ML18092B469

Atlantic Electric 1986 Annual Rept.

ML18092B469
Person / Time
Site:	Peach Bottom, Salem, Hope Creek, 05000000
Issue date:	12/31/1986
From:	Feehan J, Huggard E ATLANTIC CITY ELECTRIC CO.
To:
Shared Package
ML18092B463	List: ML18092B462 ML18092B465 ML18092B466 ML18092B468 ML18092B469
References
NUDOCS 8703200032
Download: ML18092B469 (44)

Text

NOTICE -

THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS RECORDS FACILITY BRANCH

Corporate Address P.O. Box 1264 1199 Black Horse Pike Pleasantville, New Jersey 08232 (609) 645-4100 ABOUT THE COMPANY Atlantic City Electric Company is the official name of the Company as it appears in the Articles of Incor-poration . The Company also uses the registered trade name Atlantic Electric in various shareholder and customer publications and in its daily operations.

NOTICE OF ANNUAL MEETING The 1987 Annual Meeting of Share-holders will be held on Wednesday, April 22, 1987 at the Quail Hill Inn, Smithville , New Jersey. A Notice of Annual Meeting will be mailed in March to those shareholders entitled to vote.

CONTENTS Letter to Shareholders 2 The Year in Review 4 Perspectives on Service 6 Our Service Area 14 Customers At-A-Glance 15 Financial Information 16 Investor Information 37 Statistical Review 1986-1976 38 Board of Directors 40 Director Committees 40 Corporate Officers 40

Financial Highlights Results of Operations 1986-1984

% Change  % Change 1986 1986-1985 1985 1985-1984 1984 Electric Operating Revenues (OOO's) $ 582 ,961 .6 $ 579 ,733 5.5 $ 549,531 Operating Expenses (OOO's) $ 487,507 (.6) $ 490 ,327 7.0 $ 458 , 140 Net Income (OOO's) $ 69,550 14.9 $ 60 ,519 (4.4) $ 63,277 Earnings Per Common Share $ 3.50 16. 7 $ 3.00 (6.3) $ 3.20 Dividends Paid Per Common Share $ 2.60 2.8 $ 2.53 4.5 $ 2.42 Total Assets (OOO's) $1,398,886 7.6 $1,299,633 6.5 $1,220,503 Cash Construction Expenditures (OOO's) $ 92,283 (1. 8) $ 94,017 11.1 $ 84,630 Sales of Electricity (KWH) (OOO's) 6,521,414 5.2 6, 199,672 2.4 6,053 ,791 Price Paid Per KWH-(All Customers) 9.033¢ (4. 7) 9.481 ¢ 5.4 8.999¢ Total Customer Accounts (Year-end) 407,776 3.2 395 ,205 2.9 384,166 Number of Shareholders-Common Stock (Year-end) 47,133 (3.1 ) 48 ,635 2.5 47 ,446 Number of Employees (Year-end) 2,168 3.3 2,099 4.3 2,012 Book Value $ 25.67 3.7 $ 24.76 2.0 $ 24 .27 Earnings and Dividends Market Price Paid Per Share Per Share of Common Stock of Common Stock (in dollars) (year-end in dollars) 3.50 40 3.00 35 2.50 30 2.00 25 1.50 20 -

I I I I I I 0 '82 '83 '84 '85 '86 0 '82 '83 '84 '85 '86 Earnings

• Dividends Paid

To Our Shareholders:

In 1986, we celebrated our first century of Future fina ncial perfo rmance will continue to service and the resu lts of the year are further cause depend on both sales and appropriate rate relief. In for celebration-earnings and dividends are up, and March 1986 , the New Jersey Board of Public the price of electricity is down . It has been one of Utilities granted us a $13 .6 million increase in base the Company's best years ever! Per share earni ngs rates. We have also been involved in a separate rate fo r 1986 amounted to $3.50, an all-time record , and proceeding dealing with our 5% share of the new it represents a substantial increase above the 1985 Hope Creek unit , which is jointly owned with Public level of$3.00. Service Electric & Gas Company. H ope Creek was Our fine record of dividend increases con- completed and joined the other units in the PJM tinued . For thirty-fo ur consecutive years now, power pool in December 1986 .

dividends paid per share have increased . In 1986, the T he BPU has been conducting hearings within dividends paid amounted to $2.60 per share, reflect- a Public Service case to examine the costs of the ing the decision by the Directors last June to increase Hope Creek uni t and to fix a level of investment fo r the quarterly dividend rate by one cent , to $.65 Y2 . ratemaking purposes. We understand that the BPU Our strong financial results derived in large has just issued an oral decision in the Public Service measure fro m the growth in energy sales . More than case, recognizing only $4. 129 billion of total Hope 11 ,600 new customers joined us this past year, and Creek costs, and disallowing $455 million. We will kilowatthour sales increased by 5.2%. Growth was have to wait until written orders are issued in that exceptional in both the commercial and residential case and in ours to determine what the effect on the sectors. Peak demand reached a new level of 1,459 Company might be. A disallowance by the BPU of MW, representing a 1. 9% increase over the prior some of our Hope Creek costs could result in a rate record set in 1985. increase lower than we had requested and , based upon new accounting standard s fo r regulated indus-tries issued in December 1986, a wri te-down of some portion of our booked investment would result. T he accounting standard is not required to be imple-mented by the Company until 1988 and , in that event, the adjustment would be reflected in a restatement of previously reported retained earnings .

O n the positive side, H ope Creek is a new generating unit which successfull y completed pre-commercial testing in record time, has been per-fo rming well , and will play an important role in our capacity mix fo r the future.

We expect that the rate decision to be issued shortly by the BPU will result in a net decrease in rates fo r our customers: An increase fo r Hope Creek and certain other costs would be offset by decreases due to fuel savings with H ope Creek on-line, lower charges fo r other fuel and purchased power costs and reduced federal income tax expense as a result of the Tax Reform Act of 1986.

Once again in 1986, about 80% of our energy

{I tor]: E .D . H uggard, J D. Feehan was provided by coal and nuclear sources. Our diverse mix of fuels and generating units continues to be a significa nt facto r in managing costs: Rates charged our customers have been relatively stable since 1984, and we expect that stability to continue through this coming year .

The Company enjoyed the benefits of improv-ing financial markets in 1986. As the Standard &

Poor's 500 index increased by 18% over the year , our stock price showed an increase of 30%. A share-holder buying ATE fo r $28 % at the beginning of 2

1986 would have seen, by year's end , an increase of Developments of the past year have made full about $8.50 in share price . Coupled with the $2. 60 use of the many skills provided by each member of of dividends paid , the total return on that initial the Board . One of our Directors, Richard M. Dicke ,

investment would have been 38%. Interest rates has served on the Board since 1969. Having attained were quite favorable in 1986, and we were able to the age of 71, Rick will not be standing for re-election replace some of our outstanding long term debt with as a Director at this year's Annual Meeting. By that lower-cost new issues. time, Rick will have served on the Board for more We have been giving a lot of thought to the than 18 years. His expertise in corporate and securities changes occurring in our industry. Developments in law is renowned throughout the industry, and we have regulation, competition and alternate energy sources benefited, in lasting measure, from his unlimited will be the challenges which, if managed properly, energy and dedication to the success of the Company.

can become rewarding opportunities. In the process, Our newest Director, Richard McGlynn , has we have sharpened our focus on customers, choices been of great assistance since joining us last April ,

and costs. providing the Board with his vast experience and In the future, strong financial performance will knowledge of regulatory and legal matters. We would depend on our ability to further increase productiv- also note, with great sadness, the passing of John ity and manage expenses . We believe that the Miner in January 1987. John was one of our senior interests of both customers and shareholders can best Directors, having served on the Board since 1973.

be served with a "least-cost" strategy: More intensive His insight and financial advice have been of great conservation and load management, customer-owned value, and we will treasure the contribution which generation and cogeneration are key options in our he has made over the years to the Company. We will energy future. Combined with a reduced level of miss him as a dear friend.

investment in new, traditional generating capacity, it A sense of family binds the people of Atlantic should be possible to provide our customers with the Electric together. Growth and change can be energy they require at the lowest reasonable cost. rewarding, particularly for a family which has a From the shareholders' perspective , we want to common sense of purpose. For us, it is a belief that assure that future investment by the Company fits success is achieved by providing our customers the into a least-cost system, and that it will earn an services they desire. That, in turn , brings added appropriate return . value to your investment and , we trust, pride in We have come to believe that a holding your Company.

company structure would provide greater flexibility and better support for this strategy. The proposed For the Board of Directors, holding company, Atlantic Energy, Inc., will have Atlantic City Electric Company as its main subsid-iary. Other, unregulated subsidiaries will complement the electric company in developing future power supply, such as cogeneration, and supporting economic vitality in the service area. We also believe that there are additional opportunities for us to enhance earnings through financial investment activities.

J. D. Feehan Chairman of the Board Although we believe that diversification will be beneficial, our deployment of resources outside of the core business will be conservative. Diversification will remain related, in large part , to assuring that the people of our service area will have the energy which they need.

E. D. Huggard President and Chief Executive Officer February 6, 1987 3

The Year in Review Construction

- T he 1986 program totalled $109. 3 million. Deepwater Unit #1 was modified to burn both oil Major projects within that program included: and natural gas. The unit now has the capability to Construction of Hope Creek was completed and switch between fuels based on economics. A new was made available for full dispatch to the power electronic control system was installed during the pool in December 1986. Hope Creek set a new conversion that will enhance the unit's efficiency.

industry record for the fastest start-up of a boiling Modifications made to B. L. England Unit #3 water reactor. during 1986 are expected to improve the unit's load-The exterior shell for a new 475' chjmney was tracking capabilities during off-peak times.

constructed at the B. L. England Station. It will In July 1986 the Company began using a com-serve two coal fired and one oil fired unjt and will puter-aided drafting system for producing drawings.

help maintain compliance with emission standards. This system will improve drawing clarity, promote The structure is expected to be in service in 1988 and standardization and improve productivity.

when completed, will resemble a lighthouse.

Operations

- A new energy peak demand of 1,459 megawatts - Jointly-owned units combined produced about occurred on July 7, 1986 representjng a 1. 9% 20% more energy during 1986 than in 1985. Unit increase over the 1985 recorded peak. Sales for 1986 output records were achjeved at Keystone and were 6. 5 billion kilowatt-hours, a 5.2% increase over Conemaugh facilities.

1985.

- The Generating Equipment Maintenance Sys-

- Coal and nuclear generating facilitie provided tem was instituted in 1986 to streamline maintenance 78% of energy needs in 1986. The continued use of management functions. The system will improve our coal and nuclear saved customers an estimated $90 ability to plan and schedule maintenance projects, million in fu el costs. check their progress and track their costs.

Administration A new training center was opened in June. Employee and Company contributions to the Training activities were consolidated to efficiently United Way in 1986 exceeded $186,000, representing provide a broad range of programs including com- about a 15% increase over last year .

puter literacy, skill development, personal growth Through the Good Neighbor Fund , customer and safety in the work place .

and Company donations assisted 1,500 needy fami -

President Doug Huggard met with employees lies with their heating bills.

at various locations in a series of meetings through-out 1986. Through these sessions, suggestions for improvements in working conditions and perfor-mance evaluations were made and implemented.

4

Planning and Rates

- In March 1986, the New Jersey Board of Pu blic - The corporate planning process was further Utilities (BPU) granted a $13 .6 million increase in refined in 1986 with the establishment of specific base annual revenues. T he order allowed an overall Strategic and Operational Planning Committees. The rate of return of 11. 42% and a return on common Strategic Planning Committee coordinates the equity of 14.1%. activities that deal with the nature and the di rection of the Company while the Operational Planning

- Effective January 1986, the BPU approved Committee concentrates on operational planning and reductions in energy adjustment revenues totalling objectives.

$44 million . The decrease in rates primarily reflected lower projected fuel costs. Special meetings of the Company's Board of Directors were held during 1986 to evaluate certain

- Proposed restructuring of Atlantic Electric into strategic planning issues including opportunities fo r a holding company was approved by the BPU in diversification, changes in utility regulation and December 1986.

alternate energy technologies.

Finance and Accounting

- T he Company sold $125 million of 8Ys% Series - on July 2, 1986 members of the Company's of First Mortgage Bonds due 2016 and $95 million of senior management appeared before the New York 8% Series of F irst Mortgage Bonds due 1996. Some Society of Security Analysts to discuss the Company's of the proceeds were used to redeem $143.2 million financial perfo rmance and its least cost planning of First Mortgage Bonds of 11 Y2% or greater. strategy.

- T hro ugh redemption and sinking fund s in - During 1986, the first module of the new Cost 1986, the Company reduced its embedded cost of Center Management System was used to develop debt by about 72 basis points to 8.9% and its portions of the Company's 1987 operation and embedded cost of preferred stock by about 30 basis maintenance budget. Other modules of this account-points to 7.2%. ing information system are being implemented as pan of a long-term plan to provide better cont rol of costs.

Customer Service

- At year end 1986, the total number of customer - Conservation and load management programs accounts was approximately 408,000 , a 3.2% increase provided customers with opportunities to control over 1985. T he number of Residential and Commer- their cost of electricity in 1986. Over 5,200 home cial customers increased 3.2% and 3.1%, respectively, energy audits were completed and about 4,700 while the number of Industrial customers decreased customers took advantage of customer seal-up slightly. programs.

- Two additional customer courtesy centers were - Over 900 employees from all areas of the opened in the service territory in 1986 . T hese Customer Service section participated in one of the locations provide customers with convenience and Company's largest training programs. The moti-direct access to Company personnel fo r handling a vational program focu sed on the importance of good fu ll spectrum of customer services. customer service in an emerging competitive environment.

5

- "The familiar images of customer service tell only a part of the story. For us, service is tradition. It's a spirit and commitment to help customers for both the short and long term. That's just good business. Our tradition becomes meaningful through the efforts of all our employees, each one leaving a personal imprint on the service we provide."

E.D. HUGGARD-President and Chief Executive Officer 6

7

- "Every customer is special, with unique needs for service. It's our job to mobilize the people and technical resources necessary to provide quality service. What gives us pride is meeting each customer's standards for getting the job done well."

JOHN J. SIDERAVAGE-Manager of Transmission and Distribution 8

v'ElDplf)Etlf Of f( "M!Nu. Of 1fA1E'S 10 i: - DF - use. Rti.:rfs ll)[ Cu~10Mef1S WlfH C'#o1c.ts OAo-5hAp!S. 0,A~~c.:f1(1sli(.S

~ LHIVS Cosn of f.Nt:R&J

'"  ?.

- "Setting electric rates is a complex process. \%work to establish rates which provide a fair return. But an important part of the process is to develop a menu of rates, tailored to customer needs. Rate design seeks to give customers a choice, encouraging conservation and off-peak usage to help keep total electricity costs down."

THOMAS W. LANGLEY-Manager of Rate Design 9

- "There's a lot of value in cogeneration technology that many of our customers may not be aware of That's why it's important for us to raise customers' awareness about cogeneration and identify those customers who could enjoy its unique benefits. ~'re working closely with potential cogenerators to tailor this highly specialized process to fit their energy needs, both now and in the future."

HOWARD SOLGANICK-Manager of Corporate Planning and Corporate Performance 10

"Every day, customers make choices that can affect the cost of electricity for years to come. It's our job to keep customers informed and to involve them in the energy conservation process. By helping customers make thoughtful choices about the way they use energy now, we will be better able to provide them with affordable energy in the future."

W.K. CAVENDER, JR.-Manager of Conservation and Load Management 11

- "Our concern for the environment goes beyond the need to meet regulations. As a visible part of the communities we serve, it's important to conduct our operations as any good neighbor should.

Our commitment to preserve the environment is a real one-after all, we live here, too."

R.F. DAUGHERTY-Manager of Environmental Affairs 12

- "The portrait of a company is painted by its people.

Enthusiastic, competent and understanding employees are our greatest resource. Our ability to put the customer at ease by delivering personal service brings a sometimes large and "unknown" entity down to a size where customers can feel comfortable and confident that their service needs will be met."

FERN M. MILLS-Manager of Customer Inquiry and Billing 13

Customers At-A-Glance Residential (billions of kwh )

Total residential kilowatt-hour sales increased 7.6% in 1986 4 and average use per residential customer rose 4.4%. In 1986, the average number of residential customers increased 3% 3 and now comprises over 88% of the Company's total customer accounts. Over 9,700 new residential dwellings -

2 were connected in 1986, with the majority located in the r coastal area. -

I I'

I* I~

Est. 1986-2001 0 '82 '83 '84 '85 '86 2001 Annual Growth average 1986 2001 Rate customer 7.4 7.7 7.9 7.6 8.0 use 7.4 (000 kwh)

Energy (billion kwhrs) 2.839 3.577 1.55%

% of total 44 43 44 Peak (Mw) 786 988 1.54% sales 43 43 45 Commercial (billions of kwh)

The Company's average number of commercial customers 4 increased 2.5% to 45,359. Overall, commercial sales rose 4.5%. Sales to the eleven hotel casinos increased over 7% 3 from 1985, and represented 5.9% of 1986 total energy sales.

Two additional hotel casinos are expected to be in operation 2

by year-end 1987.

Est. 1986-2001 0 '82 '83 '84 '85 '86 2001 Annual Growth average 1986 2001 Rate customer 44.2 46.8 49.3 51.9 52.9 use 67.7 (000 kwh)

Energy (billion kwhrs) 2.401 3.128 1.78%

% of total 34 35 35 37 37 40 Peak (Mw) 528 711 2.00% sales Industrial & Other (billions of kwh)

Sales to industrial and other customers increased 1.5% in 4 1986 from 1985 levels. Industries in the Company's service area include glass, chemicals and allied products, rubber 3 and plastic products, food products, petroleum refining and machinery. The Company's 1,022 industrial customers, 2

whose average use per customer increased slightly in 1986, are located primarily in the inland and western sections of - .. I---

I the Company's service territory.

Est. 1986-2001 0 '82 '83 '84 '85 '86 2001 Annual Growth average 1986 2001 Rate customer use 1197.0* 1200.4* 1179.7* 1181.3* 11%.7* 1115.2*

(000 kwh)

Energy (billion kwhrs) 1.281 1.192 -0.48%

% of Peak (Mw) total 23 22 21 20 19 15 145 124 -1.04% sales

• Industrial customers only 15

Index to Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations Report of Management Auditors' Opinion ~1 Statement of Income and Retained Earnings .

Statement of Cash Flows Balance Sheet Notes to Financial Statements 16

Management's Discussion and Analysis of Atlantic City Electric Company Financial Condition and Results of Operation The aggregate dollar amounts of major external financ-OVERVIEW ings for the past three years are summarized as follows:

The nature of the Company's operations is capital intensive.

A significant amount of funds are invested in property (Millions of Dollars) 1986 1985 1984 and plant to generate, transmit and distribute electric First Mortgage Bonds $220.0 $70 .0 $42.2 energy service to customers. At December 31, 1986, gross Common Stock .4 11.2 12.2 investment in property and plant was approximately $1.5 billion. As a utility, the Company is generally subject to Total $220.4 $81.2 $54.4 regulation by the New Jersey Board of Public Utilities (BPU). The Company seeks to maintain a level of rates Financings in 1986 included the sale of two series of First which will allow it to meet daily working capital require- Mortgage Bonds: $125 million of the 87/s% Series due 2016 ments, long term obligations, and to provide a fair return and $95 million of the 8% Series due 1996. Portions of the on investment to its shareholders, while maintaining proceeds of these financings were used to redeem outstand-service reliability. ing indebtedness which had been issued at higher interest rates. The 1986 Common Stock issuances related to shares LIQUIDITY AND CAPITAL RESOURCES issued through the Employee Stock Ownership Plan (ESOP). Effective January 1, 1986 the Company's Dividend Construction Program Reinvestment and Stock Purchase Plan (DRP) was modi-During 1986, cash construction expenditures aggregated fied so that shares issued under the DRP would be shares

$92 million, which is a 2% decrease from the $94 million purchased in the open market rather than newly issued expenditure level experienced in 1985 and a 9% increase shares.

from the level in 1984. A major element of the construction The 1985 financings included the sale of $70 million of program during the past several years has been the ll Y2% Series of First Mortgage Bonds, $10.8 million of Company's 5% interest in the Hope Creek Generating Common Stock issued through the DRP, and $.4 million of Station. Cash construction expenditures associated with Common Stock issued through the ESOP.

Hope Creek during 1986, 1985 and 1984 amounted to $17 In 1984 the Company issued three pollution control million, $31 million and $23 million, respectively. The series of First Mortgage Bonds: $.85 million of a lO Y2%

construction program and the forecast of related construc- Series, $18.2 million of Adjustable Rate Series, and $23.15 tion expenditures is reviewed regularly and is designed to million of a separate 10Yz% Series. Also issued was $11.4 meet customers' demand for electric energy service for the million of Common Stock through the DRP and $.8 present and the future. The current forecast of peak load million through the ESOP.

growth for 1987 through 1991 is 1.4% per year. This The timing and amount of security issuances are guided, forecast reflects a continuing commitment to promote in part, by the Company's capital structure goals.

energy conservation among customers, and alternatives to Capitalization ratios as of December 31 for the last five conventional energy supply, including cogeneration. In years are set forth in the accompanying chart.

response to customers' needs, the construction program Approximately 34% of the cash requirements for con-includes elements to improve or replace existing produc- struction, maturities, sinking funds, optional retirements tion plant, and upgrading of the transmission and and redemptions associated with long term debt and distribution system. preferred stock, and for other capital purposes during the Financing Program period 1984-1986 was generated from operations after The Company's financing program is determined by the deductions for dividends and working capital needs, but excess of its total cash requirements over the level of cash exclusive of changes in temporary cash investments.

generated by its operations. Cash requirements are affected Excluding the early retirement of all of the 125/s% Series not only by the levels of construction expenditures, but First Mortgage Bonds and a portion of the 1F/s% and also by requirements associated with normal operations, ll Y2% Series First Mortgage Bonds in 1986, approximately redemptions, retirements, sinking funds and maturities of 46% of cash requirements during the period 1984-1986 outstanding debt and senior equity. Interim financing of were generated internally.

cash requirements is accomplished by means of short term Provisions of the Company's charter, mortgage and debt, which is periodically repaid with the proceeds from debenture agreements can limit, in certain cases, the permanent financings. The types of permanent financings amount and types of additional financing which may be employed by the Company are determined after considera- used. At December 31, 1986 the Company estimates tion of such factors as cost of capital, leverage and long- additional funding capacities at $314 million for First term capital structure goals. Flexibility in financing needs Mortgage Bonds, or $373 million for Preferred Stock, or is complemented by maintaining short-term lines of credit $213 million for unsecured debt. These amounts are not with lending institutions, which aggregated $ll5 million at necessarily additive.

December 31, 1986.

17

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

Future changes in operating revenues will reflect the RESULTS OF OPERATIONS timeliness and adequacy of rate relief, general economic The tabulation on pages 38 and 39 includes key historical conditions in the service area and the results of load indicators which may be helpful in evaluating the perfor- management and conservation programs.

mance of the Company over the past ten years.

Sales Earnings Changes in kilowatt-hour sales are generally due to changes Earnings per share of Common Stock, based on the in the average number of customers and average customer weighted average number of shares outstanding, were use, which is also affected by weather conditions.

$3.50 in 1986, compared to $3.00 in 1985 and $3.20 in Energy sales statistics, stated as percentage changes 1984. The increase in 1986 earnings per share is primarily from prior years, are shown below:

attributable to increased sales, while the decrease in Increase (Decrease) from Prior Year earnings per share in 1985 is attributable to increases in operating expenses without corresponding rate relief. In Customer Class 1985 addition, earnings are sensitive to other changes in Average Average revenues and expenses as discussed below. # of #of Revenues Sales Use Cust. Sales Use Cust.

Operating revenues increased .6% in 1986 to $583.0 Residential 7.6% 4.4% 3.0% (.3)% (2.8)% 2.6%

million compared to $579.7 million in 1985 . The 1985 level Commercial 4.5 1.9 2.5 6.9 5.4 1.5 of revenues represented a 5.5% increase compared to 1984. Industrial 1.5 1.3 .2 .6 .1 .5 These overall increases reflect the net results of base Other .8 .8 (2.4) (4.2) 1.8 revenue increases, changes in Levelized Energy Clause Total 5.2 2.2 3.0 2.4 2.5 revenues and changes in kilowatt-hour sales as shown below:

The 5.2% and 2.4% increases in total kilowatt-hour sales in (Thousands of Dollars) 1986 1985 1986 and 1985, respectively, are largely attributable to the number of new customers added to the system. The Base and Unbilled Revenues $ 7,527 $24,142 growth of electricity consumption within the service Levelized Energy Clauses (33,849) (7 ,039) territory is related to improving economic conditions, Kilowatt-hour Sales 29,550 13,099 enhanced in part by the hotel/casino industry.

Overall, the combined effects of the changes in sales and Total $ 3,228 $30,202 rates have resulted in a decrease in revenues per kilowatt-hour of 3.6% in 1986 compared to 1985, and an increase of 2.3% in 1985 compared to 1984.

Cash Requirements and Year-end Capitalization Total Energy Sales Internal Generation of Funds (in percent) (in billions of kiluwau-hours)

(in millions of dollars) 2SO JOO 7.0 200 80 6.S ISO 60 6.0 JOO 40 s.s so 20 s.o 0 '82 '83 '84 '85 '86 . 0 '82 '83 '84 '85 '86 0 I I I I I

'82 '83 '84 '85 '86 Construction and Other Common Equity

• Long term Debt Maturities, Retirements and Sinking Funds

• Preferred Stock

• Short term Debt

• Internal Cash Generation 18

• Excludes certain optional retirements.

Atlantic City Electric Company Costs and Expenses Operation and maintenance costs include the costs of Total operating expenses decreased .6% in 1986 compared both wholly-owned and jointly-owned generating units. At to 1985. The 1985 operating expenses represented an the Company's wholly-owned units, programs have been increase of 7.0% compared to 1984. Excluding depreciation instituted to upgrade these facilities to improve efficiency and taxes , operating expenses fell to $328.6 million in and extend the service life of the generating units.

1986, a decrease of 1.3% from 1985, which bad increased Additionally, operating and maintenance costs are sub-6.9% from 1984. jected to price increases relating to materials, supplies and Net Energy Costs reflect the amount of energy pro- services, and include wages and employee benefits.

duced , the various fuel and purchased power sources used Changes in depreciation expense generally represent to produce it, as well as the operation of the levelized changes in the value and mix of electric utility plant in energy clauses (LEC's). Information on the sources and service and the respective in-service dates.

costs per kilowatt-hour of energy is shown in the accom- The components of federal income taxes are detailed in panying graph and table. During 1986 the Company was in the notes to the financial statements.

an overrecovery position with respect to the LEC's. For Interest charges before the allowance for borrowed funds 1985 , Net Energy Costs include $5,865 ,000 of previously used during construction rose to $46.l million in 1986 Deferred Energy Costs representing fuel costs recovered compared to $41.6 million in 1985 and $40 .3 million in under the LEC's. In 1984 Net Energy Costs were reduced 1984. These increases reflect net effects of principal by $6,969,000 reflecting the deferral of fuel costs incurred amounts and interest rates of debt outstanding in the in excess of revenues collected under the LEC's effective periods. A total of $332.2 million of long term debt was for that year. issued during the 1984-1986 period as described under At December 31, 1986, $13 ,177 ,000 is shown on the "Financing Program" above. In the same period, matu-balance sheet as Deferred Energy Revenues associated with rities of long term debt included $5 million of 3% Series the current energy clause, compared to $4,466,000 at First Mortgage Bonds and $21 million of 9% Pollution December 31, 1985 . Control Series First Mortgage Bonds in 1984, $10 million The Company's annual fuel, interchange and purchased of 3Y4% Series First Mortgage Bonds in 1985 and $45 power costs reflect changes in availability of low-cost million of floating rate notes in 1986. In addition, $63. 75 generation from Company-owned and purchased sources, million, $36.675 million and $48. 785 million principal as well as changes in the needs of other utilities participat- amounts, respectively, of the 125/s%, 1F/s% and l1 Y2%

ing in energy interchange. Certain costs associated with Series of First Mortgage Bonds were retired early in 1986.

purchased power are deferred on the balance sheet since The decrease in short term interest expense in 1986 from rates are levelized to collect these costs over the 17-year life 1985 reflects lower average balances and lower average of the agreements with Pennsylvania Power & Light rates. The increase in short term interest expense in 1985 Company. from 1984 reflects higher average balances offset by lower average rates. The embedded cost of long term debt at December 31, 1986 was 8.9%, compared to 9.6% in 1985 Pre-Tax Interest Average Annual Price AFDC as a Percent Coverage Ratio Per Kilowatt-Hour of Net Income (times coverage) (in cents) 5 JO 25 4 8 20 3 l.< 6 15 I:

2 4 JO

.. I.

1:.

11 I I'. 2 5 l' ~

0 '82 '83 '84 '85 '86 0 '82 '83 '84 '85 '86 0 '82 '83 '84 '85 '86 19

Management's Discussion and Analysis of Atlantic City Electric Company Financial Condition and Results of Operation continued )

and 9.2% in 1984. The Company expects to use short term There are external forces which the Company may be debt, but to a lesser degree, to finance the construction unable to influence. The ability to raise adequate capital and working capital needs on an interim basis, replacing it when needed, at the lowest possible cost, depends upon with long term issues as permanent financing. such factors as regulatory treatment of cost of service and The Allowance for Funds Used During Construction the maintenance of good credit ratings.

(AFDC) including both the Borrowed Funds portion, The recent tax law changes enacted in the Tax Reform which is used to reduce interest charges, and the Equity Act of 1986 will affect the Company in certain respects, Funds portion, shown under Other Income, was $17.0 some of which will be unfavorable. For instance, the repeal million in 1986 compared to $11.2 million in 1985 and $10.8 of the investment tax credit provisions are not favorable to million in 1984. The increases are due to increases in the a business such as the Company's which historically invests average balances of construction work in progress, as well heavily in plant and equipment. A positive impact is an as an increase in the rate from 8.5% to a semi-annually overall reduction in the corporate income tax rate from the compounded 8.95%. AFDC as a percent of net income for current maximum of 46% to a composite rate of 40% in 1986, 1985 and 1984 was 24.5%, 18.5% and 17.0%, 1987 and 34% beginning in 1988. Coupled with this is a respectively. possible change in accounting for income taxes for financial reporting purposes, principally with respect to deferred income taxes, as proposed by the Financial Accounting OUTLOOK Standards Board for implementation in 1987. If adopted in The Company has positioned itself to remain flexible in its current form, the proposal would require the Company responding to the external forces that may affect it. This to record certain deferred tax liabilities previously unre-strategy is evident in the diversity of power supply sources, corded in accordance with rate regulation treatment, and which include investments in both wholly-owned generat- to adjust deferred tax liabilities to be computed at tax rates ing facilities, as well as ownership interests in jointly- currently in effect. The Company believes the recording of owned facilities, purchased power contracts and a diversity previously unrecorded deferred tax liabilities would not in fuel mix including coal, nuclear, oil and natural gas. have a material impact on its financial results because rate This strategy is also evident in the proposed plans to form regulation should allow recovery of these costs and thus a holding company, Atlantic Energy, Inc. This corporate create an offsetting asset. The effect of calculating cur-restructuring is expected to allow additional flexibility to rently existing deferred tax liabilities at the new rates as take advantage of opportunities which may arise in energy enacted by the Tax Reform Act will be lessened because related or other areas, and to respond more quickly to deferred taxes relating to utility plant would be adjusted changes which may affect the Company. over the remaining lives of the related assets using an "average rate assumption" as provided in the Tax Reform Total Sources and Act. Other potential deferred tax amount adjustments Costs of Energy would be subject to rate treatment, and thus may occur (in billions of kilowau-hours) over more than one year. Therefore, the major concern of the Company relating to these changes is the impact on 7 2%

2%

7% 11% cash flows, since taxes currently payable are expected to 3% 2% 2%

20% increase. In addition, the impact of the Tax Reform Act of

~~

10% 10%

21% 1986 is the subject of a proceeding before the BPU to determine the appropriate amount of decrease in the 5 22% Company's revenue requirements which should be 16% 32%

35% reflected in customer rates, since overall tax expense is 31%

4 expected to decrease as a result of the Act.

In summary, management believes the Company is ready 3 to meet the challenges and take advantage of the oppor-62% 60% tunities of the future, but continues to monitor and 2 49% develop appropriate responses to the changing environ-48% 42%

ment in which the Company operates.

L 2)% --L( l )O/o 0

'82 '83 '85 '86 Coal 2.35 2.02 2.01 1.95 1.80 Nuclear .59 .86 .97 1.00 .89

• Oil 5.15 5.00 5.66 5.20 4.09 Natura l Gas 5. 13 6.56 6.93 5.50 3.80 Interchange 5.43 5.21 6.02 3.65 2.48

\i?arly Average 2.38 2.54 2..13 2.17 1.81

- ce nts per kilowall *hour 20

Report of Management Auditors' Opinion The management of Atlantic City Electric Company is responsible for the financial statements presented herein.

Deloitte

!hese fina~cial ~tatements were prepared by management Haskins+ Sells One World Trade Center m confor~mty with generally accepted accounting princi- Certified Public Accountants New York , New York 10048 ples applicable to public utilities which are consistent in all material respects with the accounting prescribed by the State of New Jersey, Board of Public Utilities and the Feder~l Energy Regulatory Commission. In preparing the To the Shareholders and the Board of Directors financial statements, management made informed judg- of Atlantic City Electric Company:

ments and estimates relating to events and transactions being reported. We have examined the balance sheets of Atlantic City The Company has established a system of internal Electric Company as of December 31, 1986 and 1985 and the related statements of income and retained earnings and ac~ounting and financial_ controls and procedures designed of cash flows for each of the three years in the period to msure that the financial records reflect the transactions of the Company and that assets are safeguarded. This ended December 31, 1986. Our examinations were made in system is_ examined by management on a continuing basis accordance with generally accepted auditing standards and for effectiveness and efficiency and is reviewed on a regular accordingly, included such tests of the accounting records '

and such other auditing procedures as we considered basi~ by an i~ternal audit staff that reports directly to the Audit Committee of the Board of Directors. necessary in the circumstances.

The financial statements have been examined by Deloitte In our opinion, the accompanying financial statements Haskins & Sells, Certified Public Accountants. The present fairly the financial position of the Company at auditors provide an objective, independent review as to December 31, 1986 and 1985 and the results of its management's discharge of its responsibilities insofar as operations and its cash flows for each of the three years in they relate to the fairness of reported operating results and the period ended December 31 , 1986, in conformity with fin~ncial condition. Their examination includes procedures generally accepted accounting principles applied on a believed by them to provide reasonable assurance that the consistent basis.

financial statements are not misleading and includes a revie~ of the Company's system of internal accounting and financial controls and a test of transactions.

The Board of Directors has oversight responsibility for determining that management has fulfilled its obligation in the p:ep~ration of financial statements and the ongoing January 30, 1987, except for exammation of the Company's system of internal account- the seventh paragraph of Note ing controls. The Audit Committee, which is composed 11 as to which the date is solely of outside directors, meets regularly with manage- February 6, 1987 ment, Deloitte Haskins & Sells and the internal audit staff to discuss accounting, auditing and financial reporting matters. The Audit Committee reviews the program of audit work performed by the internal audit staff. To insure auditor independence, both Deloitte Haskins & Sells and the internal audit staff have complete and free access to the Audit Committee.

21

Statement of Income and Retained Earnings Atlantic City Electric Company For the Years Ended December 31 (Thousands of Dollars) 1986 1985 1984 Operating Revenues-Electric $582,961 $579,733 $549,531 Operating Expenses:

Energy:

Fuel 111,384 133,437 178,681 Interchange 19,387 17,272 (15,558)

Deferred Costs 5,865 (6,969)

Net Energy 130,771 156,574 156,154 Purchased Power-Exclusive of Fuel 40,887 42,636 28,905 Operations 112,127 90,187 86,866 Maintenance 44,820 43,378 39,247 Depreciation and Amortization 42,515 41,985 38,318 New Jersey Gross Receipts and Franchise Taxes 69,797 71,100 60,769 Federal Income Tax Expense 36,754 36,308 41,227 Other Taxes 9,836 8,159 6,654 Total Operating Expenses 487,507 490,327 458,140 Operating Income 95,454 89,406 91,391 Other Income:

Allowance for Equity Funds Used During Construction 8,336 5,216 4,821 Miscellaneous Income-Net 3,165 1,502 1,424 Total Other Income 11,501 6,718 6,245 Income Before Interest Charges 106,955 96,124 97,636 Interest Charges:

Interest on Long Term Debt 46,146 39,604 38,231 Interest on Short Term Debt 408 2,144 2,131 Other Interest Expense (465) (163) (66)

Total Interest Charges 46,089 41,585 40,296 Allowance for Borrowed Funds Used During Construction (8,684) (5,980) (5,937)

Net Interest Charges 37,405 35,605 34,359 Net Income 69,550 60,519 63,277 Retained Earnings at Beginning of Year 169,646 161,629 148,454 239,196 222,148 211,731 Dividends Declared:

Cumulative Preferred Stock 5,545 6,282 6,949 Common Stock 47,682 46,220 43,153 Total Dividends Declared 53,227 52,502 50,102 Retained Earnings at End of Year $185,969 $169,646 $161 ,629 Earnings for Common Stock:

Net Income $ 69,550 $ 60,519 $ 63,277 Less Preferred Dividend Requirements 5,627 6,369 6,968 Balance Available for Common Stock $ 63,923 $ 54,150 $ 56,309 Average Number of Shares of Common Stock Outstanding (in thousands) 18,266 18,069 17 ,581 Per Common Share:

Earnings $ 3.50 $ 3.00 $ 3.20 Dividends Declared $ 2.61 $ 2.555 $ 2.45 Dividends Paid $ 2.60 $ 2.53 $ 2.42 The accompanying Notes to Financial Statements are an integral part of these statements.

22

Statement of Cash Flows Atlantic City Electric Company For the Years Ended December 31 (Thousands of Dollars) 1986 1985 1984 Net Cash Flows From Operating Activities:

Net Income $ 69,550 $ 60,519 $ 63,277 Noncash items affecting operating activities:

Depreciation and Amortization 42 ,515 41,985 38,318 Allowance for Funds Used During Construction (17,020) (11 ,196) (10,758)

Investment Tax Credit Adjustments-Net 4,585 7,261 2,765 Deferred Federal Income Taxes-Net 35,778 16,865 20,304 Net (Increase) Decrease in Working Capital* 10,786 (26,535) 15 ,044 Other-Net (201) 2,124 (3,994)

Deferred Energy Costs and Revenues 8,711 22 , 190 (6,967)

Deferred Purchased Power Costs (15,700) (14,680) (6,530)

Net Cash Flows From Operating Activities 139,004 98,533 111,459 Cash Flows From Investing Activities:

Additions to Utility Plant (109,303) (105 ,213) (95 ,388)

Less Allowance for Funds Used During Construction 17,020 11,196 10,758 Cash Construction Expenditures (92,283) (94,017) (84,630)

Increases in Property Abandonment Costs (5,922) (5,215)

Investment in Subsidiary Companies (6,404)

Other-Net 1,925 (489) 430 Net Cash Flows Used by Investing Activities (102,684) (99,721 ) (84,200)

Cash Flows From Financing Activities:

Sale of Long Term Debt 220,000 70,000 42 ,200 Retirement and Maturity of Long Term Debt (214,854) (1 0,000) (26,000)

Pollution Control Funds Released (Held) by Trustee (2,399) 7,718 (5,539)

Proceeds of Short Term Debt 89,100 260 ,800 132,000 Repayment of Short Term Debt (76,200) (260,800) (132,000)

Common Stock Issued 548 11,515 12,487 Conversion of Preferred Stock (199) (353) (267)

Redemption of Preferred Stock (9,300) (11,850) (2,100)

Dividends on Preferred Stock (5,545) (6,282) (6,949)

Dividends on Common Stock (47 ,682) (46,220) (43,153)

Debt Costs and Other (6,146) 905 1,311 Net Cash Flows Provided (Used) by Financing Activities (52,677) 15 ,433 (28 ,010)

Net Increase (Decrease) in Cash And Temporary Investments $ (16,357) $ 14,245 $ (751 )

• Excluding cash and temporar y investments.

The accompanying Note s 10 Financial Statements are an integral pan of these statement s.

23

Balance Sheet December 31 (Thousands of Dollars) 1986 1985 Assets Electric Utility Plant:

In Service:

Production $ 557,257 $ 553,253 Transmission 206,198 200,517 Distribution 367,932 345,177 General 70,709 63,590 Total 1,202,096 1,162,537 Less Accumulated Depreciation 350,873 330,895 Net 851,223 831,642 Construction Work in Progress 282,079 237,310 Land Held for Future Use 5,623 6,849 Electric Utility Plant-Net 1,138,925 1,075,801 Nonutility Property and Investments 11,397 4,298 Pollution Control Construction Funds 5,426 2,871 Current Assets:

Cash and Working Funds 7,522 5,379 Temporary Cash Investments 18,500 Accounts Receivable:

Utility Service 41,744 42,899 Miscellaneous 13,434 8,386 Allowance for Doubtful Accounts (1,600) (1,600)

Unbilled Revenues 24,588 26,401 Fuel (at average cost) 22,899 29,828 Materials and Supplies (at average cost) 17,438 17 ,223 Prepayments 9,280 8,382 Total Current Assets 135,305 155,398 Deferred Debits:

Property Abandonment Costs 24,815 19,878 Unrecovered Purchased Power Costs 48,360 32,660 Unamortized Debt Costs 27,240 5,220 Other 7,418 3,507 Total Deferred Debits 107,833 61,265 Total Assets $1,398,886 $1,299,633 The accompanying Notes to Financial Statements are an integral part of these statements.

24

Atlantic City Electric Company December 31 (Thousands of Dollars) 1986 1985 Liabilities and Capitalization Capitalization:

Common Shareholders' Equity:

Common Stock $ 54,821 $ 54,771 Premium on Capital Stock 229,788 229,287 Capital Stock Expense (1,555) (1,607)

Retained Earnings 185,969 169,646 Total Common Shareholders' Equity 469,023 452,097 Cumulative Preferred Stock Not Subject to Mandatory Redemption 41,154 41,353 Cumulative Preferred Stock Subject to Mandatory Redemption 24,800 34,100 Long Term Debt 494,972 437,462 Total Capitalization 1,029,949 965,012 Current Liabilities:

Current Portion:

Cumulative Preferred Stock Subject to Mandatory Redemption 5,050 5,050 Long Term Debt 10,000 45,000 Short Term Debt 12,900 Accounts Payable 26,094 28,755 Taxes Accrued 8,817 5,372 Interest Accrued 9,509 12,865 Dividends Declared 13,195 13,224 Customer Deposits 3,408 2,945 Deferred Taxes 14,153 17,747 Deferred Energy Revenues-Net 13,177 4,466 Other 18,463 5,681 Total Current Liabilities 134,766 141,105 Deferred Credits:

Deferred Investment Tax Credits 69,997 65,412 Deferred Income Taxes 156,242 120,464 Other 7,932 7,640 Total Deferred Credits 234,171 193,516 Commitments and Contingent Liabilities (Note ll)

Total Liabilities and Capitalization $1,398,886 $1,299,633 25

Notes to Financial Statements NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Regulation Nuclear Fuel The accounting policies and rates of the Company are Fuel costs associated with the Company's participation in subject to the regulations of the State of New Jersey, Board jointly-owned nuclear generating stations, including a of Public Utilities (BPU) and in certain respects to the provision for estimated spent fuel disposal costs, are Federal Energy Regulatory Commission (FERC). All charged to Fuel Expense based on the units of thermal significant accounting policies and practices used in the energy produced.

determination of rates are also used for financial reporting Federal Income Taxes purposes . The financial statements are prepared on the basis of the Uniform System of Accounts prescribed by The Company provides deferred Federal Income Taxes on FERC. all significant current transactions for which the timing of reporting differs for book and tax purposes. Investment Operating Revenues tax credits, which are used to reduce current federal Revenues are recognized when electric energy services are income taxes, are deferred on the balance sheet and rendered, and include estimates for amounts unbilled at recognized in book income over the life of the related the end of the period for energy used subsequent to the property.

last billing cycle.

Retirement Plan Electric Utility Plant The Company has a noncontributory defined benefit Property is stated at original cost. Generally the plant is retirement plan covering substantially all employees. The subject to a first mortgage lien. The cost of property Company's policy is to fund pension costs as accrued.

additions , including replacement of units of property and Costs of the plan are determined actuarially under the betterments, is capitalized. Included in certain additions is aggregate cost method.

an Allowance for Funds Used During Construction Property Abandonment Costs (AFDC) which is defined in the applicable regulatory system of accounts as the cost during the period of These costs consist principally of the Company's unamor-construction of borrowed funds used for construction tized investment in Hope Creek Unit No. 2, a nuclear purposes and a reasonable rate on other funds when so generating unit which was cancelled in 1981, offshore used. AFDC has been calculated using a semi-annually nuclear units which were cancelled in 1978, unrecovered compounded rate of 8.95% for 1986 and 8.5% for 1985 and nuclear fuel advances associated with uranium supply 1984. contracts which were terminated in 1985 and study costs associated with a proposed plant site.

Deferred Energy Costs and Revenues The Hope Creek Unit No. 2 investment is being The Company has a Levelized Energy Clause which is amortized over a 15-year period that began in 1983. The based on projected energy costs and includes a provision investment in the offshore nuclear units is being amortized for prior period under or over recoveries. The recovery of over a 20-year period that began in 1979. Unrecovered energy costs is made through levelized monthly charges nuclear fuel advances are being amortized over 15 years, over the period of projection. Any under or over recoveries beginning in 1986. The study costs are being amortized are deferred in balance sheet accounts as a current asset or over 10 years beginning in 1986. The unamortized current liability as appropriate. These deferrals are recog- amounts are $11,701,000, $2 ,542,000, $4,948 ,000 and nized in the Statement of Income during the period in $5,484,000, respectively, at December 31, 1986.

which they are subsequently recovered through the clause.

Unrecovered Purchased Power Costs Depreciation These represent purchased capacity costs, relating to the The Company provides for straight-line depreciation based Company's purchased power agreements with Pennsylvania on the estimated remaining life of transmission and Power & Light Company, which are not being recovered distribution property and, based on the estimated average currently, but for which recovery has been specifically pro-service life, for all other depreciable property. Depreciation vided in a levelized component of future rates by the BPU.

applicable to nuclear plant includes amounts provided for Other decommissioning. The overall composite rate of deprecia-tion was approximately 3.7% for 1986 and 1985, and 3.6% Debt premium, discount and expenses are amortized over for 1984. Accumulated depreciation is charged with the the life of the related debt. Costs associated with debt cost of depreciable property retired together with removal reacquired by refundings are amortized over the life of the costs less salvage and other recoveries. newly issued debt as permitted by the BPU. Gains and losses relating to other reacquired debt are recognized currently.

Certain 1985 and 1984 amounts have been reclassified to conform with 1986 presentations.

26

Atlantic City Electric Company NOTE 2. FEDERAL INCOME TAXES Federal income tax expense is less than the amount computed by applying the statutory rate on book income subject to tax for the following reasons:

Years Ended December 31 (Thousands of Dollars) 1986 1985 1984 Net Income $ 69,550 $ 60,519 $ 63,277 Federal Income Tax Expense (as below) 37,911 36,317 41,876 Book Income Subject to Tax $107,461 $ 96,836 $105,153 Income Tax Computed at the Statutory Rate $ 49,432 $ 44,544 $ 48,370 Items for which deferred taxes are not provided:

Difference between Tax and Book Depreciation 2,842 2,801 (250)

Allowance for Funds Used During Construction (7,684) (5,029) (4,832)

Capitalized Overheads (1,431) (1,209) (1,221)

Investment Tax Credits (2,026) (2,178) (1,842)

Other (3,222) (2,612) 1,651 Total Federal Income Tax Expense $ 37,911 $ 36,317 $ 41,876 Components of Federal Income Tax Expense:

Federal Income Taxes Currently Payable $ 790 $ 12,956 $ 15,512 Deferred Federal Income Taxes:

Liberalized Depreciation 17,756 11,899 18,335 Unbilled Revenues (834) 1,415 (616)

Unrecovered Purchased Power Costs 7,222 6,753 3,004 Deferred Energy Costs (2,551 ) 3,205 Costs Associated With Reacquired Debt 10,078 Other (2,038) (1,787) (1,034)

Deferred Investment Tax Credits 4,585 7,261 2,765 Employee Stock Ownership Plan Credits 352 371 705 Total Deferred Federal Income Tax Expense 37,121 23,361 26,364 Total Federal Income Tax Expense 37,911 36,317 41,876 Less Federal Income Taxes Included in Other Income 1,157 9 649 Federal Income Taxes Included in Operating Expenses $ 36,754 $ 36,308 $ 41,227 The Company's federal income tax returns for 1981 and The effects of applying these provisions were recorded by prior years have been examined by the Internal Revenue the Company in the fourth quarter of 1986 in accordance Service (IRS) and the Company's federal income tax with generally accepted accounting principles. The liabilities for all years through 1976 have been determined recording of these adjustments did not have a material and settled. The IRS has proposed certain deficiencies in effect on the Company's results of operations or financial taxes for the years 1977 through 1981. The Company has position.

protested the proposed deficiencies and is of the opinion The Financial Accounting Standards Board has issued that the final settlement of its federal income tax liabilities an exposure draft of a proposed Statement of Financial for these years will not have a material adverse effect on its Accounting Standards entitled "Accounting for Income results of operations or financial position. Taxes." If adopted in its current form, the statement would At December 31, 1986 the cumulative amount of change the recording methodology relating to deferred deferred income taxes which have not been provided on income taxes to a liability approach. The principal impact timing differences, principally depreciation, amounted to of such a change to the Company would relate to the approximately $87 ,000,000 computed at the current recording of changes in the tax rates on a current basis, statutory rate of 46%. and the recording of deferred tax liabilities not previously On October 22, 1986, the Tax Reform Act of 1986 was recorded. The Company expects the impacts of such a signed into law. Some of the provisions of the Act, change would be lessened due to rate regulation, and in the principally those dealing with the repeal of the Investment opinion of management, would not have a material adverse Tax Credit, impacted the Company's 1986 tax provision. effect on results of operations or financial position.

27

N Otes (continued)

NOTE 3. RATE MATTERS Base Rate Case Decisions During the four year period ended December 31, 1986 base rate case decisions of the New Jersey Board of Public Utilities (BPU) are shown below:

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

January 1983 $30.8 October 7, 1983 $24.5 4.5 % September 30, 1982 October 1983 25.3 August 17, 1984 December 31, 1983 October 1984 24.1 February 13, 1985 24.0 4.3% September 30, 1982 April 1985 63.3 April 3, 1986 13 .6 2.1% September 30, 1985 The October 1983 increase relates to the first half of the 14.30%. Prior to the BPU decision, the Company had been purchase of 125 megawatts of capacity and related energy authorized to earn an overall rate of return of 11. 7% and a from Pennsylvania Power & Light Company (PP&L) return on common equity of 15.0%. In November 1985 the under two Capacity and Energy Sales Agreements (the decision by the BPU was affirmed by the New Jersey PP&L Agreements), which commenced with the start of Superior Court. The Company subsequently filed a request commercial operation of PP&L's Susquehanna Unit 1. The with the New Jersey Supreme Court for review of the February 1985 increase relates to the second half of the appellate ruling. This request was denied on March 23, Company's agreements with PP&L and commenced with 1986.

the start of commercial operation of PP&L's Susquehanna In April 1985, the Company filed a petition requesting a Unit 2. The PP&L Agreements provide for the purchase net increase of $91,850,000 to be implemented in two by the Company of capacity and energy from the phases. The first phase request, for $63,316,000, related to Susquehanna Units through September 30, 1991, and then increased operations and maintenance costs, and capital from certain PP&L coal-fired units through September 30, investment, and was based upon a test year of September 2000. Through September 30, 1991, the estimated costs to 30, 1985. In April 1986, the BPU issued an Order relating be incurred by the Company for purchases of capacity and to the first phase granting the Company an increase in associated energy from the Susquehanna Units will exceed annual revenues of $13,587 ,000. The BPU order reflects an the levelized costs to be recovered by the Company from overall rate of return of 11.42%, with a return on common its customers. Such unrecovered costs will be accumulated equity of 14.10%. The second phase request, for a net and deferred. Such costs are included in the balance sheet increase of $28,534,000, relates to the Company's 5%

as Unrecovered Purchased Power Costs along with a related ownership in the Hope Creek Generating Station, and provision for deferred taxes . The level of rates approved by would become effective upon commercial operation of the the BPU is designed to enable the Company to recover unit.

these deferred costs and associated carrying charges during In March 1986, the Company filed revised testimony in the balance of the 17-year period. The stipulation provided its second phase with respect to Hope Creek and other that any difference between actual costs incurred by the matters. The Company requested a net increase in annual Company under the agreements and the estimated costs on revenues of $34.9 million, of which approximately $32.2 which the increased rates were based will be recognized in million related to costs associated with the Hope Creek future base rate proceedings if such costs are found to be Station. In April 1986, the Company updated its second reasonable. The BPU order prescribes a revenue reduction phase request to reflect certain of the decisions set forth in formula in the event that the Susquehanna Units fail to the BPU's Order in the first phase, resulting in an updated meet a combined minimum performance standard estab- request for a net increase of $36.4 million, with approx-lished by the stipulation which could subject the Company, imately $33.6 million of such amount related to Hope under the most adverse circumstances, to a revenue Creek. As of December 31, 1986, the Company had reduction not to exceed $15,000,000 per unit per year. expended $236 million, including AFDC, for Hope Creek.

In August 1984, the BPU denied the Company's October For purposes of applying the provisions of a cost contain-1983 request for the $25 ,300,000 increase in base rates. ment agreement approved by the BPU in 1983, the The BPU, in denying rate relief, made several adjustments Company currently projects its share of the final cost of to the Company's requested rate base, test year operating Hope Creek to be approximately $240 million, including income and rate of return, providing for an overall rate of AFDC, compared with an estimate of the targeted costs of return of 11.35% and a return on common equity of approximately $202.2 million. The cost containment agree-28

Atlantic City Electric Company ment provides for a graduated disallowance of a return on Date of Amount Date Amount reasonable project costs in excess of the targeted amount. Petition Requested Effective Approved The amount requested by the Company for Hope Creek reflects the estimated effects of the provisions of the cost (millions) (millions) containment agreement. Hearings in the second phase rate October 1983 $ 28.1 January 20, 1984 $ 28 .1 request commenced in mid-April 1986. As discussed more October 1984 25.4 February 13, 1985 4.8 fully in Note 11, the BPU has also examined in a separate September 1985 (37.1 ) January 1, 1986 (44 .0) proceeding, in which the Company was granted intervenor status, the reasonableness of costs associated with the As part of the February 1985 energy clause approval, Hope Creek project. The BPU has issued an interim $1,639,000 of the costs associated with an extended outage accounting order to permit the Company to defer the of Salem Unit 1during1983 were excluded from recovery, operating costs of Hope Creek and a related return on the and $4,298,000 of Deferred Energy Costs were reclassified plant costs until a final BPU decision resolving the issues to Unrecovered Purchased Power Costs. The Company also concerning Hope Creek. The Company cannot predict the agre7d to defer $7 ,500,000 of Deferred Energy Costs, final cost of Hope Creek which will ultimately be allowed relatrng to costs associated with certain nuclear unit for ratemaking purposes, or the outcome of these proceed- outages in 1984.

ings, or their ultimate effect on the Company. The As part of the January 1986 energy clause approval, the Company has requested that changes to its customer rates Company agreed to expense $3,975,000 of replacement be synchronized to implement all changes expected result- power costs associated with maintenance and repair out-ing from these proceedings and its energy clause ages at Peach Bottom Unit 2 and Salem Unit 2. Also, the proceeding, as discussed below, and expects a BPU Order Company agreed to increase the 1985 deferral of in February 1987. $7 ,500,000 of Deferred Energy Costs to $12,179,000.

The Company has evaluated the impact of the Tax These costs represent the Company's pro rata impact of Reform Act of 1986 and its effect on tax expense and BPU findings in proceedings related to other co-owners related revenue requirements. The Company expects the with respect to replacement power costs associated with overall impact of the Act to reduce revenue requirements certain outages at the Salem Nuclear Generating Station primarily as a result of the decrease in corporate tax rate; and are subject to later review by the BPU. '

offset in part by the elimination of the investment tax ' In September 1986, the Company filed petitions with the credit, the capitalization of construction interest and the BPU requesting a reduction of $14. 9 million in annual taxation of unbilled revenues and contributions in aid of energy clause revenues. This reduction reflects lower fuel construction. The Company has submitted data on this costs experienced in 1986 and projected fuel costs for 1987.

impact to the BPU for their consideration. The Company had originally requested that the change be effective for service rendered on and after January 1, 1987, Energy Clauses but has requested that changes to its customer rates be The Company's energy clauses are reviewed annually by synchronized to implement all changes, as discussed the BPU and the most recent decisions are shown above: above, at one date.

NOTE 4. RETIREMENT BENEFITS The cost to the Company in providing a retirement plan A comparison of accumulated plan benefits and plan net for its employees was $4,300,000, $6,465,000 and assets (including purchased annuity contract amounts) for

$7,555,000 in 1986, 1985 and 1984, respectively. Approx- the Company's Plan, as of the most recent actuarial imately 80% of these costs were charged to operating valuation dates, is as follows:

expense and the remainder, which was associated with construction labor, was charged to the cost of new utility January I plant. (Thousands of Dollars) 1986 1985 The weighted average assumed rate of return used in Actuarial present value of accumu-determining the actuarial present value of accumulated lated plan benefits:

plan benefits was 8% for 1986 and 1985. The Company's Vested $ 96,849 $ 84,563 Plan is in compliance with the Employee Retirement Nonvested 2,045 4,459 Income Security Act of 1974 as amended.

Total $ 98,894 $ 89 ,022 Net Assets available for benefits $146,473 $121,778 29

N Otes (continued)

In December 1985 the Financial Accounting Standards cost of these premiums and related plan costs expensed in Board adopted an accounting standard which will require providing those benefits totalled $1 ,537 ,000 for 1986, the Company to modify the financial accounting and $992 ,000 for 1985 and $845,000 for 1984.

reporting for its retirement plan beginning in 1987. The In December 1986, the Company established a trusteed Company believes the adoption of this new standard will plan to begin funding for these post-employment benefits.

not have a material adverse effect on its results of The Company made an initial contribution of $2,900,000 operations or financial position. to the trust. Funding on behalf of active employees is In addition to providing pension benefits, the Company based on the aggregate cost method over their service lives provides certain health care and life insurance benefits for and is equivalent to normal cost. For current retirees, retired employees. Substantially all of the Company's funding is based on current actual experience and amorti-employees may become eligible for those benefits if they zation of expected benefits over the remaining life reach retirement age while working for the Company. expectancy of the retiree group. The actuarial present Benefits have been provided through insurance companies value of accumulated post-employment benefits under the and other plan providers whose premiums and related plan plans was $23,700,000 at January 1, 1986.

costs are based on the benefits paid during the year. The NOTE 5. JOINTLY-OWNED GENERATING STATIONS The Company participates with other utilities in the The amounts shown represent the Company's share of construction and operation of several electric production each plant at December 31, and includes an allowance for facilities . funds used during construction.

Station Energy Company's Electric Plant Construction Generation Source Share in Service Work in Progress 1986 1985 1986 1985 1986 1985 (Thousands of Dollars) (MWH)

Keystone Coal 2.47% $ 8,074 $ 7,306 $ 285 $ 976 286,415 258,436 Conemaugh Coal 3.83 12,558 12,355 1,100 210 402,874 400,790 Peach Bottom Nuclear 7.51 91,690 91,010 4,285 2,490 878,791 420,469 Salem Nuclear 7.41 162,960 160,977 4,006 2,605 919,915 1,039,420 Hope Creek Nuclear 5.00 236,055 203,656 53,766 The Hope Creek Station completed its power ascension disposal, requiring the payment of fees related to the program and was released to the Pennsylvania-New Jersey- Company's ownership interests in the stations. Current Maryland power pool for dispatch on December 20 , 1986. recovery of these spent nuclear fuel disposal costs is Public Service Electric & Gas Company, the operator of provided as part of the Company's energy clause.

the station, has not declared the unit commercial, pending The Company provides its own financing during the receipt of a BPU Order. construction period for its share of the jointly-owned The operators of the Salem and Peach Bottom Nuclear plants and includes its share of direct operations and Generating Stations entered into contracts with the United maintenance expenses in its Statement of Income.

States Department of Energy for spent nuclear fuel NOTE 6. INVESTMENTS IN OPERATING SUBSIDIARIES The Company's investment in Deepwater Operating Com- Deepwater are included in the Company's accounts classi-pany (Deepwater), a wholly-owned subsidiary which fied as to operation, maintenance and taxes.

operates generating and process steam units owned by the The Company's investment in Atlantic Housing, Inc., a Company, was $3,291,000 at December 31, 1986 and 1985, wholly-owned subsidiary, was $6,404,000 at December 31, respectively. The principal asset of Deepwater is working 1986 and $1,000 at December 31, 1985. Atlantic Housing, capital in which the equity of the Company is fairly Inc. was inactive during 1985, and in 1986 made an represented by its investment. The net production costs of investment in a commercial real estate property.

30

Atlantic City Electric Company NOTE 7. COMMON STOCK As of December 31, 1986 and 1985, the Company's Common Stock included 25,000,000 authorized shares of Common Stock ($3 par value).

Shares Issued and Outstanding: 1986 1985 1984 Beginning of Year 18,257,009 17,821,346 17,250,882 Dividend Reinvestment and Stock Purchase Plan 408 ,999 525,118 Employee Stock Ownership Plan 9,665 14,306 36,009 Conversion of Preferred Stock 6,981 12 ,358 9,337 End of Year 18,273,655 18,257 ,009 17 ,821,346 At $3 Par Value $54,820,965 $54,771,027 $53,464,038 Premium on Capital Stock was credited in 1986 and 1985 authorized for issuance pursuant to the Employee Stock with $501,000 and $10,209,000, respectively, representing Ownership Plan and 40,394 shares of Common Stock the excess of proceeds over the par value of shares of reserved for the conversion of 57/s% Convertible Series of Common Stock issued, sold and converted. At December Preferred Stock.

31 , 1986 there were 47 ,514 shares of Common Stock NOTE 8. CUMULATIVE PREFERRED STOCK The Company has authorized 799,979 shares of upon issuance. In certain circumstances, if dividends on Cumulative Preferred Stock, $100 Par Value, 2,000,000 issued Preferred Stock are in arrears, voting rights for the shares of No Par Preferred Stock and 3,000,000 shares of election of a majority of the Board of Directors becomes Preference Stock, No Par Value. Unissued shares may, or operative.

may not , possess mandatory redemption characteristics NOTE 8(A).

Cumulative Preferred Stock Not Subject To Mandatory Redemption:

December 31 Current

$100 Par Value-Cumulative and Non-participating shares issued 1986 1985 Redemption and outstanding: (Thousands of Dollars) Price Per Share Series:

4% 77 ,000 Shares $ 7,700 $ 7,700 $105 .50 4.10% 72 ,000 Shares 7,200 7,200 101.00 4.35% 15 ,000 Shares 1,500 1,500 101.00 4.35% 36,000 Shares 3,600 3,600 101.00 4.75% 50,000 Shares 5,000 5,000 101.00 5% 50,000 Shares 5,000 5,000 100.00 57/s% Convertible Series:

11 ,5 35 Shares (1986) 1,154 101.50 13,530 Shares (1985) 1,353 7.52% 100,000 Shares 10,000 10,000 104.89 Total $41,154 $41 ,353 31

N Otes (continued)

Cumulative Preferred Stock Not Subject to Mandatory The 57/s% Convertible Series, of which 1,995 and 3,531 Redemption is redeemable solely at the option of the shares were converted in 1986 and 1985, respectively, is Company upon payment of the redemption price plus convertible, subject to adjustment in certain events, into accumulated and unpaid dividends to the date fixed for Common Stock at the rate of 3.5 shares of Common Stock redemption. Premium on such Preferred Stock was for each share of Preferred.

$93,000 at December 31, 1986 and 1985.

NOTE 8(B).

Cumulative Preferred Stock Subject To Mandatory Redemption:

December 31 Current Refunding Par 1986 1985 Redemption Restricted Shares Issued and Outstanding: Value (Thousands of Dollars) Price Per Share Prior to Series:

9.96% 96,000 Shares (1986) $100 $ 9,600 $ - $105.70 104,000 Shares (1985) 10,400

$8 .25 82,500 Shares (1986) None 8,250 106.35 November 1, 1987 87 ,500 Shares (1985) 8,750

$9.45 120,000 Shares (1986) None 12,000 103.15 November 1, 1989 200,000 Shares (1985) 20,000 29,850 39,150 Less portion due within one year 5,050 5,050 Total $24,800 $34,100 On February 1, 1985, the Company redeemed 8,000 shares On November 1 of each year, 2,500 shares of the $8.25 of its 8.40% Preferred Stock Series through the operation No Par Preferred Stock Series must be redeemed through of the sinking fund and optional redemption provisions at a the operation of a sinking fund at a redemption price of redemption price of $100 per share. On August 2, 1985 the $100 per share. At the option of the Company, not more Company reacquired all of the remaining shares (92,000) than an additional 2,500 shares may be redeemed on any of this series, with an aggregate par value of $9,200,000 for sinking fund date without premium. The Company

$9,177 ,000. redeemed 5,000 and 2,500 shares at par in 1986 and 1985, On August 1 of each year, 8,000 shares of the 9. 96% respectively.

Series must be redeemed through the operation of a On November 1, 1986, and annually thereafter, 40,000 sinking fund at a redemption price of $100 per share. At shares of the $9.45 No Par Preferred Stock Series must be the option of the Company, an additional 8,000 shares may redeemed through the operation of a sinking fund at a be redeemed on any sinking fund date, without premium, redemption price of $100 per share. At the option of the up to 40,000 shares in the aggregate. The Company Company, not more than an additional 40,000 shares may redeemed 8,000 and 16,000 shares at par, in 1986 and 1985, be redeemed on any sinking fund date, without premium, respectively, through the operation of the sinking fund and up to 50,000 shares in the aggregate. The Company optional redemption provisions. As of December 31, 1986 redeemed 80,000 shares at par in 1986.

the Company had redeemed the maximum 40,000 shares. The annual minimum sinking fund provisions of the above series aggregate $5,050,000 each year from 1987 through 1989 and $1,050,000 for 1990 and 1991.

32

Atlantic City Electric Company NOTE 9. LONG TERM DEBT December 31 (Thousands of Dollars) 1986 1985 First Mortgage Bonds:

41/2% Series due (January 1) 1987 $ 10,000 $ 10,000 31/s% Series due (April 1) 1988 10,000 10,000 41/2% Series due (April 1) 1989 2,775 2,775 41/2% Series due (March 1) 1991 10,000 10,000 4 1/2% Series due (July 1) 1992 10,350 10,350 43/s% Series due (March 1) 1993 9,540 9,540 l l7/s% Series due (November 1) 1993 13,325 50 ,000 5 l/s% Series due (February 1) 1996 9,980 9,980 8% Series due (November 1) 1996 95,000 87/s% Series due (September 1) 2000 19,000 19,000 8% Series due (May 1) 2001 27,000 27 ,000 7 1/2% Series due (April 1) 2002 20,000 20,000 7314% Series due (June 1) 2003 29,976 29,976 75/s% Pollution Control Series due (January 1) 2005 6,500 6,500 63/s% Pollution Control Series due (December 1) 2006 2,500 2,500 125/s% Series due (January 1) 2010 63 ,750 ll5/s% Pollution Control Series due (May 1) 2011 39,000 39,000 10 1/2% Pollution Control Series B due (July 15) 2012 850 850 Adjustable Rate Pollution Control Series A due (April 15) 2014 (7 1/4°/o Until 4-15-87) 18,200 18,200 101/2% Pollution Control Series C due (July 15) 2014 23 ,150 23 , 150 11 1/zO/o Series due (October 1) 2015 21,215 70,000 87/s% Series due (May 1) 2016 125,000 Total 503 ,361 432, 571 Debentures:

51/4% Sinking Fund Debentures due (February 1) 1996 2,267 2,267 7 1/4% Sinking Fund Debentures due (May 1) 1998 2,619 2,619 Total 4,886 4,8 86 Notes-Variable Rate Notes due (April 30) 1986 45 ,000 Unamortized Premium and Discount-Net (3,275) 5 Total 504,972 482,462 Less portion due within one year 10,000 45 ,000 Total $494,972 $437 ,462 On January 1, 1986 the Company redeemed $6,000,000 principal amounts of $36,675 ,000 and $48 ,785 ,000 , respec-principal amount of the 12%% Series bonds through the tively, were reacquired. The aggregate cost of these operation of the sinking fund and optional redemption redemptions was $8,750,000, net of related income taxes .

provisions. On June 12, 1986 the Company redeemed all These costs, including unamortized debt expenses related of the remaining principal amount, $57 , 750,000, at a to the issuances of the debt and other expenses, and the redemption price of 109. 92%. The aggregate costs of the related deferred income taxes, are being amortized over ten reacquisition were $3,288 ,000, net of related income taxes. years beginning in November 1986.

These costs, including unamortized debt expenses related In January 1987, the Company reacquired an additional to the issuance of the debt and other expenses, and the $300,000 principal amount of the ll 'l's% Series relative to related deferred income taxes , are being amortized over the November 5, 1986 tender.

thirty years beginning in June 1986. Deposits in sinking funds for retirement of debentures On November 5, 1986 the Company tendered for all of are required on February 1 of each year through 1995 for the outstanding principal of the $50,000,000, 1F/s% Series the 5Y4% Debentures, and on May 1 of each year through due 1993 and the $70,000,000, ll Y2% Series due 2015 at 1997 for the 7Y4% Debentures in amounts in each case redemption prices of 112.570% and 121.125% of the sufficient to redeem $100,000 principal amount plus, at the principal amount, respectively. At December 31 , 1986 election of the Company, up to an additional $100,000 33

N Otes (continued) principal amount in each year. By December 31, 1986 the the purpose or in anticipation of refunding through the Company had reacquired and cancelled $1,133,000 and direct or indirect use of funds borrowed by the Company

$981,000 principal amount of the 5Y4% and 7Y4% Deben- at effective interest costs to the Company of less than tures, respectively, toward its requirements for 1987 and specified rates.

subsequent periods. Current sinking fund requirements of $750,000 in Regular redemption prices on a face value per bond connection with certain First Mortgage Bonds outstanding basis are currently in effect for each series of First may be satisfied by certification of property additions as Mortgage Bonds except for certain pollution control series provided for in the related mortgage indentures.

in which regular redemption is restricted by agreement The aggregate amount of debt maturities, in addition to prior to specified dates. Also, certain pollution control sinking fund requirements, of all long term debt outstand-series contain future sinking fund requirements. Redemp- ing at December 31, 1986 are $10,000,000 in 1987 and tion of certain series of the First Mortgage Bonds are 1988, $2,775,000 in 1989 and $10,000,000 in 1991. No restricted prior to specified dates if the redemption is for outstanding long term debt matures in 1990.

NOTE 10. SHORT TERM DEBT AND COMPENSATING BALANCES As of December 31, 1986, the Company had bank lines of $12,900,000 of short term debt outstanding at December credit available for use of $115,000,000. The Company is 31, 1986, consisting of $8,500,000 of commercial paper, required, with respect to $14,000,000 of these credit lines, and $4,400,000 of notes payable. The notes payable to maintain average compensating balances of $455,000. represent two separate pollution control financings at These compensating balances are maintained in demand respective interest rates of 4. 7% and 5 .5%. These notes deposits which are not legally restricted. The Company is will mature in July 1987. The Company expects in compliance with such compensating balance arrange- to refinance these short term borrowings on a long ments. With respect to the remaining available credit lines, term basis during 1987. The Company had no out-the Company pays commitment fees (generally Y4%) for standing short term debt at December 31, 1985 or which charges amounted to $248,000 for 1986, $235,000 1984. Additional information regarding short term for 1985 and $242,000 for 1984. The Company had debt follows :

(Thousands of Dollars) 1986 1985 1984 For the year ended-Maximum amount of total short term debt at any month-end:

Commercial Paper $10,500 $55,700 $35,000 Notes Payable to Banks $ 5,000 $10,000 Average amount of short term debt (based on daily outstanding balances):

Commercial Paper $ 2,256 $19,905 $17,519 Notes Payable to Banks $ 123 $ 4,239 $ 301 Weighted daily average interest rates on short term debt:

Commercial Paper 6.3% 7.9% 10.6%

Notes Payable to Banks 6.8% 8.1% 9.2%

NOTE 11. COMMITMENTS AND CONTINGENCIES Construction Program Insurance Programs Total cash construction expenditures for 1987 are estimated The Company is a member of certain insurance programs at approximately $109,783,000, which includes $17 ,611,000 which provide coverage for property damage to members' for jointly-owned facilities. Current commitments for the nuclear generating plants. Facilities at the Peach Bottom, construction of major production and transmission facili- Salem and Hope Creek Stations are insured against ties amount to approximately $52,577 ,000 of which it is property damage losses up to $1.16 billion per site under estimated approximately $16,771,000 will be expended in these programs.

1987. These amounts exclude allowance for funds used In addition, the Company is a member of an insurance during construction and customer contributions. program which provides insurance coverage for the cost of 34

Atlantic City Electric Company replacement power during prolonged outages of nuclear oral decision involving PSE&G, ruling that a total of units caused by certain specific conditions. Under the $455.2 million of costs associated with the Hope Creek property and replacement power insurance programs, the project would be disallowed for ratemaking purposes.

Company could be assessed retrospective premiums in the Pending issuance of a written order in the PSE&G case, event the insurers' losses exceed their reserves. As of as well as a ruling in our separate proceeding, the December 31, 1986, the maximum amount of retrospective Company cannot predict the outcome of these proceedings premiums the Company could be assessed for losses during or their effects on the Company.

the current policy year was $9.05 million under these programs. Nuclear Plant Outages In the event of a nuclear incident at any of the facilities The BPU has deferred consideration of $12,179,000 of covered by the federal government's third-party liability replacement power costs associated with certain nuclear indemnification program, the Company could be assessed outages relating to generator failures at Salem Station up to $2.34 million per incident, but not more than pending the development of the record on such outages in

$4.67 million in a calendar year, in the event more than the next energy clause adjustment proceeding of the one incident is experienced. operator of the station, Public Service Electric & Gas The Company is also a member of several industry- Company. The co-owners of the station have instituted owned mutual insurance companies providing various litigation against the supplier of the affected equipment.

other liability insurance coverages as part of the Company's The Company cannot predict the outcome of this matter or overall insurance programs. As of December 31, 1986, its ultimate effect on the Company.

under these policies the maximum amount of retrospective Nuclear Fuel premiums the Company could be assessed for losses during the current policy year was $6.8 million. The Company's contractual liability to purchase nuclear fuel from Pearl Fuel Corporation for Salem and Hope Purchase Power Agreements Creek Generating Stations as of December 31 , 1986 was The Company has an arrangement for a limited term approximately $29,700,000. Under certain conditions of purchase of energy and capacity from Allegheny Power termination, the Company will be required to purchase all System which is subject to annual extensions. The nuclear fuel then existing at a price which will allow Pearl Company also has agreements to purchase certain capacity Fuel Corporation to recover its net investment costs.

and energy output from units of Pennsylvania Power & Nuclear fuel requirements for Peach Bottom Generating Light Company. Station are being provided by the operating company through a fuel purchase contract. The Company is Hope Creek Nuclear Generating Station responsible for payment of its share of fuel consumed and The Company owns 5% of the Hope Creek Nuclear related operating costs and interest expense. These costs Generating Station, along with Public Service Electric & are included in fuel expense .

Gas Company (PSE&G), which owns the other 95% of the unit. In July 1983, the BPU approved an Agreement Accounting Standards between the Company, PSE&G, the New Jersey Depart- In December 1986 the Financial Accounting Standards ment of Energy and the New Jersey Department of the Board issued a new accounting standard entitled " Regu-Public Advocate which establishes a program to contain lated Enterprises-Accounting for Abandonments and the continuing construction costs of Hope Creek. The cost Disallowances of Plant Costs" , which is an amendment to containment agreement established a targeted in-service existing accounting standards for regulated enterprises, date of December 1986 and a targeted cost of $3. 7952 such as the Company and is effective for fiscal years billion and provides for penalties for overruns based on the beginning after December 15 , 1987. This standard alters final cost of the unit. The Company's portion of the current accounting for the types of events enumerated and targeted cost is approximately $202 million. However, the requires the Company to reduce the carrying value of targeted amount may be subject to adjustment due to certain assets on the balance sheet, principally the changes in the regulatory treatment of Construction Work unamortized costs of abandoned plant projects. The In Progress and the Allowance for Funds Used During effects of such an adjustment would not be material in Construction, as well as changes due to certain extraordi- relation to the Company's financial position. Additionally, nary events not contemplated by the parties in 1983. At the new standard will affect the accounting for the Hope December 31 , 1986 the Company's costs associated with Creek Generating Station depending upon the outcome of Hope Creek amounted to approximately $236 million . In those proceedings as discussed above. Depending on the 1985, the Company filed a petition with the BPU to outcome of the proceedings, the new standard could recognize Hope Creek in its rate base. In late 1986, a require the Company to recognize a loss on any disallowed separate proceeding involving Hope Creek was conducted costs based on prudency or recognize a loss for any costs by the BPU to examine .the reasonableness of the total on which a return is not allowed. The Company cannot costs of the unit. On February 6, 1987, the BPU issued an predict the ultimate impact of the new standard.

35

N Otes (continued) Atlantic City Electric Company NOTE 12. LEASES The Company has certain obligations which, in accordance leases would not have a material effect on assets or with criteria established by the Financial Accounting liabilities, and would not affect income, since the total Standards Board (FASB), are capital leases, but are amortization of the leased assets and the interest on the accounted for as operating leases in accordance with the lease obligation would equal the rental expense currently ratemaking treatment. An accounting standard issued by allowed for ratemaking purposes.

the FASB requires that the Company record such leases on Rentals charged to operating expenses were as follows:

its balance sheet beginning in 1987. Recording capital (Thousands of Dollars) 1986 1985 1984 Nuclear Fuel $14,872 $11 ,800 $ 8,457 Other 4,033 4,511 4,759 Total $18,905 $16 ,311 $13 ,216 The future minimum rental commitments under all noncancelable lease agreements are not significant.

NOTE 13. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

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

Quarter Operating Operating Net Earnings For Earnings Revenues Income Income Common Stock Per Share (Thousands of Dollars E xcept Per Share Amounts) 1986 1st $136,520 $20,339 $13 ,316 $11 ,868 $ .65 2nd 134,433 20,858 14,480 13 ,033 .71 3rd 179,310 37 ,826 31 ,008 29 ,575 1.62 4th 132 ,698 16,431 10,746 9,447 .52

$582 ,961 $95 ,454 $69 ,550 $63,923 $3 .50 1985 1st $140 ,491 $19 ,104 $12 ,658 $10 ,962 $ .61 2nd 134,214 15 ,683 8,866 7, 176 .40 3rd 180,411 35 ,630 27 ,815 26,283 1.45 4th 124,617 18 ,989 11 , 180 9,729 .53

$579 ,733 $89 ,406 $60 ,519 $54 , 150 $3 .00(1 )

(l ) The indi vidua l quarters may not add to the total due to the increasing average number of Common shares outstand ing at the end of each quarter.

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

36

Investor Information Atlantic City Electric Company Where should I send inquiries concerning my investment Is additional information about the Company available?

in Atlantic City Electric Company? The annual report to the Securities and Exchange Com-The Company staffs an Investor Records Department mission on Form 10-K and other reports containing which serves as recordkeeping agent, dividend disbursing financial data are available to shareholders. Specific agent and also as Transfer Agent for Common and requests should be addressed to Mr. R. E. Moeller, Preferred Stocks. Correspondence concerning such matters Manager of Investor Services, or the Investor Records as the replacement of dividend checks or stock certificates, Department, at the address shown.

address changes, transfer of Common and Preferred Stock certificates, Dividend Reinvestment and Stock Purchase Who is the trustee and interest paying agent for the Plan inquiries or any general information about the Company's Bonds and Debentures?

Company should be addressed to: First Mortgage Bond recordkeeping and interest disburs-Atlantic City Electric Company ing are performed by Irving Trust Company, One Wall Investor Records Department Street, New York, New York 10015. Debenture P.O. Box 1334, 1199 Black Horse Pike recordkeeping and interest disbursing are performed by Pleasantville, New Jersey 08232 First Fidelity Bank, N .A., 765 Broad Street, Newark, Telephone (609) 645-4506 or (609) 645-4507 New Jersey 07101.

Ms. S. M. Dodd, Secretary, is the corporate officer When are dividends paid?

responsible for all investor services-Mr. R. E. Moeller is The proposed record dates and payable dates for dividends Manager of Investor Services and Mrs. M. T. Lindsay is on Common Stock are as follows:

Supervisor of Shareholder Recordkeeping.

Record Dates Payable Dates Does the Company have a Dividend Reinvestment and Stock Purchase Plan? March 19, 1987 April 15, 1987 Yes. The Plan allows shareholders and employees to June 18, 1987 July 15, 1987 automatically invest their cash dividends and /or optional September 17, 1987 October 15, 1987 cash payments in shares of the Company's Common Stock. December 17, 1987 January 15, 1988 Holders of record of Common Stock interested in enrolling in the Plan should contact the Investor Records Depart- The following table indicates dividends paid in 1986 and ment. See the address above. 1985 on Common Stock:

Where is the Company's stock listed? 1986 1985 Common Stock and 57/s% Cumulative Convertible Pre-ferred Stock are listed on the New York Stock Exchange. First Quarter $ .645 $ .62 The Company's Common Stock is also listed on the Pacific Second Quarter $ .645 $ .62 and Philadelphia Stock Exchanges. The trading symbol of Third Quarter $ .655 $ .645 the Company's Common Stock is ATE; however, news- Fourth Quarter $ .655 $ .645 paper listings generally use AtCyEI. Annual Total $2.60 $2.53 The high and low sales prices of the Common Stock as reported in the Wall Street Journal as New York Stock Dividends paid on Common Stock in 1986 and 1985 Exchange-Composite Transactions for the periods indi- were fully taxable.

cated were as follows:

1986 1985 High Low High Low First Quarter 36 Y4 28 Y4 25Y4 23 %

Second Quarter 38 7/s 32 Y2 29% 24%

Third Quarter 465/s 337/s 29 Y4 25 5/s Fourth Quarter 413/s 37 29% 26 37

Summary Financial and Statistical Review 1986-1976 1986 1985 1984 1983 Facilities for Service Total Utility Plant (Thousands) $1,489,798 $1,406,696 $1,309,670 $1,226,165 Additions to Utility Plant (Thousands) $ 109,303 $ 105,213 $ 95,388 $ 83,673 Pole Miles of Transmission and Distribution Lines 7,015 6,977 6,958 6,925 Generating Capacity (Kilowatts) (a) (b) 1,660,700 1,605,700 1,594,200 1,594,200 Maximum Utility System Demand-kw 1,459,000 1,432,000 1,298,800 1,346,700 Capacity Reserve at Time of Peak (% of Instal. Gen. ) 12.1% 10.8% 18.5% 15.5%

Energy Supply (Thousands of kwh):

Net Generation 5,912,834 5,817,254 6,237,724 5,913,196 Purchased and Interchanged-Net 1,185,666 1,049,393 393,175 579,488 Total System Load 7,098,500 6,866,647 6,630,899 6,492,684 Electric Sales (Thousands of kwh)

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

Amount of Electricity used during the year (kwh) 7,982 7,643 7,866 7,715 Revenue for a year's service $ 780.43 $ 778.77 $ 783.47 $ 735 .66 Revenue per Kilowatt-hour 9.78¢ 10.19¢ 9.96¢ 9.54¢ Customer Data (Average)

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

Energy Revenues:

Residential $ 277,601 $ 268,814 $ 263,612 $ 242,705 Commercial 211,023 209,880 190,435 175,520 Industrial 78,404 80,392 79,123 76,109 All Others 10,152 10,315 10,405 10,133 Total Energy Revenues 577,180 569,401 543,575 504,467 Unbilled Revenues-Net (1,813) 3,076 (1,340) 5,671 Other Electric Revenue 7,594 7,256 7,296 7,004 Total $ 582,961 $ 579,733 $ 549,531 $ 517,142 Investor Information Net Income $ 69,550 $ 60,519 $ 63,277 $ 66,152 Average Number of Shares Outstanding (Thousands) 18,266 18,069 17 ,581 16,923 Earnings per Average Common Share $ 3.50 $ 3.00 $ 3.20 $ 3.48 Total Assets (Year End) $1,398,886 $1,299,633 $1,220,503 $1,139,978 Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year End) $ 534,822 $ 521,612 $ 473,462 $ 459,366 Dividends Declared on Common Stock $ 2.61 $ 2.555 $ 2.45 $ 2.32 Dividend Payout Ratio 74% 84% 76% 66%

Book Value Per Share (Year End) $ 25.67 $ 24.76 $ 24.27 $ 23.58 Price Earnings Ratio (Year End) 11 10 8 7 Times Fixed Charges Earned (before income taxes) 3.33 3.33 3.61 4. 11 Shareholders and Employees (Year End)

Common Shareholders 47,133 48,635 47,446 48,299 Employees 2,168 2,099 2,012 1,995 (a) Excludes capacity allocated to a large industrial customer.

(b) Includes unit purchase of capacity under contracts with Pennsylvania Power & Light Company (commencing in 1983) and Delmarva Power & Light Company (from 1980 through 1984).

(c) Net income and earnings calculations include the cumulative effect of an accounting change. Financial ratio is computed excluding the cumulative effect.

38

Atlantic City Electric Company 1982 1981 1980 1979 1978 1977 1976

$1 , 153,321 $1,064,928 $ 962 ,052 $ 870,075 $ 802,473 $ 753 ,269 $ 710 ,343

$ 126,893 $ 123,318 $ 97,330 $ 72,773 $ 58,073 $ 48,733 $ 41 ,702 6,918 6,910 6,879 6,831 6,786 6,735 6,696 1,531,200 1,524,600 1,431 ,600 1,384,700 1,414 ,700 1,414,700 1,334,700 1,264,200 1,263 ,800 1,261 ,700 1, 192,600 1,177,400 1,176,000 1,030,300 17.4% 17 .1% 11.9% 13 .9% 16.7% 16.9% 22 .8%

5,676, 118 5,302 ,023 5,533,178 5,397 ,338 5,625,988 5,293 ,019 4,918,906 466 ,667 946 ,241 643 , 106 464, 143 130,037 224 ,169 324, 196 6, 142 ,785 6,248 ,264 6, 176,284 5,861,481 5, 756 ,025 5,517 , 188 5,243,102 2,415 ,292 2,480,225 2,514,738 2,411 ,732 2,377,202 2,221 ,250 2,070,766 1,894,535 1,849,863 1,769,208 1,580,384 1,586,097 1,478,559 1,392,029 1,218 ,520 1,279 ,724 1,286,205 1,255 ,304 1,250,636 1,220,260 1, 143,170 63 ,770 65,555 63 ,753 60,799 60 ,705 58 ,866 57 ,667 5,592,117 5,675 ,367 5,633 ,904 5,308,219 5,274,640 4,978 ,935 4,663 ,632 7,444 7,751 8,003 7,849 7,951 7,653 7,320

$ 644.77 $ 670.66 $ 536.99 $ 439.92 $ 406 .18 $ 378 .36 $ 349.64 8.66¢ 8.65 ¢ 6. 71 ¢ 5.61 ¢ 5.11¢ 4.94¢ 4.78¢ 59,319 56, 100 52 ,225 48 ,339 44 ,387 40 ,318 37 ,581 265,124 263 ,904 261 ,988 258 ,941 254,592 249 ,927 245 ,296 324,443 320,004 314,213 307,280 298,979 290 ,245 282 ,877 42 ,885 43 ,219 43 ,267 43 ,219 42,672 42 ,033 41 , 170 1,018 1,032 1,041 1,048 1,034 1,047 1,071 627 634 654 667 673 676 681 368,973 364,889 359, 175 352,214 343 ,358 334,001 325 ,799 391 ,989 386,046 379,242 371 ,362 362,131 352 ,205 343 ,147

$ 209 , 191 $ 214 ,614 $ 168 ,733 $ 135 , 178 $ 121 ,440 $ 109,818 $ 98 ,904 154,792 156,624 115 ,973 88,819 80 ,539 73 ,354 66 ,354 71,255 82 ,908 60 ,512 47, 590 42 , 185 40 ,885 36,438 9,255 9,700 7,836 6,624 5,973 5,630 5,406 444,493 463,846 353 ,054 278 ,211 250,137 229,687 207 ,102 (6,795) 6,480 5,837 5,337 4,895 4,921 5,308 4,925

$ 444,178 $ 469 ,683 $ 358 ,391 $ 283 ,106 $ 255 ,058 $ 234,995 $ 212 ,027

$ 49 ,055 (c) $ 46,988 $ 38,5 38 $ 34,307 $ 30,064 $ 27 ,358 $ 30,796 15 ,116 13,034 12,372 11 ,980 10,791 10,630 9,747

$ 2. 76 (c) $ 3.03 $ 2.62 $ 2. 36 $ 2.21 $ 2.06 $ 2.60

$1 ,077,969 $1 ,013 ,789 $ 879,795 $ 779,026 $ 699 ,861 $ 662 ,614 $ 633 ,058

$ 462,470 $ 447 ,389 $ 394,288 $ 324,848 $ 329,781 $ 330,120 $ 320,636

$ 2.24 $ 2.08 $ 1.93 $ 1.79 $ 1.70 $ 1.62 $ 1.58 80% 67% 73% 75% 76% 79% 60%

$ 22.45 $ 22.40 $ 22 .22 $ 21.63 $ 21.27 $ 20 .71 $ 20.25 8 6 6 7 8 11 9 2.27 (c) 2.84 3.03 3.62 3.62 3.17 3.14 48,790 48 ,424 47 ,762 48 , 194 44,490 43 ,826 42 ,516 2,022 2,035 1,968 1,903 1,797 1,739 1,7 14 T his Annual Report has been prepared for the pur pose of providing general and statistical info rmation concerning the Com pany and not in connec tion with any sale, offer fo r sale or solicitation of an offer to buy any securities.

39

Board of Directors ELEANOR S. DANIEL Self-employed, Vice President and director of several real estate corporations Director RICHARD M. DICKE Committees Counselor-at-law, partner of the law firm of Simpson, Thacher & Bartlett Audit JOHN D. FEEHAN Chairman of the Board of the Company JOS. MICHAEL GALVIN, JR. Corporate President and Chief Executive Officer of Development Salem County Memorial Hospital GERALD A. HALE Energy, President of HHH, Inc., an investment and Operations management company & Research MATTHEW HOLDEN, JR.

Professor of Government and Foreign Affairs, Finance University of Virginia E.DOUGLASHUGGARD President and Chief Executive Officer Pension &

of the Company Insurance IRVING K. KESSLER Retired , Former Executive Vice President, Personnel RCA Corporation RICHARD B. McGLYNN Shareholder, Counselor-at-Law, Attorney with the Community &

firm of Stryker, Tams & Dill Government MADELINE H. McWHINNEY Relations President of Dale, Elliott & Company, a management consulting firm providing services to the banking industry

• Committee Chairman JOHN M. MINER Committee Membership Financial Consultant

• Ex Officio Membership Officers Years of Years of Years of Service Service Service E.DOUGLASHUGGARD JOHN M. CARDEN JOSEPH T. KELLY, JR.

President and Vice President- Vice President-Chief Executive Officer 31 Administrative Services 19 Interconnection Operations 36 JERROLD L. JACOBS LANCE E. COOPER BERTRAM LeMUNYON Senior Vice President- Vice President-Control Vice President-Utility Operations 25 and Assistant Treasurer 4 Power Delivery 27 MICHAEL A. JARRETT SABRINA M. DODD HENRY K. LEVARI, JR.

Senior Vice President- Corporate Secretary Vice President-Corporate Services 11 Corporate Planning 15 BRIAN A. PARENT THOMAS E. FREEMAN J. DAVID McCANN Senior Vice President- Vice President- Vice President, Treasurer Planning and Rates 19 Human Resources 6 and Assistant Secretary 14 J. G. SALOMONE MEREDITH I. HARLACHER, JR. HENRY C. SCHWEMM, JR.

Senior Vice President- Vice President- Vice President-Finance and Accounting 10 Customer Service 21 Production 17 40

Front row [I to r ]: Back row [I tor]:

M. Holden I. K. Kessler M.H. McWhinney G.A. Hale J.M . Galvin, Jr. E.D. Huggard R.B . McGlynn J.D . Feehan R.M . Dicke J.M. Miner E .S. Daniel Design: Mueller & Wister, In c.

Major Photography: Kelly/ Mooney

ARANTIC ELECTRIC BULK RATE U.S . POSTAGE P.O. Box 1264 1199 Black Horse Pike PAID PERMIT NO. 11 Pleasantville, NJ 08232 SOUTH JERSEY, N .J.

08031