans- muscle. Using a stringent budgeting system, we're looking at form our company into a competitive market-driven organiza- virtually every dollar we spend and analyzing how it contributes to tion. We threw out the status-quo and took on a new attitude the achievement of our competitive strategies. Expenditures that that embraces change and the spirit of competition. We created don't make us more competitive are being eliminated. Through our own version of a "think-tank" in which 300 of our brightest this process, we ' ve cut layers of management, found new ways to employees mapped out our future. The result of our efforts is a streamline operations and have done away with inefficient activi-plan to create a company that's focused on serving the full ties. Our utility down-sizing program will reduce our labor force spectrum of our customers ' energy needs. We're excited about the by about 350 people by year-end 1995. That reduction represents new direction we're taking and are already seeing results. The close to a 35 percent decline from peak utility staffing levels of just pages that follow present in detail the many facets of our plan . a few years ago. We expect to recover the cost of the program, Last summer, while we were actively engaged in building $17.3 million , after taxes , within two years through reduced our own future , the financial markets were calling into question labor costs .

the future prospects of our entire industry. Rising interest rates Opportunities to cut costs and improve efficiency are being and the news of dividend cuts by several utilities prompted a discovered all over our company. A consolidation of our nine negative response by the investment community. During 1994 utility operating districts into four will save significant labor, in fact, utility share prices, on average, declined more than 15 equipment and operations costs. And our new power system percent across the industry. expansion policy calls for smaller, incremental additions to our As these unsettling events unfolded, we moved into action, system. This new strategy will save us $7 million for one project communicating our strategic vision and our strengths to key alone. Taken together, these and many other cost cutting measures financial analysts and most importantly, our shareholders. Our add up to big savings and clearly demonstrate an attitude that says objective was to clearly demonstrate that we are a company in we ' re in this for the long run.

control of our own destiny, with strong leadership and a plan to successfully move out of the old monopolistic utility era and Competitive Electric Rates into the competitive 21st century. Ultimately, the financial The savings we achieve are helping us keep the rates we markets , along with you , will base opinions on solid results. charge our customers competitive. Today, our residential electric We're confident that we ' ve assembled the right people and built rates are closely in line with those charged by New Jersey 's other the right strategy to turn our plans into reality. electric utilities, and we have no plans to increase base electric We also made a commitment last summer to our investors rates for the next several years. That's quite a success story. Just a to maintain our 1994 annual dividend rate at $1.54. We're few years ago we saw the potential for our rates to be significantly proud to say we kept our word. We know how important stable higher than those of our neighboring utilities. Cost-cutting tells dividends are to our shareholders. Just as important, our only part of how we ' ve kept rates in-check. We ' ve also taken some dividends must reflect current financial results as well as the direct and innovative measures. A new "economic initiative" rate present business environment. Our decision to hold dividends cut about $28 million off the fuel costs we pass on to customers.

steady rather than increase them was made after careful delib- Our work to renegotiate three power purchase contracts with eration. We weighed the impact to shareholders against the independent power producers is expected to yield at least an $80 financial market's heightened concern over high utility dividend million savings for customers over the life of the contracts. We pay-out ratios. In the end we held it steady - a decision that best will continue to aggressively pursue further reductions in these serves all involved. contracts in order to bring them more in line with the market.

Our current dividend policy focuses on gradually reducing our pay-out ratio to be more in line with those of companies in Regional Economic Expansion competitive industries. We plan on achieving the shift by Our local economy is on the upswing . We ' re seeing strong plowing more of our earnings back into energy-related busi- business activity in several pockets of our region. During 1994 nesses that offer ample potential for revenue growth. Those new Atlantic City' s hotel-casino industry began in earnest to prepare for earnings sources will , in turn , help keep dividends strong. the growth generated by the city 's new convention center, sched-uled to open in early 1997. Plans are on the table for the construc-Financial Performance tion of at least 2,000 hotel-casino guest rooms in the coming few Our growth strategy depends on a strong financial founda- years. We aren't the only ones excited about Atlantic City's tion , and 1994 was the year we laid the groundwork. Earnings prospects. During 1994 there was a flurry of activity by a number per share were $1.41, a decline from the $1.80 reported last of prominent investors who formally initiated efforts to invest in year. Reflected in 1994 ' s earnings is an approximate 1 percent casinos there.

2*

f FINANCIAL HIGHLIGHTS

% Change  % Change  % Change 1994 1994-1993 1993 1993-1992 1992 1992-1991 Earnings per Common Share $ 1.41* (21. 7) $ 1.80 7.8 $ 1.67 (4 .6)

Dividends Paid per Common share $ 1.54 .7 $ 1.53 1.3 $ 1.51 1.3 Book Value per Common Share $ 15.56 (.4) $ 15.62 3.0 $ 15.17 2.2 Number of Common Shares Outstanding:

Year-end (000):

Average 54,149 2.4 52,888 2.5 51 ,592 5.3 Actual 54,155 1.2 53,507 2.5 52 , 199 2.6 Return on Average Common Equity 9.07%* (22.5) 11.71% 5.1 11.14% (7.9)

Electric Operating Revenues (000) $ 913,039 5.5 $ 865,675 6.0 $ 816,825 1.0 Operating Expenses (000) $ 759,499 7.6 $ 706,091 3.9 $ 679,657 2.4 Net Income (000) $ 76,113* (20.1) $ 95,297 10.5 $ 86,210 0.7 Utility Cash Construction Expenditures (000) $ 119,961 ( 13. I) $ 138,111 5.7 $ 130,700 (2 4.2)

Total Assets (000) $2,545,555 2.3 $2,487,508 12.1 $2,2 19,338 3.2 Sales of Electricity to Ultimate Customers (KWH) (000) 8,167,856 1.3 8,066, 412 5.4 7,655 , 13 8 (3.5)

Price Paid per Kilowatt-Hour (Ultimate Customers) 10.610 ¢ 2.8 10.31 6 ¢ 0.6 10.257¢ 4.5 Total Ultimate Electric Customer Accounts (Year-end) 468,712 1.2 463 ,073 1.0 458 ,549 1.2 Number of Shareholders-Common Stock (Year-end) 48,850 2.1 47 ,832 2.8 46 ,524 6.2 Number of At lantic Electric Employees (Year-end) 1,794 (2.2) 1,835 (9.3) 2,023 (0 .4)

ATLANTIC ENERGY ATLANTIC ENERGY EARNINGS AND DIVIDENDS MARKET PRICE PER PAID PER SHARE OF COMMON STOCK SHARE OF COM MON STOCK 2

1.80 25 1.67 23.13 21.75 1.54 20 20.50 1.5 17.63 16.94 15 10

.5 5

0 0 90 91 92 93 94 90 91 92 93 94

. EARNINGS

. DIVIDENDS Earnings per share of Common Stock is This is the closing price of Atlantic net income divided by the average Energy's Common Stock on the last number of common shares outstanding. trading date each year, as reported by the Dividends paid per share is the sum of New York Stock Exchange Composite the quarterly dividend payments made in Transactions li sting.

January, April , July and October.

• reflects special charges, primarily for employee separation costs

financial Information REPORT OF MANAGEMENT REPORT OF THE AUDIT COMMITTEE 1

INDEPENDENT AUDITORS REPORT CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY 1

MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTOR INFORMATION

SUMMARY

FINANCIAL AND STATISTICAL REVIEW 1994-1984 DIRECTORS AND OFFICERS

'JR.eport of management The management of Atlantic Energy, Inc. and its subsid- statements. Their audits are based on procedures iaries (the Company) is responsible for the preparation of believed by them to provide reasonable assurance that the the financial statements presented in this Annual Report. financial statements are free of material misstatement.

The financial statements have been prepared in confor-mity with generally accepted accounting principles. In The Company's internal auditing function conducts preparing the financial statements, management made audits and appraisals of the Company's operations. It informed judgments and estimates, as necessary, relating evaluates the system of internal accounting, financial to events and transactions reported. Management is also and operational controls and compliance with estab-responsible for the preparation of other financial informa- lished procedures. Both the external auditors and the tion included elsewhere in this Annual Report. internal auditors periodically make recommendations concerning the Company's internal control structure to Management has established a system of internal management and the Audit Committee of the Board of accounting and financial controls and procedures Directors. Management responds to such recommenda-designed to provide reasonable assurance as to the tions as appropriate in the circumstances. None of the integrity and reliability of financial reporting. In any recommendations made for the year ended December 31, system of financial reporting controls, inherent limita- 1994 represented significant deficiencies in the design or tions exist. Management continually examines the operation of the Company's internal control structure.

effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified. Management believes that, as of December 31, 1994, the system of internal accounting and finan-cial controls over financial reporting is effective.

Management also recognizes its responsibility for J. L. Jacobs fostering a strong ethical climate in which the President and Chief Executive Officer Company's affairs are conducted according to the highest standards of corporate conduct. This responsi-bility is characterized and reflected in the Company's code of ethics and business conduct policy.

F. F. Frankowski The financial statements have been audited by Deloitte Chief Accounting Officer

& Touche LLP, Certified Public Accountants. Deloitte

& Touche LLP provides objective, independent audits as to management's discharge of its responsibilities February 9, 199 5 insofar as they relate to the fairness of the financial 1 ATLANTIC ENERGY INC. AND SUBSIDIARIES

1Report of the :Audit C9ommittee Independent :Auditors' Report The Audit Committee of the Board of Directors is comprised solely of independent directors. The Deloitte&

members of the Committee are: Jos. Michael Galvin, ToucheLLP Jr., Gerald A. Hale, Matthew Holden, Jr., Kathleen 0 Certified Public Accountants MacDonnell and Harold J. Raveche. The Committee Two Hilton Court held four meetings during 1994. Parsippany, New Jersey 07054 The Committee oversees the Company's financial To the Shareholders and the Board of Directors reporting process on behalf of the Board of Directors. of Atlantic Energy, Inc.:

In fulfilling its responsibility, the Committee recom-mended to the Board of Directors, subject to share- We have audited the accompanying consolidated holder ratification, the selection of the Company's balance sheets of Atlantic Energy, Inc. and subsidiaries independent auditors, Deloitte & Touche LLP, The as of December 31, 1994 and 1993 and the related Committee discussed with the Company's internal consolidated statements of income, changes in com-auditors and Deloitte & Touche LLP the overall scope mon shareholders' equity, and cash flows for each of of and specific plans for their respective activities the three years in the period ended December 31, 1994.

concerning the Company. The Committee also dis- These financial statements are the responsibility of the cussed the Company's consolidated financial state- Company's management. Our responsibility is to ments with Deloitte & Touche LLP. The Committee express an opinion on these financial statements based meets regularly with the internal and external auditors, on our audits.

without management present, to discuss the results of We conducted our audits in accordance with generally their activities, the adequacy of the Company's system accepted auditing standards. Those standards require of accounting, financial and operational controls and that we plan and perform the audit to obtain reasonable the overall quality of the Company's financial report- assurance about whether the financial statements are ing. The meetings are designed to facilitate any private free of material misstatement. An audit includes communication with the Committee desired by the examining, on a test basis, evidence supporting the internal and external auditors. No significant actions amounts and disclosures in the financial statements.

by the Committee were required during the year ended An audit also includes assessing the accounting prin-December 31, 1994 as a result of any private communi- ciples used and significant estimates made by manage-cations conducted. ment, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements Matthew Holden, Jr. present fairly, in all material respects, the financial Chairman, Audit Committee position of Atlantic Energy, Inc. and its subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years February 9, 1995 in the period ended December 31, 1994 in conformity with generally accepted accounting principles.

~.r~ LLP February 9, 1995

• ATLANTIC ENERGY INC. AND SUBSIDIARIES 2

C9onsolidated Statement of Income ATLANTIC ENERGY, INC . AND SUBSIDIARIElil (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Operating Revenues-Electric I $913,039 $865,675 $816,825 Operating Expenses:

Energy 210,891 159,438 161,134 Purchased Capacity 130,929 110,781 103,173 Operations 156,409 162,151 148,917 Maintenance 37,568 45,360 49,837 Depreciation and Amortization 73,344 67,950 69,371 State Excise Taxes 97,072 104,280 97,969 Federal Income Taxes 42,529 45,277 37,143 Other Taxes 10,757 10,854 12,113 Total Operating Expenses 759,499 706,091 679,657 Operating Income 153,540 159,584 137,168 Other Income and Expense:

Allowance for Equity Funds Used During Construction 3,634 2,368 2,212 Employee Separation Costs, net of tax of $9,265 (17,335)

Litigation Settlement, net of tax of:

1993-$(1 ,321 ); 1992-$4,982 (2,564) 9,671 Other-Net 8,678 12,884 9,519 Total Other Income and Expense (5,023) 12,688 21,402 Income Before Interest Charges 148,517 172,272 158,570 Interest Charges:

Interest on Long Term Debt 57,346 59,385 53,284 Other Interest Expense 1,114 1,633 2,678 Total Interest Charges 58,460 61,018 55,962 Allowance for Borrowed Funds Used During Construction (2,772) (1,448) (1,414)

Net Interest Charges 55,688 59,570 54,548 Less Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Net Income $ 76,113 $ 95,297 $ 86,210 Average Number of Shares of Common Stock Outstanding (in thousands) 54,149 52,888 51,592 1 Per Common Share:

Earnings $ 1.41 $ 1.80 $ 1.67 Dividends Declared $ 1.54 $ 1.535 $ 1.515 Dividends Paid I $ 1.54 $ 1.53 $ 1.51 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3

r9onsoiidated Statement of C9ash Flows ATLANTIC ENERGY, INC. AND SUBSIDIARIES (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Cash Flows Of Operating Activities:

Net Income $ 76,113 $ 95,297 $ 86,210 Deferred Purchased Power Costs 14,920 (6,050) 13,410 Deferred Energy Costs (3,819) (15,269) (6,143)

Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Depreciation and Amortization 73,344 67,950 69,371 Deferred Income Taxes-Net 17,863 20,901 23,386 Prepaid State Excise Taxes (37,029) (35,982) 540 Employee Separation Costs 26,600 Net (Increase) Decrease in Other Working Capital (24,571) 32,364 7,685 Other-Net (2,457) 1,534 5,650 Net Cash Provided by Operating Activities 157,680 178,150 217,921 Cash Flows Of Investing Activities:

Utility Cash Construction Expenditures (119,961) (138,111) (130,700)

Leased Property (10,713) (9,946) (9,565)

Nuclear Decommissioning Trust Fund Deposits (6,424) (6,424) (6,424)

Other-Net (11,276) (9,832) (8,524)

Net Cash Used by Investing Activities (148,374) (164,313) (155,213)

Cash Flows Of Financing Activities:

Proceeds from Long Term Debt 54,572 464,633 74,655 Retirement and Maturity of Long Term Debt (42,664) (370,541) (40,599)

Increase (Decrease) in Short Term Debt 8,600 (14,600) (6,000)

Proceeds from Common Stock Issued 10,289 16,208 16,110 Repurchases of Common Stock (3,909)

Redemption of Preferred Stock (24,500) (5,469) (250)

Dividends Declared on Preferred Stock (16,716) (17,405) (17,812)

Dividends Declared on Common Stock (75,829) (67,259) (65,644)

Other-Net 12,330 8,584 4,412 Net Cash (Used) Provided by Financing Activities (77,827) 14,151 (35,128)

Net (Decrease) Increase in Cash and Temporary Investments (68,521) 27,988 27,580 Cash and Temporary Investments, beginning of year 73,635 45,647 18,067 Cash and Temporary Investments, end of year $ 5,114 $ 73,635 $ 45,647 Supplemental Schedule of Payments:

Interest $ 62,855 $ 52,765 $ 55,275 Income taxes $ 23,374 $ 19,565 $ 24,312 Noncash Financing Activities:

Commori Stock issued under Stock Plans I $ 7,652 Th e accompany ing Notes to Consolidated Financial Statements are an integral part of these statements.

$ 14,088 $ 12,692 4

C9onsolidated JBalance Sheet ATLANTIC ENERGY, INC. AND S UBSIDIARllOS (Thousands of Dollars) December 31, 1994 1993 Assets Electric Utility Plant:

In Service:

Production $1,151,661 $1,054,217 Transmission 357,389 338,584 Distribution 659,619 627,649 General 180,204 173,206 Total In Service 2,348,873 2,193,656 Less Accumulated Depreciation 725,999 668,832 Net 1,622,874 1,524,824 Construction Work in Progress 110,078 156,590 Land Held for Future Use 6,941 6,901 Leased Property-Net 42,030 45,268 Electric Utility Plant-Net 1,781,923 1,733,583 Investments and Non-utility Property:

Investment in Leveraged Leases 78,216 77,268 Nuclear Decommissioning Trust Fund 52,004 43 ,163 Non-utility Property and Equipment-Net 18,163 14,535 Other Investments and Funds 28,940 18, 102 Total Investments and Non-utility Property 177,323 153,068 Current Assets :

Cash and Temporary Investments 5,114 73 ,63 5 Accounts Receivable:

Utility Service 54,554 51 ,502 Miscellaneous 14,067 11,420 Allowance for Doubtful Accounts (3,300) (3,000)

Unbilled Revenues 32,070 39,309 Fuel (at average cost) 28,030 14,635 Materials and Supplies (at average cost) 27,823 28,230 Working Funds 14,475 14,315 Deferred Energy Costs 10,999 7, 180 Deferred Income Taxes 12,264 3,283 Other 11,883 15,796 I Total Current Assets .

207,979 256,305 Deferred Debits:

Unrecovered Purchased Power Costs 115,538 130,458 Recoverable Future Federal Income Taxes 85,854 85,855 Unrecovered State Excise Taxes 73,834 33,706 Unamortized Debt Costs 38,184 39,306 Other Regulatory Assets 47,055 41 ,705 Other 17,865 13,522 Total Deferred Debits f 378,330 344,552 Total Assets f $2,545,555 $2,487,508 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5

~onsolidated 'Balance Sheet ATLANTIC ENERGY, INC. AND SUBSIDIARIES (Thousands of Dollars) December 31, 1994 1993 Liabilities and Capitalization Capitalization:

Common Shareholders' Equity:

Common Stock, no par value; 75,000,000 shares authorized; issued and outstanding:

1994 - 54,155,245; 1993 - 53,506,786 $ 593,475 $ 579,443 Retained Earnings 249,181 256,549 Total Common Shareholders' Equity 842,656 835,992 Preferred Stock of Atlantic City Electric Company:

Not Subject to Mandatory Redemption 40,000 40,000 Subject to Mandatory Redemption 149,250 173,750 Long Term Debt 778,288 766,101 Total Capitalization (excluding current portion) 1,810,194 1,815,843 Current Liabilities:

Preferred Stock Redemption Requirement 12,250 12,250 Long Term Debt 1,000 -

Short Term Debt 8,600 -

Accounts Payable 66,080 63,847 Taxes Accrued 10,409 16,020 Interest Accrued 19,168 22,149 Dividends Declared 24,681 24,910 Accrued Employee Separation Costs 26,600 -

Other 19.813 25.626 Total Current Liabilities 188,601 164,802 I

Deferred Credits and Other Liabilities:

Deferred Income Taxes 412,574 383,347 Deferred Investment Tax Credits 51,646 54,180 Capital Lease Obligations 41,111 44,407 Other 41.429 24.929 Total Deferred Credits and Other Liabilities I 546,760 506,863 I Commitments and Contingencies (Note 10)

Total Liabilities and Capitalization $2,545,555 $2,487,508 6

C9onsolidated Statement of C9hanges in C9ommon Sha1feholde1fs 1 Gquity ATLANTIC ENERGY, INC. ANO SUBSIDIARIES Common Retained Shares Stock Earnings (T/11111,t111d.\ '~r Doi/an)

Balance, December 31, 1991 50,896,074 $520,345 $234,894 Common Stock issued 1,302,550 28,802 Net Income 86,210 Common Stock dividends (78,336)

Balance, December 31 , 1992 52,198,624 549,147 242,768 Common Stock issued 1,308,162 30,296 Net Income 95,297 Capital Stock expense of subsidiary (169)

Common Stock dividends (81,347)

Balance, December 31, 1993 53 ,506,786 579,443 256,549 Common Stock issued 870,159 17,941 Common Stock repurchased (221,700) (3,909)

Net Income 76,113 Common Stock dividends (83,481)

Balance, December 31 , 1994 54,155,245 $593,475 $249,181 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7

lflotes to @onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIES NOT SIGNIFICANT ACCOUNTING POLICIES Organization - Atlantic Energy, Inc. (the Company, counts for another investment using the equity method AEI or parent) is the parent of a consolidated group of by recognizing its proportionate share of the results of wholly-owned subsidiaries consisting of Atlantic City operations of that investment. The results of opera-Electric Company (ACE) and the following non-utility tions of the non-utility companies are not significant to companies: Atlantic Energy Technology, Inc. (AET), the results of the Company and are classified under Atlantic Generation, Inc. (AGI), Atlantic Southern Other Income in the Consolidated Statement of Income.

Properties, Inc. (ASP), ATE Investment, Inc. (ATE) and Atlantic Thermal Systems, Inc. (ATS). ACE is a Regulation - The accounting policies and rates of ACE public utility primarily engaged in the generation, are subject to the regulations of the BPU and in certain transmission, distribution and sale of electric energy. respects to the Federal Energy Regulatory Commission Rates for service are regulated by the New Jersey (FERC). ACE follows generally accepted accounting Board of Public Utilities (BPU), formerly Board of principles (GAAP) and financial reporting require-Regulatory Commissioners. ACE's service territory ments employed by all industries as specified by the encompasses approximately 2,700 square miles within Financial Accounting Standards Board (F ASB) and the the southern one-third of New Jersey. The majority of Securities and Exchange Commission (SEC). How-ACE's customers are residential and commercial. ever, accounting for rate regulated industries may ACE, with its wholly-owned subsidiary that operates depart from GAAP applied by other industries as certain generating facilities, is the principal subsidiary permitted by Statement of Financial Accounting within the consolidated group. AGI and its wholly- Standards No. 71 (SFAS No. 71). SFAS No. 71 owned subsidiaries are engaged in the development provides guidance on circumstances where the eco-and operation of cogeneration power projects, cur- nomic effect of a regulator' s decision warrants different rently located in New Jersey and New York, through applications of GAAP as a result of the rate making several partnership arrangements. ASP owns and process. In setting rates, a regulator may provide manages a commercial office and warehouse facility recovery of an incurred cost in a year or years other located in southern New Jersey. ATE provides fund than the year the cost is incurred. As permitted by management and financing to affiliates and manages a SFAS No. 71 , costs ordered by a regulator to be portfolio of investments in leveraged leases for equipment deferred or capitalized for future recovery are recorded used in the airline and shipping industries. ATS and its as a regulatory asset because the regulator's rate action wholly-owned subsidiary, both formed in May 1994, are provides reasonable assurance of future economic engaged in the development of thermal heating and benefits attributable to these costs. In a non-rate cooling systems. AET is presently concluding the affairs regulated industry, such costs may be charged to of its subsidiary, which is its sole investment. On expense in the year incurred. SFAS No. 71 further January 1, 1995, a new subsidiary of AEI, Atlantic specifies that a regulatory liability is recorded when a Energy Enterprises, Inc. (AEE), was formed. AEI will regulator orders a refund to customers of revenues transfer direct ownership of the existing non-utility previously collected, or when existing rates provide for companies to AEE. AEE will seek to form new busi- recovery of future costs not yet incurred. Such treat-nesses and ventures and invest in established businesses. ment is not afforded to non-rate regulated companies.

When collection of regulatory assets or relief of Principles of Consolidation - The consolidated regulatory liabilities is no longer probable, the assets financial statements include the accounts of the and liabilities are applied to income in the year that the Company and its subsidiaries. All significant inter- probability assessment is made. Specific regulatory company accounts and transactions have been elimi- assets and liabilities that have been recorded are nated in consolidation. ACE, AET, AGI and ATS discussed elsewhere in the notes to the consolidated consolidate their respective subsidiaries. AGI ac- financial statements.

8

Vlotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIES Electric Operating Revenues - Revenues are recog- site specific studies used by the BPU for approval in nized when electric energy services are rendered, and 1991 and restated in 1994 dollars, is $152.2 million.

include estimates for amounts unbilled at the end of The BPU has further established that decommissioning the period for energy used subsequent to the last activities are expected tq begin in 2006 and continue billing cycle. through 2032. Actual costs and timing of decommis-sioning activities may vary from the current estimates.

Nuclear Fuel - Fuel costs associated with ACE's ACE will seek to adjust these estimates and the level of participation in jointly-owned nuclear generating rates collected from customers in future BPU proceed-stations, including spent nuclear fuel disposal costs, ings to reflect changes in decommissioning cost are charged to Energy expense based on the units of estimates and the expected levels of inflation and thermal energy produced. interest to be earned by the assets in the trust. As of December 31, 1994, the present value of such contribu-Electric Utility Plant - Property is stated at original tions based on estimates for future decommissioning cost. Generally, the plant is subject to a first mortgage costs and the dates such activities are expected to occur lien. The cost of property additions, including replace- is $111.4 million, without earnings on or appreciation ment of units of property and betterments, is capital- of the fund assets. As of December 31, 1994, the cost ized. Included in certain property additions is an and market value of the trust were $52 million. Trust Allowance for Funds Used During Construction contributions of $36.9 million qualify for Federal (AFDC), which is defined in the applicable regulatory income tax purposes. The related reserves for decom-system of accounts as the cost during the period of missioning costs are presented as a component of construction of borrowed funds used for construction accumulated depreciation and amounted to $51.1 purposes and a reasonable rate on other funds when so million at December 31, 1994, and $42.2 million at used. AFDC has been calculated using a semi-annu- December 31, 1993.

ally compounded rate of 8.25%, as approved by the BPU, since August 11 1993. The AFDC rate w:as The SEC has questioned certain accounting practices 8.95%, as approved by the BPU, prior to this date. employed by the electric utility industry concerning decommissioning costs for nuclear generating facili-Depreciation - ACE provides for straight-line deprecia- ties. The FASB is currently reviewing this issue tion based on the estimated remaining life of transmis- wjthin the broad context of removal costs relative to sion and distribution property, remaining life of the all industries. At this time, the Company cannot related nuclear plant operating license for nuclear predict what future accounting practices may be property and estimated average service life for all other required by the F ASB and SEC concerning this issue, depreciable property. The overall composite rate of nor the impact on the financial statements that any depreciation was approximately 3.3% in 1994 and new accounting practices may have.

1993 and 3.5% in 1992. Accumulated depreciation is charged with the cost of depreciable property retired Deferred Energy Costs - As approved by the BPU, ACE together with removal costs less salvage and other has a Levelized Energy Clause (LEC) through which recoveries. Depreciation expense of the non-utility energy arid energy-related costs (energy) are charged to companies is not significant. customers. LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries of Nuclear Decommissioning Trust - ACE has a trust to energy costs. Energy costs are recovered through fund the future costs of decommissioning each of the levelized rates over the period of projection, which is five nuclear units in which it has an ownership interest. generally a 12-month period. In any period, the actual The current annual funding amount, as authorized by amount of LEC revenues recovered from customers may the BPU, totals $6.4 million and is provided for in be greater or less than the recoverable amount of actual rates charged to customers. The funding amount is energy costs incurred in that period. Energy expense is based on estimates of the future cost of decommission- adjusted to match the associated LEC revenues. Any ing each of the units, dates that decommissioning underrecovery (an asset representing energy costs in-activities are expected to occur and return to be earned curred that are to be collected from customers) or by the assets of the fund. The present value of ACE's overrecovery (a liability representing previously collected nuclear decommissioning obligation, based on 1987 energy costs to be returned to customers) of costs is 9

ATLANTIC ENERGY, INC. AND SUBSIDIARIES deferred on the Consolidated Balance Sheet as Deferred BPU-approved recovery period of 20 years beginning in Energy Costs. These deferrals are recognized in the 1994. The unrecovered balances were $19.6 million and Consolidated Statement of Income as Energy expense $20 million at December 31, 1994 and 1993, respectively.

during the period in which they are subsequently included in the LEC. Regulatory Assets and Liabilities - Costs incurred by ACE that have been permitted by the BPU to be deferred Income Taxes - Effective January 1, 1993, deferred for recovery in rates in more than one year, or for which Federal and state income taxes are provided on all future recovery is probable, have been recorded as significant temporary differences between book bases and regulatory assets. Regulatory assets are amortized to tax bases of assets and liabilities, transactions that reflect expense over the period of recovery. Total regulatory taxable income in a year different than book income, and assets on the Consolidated Balance Sheet at December tax carryforwards. Deferred Federal and state income 31 , 1994 and 1993 were $365.5 million and $332.1 taxes for 1992 were provided on all significant ciirrent million, respectively. Unamortized costs currently being transactions for which the timing of recognition differs recovered in rates at December 31, 1994 and 1993, for book and tax purposes. Investment tax credits, which respectively, and remaining recovery periods at December are used to reduce current Federal income taxes, are 31, 1994 are: Unrecovered State Excise Taxes of$73.8 deferred on the Consolidated Balance Sheet and recog- million and $33.7 million, with a remaining recovery nized in book income over the life of the related property. period of eight years; decommissioning and decontami-The Company and its subsidiaries file a consolidated nating Federally-owned nuclear units of $7.2 million and Federal income tax return. Income taxes are allocated to $8.4 million, with a remaining recovery period of 14 each of the companies within the consolidated group years; and asbestos removal of $9.6 million and $9.9 based on the separate return method. million, for which the.recovery period is over the remain-ing depreciable life of the related generating station of36 Earnings Per Common Share - This is computed based years. Property Abandonment costs at their net present upon the weighted average number of common shares value of $5 million and $6.3 million at December 31, outstanding during the year. Common Stock equivalents 1994 and 1993, respectively, are being recovered through attributable to the Equity Incentive Plan do not impact rates with no return on the unamortized balances of $6.5 this computation because they are currently anti-dilutive. million and $8.5 million, respectively. Such costs were written down to their net present values at the date of Unrecovered Purchased Power Costs - ACE has an abandonment with subsequent accretions of the arrangement that commenced in 1983 to purchase unamortized balances over the recovery period. These capacity and related energy through September 30, 2000. costs have recovery periods between two and seven years.

Levelized base rates over the term of the arrangement Also included in Other Regulatory Assets are amounts for were approved by the BPU to recover costs estimated at which future recovery is probable of $9.4 million and commencement to be incurred. During the first half of the $9 .1 million at December 31, 1994 and 1993, respec-term, estimated costs that exceeded levelized revenues tively. Costs associated with debt reacquired by were deferred on the Consolidated Balance Sheet as refundings, included in Unamortized Debt Costs, are Unrecovered Purchased Power Costs. Since then, amortized over the life of the newly issued debt as levelized revenues have been greater than the estimated permitted by the BPU in accordance with FERC guide-costs, permitting the deferred costs to be charged to lines. The unamortized balances of these costs were Purchased Capacity expense on the Consolidated State- $32.2 million and $33.2 million at December 31, 1994 ment of Income. The BPU granted a return on the and 1993, respectively. Recovery ofregulatory assets for unrecovered deferred balance throughout the term of the Unrecovered Purchased Power Costs (Note 1), Deferred arrangement. The unrecovered deferred balances at Energy Costs (Note 1), Recoverable Future Federal December 31, 1994 and 1993 were $95.9 million and Income Taxes (Note 2) and Postretirement Benefits Other

$110.5 million, respectively. Also included within Than Pensions (Note 4) are separately discussed in the Unrecovered Purchased Power Costs are costs incurred in Notes to Consolidated Financial Statements where renegotiating a contract with an independent power indicated. No regulatory liabilities existed at December producer. These costs are amortized to expense over the 31, 1994 and 1993.

I 10 l

1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIES Financial Instruments - A number of items within Other - Debt premium, discount and expenses of ACE Current Assets and Current Liabilities on the Consoli- are amortized over the life of the related debt. Tempo-dated Balance Sheet are considered to be financial rary investments considered as cash equivalents for instruments because they are cash or are to be settled in Consolidated Statement of Cash Flows purposes repre-cash. Due to their short term nature, the carrying values sent purchases of highly liquid debt instruments maturing of these items approximate their fair market values. in three months or less. The weighted daily average Accounts Receivable - Utility Service and Unbilled interest rate on short term debt was 4.4% for 1994 and Revenues are subject to concentration of credit risk 3.2% for 1993.

because they pertain to utility service conducted within a confined geographic region. Investments in Leveraged Certain prior year amounts have been reclassified to Leases are subject to concentration of credit risk because conform to the current year reporting of these items.

they are exclusive to a small number of parties within two industries. The Company has recourse to the affected assets under lease. These leased assets are of general use within their respective industries.

NOT INCOME TAXES For the Years Ended December 31, (000) 1994 1993 1992 The components of Federal income tax expense are as follows:

Current $ 19,729 $ 25,349 $ 22,441 Deferred 17,414 20,247 23,154 Investment Tax Credits Recognized on Leveraged Leases (12) (233)

Total Federal Income Tax Expense 37,143 45,584 45,362 Less Amounts Included in Other Income (5,386) 307 8,219 Federal Income Taxes Included in Operating Expenses $ 42,529 $ 45,277 $ 37,143 A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate follows:

Statutory Federal Income Tax Rate 35% 35% 34%

Income Tax Computed at the Statutory Rate $ 45,490 $ 55,400 $ 50,791 Plant Basis Differences (27) (5,171) 2,022 Amortization of Investment Tax Credits (2,534) (2,546) (2,767)

Tax Adjustments (4,097) (2,071) (3,757)

Other-Net (1,689) (28) (927)

Total Federal Income Tax Expense $ 37,143 $ 45,584 $ 45,362 Effective Federal Income Tax Rate 29% 29% 30%

State income tax expense is not significant.

11

ATLANTIC ENERGY, INC. AND SUBSIDIARIES Items comprising deferred tax balances are as follows at December 3 1, 1994 and 1993:

(000) 1994 1993 Deferred Tax Liabilities:

Plant Basis Differences $304,476 $295 ,445 Leveraged Leases 61,409 53,461 Unrecovered Purchased Power Costs 33,557 38,792 State Excise Taxes 25,842 11 ,797 Other 24 732 21 057 Total Deferred Tax Liabilities 450,016 420,552 Deferred Tax Assets:

Deferred Investment Tax Credits 27,879 29,247 Employee Separation Costs 6,932 Other 15,245 11 ,741 Total Deferred Tax Assets 50,056 40,988 Total Deferred Taxes-Net $399,960 $379,564 At December 31 , 1994 and 1993, valuation allowances period against future Federal income tax payable, to the exist against deferred tax assets primarily for cumula- extent that the regular Federal income tax payable tive net operating losses (NOLs) for state income tax exceeds future AMT payable.

purposes. The effects of the valuation allowances and state NOLs are generally not material to consolidated Deferred tax costs associated with additional deferred results of operation and financial position. tax liabilities resulting from a change in accounting standards regarding deferred taxes effective in 1993 are The Company is subject to Federal Alternative Mini- recorded on the Consolidated Balance Sheet as Recov-mum Tax (AMT), which is attributable to non-utility erable Future Federal Income Taxes. Such recognition operations. At December 31, 1994, there is an esti- is given in respect of the probable amount of revenue mated cumulative AMT credit of $12.5 million. The to be collected from ratepayers for these additional AMT credit is available for an indefinite carryforward taxes to be paid in future years.

NOT RATE MATTERS OF ACE Energy Clause Proceedings for the LEC period June 1, 1992 through May 31 , 1993 Changes in Levelized Energy Clause Rates 1992-1994 requesting no change in LEC rates . In April 1992, Amount Amount ACE filed a revision to their petition requesting a $6.6 Date Requested Granted Date million decrease in LEC rates based on an update for Filed (millions) (millions) Effective the projected overrecovery of prior LEC costs and an amount allocated to customers from the litigation 2192 $(6.6) $(8.5) 10/92 settlement with PECO Energy (PECO) related to the 3193 14.2 10.9 10/93 Peach Bottom Atomic Power Station. In October 2194 63.0 55.0 7/94 1992, the BPU approved a reduction in annual LEC revenues of $8.5 million which included the recovery ACE's Levelized Energy Clause (LEC) is subject to of $10.4 million over a three-year period of certain annual review by the BPU. deferred costs relating to the Salem Nuclear Generating Station. The PECO settlement allocation was subject In February 1992, ACE filed a petition with the BPU to review by the BPU in ACE's 1993 LEC proceeding.

12

'Vlotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARllES In March 1993, ACE filed a petition with the BPU Base Rate Case Proceedings requesting a $14.2 million increase in LEC revenues for the June 1, 1993 through May 31, 1994 LEC Effective October 1992, the BPU authorized a net period. Effective for service rendered on and after increase in annual base rate revenues of $12.9 million.

October 1, 1993, the BPU approved an increase of In March 1994, in response to an appeal filed by the

$10.9 million which included the following: (1) an Ratepayer Advocate in December 1992, the Superior additional $3.8 million of the PECO settlement to- Court of New Jersey, Appellate Division, affirmed the gether with accrued interest to be returned to customers BPU's decision to allow an increase in base rates during the 1994-1995 LEC period; (2) recovery of relating to changes in the state excise tax.

$400 thousand for the annual assessment for the Department of Energy (DOE) decommissioning and Other Rate Proceedings decontamination fund; (3) full LEC recovery of all future assessments for the DOE decommissioning and In November 1993, ACE filed a petition with the BPU decontamination fund and (4) recognition of the $48 requesting that hotel-casino customers be permitted to thousand penalty for 1992 nuclear operations as take service under rate schedules offered to all other required by the Nuclear Performance Standard. The commercial and industrial customers. On June 23, additional allocation of the PECO settlement was 1994, the BPU approved the request with a provision provided for in the 1993 financial results and the that ACE not seek recovery of lost revenues resulting reimbursement was made through the 1994 LEC. from the hotel-casinos being permitted to shift to other rate schedules prior to ACE's next base rate case. The On February 8, 1994, ACE filed a petition with the BPU also allowed for a one-time adjustment to be BPU requesting an increase in LEC revenues of $63 billed to hotel-casino customers for the associated million for the period June 1, 1994 through May 31, underrecovery in ACE's fuel clause. Prior to BPU 1995. The increase was due primarily to the additional approval, hotel-casino customers were served under the costs incurred from two new independent power Hotel Casino Service rate schedule, the highest rate for producers (IPPs) scheduled to begin commercial service of all ACE' s service classes. Effective July 1, operation during the 1994/ 1995 LEC period. The total 1994, all hotel-casino customers began taking service projected costs for fuel and capacity for the LEC period under a general service rate schedule which could were $147 million. ACE reduced the requested reduce annual base rate revenues by approximately $7 amount by $84 million as a result of the utilization of million. Effective July 25, 1994, the Hotel Casino

$56 million of current base rate revenues associated Service rate schedules were no longer offered for with a utility power purchase contract expiring in May electric service.

1994 and the Southern New Jersey Economic Initiative (SNJEI), an ACE initiative that forgoes the recovery of In July 1993, the BPU initiated a generic proceeding to

$28 million of fuel costs. Included in ACE' s request address the recovery of the capacity costs associated was the recovery over five years of $20 million paid by with purchases of power from non-utility generation ACE in December 1993 in connection with contract projects. This issue relates to the Ratepayer renegotiations with an IPP. Effective July 26, 1994, Advocate's contention that present BPU policy which the BPU approved a provisional increase of $55 permits full recovery of these costs through the LEC million based on an adjustment to actual costs for fuel provides for a "double recovery" of cogeneration and capacity. On November 30, 1994, the BPU capacity costs. In August 1993, the Ratepayer Advo-rendered its decision on ACE's LEC request approving cate identified ACE as one of the electric utilities for the continuation of provisional LEC rates, the recovery which they considered the double recovery of capacity of the $20 million in renegotiation costs and the costs to be at issue. Pursuant to its February 18, 1994 reduction for the $28 million SNJEI. decision supporting the investigation of the double recovery of capacity costs from non-utility generation projects, the BPU issued its written order on September 16, 1994. The order confirmed the establishment of a generic proceeding to review the non-utility purchase 13

ATLANTIC ENERGY, INC. AND SUBSIDIARIES power capacity cost recovery methodology and ordered be applicable. Following the conclusion of the first that the matter be reviewed in a two phase proceeding. phase of the proceeding, the BPU, in the second phase, The scope of the issues to be resolved during the first will render a final decision regarding the specific phase of the proceeding will include: (1) the determi- findings of the Office of Administrative Law and nation of the existence, or lack of existence, of the address the broader issues relating to the appropriate double recovery as a result of the traditional LEC pass- prospective purchase power capacity cost recovery through of non-utility generation capacity costs; (2) the methods. Evidentiary hearings have been scheduled quantification of any such double recovery found to through December 1995. The BPU' s final decision is exist for each utility for the relevant periods; and (3) a not anticipated until 1996. At this time, ACE cannot determination of an appropriate remedy or adjustment predict the outcome of this proceeding and cannot if such double recovery is found to occur and the estimate the impact that the double recovery issue may periods of time over which such an adjustment would have on future rates.

NOT RETIREMENT BENEFITS Pension A reconciliation of the funded status of the plan as of December 31 , 1994 and 1993 is as follows:

ACE has a noncontributory defined benefit pension (000) 1994 1993 plan covering substantially all of its employees and those of its wholly-owned subsidiary. Benefits are Fair value of plan assets $190,200 $213 ,600 based on an employee's years of service and average Projected benefit obligation 206,742 207,246 final pay. ACE's policy is to fund pension costs within Plan assets (less than) in excess the guidelines of the minimum required by the Em-of projected benefit obligation (16,542) 6,354 ployee Retirement Income Security Act and the Unrecognized net transition asset (1,722) (1,894) maximum allowable as a tax deduction. Each com-Unrecognized prior service cost 306 329 pany is allocated its participative share of plan costs Unrecognized net loss (gain) 24,106 (638) and contributions.

Prepaid pension cost $ 6,148 $ 4, 151 Accumulated benefit obligation:

Net periodic pension costs for 1994, 1993 and 1992 Vested benefits $166,602 $165 ,872 include the following components:

Nonvested benefits 485 1,216 Total $167,087 $167,088 (000) 1994 1993 1992 Service cost - At December 31 , 1994, approximately 60% of plan benefits earned assets were invested in equity securities, 18% in fixed during the period $ 6,871 $ 7,196 $ 7,310 income securities and 22% in other investments. The Interest cost on projected assumed rates used in determining the actuarial present benefit obligation 15,390 16,016 17,301 Actual return on plan assets (860) (23 ,200) (13 ,283) value of the projected benefit obligation at year-end Other-net (16,885) 5,496 (3 ,795) were as follows :

Net periodic pension costs $ 4,516 $ 5,508 $ 7,533 1994 1993 Approximately $3 million, $5 .2 million and $4.8 Weighted average discount 7.5% 7.5%

million of these costs were charged to operating Anticipated increase in expense in 1994, 1993 and 1992, respectively, and the compensation 3.5% 3.5 %

remaining costs, which are associated with construction labor, were charged to the cost of a new utility plant. The assumed long term rate of return on plan assets was 8.5 % for both 1994 and 1993 and 8% for 1992.

14

1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARll!S Other Postretirement Benefits A reconciliation of the funded status of the plan and the obligation for other postretirement benefits recognized ACE and its subsidiary provide certain health care and in the Consolidated Balance Sheet as of December 31 ,

life insurance benefits for retired employees and their 1994 and

• 1993 is as follows:

eligible dependents. Substantially all employees may (000) 1994 1993 become eligible for these benefits if they reach retire-ment age while working for the companies. Benefits Accumulated benefits obligation:

are provided through insurance companies and other Retirees $ 43,265 $32,720 plan providers whose premiums and related plan costs Fully eligible active plan participants 18,010 21,267 are based on the benefits paid during the year. ACE Other active plan participants 60,588 49,125 has a tax qualified trust to fund these benefits. Each Total accumulated benefits obligation 121,863 103,112 company is allocated its participative share of plan Less fair value of plan assets 14,700 14,400 costs and contributions.

Accumulated benefits obligation in excess of plan assets 107,163 88,712 The cost of other postretirement benefits was $15.6 lJnrecognized net loss (19,223) (6,639) million, $13.1 million and $6 million in 1994, 1993 and lJnamortized unrecognized transition 1992, respectively. These costs were allocated as follows:

obligation (70,075) (73,968)

(millions) 1994 1993 1992 Accrued other postretirement benefits cost obligation $ 17,865 $ 8,105 Operating expense $5.6 $3.3 $3.8 New utility plant-associated At December 31, 1994, approximately 81 % of plan with construction labor .2 1.7 2.2 assets were invested in fixed income securities and Regulatory asset 9.8 8.1 19% in other investments.

The regulatory assets represent the amount of cost The assumed health care costs trend rate for 1994 is recognized under accounting standards effective 10% and is assumed to evenly decline to an ultimate January 1, 1993 in excess of the amount of cost constant rate of 5% in the year 2000 and thereafter. If currently recovered in rates. These excess costs are the assumed health care costs trend rate was increased deferred as authorized by an accounting order of the by 1% in each future year, the aggregate service and BPU pending future recovery through rates. interest costs of the 1994 net periodic benefits cost would increase by $1.9 million, and the accumulated Net periodic other postretirement benefits cost as postretirement benefits obligation at December 31, calculated in accordance with accounting standards in 1994 would increase by $16.7 million. The weighted effect since January 1, 1993 include: average discount rate assumed in determining the accumulated benefits obligation was 7.5% for 1994 (000) 1994 1993 and 1993. The assumed long term return rate on plan assets was 7% for 1994 and 1993.

Service cost-benefits attributed to service during the period $ 3,817 $ 3,045 Interest cost on accumulated postretirement benefits obligation 8,450 7,133 Actual return on plan assets 100 (255)

Amortization of unrecognized transition obligation 3,893 3,893 Other-net {700} {7112 Net periodic other postretirement cost $15,560 $13,105 15

ATLANTIC ENERGY, INC . AND SUBSIDIARIES NOT JOINTLY-OWNED GENERATING STATIONS ACE owns jointly with other utilities several electric The amounts shown represent ACE' s share of each production facilities. ACE is responsible for its pro-rata facility at, or for the year ending, December 31, includ-share of the costs of construction, operation and mainte- ing AFDC as appropriate.

nance of each facility.

Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Coal Nuclear Nuclear Nuclear Company's Share (%/MWs) 2.47/42.3 3.83/65.4 7.51/157.0 7.41/164.0 5.00/52.0 Electric Plant in Service (000):

1994 $11,293 $26,607 $125,003 $206,804 $238,980 1993 10,746 18,055 123,428 203,858 237,496 Accumulated Depreciation (000):

1994 $ 3,180 $ 6,237 $ 55,190 $ 79,898 $ 53,746 1993 3,231 5,971 5 l,871 78,383 46,933 Construction Work in Progress (000):

1994 $ 1,216 $ 2,649 $ 11,002 $ 8,727 $ 387 1993 758 9,956 7,983 10,799 1,022 Operation and Maintenance Expenses (including fuel)(OOO):

1994 $ 5,085 $ 7,211 $ 29,530 $ 27,731 . $ 10,471 1993 5,323 6,855 31,479 27,021 9,764 1992 4,976 7,194 29,618 25,461 9,541 Working Funds (000):

1994 $ 44 $ 69 $ 5,051 $ 5,199 $ 2,013 1993 44 69 4,772 5,249 2,061 Generation (MWH):

1994 257,561 419,3 13 1,214,776 836,725 355,390 1993 293,876 416,263 1,043,485 840,043 440,118 1992 294,222 457,771 958,740 737,356 351,672 ACE provides financing during the construction period for tors of the facilities to fund operational needs. The its share of the jointly-owned facilities and includes its increase in Electric Plant in Service and decrease in share of direct operations and maintenance expenses in Construction Work in Progress for Conemaugh is the Consolidated Statement of Income. Additionally, primarily due to the placement in service of flue gas ACE provides an amount of working funds to the opera- desulfurization equipment (scrubber).

16

1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARllt:S NOT NON-UTILITY COMPANIES The Company (AEI) is the parent holding company of ASP's results in each year reflect the vacancy in its the consolidated group. Its primary activities are the commercial site due to generally poor market condi-management of investments in the subsidiary compa- tions in commercial real estate. The 1994 results nies, issuance of common equity and performance of include a net after tax write-down of the carrying value administrative functions on behalf of the consolidated of the commercial site of $1. 7 million.

group. Principal assets of each of the subsidiary companies are: AGI - capital investments of approxi- ATE's 1994 results reflect a reduction in deferred mately $30.3 million in cogeneration development income tax expense. A TE' s 1993 results were reduced projects and partnerships; ASP - commercial real estate by increased deferred state income tax expense. ATE's site with a net book value of $10.3 million; ATE - 1992 results benefitted from lower interest rates on leveraged lease investments of $78.2 million; and amounts outstanding under its revolving credit agreement.

ATS - construction costs in thermal heating and cooling projects of $6.3 million. AET is presently concluding the ATS, formed in May 1994, is primarily a developmen-affairs of its subsidiary, which is its sole investment. The tal stage company that will become operational as heating net investment in this subsidiary is nominal. and cooling system projects are completed. The 1994 results reflect administrative and general costs.

Other financial information regarding the subsidiary companies is as follows: AET's 1994 results reflect expenses incurred research-ing future investment opportunities and an increase in Company Net Assets Net Income (Loss) deferred Federal income tax expense. AET's 1993 (000) 1994 1993 1994 1993 1992 results are due to the receipt of life insurance proceeds by its subsidiary company. In 1993, this subsidiary AGI $23,610 $18,746 $2,959 $4,459 $1,366 (347) (263) discontinued its operating activities to concentrate on ASP 3,175 5,131 (1,956)

ATE 9,449 9,182 266 (777) 667 licensing its patented proprietary knowledge. AET's ATS 2,577 (327) 1992 results reflect the provision for the restructuring AET 1,324 2,069 (744) 524 (4,793) of its subsidiary's activities.

AGI's results reflect the operation of cogeneration AEI parent-only operations, excluding its equity in the facilities in which AGI has an ownership interest. results of subsidiary companies, generally reflect AGI's 1994 results were reduced by decreased opera- administrative expenses. Net results were losses of tion of a cogeneration unit and an increase in deferred $543 thousand in 1994, $183 thousand in 1993 and income tax expenses. $401 thousand in 1992.

17

ATLANTIC ENERGY, INC. AND SUBSIDIARIES NOT CUMULATIVE PREFERRED STOCK OF ACE ACE has authorized 799,979 shares of Cwnulative Preference Stock, No Par Value. Information relating Preferred Stock, $100 Par Value, two million shares of to outstanding shares at December 31 is shown in the No Par Preferred Stock and three million shares of table below.

1994 1993 Current Optional Series Par Value Shares (000) Shares (000) Redemption Price Not Subject to Mandatory Redemption:

4% $100 77,000 $ 7,700 77,000 $ 7,700 $105.50 4.10% 100 72,000 7,200 72,000 7,200 101.00 4.35 % 100 15,000 1,500 15,000 1,500 101.00 4.35 % 100 36,000 3,600 36,000 3,600 101.00 4.75 % 100 50,000 5,000 50,000 5,000 101.00 5% 100 50,000 5,000 50,000 5,000 100.00 7.52% 100 100,000 10,000 100,000 10,000 101.88 Total $ 40 000 $ 40 000 Subject to Mandatory Redemption:

$8.25 None 55,000 $ 5,500 60,000 $ 6,000 104.66

$8.53 None 360,000 36,000 600,000 60,000 102.00

$8.20 None 500,000 50,000 500,000 50,000

$7.80 None 700,000 70,000 700,000 70,000 Total 161,500 186,000 Less portion due within one year 12,250 12,250 Total $149,250 $173,750 Cwnulative Preferred Stock Not Subject to Mandatory Beginning May 1, 2001 and annually through 2005, Redemption is redeemable solely at the option of ACE. 115,000 shares of $7.80 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a On November 1 of each year, 2,500 shares of the $8.25 redemption price of $100 per share. On May 1, 2006, the No Par Preferred Stock must be redeemed through the remaining shares outstanding must be redeemed at $100 operation of a sinking fund at a redemption price of $100 per share. ACE has the option to redeem up to an per share. ACE may redeem not more than an additional additional 115,000 shares without premiwn on each 2,500 shares on any sinking fund date without premiwn. May 1 through 2005. This series is not refundable prior ACE redeemed 5,000 shares in both 1994 and 1993. to May 1, 2006.

Commencing in 1994, on November 1 of each year, For the next five years, the annual minimwn sinking fund 120,000 shares of the $8.53 No Par Preferred Stock must requirements of the Cwnulative Preferred Stock Subject be redeemed through the operation of a sinking fund at a to Mandatory Redemption is $12.25 million for the year redemption price of $100 per share. At the option of 1995, and $22.25 million in each of the years 1996 and 1997 ACE, not more than an additional 120,000 shares may be and $10.25 million in each of the years 1998 and 1999.

redeemed on any sinking fund date without premiwn.

ACE redeemed 240,000 shares in 1994. Cwnulative Preferred Stock of ACE is not widely held and trades infrequently. The estimated aggregate fair Beginning August 1, 1996 and annually thereafter, market value of ACE's outstanding Cwnulative Preferred 100,000 shares of the $8.20 No Par Preferred Stock must Stock at December 31, 1994 and 1993 was approximately be redeemed through the operation of a sinking fund at a $185 million and $231 million, respectively. The fair redemption price of $100 per share. At the option of market value has been determined using market informa-ACE, not more than an additional 100,000 shares may be tion available from actual trades of similar instrwnents of redeemed on any sinking fund date without premiwn. companies with similar credit quality and rate.

This series is not refundable prior to August 1, 2000.

18

1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIE';S NOT LONG TERM DEBT December 31, Series Maturity Date 1994 1993 (Medium Term Notes -MTNs- have varying maturity dates and are shown with the weighted average interest rate of the related issues within the year of maturity.)

(000) 5 1/8% First Mortgage Bonds 2/1 /1996 $ 9,980 $ 9,980 Medium Term Notes Series B (6.28%) 1998 56,000 56,000 Medium Term Notes Series A (7.52 %) 1999 30,000 30,000 Medium Term Notes Series B (6.83 %) 2000 46,000 46,000 7 1/2% First Mortgage Bonds 4/112002 20,000 20,000 Medium Term Notes Series B (7.18%) 2003 20,000 20,000 73/4% First Mortgage Bonds 6/1/2003 29,976 29,976 Medium Term Notes Series A (7.98 %) 2004 30,000 30,000 Medium Term Notes Series B (7.125 %) 2004 28,000 28,000 7 5/8% Pollution Control 11112005 6,500 Medium Term Notes Series B (6.45 %) 2005 40,000 40,000 63/8% Pollution Control 12/ 112006 2,500 2,500 Medium Term Notes Series B (6.76 %) 2008 50,000 50,000 10 1/2% Pollution Control Series B 7115/2012 850 850 6518% First Mortgage Bonds 8/1 /2013 75,000 75,000 73/8% Pollution Control Series A 4/15/2014 18,200 18,200 10 112% Pollution Control Series C 7/15/2014 23,150 8 1/4% Pollution Control Series A 711 5/2017 4,400 4,400 9 1/4% First Mortgage Bonds 1011/2019 53,857 65 ,767 6.80% Pollution Control Series A 3/1 /2021 38,865 38,865 7% First Mortgage Bonds 9/1 /2023 75,000 75,000 5.60% Pollution Control Series A 111112025 4,000 4,000 7% First Mortgage Bonds 8/ 112028 75,000 75 ,000 6.15 % Pollution Control Series A 611 12029 23,150 7.20% Pollution Control Series A 111112029 25,000 7% Pollution Control Series B 11 / 112029 6,500 Total 762,278 749,188 Debentures:

5 1/4% 2/ 111996 2,267 2,267 7 1/4% 5/ 1/ 1998 2 619 2,619 Total 4,886 4,886 Unamortized Premium and Discount-Net (3,876) (2,973)

Total Long Term Debt of ACE 763,288 751 ,101 Long Tenn Debt of ATE 16,000 15,000 Less Portion Due Within One Year 1,000 Total Long Term Debt $778,288 $766,101 In 1994, ACE redeemed its 10 1/2% Pollution Control Sinking fund deposits are required for retirement of the Bonds Series C due 7/ 15/2014 and its 75/8% Pollution 5 1/4% Debentures annually on February 1 through 1995 Control Bonds due 11112005 . ACE acquired and and for the 7 1/4% Debentures annually on May 1 retired $11 .9 million principal amount of First Mort- through 1997 in amounts in each case sufficient to gage Bonds, 9 1/4% Series due 10/ 112019. The aggregate redeem $100,000 principal amount. ACE may, at its cost of these redemptions was $ 1.2 million, net of option, redeem an additional $100,000 annually in each related Federal income taxes. case. Through December 31 , 1994, ACE acquired and 19

ATLANTIC ENERGY, INC. AND SUBSIDIARIES cancelled $333 thousand and $181 thousand principal fair market value has been determined based on quoted amount of the 5 1/4% and 7 1/4% Debentures, respectively, market prices for the same or similar debt issues or on which will be used to satisfy its requirements for 1995. debt instruments of companies with similar credit Certain series of First Mortgage Bonds contain provi- quality, coupon rates and maturities.

sions for deposits of cash or certification of bondable property currently amounting to $100 thousand, which Long term debt of ATE primarily consists of $15 ACE may elect to satisfy through property additions. million of7.44% Senior Notes due 1999. The esti-For the next five years, the annual amount of scheduled mated fair market value of these Notes at December maturities and sinking fund requirements of ACE' s 31 , 1994 and 1993 was $14 million and $16 million, long term debt are $12.266 million in 1996, $175 respectively, based on debt instruments of companies thousand in 1997, $58.575 million in 1998 and with similar credit quality, coupon rates and maturities.

$30.075 million in 1999. Also, ATE has a revolving credit and term loan agree-ment which provides for borrowings of up to $35 ACE's long term debt securities are not widely held million during successive revolving credit and term and generally trade infrequently. The estimated loan periods through June 1995. There were $1 aggregate fair market value of ACE's outstanding long million in borrowings outstanding under this agreement term debt securities at December 31 , 1994 and 1993 at December 31 , 1994. Commitment fees on the was $693 million and $768 million, respectively. The unused credit line were not significant.

NOT COMMON 5HAREHOLDERS 1 EQUITY In addition to public offerings, Common Stock may be a three-year period. Restrictions lapse upon actual issued through the Dividend Reinvestment and Stock award at the end of the three-year performance period.

Purchase Plan (DRP), ACE benefit plans (ACE plans) Shares not awarded are forfeited. Dividends earned on and the Equity Incentive Plan (EIP). The number of restricted stock issued through the EIP are invested in shares of Common Stock issued (forfeited), and the additional restricted stock under the EIP. Such stock number of shares reserved for issuance at December acquired is subject to the same restrictions. The 31 , 1994, were as follows: number of restricted shares issued in 1994 to employee participants was 167 ,300. Stock options granted in 1994 1993 1992 Reserved 1994 are nonqualified and are exercisable three years after but within 10 years from the date of grant. Stock DRP 699,493 1,300, 129 1,291 ,653 723 ,975 options are priced at an amount at least equal to 100%

ACE Plans (5,046) 8,033 10,897 141 ,038 of the fair market value of Common Stock on the date EIP 175,712 624,288 of grant. As of December 31, 1994, options on Total 870,159 1,308, 162 1,302,550 167 ,300 shares of common stock were granted at a price of $21.125 per share. No options were eligible to In April 1994, the shareholders of the Company be exercised in 1994.

approved the EIP. Eligible participants are officers, general managers and nonemployee directors of the In October 1994, the Board of Directors authorized the Company and its subsidiaries. Under the EIP, reaquisition of up to three million shares of the nonemployee director participants are entitled to Company's Common Stock. Management will use its receive a grant of 1,000 shares of restricted stock. discretion, based on market conditions, as to the timing Restrictions on these grants expire over a five-year and price of share~ repurchased. There is no schedule period. Employee participants may be awarded shares or specific share price target associated with the of restricted Common Stock, stock options and other acquisition and the authorized number of shares will Common Stock-based awards. Actual awards of not be affected. Shares repurchased are cancelled.

restricted shares are based on attainment of various During 1994, the Company reacquired 221, 700 shares levels of certain Company performance criteria within at prices ranging from $16.50 to $18.125 per share.

20

1flotes to C9onsolidated Financial Statements ATLANTIC EN E RGY, INC. ANO SUBSIDIARIES ,

NOT COMMITMENTS AND CONTINGENCIES Construction Program The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson ACE's cash construction expenditures for 1995, Amendments Act of 1988, govern liability and indem-which excludes AFDC and customer contributions, nification for nuclear incidents. All nuclear facilities are estimated to be approximately $116 million. could be assessed, after exhaustion of private insur-Current commitments for the construction of major ance, up to $79.275 million each, payable at $10 million production and transmission facilities approximate per year, per reactor and per incident. Based on its

$23 million, of which it is estimated that $19 ownership share of nuclear facilities, ACE could be million will be expended in 1995. assessed up to $27.6 million per incident. This amount would be payable at $3.48 million per year, per incident.

Insurance Programs Energy and Capacity Arrangements ACE is a member of certain insurance programs that provide coverage for decontamination and property UTILITY SOURCES damage to members' nuclear generating plants. Facili-ties at the Peach Bottom, Salem and Hope Creek ACE has an arrangement for the purchase of 125 MWs stations are insured against property damage losses up of capacity and related energy from Pennsylvania to $2.75 billion per site under these programs. Power and Light through September 30, 2000. Capac-ity costs, including certain deferred charges, totaled In addition, ACE is a member of an insurance program $26.6 million, $24.4 million and $25.1 million, and which provides coverage for the cost of replacement energy costs totaled $10.8 million, $11.2 million and power during prolonged outages of nuclear units $13.4 million in 1994, 1993 and 1992, respectively.

caused by certain specific conditions. The insurer for Commitments for capacity costs expected to be in-nuclear extra expense insurance provides stated value curred are $11. 7 million, $12.0 million, $12.3 million, coverage for replacement power costs incurred in the $12.6 million, $14.2 million and $12.3 million in each event of an outage at a nuclear unit resulting from of the years 1995-2000, respectively.

physical damage to the nuclear unit. The stated value coverage is subject to a deductible period of the first 21 ACE's arrangement for the purchase of 200 MWs of weeks of any outage. Limitations of coverage include, capacity and related energy from PECO expired May but are not limited to, outages (1) not resulting from 31, 1994. Capacity costs charged to Purchased Capac-physical damage to the unit, (2) resulting from any ity expense totaled $25.6 million through May 1994 government mandated shutdown of the unit, (3) and $55.9 million and $52.5 million for 1993 and resulting from any gradual deterioration, corrosion, 1992, respectively. Energy costs for the same periods wear and tear, etc. of the unit, (4) resulting from any amounted to $11.4 million, $21.0 million and $19.2 intentional acts committed by an insured and (5) million, respectively. ACE also had another arrange-resulting from certain war risk conditions. Under the ment with PECO for the purchase of energy only property and replacement power insurance programs, which terminated in October 1994. Energy costs ACE could be assessed retrospective premiums in the under this arrangement amounted to $32.5 million, event the insurers' losses exceed their reserves. As of $19.0 million and $17.5 million in 1994, 1993 and December 31, 1994, the maximum amount of retro- 1992, respectively.

spective premiums ACE could be assessed for losses during the current policy year was $6.6 million under these programs.

21

ATLANTIC ENERGY, INC. AND SUBSIDIARIES ACE is a member of the Pennsylvania-New Jersey- The Conemaugh owners installed a scrubber on Maryland Interconnection (PIM), an integrated power Conemaugh Unit 1 which went into service in Decem-pool that is connected with other utilities for the ber 1994. ACE' s 3.83% share of the cost was $11 interchange of energy on an as-needed and as-available million. A scrubber on Conemaugh Unit 2 is to be basis. ACE is required to plan for reserve capacity completed in 1995, with ACE's share of the cost based on aggregate P JM requirements allocated to estimated to be $4 million. The jointly-owned Key-member companies. ACE has satisfied its current stone Station is impacted by the S02 and NOx provi-reserve requirements. ACE also has an interchange sions of Title IV of the CAAA during Phase IL Cur-agreement with the City of Vineland, New Jersey, which rently, the Keystone owners plan to rely on utilizing operates a municipal utility located in ACE's service emission allowances, and modified fuel content to a territory. The cost of energy purchased through inter- lesser extent, to meet compliance with the CAAA change agreements totaled $10.4 million, $9.9 million through the year 2000. In addition, certain purchase and $9.4 million in 1994, 1993 and 1992, respectively. power arrangements will be affected by the CAAA, in amounts that are not presently determinable.

NON-UTILITY SOURCES Federal and state legislation authorize various govern-ACE has contracted for a total of 569 MWs of capacity mental authorities to issue orders compelling respon-and related energy from four non-utility sources. The sible parties to take cleanup action at sites determined last two projects under contract for 388 MWs became to present danger from releases of hazardous sub-operational in 1994. Non-utility capacity costs totaled stances. The various statutes impose joint and several

$77.0 million, $30.2 million and $24.4 million, and liability without regard to fault for certain investigative energy costs totaled $62.5 million, $36.0 million and and cleanup costs for all potentially responsible parties.

$27.6 million, in 1994, 1993 and 1992, respectively. ACE has received notification with respect to two sites Capacity and energy costs from non-utility sources are within New Jersey as one of a number of alleged recovered through the LEC. responsible parties for cleanup and remedial actions.

ACE's maximum expense for these claims is not Environmental Matters expected to exceed $1 million. ACE believes that insurance coverage is available to satisfy any amounts The provisions of Title IV of the Clean Air Act in excess of the self-insured limits associated with Amendments of 1990 (CAAA) will require, among these particular claims should any liability result. The other things, phased reductions of sulfur dioxide (S02) insurer for pollution liability insurance provides emissions by 10 million tons per year, and a limit on comprehensive excess general liability coverage, S02 emissions nationwide by the year 2000, and including pollution liability, for environmental costs reductions in emissions of nitrogen oxides (NOx) by incurred in the event of bodily injury or property approximately 2 million tons per year. ACE's wholly- damage resulting from the discharge or release of owned B.L. England Units 1 and 2 and its jointly- pollutants into or upon the land, atmosphere or water.

owned Conemaugh Station Units 1 and 2 are affected Limitations of coverage include any pollution liability during Phase I (1995) and all of ACE's other fossil- (1) resulting subsequent to the disposal of such pollut-fue1 steam generating units are affected by Phase II ants, (2) resulting from the operation of a storage (2000) of the CAAA. ACE has installed a scrubber on facility of such pollutants, (3) resulting in the forma-B.L. England Unit 2 at a cost of $81 million which tion of acid rain, (4) caused to property owned by an went into service in December 1994. By scrubbing insured and (5) resulting from any intentional acts B.L. England Unit 2, Phase I S02 emission require- committed by an insured. ,

ments are met for both B.L. England Units 1 and 2.

22

1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIEll Other be entitled to a severance package, including salary continuation, lump sum payments, extended medical ACE is subject to a performance standard for all of its benefits and outplacement services. In December jointly-owned nuclear units. This standard is used by 1994, ACE accrued the costs of the workforce reduc-the BPU in determining recovery of replacement tion in the amount of $17.3 million, net of tax of $9.3 energy costs resulting from poor nuclear performance. million, or $.32 in earnings per share. Included is The standard establishes a target aggregate capacity ACE's share of an early retirement program of a factor within a zone of reasonable performance to be jointly-owned nuclear station. ACE's employee achieved by the units. Performance outside of the zone separations are expected to be substantially completed results in penalties or rewards. Any penalties incurred by March 1, 1995.

would not be permitted to be recovered from customers and would be charged against income. For 1994, the AGI, through its subsidiaries, has partnership interests aggregate capacity factor of ACE's nuclear units is in common with affiliates of Columbia Gas System, within the reasonable performance zone, which results Inc. (Columbia) in certain cogeneration projects.

in no penalty or reward. Columbia has been operating under Chapter 11 of the Federal Bankruptcy Code since 1991. A reorganiza-A contract with an industrial company whereby ACE tion plan for Columbia and its principal pipeline unit is delivered process steam, water and by-product electric- expected to be filed with the U.S. Bankruptcy Court in ity was terminated by this company effective June 30, the first half of 1995. AGI does not anticipate any 1994. In 1993, ACE received approximately $12 significant changes in its partnership arrangements as a million from this company for services and energy result of Columbia's reorganization plan.

sales. In accordance with the termination agreement, ACE received $4.2 million in cash proceeds, 45,165 The Energy Policy Act of 1992 permits the Federal emission allowances valued at $6.5 million, and made government to assess investor-owned electric utilities provisions to retire certain equipment. A net gain of that have ownership interests in nuclear generating

$2.4 million net of tax resulted. The steam and elec- facilities an amount to fund the decontamination and tricity needs of this company are provided by a non- decommissioning of three Federally operated nuclear utility cogeneration facility. ACE has a contract for the enrichment facilities. Based on its ownership in five purchase of 188 MWs of capacity and energy from this nuclear generating units, ACE recorded a liability of facility. $6.6 million and $8 million at December 31, 1994 and 1993, respectively, for its obligation to be paid over the In November 1994, ACE announced a program to next 13 years. ACE has an associated regulatory asset of reduce its workforce by up to 20%, or 350 people. $7 .2 million and $8.4 million at December 31, 1994 and This program was initiated so that ACE can better 1993, respectively. Amounts are currently being recov-position itself for the more competitive environment ered in rates for this liability and the regulatory asset is within the electric industry. Under the program, concurrently being amortized to expense based on the certain employees will separate from the company and annual assessment billed by the Federal government.

23

ATLANTIC ENERGY, INC . AND SUBSIDIARIES NOT LEASES ACE leases various types of property and equipment ACE has a contractual obligation to obtain nuclear fuel for use in its operations. Certain of these lease agree- for the Salem, Hope Creek and Peach Bottom stations.

ments are capital leases consisting of the following at The asset and related obligation for the leased fuel are December 31 : reduced as the fuel is burned and are increased as additional fuel purchases are made. No commitments (000) 1994 1993 for future payments beyond satisfaction of the out-standing obligation exist. Operating expenses for 1994, Production plant $13,521 $13,521 1993 and 1992 include leased nuclear fuel costs of Less accumulated $14.1 million, $13.9 million and $13.5 million, respec-amortization 9,707 8,846 tively, and rentals and lease payments for all other Net 3,814 4,675 capital and operating leases of $5.3 million, $4.8 Nuclear fuel 38,216 40,593 million and $4.8 million, respectively. Future mini-Leased property-net $42,030 $45,268 mum rental payments for all noncancellable lease agree-ments are not significant to ACE's operations. Rental charges of other subsidiary companies are not significant.

NOT QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows:

Operating Operating Net Earnings Dividends Paid Quarter Revenues (000) Income (000) Income (000) Per Share Per Share 1994 1st $232,098 $ 39,712 $22,862 $ .43 $ .385 2nd 205,822 30,427 16,798 .31 .385 3rd 272,708 58,431 46,323 .85 .385 4th 202,410 24,969 (9,871) (.18) .385 Annual $913,039 $153,540 $76,113 $1.41 $1.54 1993 1st $203,656 $ 35,445 $19,995 $ .38 $ .38 2nd 192,538 27,381 11,093 .21 .38 3rd 268,883 68,580 52,329 .99 .385 4th 200,596 28,177 11,880 .22 .385 Annual $865,675 $159,584 $95,297 $1.80 $1.53 Individual quarters may not add to the total due to rounding, and the effect on earnings per share of changing average number of common shares outstanding.

The revenues of ACE are subject to seasonal fluctuations in the amount of $17.3 million, net of tax of $9 .3 million, due to increased sales and higher residential rates during or $.32 per share. Another charge is an amount for the summer months. ACE 's share of deferred costs for studies at a nuclear station in the amount of $1.4 million, net of tax of Net Income reflects special charges aggregating $20.4 $735 thousand, or $.02 per share. Also included is the million, after tax of $10.9 million, or $.3 7 per share, write-down of the carrying value of ASP's commercial recorded in Other Income during the fourth quarter of site of $1. 7 million, net of tax of $926 thousand, or 1994. One of the charges is an accrual of the costs of $.03 per share.

workforce reductions for severance and benefits packages 24

management's <Discussion and flnalysis of Financial C9ondition and Results of Operations ATLANTIC ENERGY, INC. AND SUBSIDIARIES Atlantic Energy, Inc. (the Company, AEI or parent) is Financial Results the parent of a consolidated group of wholly-owned subsidiaries consisting of Atlantic City Electric Com- Consolidated operating revenues for 1994, 1993 and pany (ACE) and the following non-utility companies: 1992 were $913.0 million, $865 .7 million and $816.8 Atlantic Energy Technology, Inc. (AET), Atlantic million, respectively. The increase in 1994 revenue Generation, Inc. (AGI), Atlantic Southern Properties, reflects an increase in Levelized Energy Clause (LEC)

Inc. (ASP), ATE Investment, Inc. (ATE) and Atlantic revenues as a result of a $55.0 million rate increase Thermal Systems, Inc. (ATS). ACE, the primary effective July 1994 and an increase in Sales for Resale.

subsidiary, is an electric utility regulated by the New The increased revenues for 1993 reflect the effect of a Jersey Board of Public Utilities (BPU). ACE has a rate increase of $10.9 million effective in that year.

wholly-owned subsidiary that operates certain generat- The revenue increase in 1993 also reflects the contrast ing facilities. AGI is engaged in the development and between the 1993 normal and the 1992 below normal operation of cogeneration and alternate energy projects summer temperatures.

through various partnership arrangements. ASP owns and manages a commercial real estate property. ATE Consolidated earnings per share for 1994 were $1.41 manages a portfolio of leveraged lease investments and on net income of $76.1 million, compared with $1.80 provides financing and fund management to an affiliate. on net income of $95.3 million in 1993 and $1.67 on ATS is engaged with development of district heating and net income of $86.2 million in 1992. The 1994 cooling facilities which it intends to own and operate. earnings were attributed solely to ACE and include a AET is presently concluding the affairs of its subsidiary, reduction of $.32 for employee separation programs which is its sole investment. On January 1, 1995, a new and $.02 for the write-off of deferred nuclear study subsidiary of AEI, Atlantic Energy Enterprises, Inc. costs. In 1993, ACE contributed $1.73 to consolidated (AEE), was formed. AEI will transfer direct ownership earnings, primarily as a result of increased kilowatt-of the existing non-utility companies to AEE. hour sales due to the contrast between 1993 and 1992 summer temperatures. ACE's 1993 earnings were The Company's business plan will concentrate on the reduced by $.10 as a result of charges for reorganiza-core utility operations of ACE and the expansion of tion activities. In 1992, ACE contributed $1. 74 to non-utility business opportunities related to the core consolidated earnings, which included $.15 for a business. The emergence of competition in the area of settlement with PECO Energy.

electric generation, slower growth in energy sales, Federal deregulation of wholesale energy sales, pro- Non-utility operations resulted in a net loss of $345 spective retail wheeling initiatives coupled with a thousand for 1994, net income of $3. 7 million for public utility's obligation to serve and the need to 1993 and a net loss for 1992 of $3 .4 million. The net mitigate future rate increases has caused ACE to re- loss for 1994 reflects the write-down of carrying value examine its traditional approach to its business. ACE's of ASP's commercial site in the amount of $1.7 current business plan recognizes the increasingly million after tax, or $.03 per share. This was offset, in competitive nature of the electric energy business in part, by the earnings of AGL Non-utility net income general and the need to encourage economic growth for 1993 was primarily the result of higher earnings of and stability in the service territory and surrounding AGI derived from the first full year's commercial region. ACE is re-evaluating its revenue requirements operation of two of its cogeneration projects. The loss and service pricing, the implementation of additional in 1992 was primarily due to provisions made by AET cost controls and the development of new sources of relating to restructuring of certain business activities.

revenue. Non-utility business strategies are expected That loss was offset, in part, by earnings of AGI to pursue new investment opportunities closely related resulting from the start up of two of AGI's cogenera-to the utility business, primarily in the areas of non- tion projects and by ATE's lower interest expense.

regulated electric generation, energy technology investments and thermal energy systems. Investments in these areas may take place as direct ownership or in partnership with others.

25

ATLANTIC ENERGY, INC. AND SUBSIDIARIES The quarterly dividend paid on Common Stock was available to the Company, which include the issuance

$.385 per share, an annual rate of $1.54 per share. of common equity through optional cash purchases Information with respect to Common Stock for the under the Dividend Reinvestment and Stock Purchase period 1992-1994 is as follows: Plan (DRP) through July 1994, and ACE's employee benefit plans, are shown as follows:

1994 1993 1992 1994 1993 1992 Dividends Paid Per Share $ 1.54 $ 1.53 $ 1.51 DRP Optional Cash Book Value Per Share $15.56 $15.62 $15 .17 Purchases Annualized Dividend Shares issued 336,193 690,466 719,324 Yield 8.7% 7.0% 6.6% Proceeds (000) $6,737 $15,985 $16,034 Return on Average Employee Benefit Plans Common Equity 9.1% 11.7% 11.1 % Shares issued 8,033 10,897 Total Return (Dividends Proceeds (000) $ - $ 258 $ 259 paid plus change in share price) (11.9)% 0.6% 20.2%

Market to Book Value 113 % 139% 152% Additional common equity has been provided by Price/Earnings Ratio 13 12 14 reinvested dividends through the DRP. In June 1994, Closing Price-New York the Company discontinued the issuance of new Com-Stock Exchange $17.63 $21.75 $23.13 mon Stock through the DRP, except for certain em-ployee benefit plans. Common shares issued from LIQUIDITY AND CAPITAL RESOURCES reinvested dividends in 1994, 1993 and 1992 were 370,654, 609,663 and 572,329, respectively.

Overview Major cash outflows of the Company were as follows:

The Company's cash flows are dependent on the cash flows of its subsidiaries, primarily ACE. Principal (Millions) 1994 1993 1992 cash inflows of the Company are dividends from ACE and funds provided by the issuance of Common Stock. Dividends to Shareholders $83.2 $81.3 $78 .3 Principal cash outflows of the Company are invest- Advances and Capital ments (capital contributions and advances) in its Contributions to Subsidiaries* $25.6 $29 .8 $24.1 subsidiaries for their investing activities, dividends to

• Net of Repayments common shareholders and repurchase of outstanding common stock. Cash invested in ACE is utilized On October 27, 1994, the Company's Board of Direc-primarily for the construction of utility generation, tors authorized the Company to acquire up to three transmission and distribution facilities, redemption and million shares of Common Stock. The Company will maturity of long and short term debt and redemption of cancel these shares. As of December 31 , 1994, the preferred stock. Current investing activities of the non- Company has acquired and cancelled 221 ,700 shares at utility subsidiaries are primarily for the development of a cost of $3 .9 million.

non-utility power generation projects and thermal heating and cooling systems. Atlantic City Electric Company Agreements between the Company and its subsidiaries Cash construction expenditures for the 1992-1994 provide for allocation of tax liabilities and benefits period amounted to $388.8 million and included generated by the respective subsidiaries. A separate expenditures for upgrades to existing transmission and credit support agreement exists between the Company distribution facilities and compliance with provisions and ATE. of the Clean Air Act Amendments (CAAA) of 1990.

ACE's current estimate of cash construction expendi-In 1994, 1993 and 1992, the Company recorded $83.2 tures for the 1995-1997 period is $268 million. These million, $81.3 million and $78.3 million, respectively, estimated expenditures reflect necessary improvements in dividends from ACE. Other sources of funds to transmission and distribution facilities and further compliance with provisions of the CAAA.

26

management's <Discussion and .Analysis of Financial C9ondition and Results of Opeirations ATLANTIC ENERGY, INC . AND SUBSIDIARIES ACE also utilizes cash for mandatory redemptions of through rates by ACE. In December 1993, ACE paid $20 Preferred Stock and maturities and redemption of long million in connection with renegotiation of a non-utility term debt. Optional redemptions of securities are purchase power contract which ACE is recovering reviewed on an ongoing basis with a view toward through its LEC. The estimated savings based on reducing the overall cost of funds. currently forecasted fuel costs, is $15 million to $20 million per year, net of the $20 million payment.

Redemptions of Preferred Stock (at par or stated value) for the period 1992-1994 are shown as follows: On an interim basis, ACE finances that portion of its 1994 1993 1992 construction costs and other capital requirements in Preferred Stock excess of internally generated funds through the (Series) issuance of unsecured short term debt consisting of 9.96% (Shares) 48,000 8,000 commercial paper and borrowings from banks. As of

$8.53 (Shares) 240,000 December 31 , 1994, ACE has arranged for lines of

$8.25 (Shares) 5,000 5,000 2,500 credit of $150 million of which $141.4 million was Aggregate Amount (000) $24,500 $5,300 $1,050 available. Permanent financing by ACE is undertaken by the issuance of its long term debt and Preferred First Mortgage Bonds redeemed or acquired and retired Stock and from capital contributions by the parent or matured in the period 1992-1994 were as follows: company. ACE's nuclear fuel requirements associated with its jointly-owned units have been financed Principal through arrangements with a third party.

Date Series Amount Price (%)

(000 In 1994, ACE issued and sold $54.65 million of its November 1994 75/8% due 2005 $ 6,500 100.00 long term debt consisting of Pollution Control Bonds.

June 1994 10 1/2% due 2014 23,150 102.00 The proceeds from the financings were used for Various 1994 Dates 9 1/4% due 2019 11 ,910 105.38

• refunding higher cost Pollution Control Bonds and for September 1993 91/4% due 2019 69,233 110.95

• construction purposes. Additionally, $125 million in September 1993 87/8% due 2016 125,000 104.80 debt securities were registered and are available for March 1993 8% due 1996 95,000 100.91 issuance in 1995. In 1993, ACE issued and sold $469 March 1993 87/8% due 2000 19,000 102.41 million of long term debt consisting of $240 million of March 1993 8% due 2001 27,000 102.53 Series B Medium Term Notes, $225 million of First March 1993 43/8% due 1993 9,540 100.00 Mortgage Bonds and $4 million of Pollution Control July 1992 4 1/2% due 1992 10,350 100.00 Bonds. The proceeds from the 1993 financings were

• Average price also used for refunding higher cost debt and construc-Scheduled debt maturities and sinking fund require- tion purposes . In 1992, ACE issued and sold $60 ments aggregate $69 million for the years 1995- 1997. million of Series A Medium Term Notes, the proceeds of which were used for ACE's construction program.

On or before April 1 of each year, ACE and other New During 1995- 1997, ACE expects to issue $50 million Jersey utilities are required to pay gross receipts and in new long term debt to be used for funding of franchise taxes (state excise taxes) to the State of New construction and repayment of short term debt.

Jersey. In March 1994, ACE paid $137.5 million.

Included in that amount was approximately $50 million Provisions of ACE's charter, mortgage and deben-representing the second and final installment for the ture agreements can limit, in certain cases, the additional one-half year's amount of tax due as required amount and type of additional financing which may by amended state law. This additional amount of gross be used. At December 31 , 1994, ACE estimates receipts and franchise tax payment, plus the additional additional funding capacities of $218 million of one-half year's payment in 1993 of $45 million, has been First Mortgage Bonds, or $530 million of Preferred recorded on the Consolidated Balance Sheet as Stock, or $432 million of unsecured debt. These Unrecovered State Excise Taxes and is being recovered amounts are not necessarily additive.

27

ATLANTIC ENERGY, INC. AND SUBSIDIARIES NON-UTILITY COMPANIES net book value of $10.3 million after a write-down of the carrying value in 1994 of $2.6 million reflecting Management of the non-utility companies is evaluating diminished value due to excess vacancy. As of De-business opportunities which are expected to enhance cember 31 , 1994, ASP's investment has been funded non-utility operations over the next five years, with by capital contributions from the parent company and focused efforts on expanding and improving its finan- borrowings under a loan agreement with ATE. ASP's cial performance in non-utility activities. Matters current agreement with ATE provides for the repayment specific to each of the non-utility companies are of such borrowings on or before December 31, 1995.

discussed below. Extensions to repay these borrowings have been routinely granted in the past. No real estate activity beyond the Atlantic Energy Enterprises, Inc. existing site is contemplated at this time by ASP.

On January 1, 1995, AEI formed a new subsidiary, ATE Investment, Inc.

Atlantic Energy Enterprises, Inc. (AEE), which will hold ownership of the existing non-utility businesses of ATE has invested $78.2 million in leveraged leases of AGI, ASP, ATE, ATS and AET. As part of this three commercial aircraft and two containerships. ATE reorganization, AEE expects to develop an organiza- has loans outstanding to ASP which totaled $8.7 tion structured to allow greater flexibility to pursue million at December 31, 1994. ATE obtained funds for non-regulated business opportunities. Expansion of its business activities and loans to ASP through capital business is expected to focus in the areas of non- contributions from the parent company and external regulated electric generation, energy technology borrowings which include $15 million principal investments and thermal energy systems. Investments amount of 7.44% Senior Notes due 1999 and a revolv-in these areas may take place as direct ownership or in ing credit and term loan facility for borrowings of up to partnership with others. AEE's business plan reflects the $35 million. At December 31, 1994, there was $1 million potential investment of approximately $215 million over in borrowings outstanding under this facility. ATE's cash the next five years. AEE will have its own Board of flows are provided from lease rental receipts and realiza-Directors, including outside directors which will help to tion of existing tax benefits generated by the leveraged guide the non-regulated enterprises. leases sufficient to sustain operations.

Atlantic Generation, Inc. Atlantic Thermal Systems, Inc.

AGI's activities are represented by partnership interests ATS is presently engaged in the development of in three cogeneration projects. At December 31, 1994, thermal heating and cooling systems. A TS has ob-total investments amounted to $24.6 million. Cash tained funds for its project development through outlays for investments (comprised of capital invest- advances from the parent company and has established ment, advances and loans) by AGI for the period 1992- a $10 million revolving credit agreement with A TE.

1994 totaled $14.6 million. AGI obtained the funds for There were no loans outstanding from this agreement its investments through capital contributions from the as of December 31, 1994.

parent company. During the period 1992-1994, AGI received distributions from the partnerships totaling Atlantic Energy Technology, Inc.

$4.4 million from return of investment and repayment of outstanding advances and loans. In June 1994, the AET is currently concluding the affairs of its subsid-third cogeneration project became operational. AGI iary, which is its sole investment. The net investment expects to continue investment in additional domestic in this subsidiary is nominal. The amount of this independent power projects in the years 1995-1999. investment was written down in 1993 as a result of planned reorganization activities that were provided for in Atlantic Southern Properties, Inc. 1992. At that time the subsidiary discontinued its opera-tions to concentrate on licensing its proprietary knowl-ASP' s real estate investment at December 31, 1994 is a edge. In 1993, AET received life insurance proceeds of 280,000 square-foot office and warehouse facility in $500 thousand through its subsidiary. There are no future Atlantic County, New Jersey. This investment has a plans for investment activity at this time by AET.

28

management's <Discussion and flnalysis .,

of Financial C9ondition and Results of Ope1fations ATLANTIC ENERGY, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS Operating results are dependent upon the performance of the subsidiaries, primarily ACE. Since ACE is the principal subsidiary within the consolidated group, the operating results presented in the Consolidated State-ment of Income are those of ACE, after elimination of transactions among members of the consolidated group. Results of the non-utility companies are reported in Other Income.

Revenues Operating Revenues - Electric increased 5.5% and 6%

in 1994 and 1993, respectively. Components of the overall changes are shown as follows:

(millions) 1994 1993 Base Revenues $ (4.2) $ 12.2 Levelized Energy Clauses 30.3 (5.0)

Kilowatt-hour Sales 9.6 42.6 Unbilled Revenues (7.3) (1.2)

Sales for Resale 17.8 0.7 Other 1.2 (0.4)

Total $47.4 $ 48.9 Levelized Energy Clause (LEC) revenues increased in 1994 due to a rate increase of $55 million in July 1994 and $10.9 million in October 1993. The decrease in 1993 LEC revenues was the net result of the increase in October 1993 and an $8.5 million decrease effective October 1992. Changes in kilowatt-hour sales are discussed under "Billed Sales to Ultimate Utility Customers." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 3.1 % and 0.8% in revenues per kilowatt-hour in 1994 and 1993, respectively. The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by 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 changes in Sales for Resale are a function of ACE's regional power pool due to the extreme weather conditions energy mix strategy, which in turn is dependent upon during the first six months of 1994.

ACE's needs for energy, the energy needs of other utilities participating in the regional power pool of Effective July 1, 1994, the BPU permitted hotel casino which ACE is a member, and the sources and prices of customers to take service under existing commercial rate energy available. The increase in Sales for Resale for schedules which is expected to reduce annual revenue by 1994 was the result of meeting the demands of the approximately $7 million.

29

ATLANTIC ENERGY, INC. AND SUBSIDIARIES benefitted from night lighting programs. The decline in 1994 industrial sales is due to the loss of ACE's largest customer to an independent power producer during the year.

Costs and Expenses Total Operating Expenses increased 7.6% and 3.9% in 1994 and 1993, respectively. Included in these ex-penses are the costs of energy, purchased capacity, operations, maintenance, depreciation and faxes.

Energy expense reflects cost incurred for energy needed to meet load requirements, various energy supply sources used and operation of the LECs.

Changes in costs reflect the varying availability of low-cost generation from ACE-owned and purchased energy sources, and the corresponding unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the Pennsylva-nia-New Jersey-Maryland Interconnection. The cost of energy is recovered from customers primarily through the operation of the LEC. Until 1994, earnings were Billed Sales to Ultimate Utility Customers generally not affected by energy costs because these costs are adjusted to match the associated LEC rev-Changes in kilowatt-hour sales are generally due to changes enues. In any period, the actual amount of LEC in the average number of customers and average customer revenue recovered from customers may be greater or use, which is affected by economic and weather conditions. less than the actual amount of energy cost incurred in Energy sales statistics, stated as percentage changes from that period. Such respective overrecovery or the previous year, are shown as follows: underrecovery of energy costs is recorded on the 1994 1993 Consolidated Balance Sheet as a liability or an asset as Avg Avg# Avg Avg# appropriate. Amounts in the balance sheet are recog-Customer Class Sales Use of Cusl Sales Use of Cust. nized in the Consolidated Statement of Income within Residential 1.5% .4% 1.1% 6.7% 5.9% 0.8% Energy expense during the period in which they are Commercial 2.6 .5 2.1 5.1 3.2 1.9 subsequently recovered through the LEC. ACE was Industrial (2.9) (3.8) .9 2.6 4.6 (1.9) underrecovered by $11 million and by $7 .2 million at Other 3.2 4.0 (.8) 1.2 1.6 (.4) December 31, 1994 and 1993, respectively.

Total 1.3 1.2 5.4 4.4 0.9 As a result of implementing the Southern New Jersey The 1994 increase in total kilowatt-hour sales was due to Economic Initiative in rates, effective July 19, 1994, the extreme weather conditions during the first quarter of the Company is forgoing recovery of future energy 1994 and an increased number of billing days in 1994 costs in LEC rates of $28 million through May 31, compared to 1993. This increase was partially offset by the 1995. After tax income has been reduced by $10.1 abnormal weather conditions during the last half of the year million due to the effects of the initiative in 1994.

when kilowatt-hour usage fell below 1993 levels. In 1993, total kilowatt-hour sales increased primarily due to the In 1994, Energy expense increased 32.7% due to the colder winter temperatures during the first quarter, and adoption of the Southern New Jersey Economic below normal temperatures during the summer of 1992. Initiative and the increase in the levelized energy Improved economic conditions also contributed to the clause that reduced underrecovered fuel costs. Produc-increase in 1993 sales. Commercial sales in both years tion-related energy costs for 1994 increased by 19.9%

30

management's <Discussion and :Analysis of Financial C9ondition and 1Results of Ope1rations ATLANTIC ENERGY, INC. AND SUBSIDIARIES due to increased overall generation and the high cost of underrecovered fuel costs in 1993 compared to 1992.

energy from additional non-utility sources. The Production-related energy costs for 1993 increased by average unit cost for energy in 1994 increased to 2.04 6. 7% largely due to increased generation. The average cents per kilowatt-hour compared to 1.82 cents per unit cost for energy in 1993 increased to 1.82 cents per kilowatt-hour in 1993. Energy expense for 1993 kilowatt-hour compared to 1.80 cents per kilowatt-hour decreased 1.1% primarily due to an increase in in 1992. The 1993 increase in the per unit cost is a 31

ATLANTIC ENERGY, INC. AND SUBSIDIARIES result of increased amounts of higher cost energy from Debt increased 11.4% in 1993 reflecting the net effects non-utility sources and a decreased supply of lower of issuance of $469 million of First Mortgage Bonds cost energy from coal sources. during the year, and the maturity, redemption and reacquisition of various series of First Mortgage Bonds Purchased Capacity expense reflects entitlements to totaling $344.8 million principal amount. At Decem-generating capacity owned by others. Purchased Capac- ber 31 , 1994, 1993 and 1992, ACE ' s embedded cost of ity expense increased 18.2% and 7.4% in 1994 and 1993, long term debt was 7.6%, 7.8% and 8.8%, respectively.

respectively. 1be increases in Purchased Capacity reflect additional capacity supplied by non-utility power produc- Preferred Stock Dividend Requirements decreased as a ers that became operational in each year. result of continuing mandatory and optional redemp-tions in each year. Embedded cost of Preferred Stock Operations expense decreased 3.5 % in 1994 and as of December 31, 1994, 1993 and 1992 was 7.6%,

increased 8.9% in 1993. The increase in 1993 was due 7.7% and 7.7%, respectively.

primarily to corporate reorganization activities by ACE. Maintenance expense decreased 17.2% in 1994 Outlook due to cost saving measures in maintenance activities.

The 9% decrease in 1993 maintenance expense was The nature of the electric utility business is capital due to the scheduling of maintenance projects. intensive. ACE's ability to generate cash flows from operating activities and its continued access to the Depreciation and Amortization expense increased 7.9% capital markets is affected by the timing and adequacy in 1994 as a result of an increase in the depreciable of rate relief, competition and the economic vitality of base of ACE's electric plant in service. State Excise its service territory. ACE has lowered its planned Taxes expense decreased 6.9% in 1994 and increased capital expenditures for the period 1995-1999 which will by 6.4% in 1993. The increase in 1993 is due to a reduce its external cash requirements. Additionally, ACE higher tax assessment. expects to review its revenue requirements with a view toward overall rate stability in light of expected price Federal Income Taxes decreased 6. 1% in 1994 and competition. ACE believes one of its greatest assets is its increased 21.9% in 1993 as a result of the level of high level of customer service and reliability.

taxable income during those periods. The change in the 1993 amount reflects the increase in the Federal The financial performance of ACE will be affected in income tax rate to 35% from 34%, effective in that year. the future by the level of sales of energy and the impacts of regulation and competition. To better Employee Separation costs represents programs by position itself for a more competitive environment, ACE to reduce its workforce by about 20%, or 350 ACE initiated cost reduction programs in 1994. One people. Other- Net within Other Income (Expense) such program was a workforce reduction program decreased in 1994 due to the net after tax impacts of the which ACE expects will result in annual after tax cost write-off of deferred nuclear study costs of $1.4 million savings in excess of $10 million. Other issues which and the write-down of the carrying value of ASP's may impact the electric utility business include public commercial property of $1 .7 million. Litigation Settle- health, safety and environmental legislation.

ment in 1992 represents ACE's share of the settlement of litigation concerning the Nuclear Regulatory Com- Changes in operating revenues in the future will result mission imposed shutdown in earlier years of the Peach from changes in customer rates, energy consumption Bottom Atomic Power Station. The Litigation Settle- and general economic conditions in the service area, as ment for 1993 represents an additional allocation to well as the impacts of load management and conserva-customers of the proceeds from the 1992 settlement as tion programs instituted by ACE. ACE ' s revenues ordered by the BPU. Other - Net increased for 1993 as could also be affected by the increasing competition in a result of the first full year operation of AG I's cogen- the retail and wholesale energy market. The emer-eration projects. gence of competition among suppliers of electricity may require ACE to create new rate structures and to Interest on Long Term Debt decreased in 1994 due to offer incentives to its Commercial and Industrial refunding of higher cost debt. Interest on Long Term customers.

32

management's <Discussion and .Analysis of Financial @ondition and JR.esults of OpeFations ATLANTIC ENERGY, INC. AND S UBSI D IARIES Net income of ACE may be affected by the operational Federal and state legislation authorize various govern-performance of nuclear generating facilities. ACE is mental authorities to issue orders compelling respon-subject to a BPU-mandated nuclear unit performance sible parties to take cleanup action at sites determined standard. Under the standard, penalties or rewards are to present danger from releases of hazardous sub-based on the aggregate capacity factor of ACE's five stances. The various statutes impose joint and several jointly-owned nuclear units. Any penalties incurred liability without regard to fault for certain investigative would not be permitted to be recovered from customers and cleanup costs for all potentially responsible parties.

and would be charged against income. ACE has received notification with respect to two sites within New Jersey as one of a number of alleged The Energy Policy Act, enacted in October 1992, pro- responsible parties for cleanup and remedial actions.

vides, among other things, for increased competition ACE's responsibility is not expected to exceed $1 between utility and non-utility electric generators and million in the aggregate.

permits wholesale transmission access, or wheeling, with certain requirements. Other pressures such as increased The Company believes that to continue to be successful customer demands for competitive rates, potential loss of it will need to focus on improving the core utility municipal power sales, excess generating capacity, operations of ACE to meet expected competition, while together with the emergence of non-utility energy identifying opportunities for new businesses and sources, are expected to increase the amount of business growth in earnings through AEE. With support from risk for electric utilities in the future. In addition, the the Board of Directors, management has embarked on extent to which New Jersey public utility regulation is implementing an aggressive business plan which it modified to be reflective of these new competitive believes will position the Company to meet the chal-realities will be a key factor affecting the Company. lenges of a new competitive environment.

Development of electric generating facilities by non- Inflation utilities has occurred in ACE's service territory.

Effects of non-utility generation could be offset to Inflation affects the level of operating expenses and some extent by natural growth in the service territory also the cost of new utility plant placed in service.

and additional efforts by ACE to reduce the impact of Traditionally, the rate making practices that have the potential loss of kilowatt-hour sales and revenues. applied to ACE have involved the use of historical test years and the actual cost of utility plant. However, the The CAAA will require modifications at certain of ability to recover increased costs through rates, whether ACE's facilities. Compliance with the CAAA will cause resulting from inflation or otherwise, depends upon the ACE to incur additional operating and/or capital costs. frequency, timing and results of rate case decisions.

Presently, ACE's construction budget for 1995 through .

1997 includes approximately $15.9 million related to the cost of compliance. In addition, certain power purchase arrangements will be affected by the CAAA, the effects of which are not presently determinable.

33

I nvest01r Information ATLANTIC ENERGY INC. AND SUBSIDIARIES (AS OF DECEMBER 31, 1994)

Where should I send inquiries concerning my investment in Who is the trustee and interest paying agent for Atlantic Atlantic Energy or Atlantic Electric? Electric 's bonds and debentures?

The Company serves as recordkeeping agent, dividend First Mortgage Bond recordkeeping and interest disbursing disbursing agent and also as Transfer Agent for Common are performed by The Bank of New York, 101 Barclay Street, Stock and Atlantic Electric's Preferred Stock. Correspon- New York, New York 10286. Debenture recordkeeping and dence concerning such matters as the replacement of interest disbursing are performed by First Fidelity Bank, N.A. ,

dividend checks or stock certificates, address changes, 765 Broad Street, Newark, New Jersey 07102.

transfer of certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general information about Does the Company have a Dividend Reinvestment and Stock the Company should be addressed to: Purchase Plan ("Plan)?

Yes. The Plan allows shareholders of record and interested Atlantic Energy, Inc. investors to automatically invest their cash dividends and/or Investor Records optional cash payments in shares of the Company's Common 6801 Black Horse Pike Stock. Other services available to Plan participants include P.O. Box 1334 certificate safekeeping and automatic investment. Holders of Pleasantville, New Jersey 08232 record of Common Stock or interested investors desiring to Telephone (609) 645-4506 or (609) 645-4507 enroll in the Plan should contact Investor Records at the address listed. In addition, shareholders whose stock is held When are dividends paid? in a brokerage account may be able to participate in the Plan.

The proposed record dates and payable dates are as follows: These shareholders should contact their broker or Investor Records for more information.

Record Dates Payable Dates March 20, 1995 April 17, 1995 Where is the Company's stock listed?

June 19, 1995 July 17, 1995 Common Stock is listed on the New York, Pacific and September 25, 1995 October 16, 1995 Philadelphia Stock Exchanges. The trading symbol of the December 26, 1995 January 15, 1996 Company' s Common Stock is ATE; however, newspaper listings generally use At!Enrg or AtlanEngy.

The following table indicates dividends paid per share in 1994 and 1993 on Common Stock: The high and low sale prices of the Common Stock reported in the Wall Street Journal as New York Stock Exchange-Compos-1994 1993 ite Transactions for the periods indicated were as follows :

First Quarter $ .385 $ .38 1994 1993 Second Quarter .385 .38 Hi~h Low Hi~h Low Third Quarter .385 .385 First Quarter $21.750 $19.875 $25 .000 $21.875 Second Quarter 21.500 16.375 23.875 21.625 Fourth Quarter .385 .385 Third Quarter 19.625 16.125 25 .375 22.625 Annual Total $1.54 $1.53 Fourth Quarter 18.250 16.000 23 .875 20.375 Dividend checks are mailed to reach shareholders approxi-Is additional information about the Company available?

mately on the payment date. If a dividend check is not The annual report to the Securities and Exchange Com-received within 10 days of the payment date, or if one is mission on Form 10-K and other reports containing lost or stolen, contact Investor Records. financial data are available to shareholders. Specific requests should be addressed to :

Dividends paid on Common Stock in 1994 and 1993 were fully taxable. Some state and local governrnents may Atlantic Electric impose personal property taxes on shares held in certain Financial Services Department corporations. Shareholders residing in those states should 6801 Black Horse Pike consult their tax advisors with regard to personal property Pleasantville, New Jersey 08232-4130 tax liability. Telephone (609) 645-4483 or (609) 645-4518 FAX (609) 645-4132 34

Summa1fy Financial and Statistical 'Review 1994-1984

• 1994 1993 1992 1991 Atlantic Energy, lnc.-Investor Information Operating Revenues (000) $ 913,039 $ 865,675 $ 816,825 $ 808,374 Net Income (000) $ 76,113 * $ 95,297 $ 86,210 $ 85 ,635 Average Number of Common Shares Outstanding (000) 54,149 52,888 51,592 49,008 Earnings per Average Common Share $ 1.41 * $ 1.80 $ 1.67 $ 1.75 Total Assets (Year-end) (000) $2,545,555 $2,487,508 $2,219,338 $2,151,416 Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year-end) (000) $ 940,788 $ 952,101 $ 842,236 $ 807,347 Capital Lease Obligations (Year-end) (000) $ 42,030 $ 45,268 $ 49,303 $ 53,093 Dividends Declared on Common Stock $ 1.54 $ 1.535 $ 1.515 $ 1.495 Dividend Payout Ratio 109% 85% 90% 85%

Book Value per Share (Year-end) $ 15.56 $ 15.62 $ 15.17 $ 14.84 Price/Earnings Ratio (Year-end) 13 12 14 12 Times Fixed Charges Earned (pre-tax, Atlantic Electric) 3.21 3.54 3.76 3.68 Common Shareholders (Year-end) 48,850 47,832 46,524 43,802 Employees (Atlantic Electric) (Year-end) 1,794 1,835 2,023 2,032 Atlantic City Electric Company (Principal Subsidiary)

Facilities for Service Total Utility Plant (000) $2,507,922 $2,402,415 $2,279, 107 $2,175,601 Additions to Utility Plant (000) $ 126,367 $ 141,927 $ 134,326 $ 177,298 Generating Capacity (Kilowatts) (Year-end) (a) (b) 2,327,700 2,307,700 2,160,700 2,090,700 Maximum Utility System Demand (Kilowatts) 1,834,000 1,962,000 1,796,000 1,911,000 Capacity Reserve at Time of Peak

(% of Installed Generation) 19.4% 11.2 % 16.9% 5.2%

Energy Supply (mwh):

Net Generation 6,081,778 6,025,861 5,775 ,098 6,300,891 Purchased and Interchanged 4,439,228 3,753,433 3,553 ,247 3,124,024 Total System Load 10,521,006 9,779,294 9,328,345 9,424,915 Electric Sales to Ultimate Customers (mwh):

Residential 3,546,789 3,495,722 3,276,330 3,370,327 Commercial 3,344,675 3,259,541 3,100,133 3,147,318 Industrial 1,224,721 1,261,069 1,229,211 1,368,329 All Others 51,671 50,080 49,464 49,626 Total (c) 8,167,856 8,066,412 7,655,138 7,935,600 Residential Electric Service (Average per Customer)

Amount of Electricity Used During the Year (kwh) 8,638 8,608 8,131 8,440 Revenue for a Year's Service $ 1,003.30 $ 969.86 $ 903 .91 $ 906.66 Revenue per Kilowatt-hour 11.62 ¢ 11.27¢ 11.12¢ 10.74¢ Ultimate Customer Data (Average)

Residential With Electric Heating 82,612 82,385 82,206 81,838 Residential Without Electric Heating 327,985 323,722 320,744 317,486 Total Residential 410,597 406,107 402,950 399,324 Commercial 54,094 52,988 51,996 51,077 Industrial 980 971 990 998 All Others 518 522 524 524 Total Ultimate Customers (c) 466,189 460,588 456,460 451,923 Operating Revenues (000)

Electric Service:

Residential $ 411,954 $ 393,866 $ 364,232 $ 362,050 Commercial 332,145 315,089 299,866 292,349 Industrial 101,093 100,812 97,475 102,202 All Others 10.905 10 575 10 548 10 136 Total from Electric Service 856,097 820,342 772,121 766,737 Unbilled Revenues-Net (7,239) 28 1,203 3,229 Sales for Resale 54,370 36,576 35,884 30,404 Other Electnc Revenues 9,998 8,853 7,723 8,112 Total Operating Revenues (c) $ 913,226 $ 865,799 $ 816,931 $ 808,482

(*)Reflects special charges, primarily for employee separation costs. (a) Excludes capacity allocated to a large industrial customer. (b) Includes unit purchases sales of capacity under contracts with certain other utilities and nonutilities. (c) Includes sales to an affiliate within the Atlantic Energy consolidated group.

35

. ' ATLANTIC ENERGY, INC. AND SUBSIDIARIES 1990 1989 1988 1987 1986 1985 1984

$ 740,894 $ 723 ,216 $ 687,335 $ 635,657 $ 604,716 $ 612,035 $ 582,386

$ 68,879 $ 80,964 $ 72,171 $ 73,765 $ 54,946 $ 46,150 $ 56,433 45,590 43,268 39,186 36,622 36,532 36,138 35,162

$ 1.51 $ 1.87 $ 1.84 $ 2.01 $ 1.50 $ 1.28 $ 1.60

$2,006,010 $1 ,864,461 $1,660,286 $1 ,499,381 $1 ,401 ,064 $1 ,319,027 $1 ,253 ,083

$ 747,877 $ 725 ,329 $ 594,461 $ 522,815 $ 534,822 $ 521 ,612 $ 473 ,462

$ 57,971 $

• 33, 146 $ 32,880 $ 37,694 $ 37,603 $ 38,857 $ 41,722

$ 1.47 $ 1.425 $ 1.37 $ 1.3575 $ 1.305 $ 1.2775 $ 1.225 97% 75 % 75 % 66% 87% 99% 76%

$ 14.36 $ 14.27 $ 13.58 $ 12.86 $ 12.18 $ 11.98 $ 11 .95 11 10 9 8 12 11 8 2.94 3.19 3.06 3.68 2.99 3.06 3.62 42,295 43 ,383 44,473 45,586 47,133 48,635 47,446 2,055 2,021 2,092 2,148 2,168 2,099 2,012

$2,027,138 $1 ,846,122 $1 ,712,614 $1 ,602,801 $1,503,010 $1 ,438,643 $1 ,351 ,392

$ 170,772 $ 147,886 $ 130,281 $ 105,521 $ 109,303 $ 105,213 $ 95,388 1,959,700 1,879,700 1,807,700 1,660,700 1,660,700 1,605,700 1,594,200 1,741 ,000 1,700,000 1,636,000 1,609,000 1,459,000 1,432,000 1,298,800 10.9% 9.6 % 9.5% 3.1% 12. 1% 10.8% 18.5 %

6,267,559 6,260,942 5,863 , 119 6,157,938 5,966,600 5,817,254 6,237,724 2,606,067 2,597,623 2,567,871 1,773,837 1,454,491 1,333 , 174 940,987 8,873 ,626 8,858,565 8,430,990 7,931 ,775 7,421,091 7,150,428 7,178,711 3,267,606 3,265 ,918 3,213,010 3,040,410 2,839, 114 2,638,121 2,646,813 3,063 ,069 2,917, 162 2,741 ,976 2,592,232 2,401 ,199 2,298,895 2, 150,464 1,376,423 1,380,832 1,339,005 1,323 ,567 1,222,981 1,204,971 1,197,392 49,769 53 ,872 56,289 58,191 58,120 57,685 59,122 7,756,867 7,617,784 7,350,280 7,014,400 6,521,414 6,199,672 6,053,791 8,251 8,382 8,460 8,281 7,982 7,643 7,866

$ 844.37 $ 840.34 $ 838.70 $ 808.14 $ 791.09 $ 799.29 $ 783.47 10.23 ¢ 10.03¢ 9.91¢ 9.76 ¢ 9.91 ¢ 10.46¢ 9.96 ¢ 81 ,479 80,409 78,805 75,900 72,640 68,871 65,261 314,529 309,245 300,974 291 ,253 28 3,062 276,305 271 ,207 396,008 389,654 379,779 367,153 355,702 345 ,176 336,468 50,274 49,509 48,398 46,775 45 ,359 44,256 43 ,615 1,002 1,008 1,014 1,015 1,022 1,020 1,015 537 549 552 554 554 554 544 447,821 440,720 429,743 415,497 402,637 391 ,006 381 ,642

$ 334,375 $ 327,443 $ 318,520 $ 296,712 $ 281 ,393 $ 275,897 $ 263,612 271 ,688 256, 199 240,890 222,129 214,230 216,052 190,435 96,766 94,634 91 ,661 84,476 80,037 83,628 79, 123 9 668 9.901 9 935 10.199 10 230 10.470 10.405 712,497 688, 177 661 ,006 61 3,516 585,890 586,047 543 ,575 (4,055) 7,215 6,716 385 (1 ,813) 3,076 (1 ,340) 24,115 18, 196 11 ,476 12,840 13 ,045 15 ,656 32,855 8,448 9,765 8,137 8,916 7,594 7,256 7,296

$ 741,005 $ 723,353 $ 687,335 $ 635,657 $ 604,716 $ 612,035 $ 582,386 36

JBomrd of <Di1fecto1fs "

ATLANTIC ENE R GY, INC. AND SUBSIDIARIES As OF DECEMBER 31, 1994 Jos. Michael Galvin, Jr . . . . . . . . . . . . . . . . . .

Mr. Galvin, a director since 1978, is president and chief executive officer of the South Jersey Health Corporation-The Memorial Hospital of Salem County. He is a director of Woodstown National Bank and the Center for Health Affairs. He is a graduate of the University of Scranton and holds a master' s degree in business administration from Xavier University. Age: 49. Professional Experience:

personnel, health care management.

Committee Chairman: Personnel. Committee Membership:

Audit; Energy, Operations & Research; Pension & Insurance.

Gerald A. Hale . . . . . . . . . . . . . . . . . . . . .

Mr. Hale, a director since 1983, is president of Hale Resources, Inc., a health care, industrial/natural resource company. He is a director of New Jersey Manufacturers Insurance Company, New Jersey Business and Industry Association and Hoke, Inc. He is a graduate of Western Michigan University. Age: 67.

Professional Experience: industrial minerals, chemicals and fabricated O.E.M. products.

Committee Chairman : Corporate Development. Committee Membership: Audit; Energy, Operations & Research; Personnel.

Matthew Holden, Jr . . . . . . . .. . . . . . . . .

Mr. Holden, a director since 1981, 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 Commis-sion 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. Age: 63. Professional Experi-ence: regulatory affairs, energy consultation, arbitration.

Committee Chairman: Audit. Committee Membership:

Corporate Development; Pension & Insurance; Personnel.

Cyrus H. Holley . . . . . . . . . . . . . . . . . . . . .

Mr. Holley, a director since 1990, is president of Manage-ment Consulting Services. He was formerly chief operating officer, executive vice president and a director of Engelhard Corporation. He is a graduate of Texas A & M University.

Age: 58. Professional Experience: industrial minerals ,

chemicals and precious metals . .

Committee Chairman : Energy, Operations & Research .

Committee Membership: Corporate Development; Finance

& Investor Relations; Personnel.

E. Douglas Huggard . . . . . . . . . . . . . . . . . . .

Mr. Huggard, a director since 1984, is chairman of the board of the Company. He served as chairman and chief executive officer of the Company and Atlantic City Electric Company from 1989 until 1993, when he retired after completing 38 years of service. Prior to that, he was director, president and chief executive officer of the Company and Atlantic City Electric Company. He holds a master's degree in mechanical engineering from the University of Delaware. Age: 61. Professional Experience:

utility operations.

Committee Membership: Ex-officio member of all commit-tees except Audit and Personnel.

37

13oard of <Diirectors ATLANTIC ENERGY, INC. AND SUBSIDIARIES Jerrold L. Jacobs . . .. . .. . . . . . . . . . . . . .

Mr. Jacobs is president and chief executive officer of the Company and of Atlantic City Electric Company. He is a director of all of the Company's subsidiaries and has been with the Company for 33 years. He is a graduate of the

• Newark College of Engineering (New Jersey Institute of Technology). Age: 55 . Professional Experience: utility operations .

Committee Membership: Ex-officio member of all commit-tees except Audit and Personnel.

Kathleen MacDonnell . . . . . . . . . . . . . . . . . . .

Ms. MacDonnell was elected as a director in 1993. She is vice president of Campbell Soup Company and president of its Frozen Foods Group. She is a member of the board of trustees of the West Jersey Hospital System, a member of the board of directors of the Camden County Girl Scouts and 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 Manage-ment. Age: 46. Professional Experience: consumer products, marketing and international management.

Committee Membership: Audit; Energy, Operations &

Research ; Finance & Investor Relation s; Pension &

Insurance.

Richard B. McGlynn . . . . . . . . . . . . . . . .

Mr. McGlynn, vice president and general counsel of United Water Resources , Inc., has been a director since 1986.

During 1994, Mr. McGlynn served as a partner in the law firm of LeBoeuf, Lamb, Greene & MacRae. 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. Age: 56. Profes-sional Experience: law, utility regulation.

Committee Chairman: Pension & Insurance. Committee Membership : Corporate Development; Energy, Operations

& Research; Finance & Investor Relations.

Bernard J. Morgan . . . . . . . . . . . . . . . . . . .

Mr. Morgan, a banking industry executive, was elected as a director in 1988. He holds a master's degree in business administration from the Wharton School of the University of Pennsylvania. Age: 58. Profess ional Experience:

banking, finance .

Committee Chairman: Finance & Investor Relations. Com-mittee Membership: Corporate Development; Pension &

Insurance; Personnel.

Harold J. Raveche . . . . .. . . .. . . . . . . . . .. .

Dr. Raveche, who became a director in 1990, is president of the Stevens Institute of Technology. He was formerly the dean of science of the Rennsselaer Polytechnic Institute.

He is a director of National Westminster Bancorp, Inc. and National Westminster Bank NJ, and a member of the U.S.

Council on Competitiveness and Business Executives for National Security. He holds a doctorate in physical chemistry from the University of California. Age: 51.

Professional Experience: higher education, science and technology policy .

Committee Membership: Audit; Corporate Development; Energy, Operations & Research; Finance & Investor Relations.

38

Officers ATLANTIC ENERGY, INC. ANDS~ SIDIARIES (AGE/YEARS OF SERVICE) AS OF DECEMBER 31, 1994 Jerrold L. Jacobs (55/33) President and Chief Executive Officer Mr. Ungerer was elected to his current position in 1994. He of Atlantic Energy; Director of Atlantic Energy and all subsidiar- previously served in management positions for Atlantic Electric in ies; Chairman, President and Chief Executive Officer of Atlantic business planning services, production economics and joint genera-Electric tion projects. He joined Atlantic Electric in 1980 as an engineer.

Mr. Jacobs was elected president and chief executive officer of Atlantic Energy and Atlantic Electric in 1993. Since 1990, he Nancy J. Cunningham (4711) President of Atlantic Energy Technol-served as president of Atlantic Energy and president and chief ogy; Treasurer of Atlantic Generation; Secretary of all non-utility operating officer of Atlantic Electric. He has also served as subsidiaries; Manager of Diversified Activities for Atlantic Energy executive vice president of Atlantic Electric. Mr. Jacobs joined Ms . Cunningham joined Atlantic Energy in 1994. She previously Atlantic Electric in 1961 as an engineer. served as manager of acquisitions and new business development for Rohm and Haas Company.

Michael J. Chesser (46/1) Vice President of Atlantic Energy; Executive Vice President and Chief Operating Officer of Atlantic Frank E. DiCola (47/1) President of Atlantic Thermal Systems Electric; Director of all non-utility subsidiaries Mr. DiCola joined Atlantic Thermal Systems as president in 1994.

Mr. Chesser joined Atlantic Energy in 1994. He was previously He was previously with Cogeneration Partners of America where he an executive with Baltimore Gas & Electric, where he was most served as president.

recently vice president-marketing & gas operations.

Frank F. Frankowski (44/11) Vice President-Controller, Assistant James E. Franklin II (4811) General Counsel to Atlantic Energy Treasurer and Assistant Secretary of Atlantic Electric; Certified and Atlantic Electric; Director of Atlantic Electric Public Accountant Mr. Franklin joined Atlantic Energy as general counsel in 1994. Mr. Frankowski was elected to his current position in 1993. He was He was previously a senior partner with the law firm of previously controller-corporate services. He has also held manage-Megargee, Youngblood , Franklin & Corcoran, P.A . where he ment positions in the accounting and tax departments. He joined represented Atlantic Energy in the capacity of external legal Atlantic Electric in 1983 as manager of internal auditing services.

counsel.

Ernest L. Jolly (42/14) Vice President-Atlantic Transformation of Meredith I. Harlacher, Jr. (52/29) Vice President of Atlantic Atlantic Electric Energy; Director of Atlantic Electric, Atlantic Energy Technol- Mr. Jolly was named to his current position in 1994. He was ogy; Atlantic Southern Properties; Atlantic Thermal Systems and previously vice president-external affairs. He has also held station ATE Investment; Senior Vice President-Energy Supply of Atlantic management positions at Deepwater Generating Station. He joined Electric Atlantic Electric in 1980 as an engineer.

Mr. Harlacher has served as vice president of Atlantic Energy since 1987 and was named senior vice president-energy supply of J. David McCann (43122) Vice President-Strategic Customer Atlantic Electric in 1993. He has also served as senior vice Support of Atlantic Electric president-utility operations and senior vice president-corporate Mr. McCann was named to his current position in 1994. He planning and services of Atlantic Electric. He joined Atlantic previously served as vice president-engineering & construction Electric in 1965 as an engineer. services of Atlantic Electric. He has also served as vice president-power delivery and vice president, treasurer and assistant secretary of Henry K. Levari, Jr. (46/23) Vice President of Atlantic Energy; Atlantic El~ctric . He joined Atlantic Electric in 1972 as an engineer.

Director of all subsidiaries; Senior Vice President-Customer Operations of Atlantic Electric Marilyn T. Powell (4711) Vice President-Marketing of Atlantic Mr. Levari has served as vice president of Atlantic Energy since Electric 1991 and was named senior vice president-customer operations of Mrs. Powell joined Atlantic Electric in 1994. She previously served Atlantic Electric in 1994. He has also served as senior vice as IBM's director of marketing process for its U.S. unit.

president-marketing & customer operations, senior vice president-corporate planning and services and vice president-power delivery Henry C. Schwemm, Jr. (53/25) Vice President-Power Generation of Atlantic Electric. He joined Atlantic Electric in 1971 as an & Fuels Management of Atlantic Electric engineer. Mr. Schwemm was named to his current position in 1993. He previously served as vice president-production of Atlantic Electric.

J. G. (Jerry) Salomone (54/18) Vice President, Secretary and He joined Atlantic Electric in 1969 as an engineer.

Treasurer of Atlantic Energy; Director of all subsidiaries; Senior Vice President-Finance & Administration of Atlantic Electric; Louis M. Walters (42116) Vice President-Treasurer and Secretary Certified Public Accountant of Atlantic Electric; Treasurer of Atlantic Southern Properties, Mr. Salomone has served as vice president of Atlantic Energy Atlantic Thermal Systems, Atlantic Energy Technology and ATE since 1987. He was named senior vice president-finance & Investment; Certified Public Accountant administration of Atlantic Electric in 1993. He was previously Mr. Walters was elected vice president-treasurer of Atlantic Electric senior vice president-finance & accounting and treasurer. He has in 1993 and elected secretary of Atlantic Electric in 1994. He served as chief financial and accounting officer of Atlantic previously served as general manager-treasury and finance of Atlantic Electric since 1984. He joined Atlantic Electric as assistant Electric. He joined Atlantic Electric in 1978 as an accountant.

controller in 1976. (retired 211195)

James C. Weller (4511) President of Atlantic Generation, Inc.

Scott B. Ungerer (36/14) Vice President of Atlantic Energy; Mr. Weller joined Atlantic Generation, Inc. as president in 1994. He Director of all non-utility subsidiaries; Chief Executive Officer of previously held the position of vice president-engineering and project Atlantic Generation, Atlantic Energy Technology and Atlantic development for Cogeneration Partners of America.

Thermal Systems; President of ATE Investment and Atlantic Southern Properties

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