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:
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ML18092B463	List: ML18092B462 ML18092B465 ML18092B466 ML18092B468 ML18092B469
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NUDOCS 8703200032
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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 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 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 Electric Operating R eve nue s (OOO's) Operating Expenses (OOO's) Net Income (OOO's) Earnings Per Common Share Dividends Paid Per Common Share Total Assets (OOO's) Cash Construction Expenditure s (OOO's) Sales of Electricity (KWH) (OOO's) Price Paid Per KWH-(All Customers) Total Customer Accounts (Year-end) Number of Shareholders-Common Stock (Year-end) Number of Employees (Year-end) Bo o k Value Earnings and Dividends Paid Per Share of Common Stock (in dollars) 3.50 3.00 2.50 2.00 1.50 0 '8 2 '8 3 '8 4 '85 '86 Earning s

• Di v id e nd s P aid Market Price Per Share 1986 $ 582 , 961 $ 487 ,5 07 $ 69,550 $ 3.50 $ 2.60 $1,398,886

$ 92,283 6,521,414 9.033¢ 407,776 47 , 133 2 , 168 $ 25.67 of Common Stock (y ear-end in dollars) 40 35 30 25 -20 I % Change 1986-1985

.6 (.6) 14.9 16.7 2.8 7.6 (1.8) 5.2 (4.7) 3.2 (3.1) 3.3 3.7 I I I I I 0 '82 '8 3 '84 '85 '86 % Change 1985 1985-1984 1984 $ 579 ,733 5.5 $ 549,531 $ 490 , 327 7.0 $ 458 , 1 40 $ 60 , 519 (4.4) $ 63,277 $ 3.00 (6.3) $ 3.20 $ 2.53 4.5 $ 2.42 $1,299,633 6.5 $1,220,503

$ 94 , 017 11.1 $ 84,630 6 , 199 ,672 2.4 6 , 053 , 791 9.481¢ 5.4 8.999¢ 395 , 205 2.9 384 , 166 48 , 635 2.5 47 , 446 2 , 099 4.3 2,012 $ 24.76 2.0 $ 24.27 2 To Our Shareholders:

I n 1986, we ce l ebrated our first century of service and the resu l ts of t h e year are f u rt h er cause for ce l ebrat i o n-ea rn i n gs a nd d i vide n ds are up, and t h e price o f e l ect ri c i ty i s dow n. It h as bee n o n e of th e Co mp a n y's b est yea r s eve r! P er s h a r e ea rni ngs for 1 986 a m o unt ed t o $3.5 0 , a n a ll-tim e r ecor d , a n d it r e pr ese nt s a s ub sta n t i al in c r ease a b ove t h e 1 985 l eve l of$3.0 0. O ur fi n e re co rd o f di v id e nd in c r eases co ntinu e d. Fo r thirt y-fo ur co n se cu tive yea r s n ow, di v id e nd s p a id p e r s h a r e h ave in c r ease d. In 1 986, t h e di v id e nd s p a id a m o un ted t o $2.60 pe r s h a r e, r eflectin g th e d ec i s i on b y th e Dir ecto r s l as t Jun e t o in crease th e qu a rt e rl y di v id e nd rate by o n e ce nt , to $.65 Y2. O ur s t ro n g fin a n c ia l r es ult s d e ri ve d in l a r ge m eas ur e fro m th e grow th in e n ergy sa l es. More t h an 11 ,6 0 0 n ew c u sto m e r s j o in ed u s t hi s p as t year, a nd kil owatt h o ur sa l es in c r eased b y 5.2%. Growt h was exce pti o n a l in b o th th e co mm e r c i a l a nd r es id e nti a l sec t o r s. P ea k d e m a nd r eac h e d a n ew l eve l of 1 ,459 M W , r e pr ese nting a 1.9% in c r ease ove r th e pri o r r eco r d se t in 1 985. {I tor]: E.D. H uggard, J D. F eehan F utur e fina n c i al p e r fo rm a n ce w ill co ntinu e to depend o n both sa l es a n d approp r iate rate re li ef. In March 1 986 , t h e New J ersey Board of Pub li c U tiliti es gra n te d us a $13.6 milli o n in crease in b ase rates. We h ave a l so b ee n i n vo l ve d in a separate ra t e proceed in g d ea lin g wit h o ur 5% s h a r e of t h e n ew H ope Cree k unit , w hi ch i s j o intl y ow n e d w ith Publi c Se r v i ce E l ect ri c & Gas Co mp a n y. H o p e C r ee k was co mpl eted a n d jo in e d t h e ot h e r uni ts in th e PJ M p ower p oo l in D ece mb er 1 986. T h e BP U h as b ee n co ndu c tin g h ea rin gs w i t hin a Pu b li c Se r v i ce case to exa mine t h e cos t s of t h e H o p e Cree k unit a nd t o fix a l eve l of in ves tm e nt fo r ra t e m a kin g purp oses. W e und e r s t a nd th a t th e BP U h as j u st i ss u e d a n oral d ec i s i o n in th e Publi c Se r v i ce case, r ecog ni z ing o nl y $4.1 29 billi o n o f total H o p e C r eek cos t s, a nd di sa ll ow ing $4 55 milli o n. W e w ill h ave t o wa it until wr itt e n o rd e r s are i ss u e d in th a t case a nd in o ur s t o det e rmin e w h a t th e effec t o n th e Co mp a n y mi g ht b e. A di sa ll owa n ce by th e BP U of so m e of o ur H o p e Cree k cos t s co uld r es ul t in a rat e in c r ease l owe r th a n we h ad r e qu es t e d a nd , b ase d up on n ew acco untin g s t a nd a rd s for r eg ul a t e d indu str i es i ss u e d in D ece mb er 1 98 6 , a w ri te-d ow n of so m e port i o n of o ur b oo k e d in ves tm e nt wo uld r es ult. T h e acco untin g s t a nd a rd i s n ot r e quir e d to b e impl em e nt e d by t h e Co mp a n y until 1 988 a nd , in th a t eve n t, the a dju s tment w o uld b e r e fl ec t e d in a r es t a t e m e nt of pr ev i o u s l y r e p o rt ed r e tain e d ea rnin gs. O n th e p os iti ve s id e, H o p e C r ee k i s a n ew ge n e r a tin g unit w hich s ucc ess full y co mpl e t e d pr eco mm e r c i al t es tin g in r e c o rd tim e, h as b e en p e rfo rmin g we ll , a nd w ill pl ay a n imp o rt a nt ro l e in o ur ca p ac it y mix fo r th e futur e. We ex p e ct th a t th e ra t e d ec i s i o n to b e i ss u e d s h o rtl y by t h e BPU w ill r es ult in a n et d e cr ease in rates fo r o ur c u sto m e r s: A n in c r ease for H o p e C r e ek a nd ce rt a in o th e r cos t s wo uld be o ff set b y d ec r eases due t o fu e l sav in gs w ith H o p e C r eek o n-lin e, l owe r c h a r ges fo r o th e r fuel a nd pur c h ased p owe r cos ts a nd r e du ced f e d e r a l in co m e t ax ex p e n se as a r es ult o f th e Tax R efo rm Ac t of 1 986. O n ce aga in in 1 986, a b o ut 80% o f o ur e n e r gy was p rov id ed b y coa l a nd nucl ea r so ur ces. O ur d ive r se mix of fue l s a nd ge n era tin g unit s co ntinu es t o be a s i g ni fica nt facto r in m a n ag in g cos t s: R ates c h a r ge d o ur c u s t o m e r s h ave b een r e l a ti ve l y sta bl e s in ce 1 98 4 , a nd w e ex p ec t th a t s t a bilit y to co ntinu e th ro u g h thi s co min g yea r. Th e Co mp a n y e nj oye d t h e b e n e fit s of impr ovin g fin a n c i al m a rk e t s in 1 98 6. As th e Sta nd a rd & P oor's 5 0 0 ind ex in c r eased b y 1 8% ove r th e yea r , o ur stoc k pr ice s h owed a n in c r ease o f 30%. A s h a r eh o ld e r bu y in g ATE fo r $28% a t th e b eg innin g of

. ' 1 986 wo uld h ave s e e n , b y yea r's e nd , a n in c r ease of a b o ut $8.5 0 in s h a r e pri ce. Co upl e d w ith th e $2.60 o f di v id e nd s paid , th e tot al r e turn o n th a t initi a l in ves tm e nt wo uld h ave b ee n 38%. Int e r est ra t es we r e quit e favora bl e in 1 986, a nd we we re a bl e to r e pl ace so m e of o ur o ut sta ndin g l o n g t e rm d e bt w ith l owe r-cost n ew i ss u es. We h ave b ee n g i v ing a l ot of th oug h t to th e c h a n ges occ urrin g in o ur indu s tr y. D ev el op m e nt s in r eg ul a ti o n , co mp e tit io n a nd a l te rn a te e n e r gy so ur ces w ill be t he c h a llen ges w hi c h , i f m a n aged p ro p e rl y, c a n be co m e r e w a rdin g opportuniti es. In th e p ro c ess, w e h ave s h a rpen e d o ur fo c us o n c u sto m e r s , ch o i ces a nd cos t s. In the futur e, s t ro n g fin a n c i al p e r fo rm a n ce w ill d e p e nd o n o ur a bilit y to furth e r in c r ease p ro du c ti vit y a nd m a n age ex p e n ses. We bel i eve t h a t th e int e r es ts of b o th cu s t o m e rs a nd s h a r e h o ld e r s can b es t b e se r ve d w i t h a " l east-cos t" s t rategy: Mo r e int e n s i ve co n se r vat i o n a nd l oad m a n age m e n t, cus t o m e r-owne d ge n erat i o n a nd cog en e rati o n a r e k ey o p t i o n s in o ur e n ergy futur e. Co mbin e d w ith a r e du ced l eve l of in ves tm e nt in n ew, t ra diti o n a l ge n e ra t in g ca p ac it y , it s h o uld b e p oss ible t o pro v ide o ur c u sto m e r s with th e e n e r gy th ey r e quire a t th e l o w est r easo n a bl e cost. Fro m the s h a r e h o ld e r s' p e r s p ect i ve , we wa nt to ass u re t h a t f utur e in ves tm e n t by t h e Co mp a n y fit s into a l eas t-cos t sys t e m, a nd t h a t it wi ll ea rn a n ap p ro pri ate ret urn. W e h ave co m e to b e li eve th a t a h o ldin g co mp a ny s tru c tur e wo uld p rovi de g r ea t e r fl exi bili ty a nd be tt e r s upp o rt fo r this s tr a t egy. T h e p ro p ose d h o ldin g co mp a n y, A tl a ntic E n e r gy, In c., w ill h ave A tl a nti c C it y El ec tri c Co mp a n y as it s m a in s ub si a r y. O th e r , unr eg ul a t e d s ub s idi a ri es w ill co m p l e m e nt t he e l e ctri c co mp a n y in d eve l o pin g f utur e p owe r s uppl y, s u c h as coge n era ti o n , a n d s up port in g eco n o mi c vita li ty in t h e serv i ce area. We a l so bel i eve t h at t h e re a re a dditi o n a l opport uni t i es for u s to e nh a n ce ea rn i n gs th ro u g h fi n a n c i a l i n ves tm e nt ac ti v iti es. A l t h o u g h we b e li eve t h at di ve r s ifi ca ti o n w ill b e b e n e fici a l, o ur d e pl oy m e nt of r eso urc es o ut s ide o f th e co r e bu s in ess w ill be co n se r va ti ve. Di ve r s ifi ca ti o n w ill r e m a in r e l a t e d , in l a r ge p a rt , to ass urin g th a t th e p eo pl e of o ur se r v ice a r ea w ill h ave the e n e r gy w hi c h th ey n ee d. D eve l o pm e nt s of the p as t yea r h ave m a d e full u se of t h e m a ny s kill s provided b y each m e mb e r o f th e B oa rd. On e o f o ur Dir ec tor s, Ri c h a rd M. Di c ke , h as se r ve d o n th e B o ard s in ce 1 969. H av ing a tt a in e d t h e age of 7 1 , Ri c k w ill n ot b e s t a ndin g for r e-e l ec ti o n as a Dir ecto r a t thi s yea r's A nnu al M ee tin g. B y th a t tim e , Ri ck w ill h ave se r ve d o n th e B oa rd for m o r e t h an 1 8 yea r s. Hi s ex p e rti se in corpora te a nd sec uriti es l aw is r e n ow n e d th ro u g h o ut th e indu s tr y , a nd we h ave be n efite d , in l as tin g m eas ur e, fr o m hi s unlimit e d e n e r gy a n d de di ca ti on t o the s u ccess of th e Co mp a n y. O ur n e w es t Director , Rich a rd McGl y nn , h as b ee n o f gr ea t ass i sta n c e s in ce j o inin g u s l as t A pril , p rov idin g th e B oa rd w ith hi s vas t ex p e ri e n ce a nd kn ow l e d ge of r eg ul a tory a nd l ega l m a tt e r s. W e wo uld a l so n o t e, w ith g r ea t sa dn ess , th e p ass in g of J o hn M in er in J a nu a r y 1 987. J o hn was o n e of o u r se ni o r Di rec t ors , h av in g se r ve d o n th e B oar d s in ce 1 973. H is in s i g h t a nd fin a n c i a l a d v i ce h ave b ee n of g r ea t va lu e , a nd we w ill t r eas ur e th e co ntr i but io n w hi c h h e h as m a de o v e r th e yea r s t o th e Co mp a n y. We w ill mi ss him as a d ea r fri e nd. A se n se of fa mil y bind s th e p eo ple o f A tl a nti c E l e ctri c t oge th e r. G rowth a nd ch a n ge can b e r ewa rdin g, p a rticul a rl y for a family w hi c h h as a co mm o n se n se of purp ose. For u s, it i s a b e li ef th at success is ac h ieved b y p rov iding o ur c u sto m ers th e se r v i ces t h ey des ir e. Th a t , in turn , brin gs a dd e d va lu e to you r i n vest m ent a nd , we tru s t , p rid e in yo ur Co m pany. Fo r t h e B oa rd o f Dire c t o r s , J. D. Fee h a n C h a irm a n of th e B oa r d E. D. Hu gga r d Pr es i de nt a n d C hi ef Executive Officer Feb ru ary 6 , 1 987 3 4 The Year in Review Construction

-T h e 1 986 progra m tota ll e d $10 9. 3 milli o n. Ma j or p ro j ec ts w ithin t h a t progra m in cl ud e d: Co n s tru c ti o n of H o p e C r ee k was co mpl e t e d a n d was made ava il ab l e fo r full di s p atch to t h e p ower pool i n D ecember 1 986. H ope C r ee k se t a n ew indu s tr y r ecord fo r th e fas t est s t a rt-up of a b o ilin g wate r reacto r. T h e ex t e ri or s h e ll fo r a n ew 4 7 5' c hjmn ey was co n s tru c t e d a t th e B. L. E n g l a nd S t a ti o n. It w ill se r ve t wo coa l fi r ed a nd o ne o il fir e d unjt a nd w ill h e lp m a int a in co mpli a n ce w ith e mi ss i o n sta nd a rd s. T he s tru c tur e i s ex p ec t ed t o b e in se r v i ce in 1 988 a n d w h e n co mpl ete d, w ill r ese mble a li g h t h o u s e. Operations

-A n ew e n e r gy p ea k de m a nd of 1 , 4 59 m egawatt s occ urr e d on J u l y 7 , 1 986 r e pr ese ntjng a 1. 9% in c r ease ove r th e 1 985 r eco rd ed p ea k. S al es for 1 986 we r e 6.5 b illi o n kil owa tt-h o ur s , a 5.2% in c r ease ove r 1 985. -Coa l and nu clea r ge n era tin g fac iliti e p rov id ed 78% of e n e r gy n ee d s in 1 98 6. Th e co ntinu ed u se of coa l a nd nucl ea r save d cu s tom e rs a n es tim ate d $9 0 milli o n in fu e l cos t s. Administration A n ew t ra inin g ce nt e r was o p e n e d in Jun e. Trainin g ac ti v iti es we r e co n so lid ated t o ef fi c i e ntl y provide a b roa d ra n ge o f pro g ram s includin g co mput e r lit era c y, s kill d eve l o pm e nt , p e r so n a l growt h a nd sa f e t y in th e wo rk pl ace. Pr es id e nt D o u g Hu gga rd m e t w ith e mpl oyee s a t va ri o u s l oca ti o n s in a se ri es of m ee tin gs t h ro u g ho ut 1 98 6. Throu g h th ese sess i o n s , s u gges ti o n s fo r imp rove m e nt s in wo rkin g co nditi o n s a nd p e r fo rm a n ce eva lu a ti o n s we r e m a de a nd impl e m e nt e d. D ee p wate r U nit #1 was m o difi e d to burn b o th o il a nd n a tu ra l gas. Th e unit n ow h as th e ca p a bilit y to sw it ch b e t wee n fuels b ase d o n eco n o mi cs. A n ew e l ec t ro ni c co nt ro l sy s t e m was in s t a ll e d durin g th e co n ve r s i o n th a t w ill e nh a n ce th e unit's e ffi c i e n cy. M o dific a ti o n s m a d e t o B. L. E n g l a nd U nit #3 durin g 1 98 6 a r e ex p ected to impro ve th e unit's l oat rac kin g ca p a biliti es durin g off-p ea k time s. In Jul y 1 98 6 th e Co mpan y b eg an u s ing a coput e r-a id e d dra f tin g sys t e m fo r produ c in g dra w in gs. Thi s sys t e m will imp rove d raw ing clarit y , prom o t e sta nd a rd iza ti o n a nd imp rove p ro du c ti v it y. -J o intl y-ow n e d uni ts co mbin e d produ ce d a b o u t 20% m o re e n e r gy durin g 1 98 6 th a n in 1 98 5. Uni t o utput r e c o rd s we r e ac hj e v e d at K eys t o ne a nd Co n e m a ugh fac iliti es. -The Ge n e r a ting E quipm e nt M a int e n a n ce Syste m was in s ti t ut e d in 1 98 6 to s tr ea mlin e m a int e n a n ce m a n age m e nt fun c ti o n s. Th e sys t e m w ill impro ve o ur a bili ty t o pl a n a nd s ch e dul e maintenan ce proj ec t s, c h ec k th e ir pro g r ess a nd tra c k their co s t s. Empl oyee a nd Co mp a n y co ntributi o n s to th e U nit e d Wa y in 1 986 excee d e d $1 8 6 , 000 , r e pr ese ntin g a b o ut a 15% in c re ase ove r l as t y ear. Throu g h th e Good N e i g hb o r Fund , c u s t o m e r a nd Co mp a n y d o n a ti o n s ass i s t e d 1 , 500 ne e d y famili e s w ith th e ir h ea tin g bill s.

Planning and Rates -In Ma r ch 1 986, th e New J e r sey B oa r d of Pu b li c U tili t i es (BP U) gra nt e d a $13.6 milli o n in c r ease in base a nnu a l r eve nu es. T he o rd er a ll owe d an overa ll ra t e of r et urn of 11.42% a nd a re turn o n co mm o n e quit y of 14.1%. -Effec ti ve J a nu a r y 1986, t h e BP U a p prove d r e du c ti o n s in e n e r gy a d j u s tm e nt r eve nu es tota llin g $44 milli o n. Th e d ec r ease in r ates prim a r i l y r e fl ec t ed l owe r pro j ec t e d f u el c os t s. -P ro p osed r es truc t uring o f At l a ntic E l ec tri c int o a h o ldin g co mp a n y was ap p roved b y t h e BP U in Dece mb er 1 986. Finance and Accounting

-T h e Co mp a n y so ld $1 2 5 milli o n o f 8 Ys% Se ri es of F i rs t Mo rt gage B o nd s du e 2 01 6 a nd $95 milli o n of 8% Series of F i rs t Mo rt gage B o n ds du e 1 996. So m e of th e p rocee d s w e r e u sed t o r e d ee m $14 3.2 milli o n of F i rs t Mo rt gage B o nd s of 11 Y2% o r g r ea t e r. -T h ro u g h rede mp t i o n a nd s inkin g fund s i n 1 986 , th e Co mp a n y r e du ce d it s e mb e dd e d cost of d e bt b y about 72 bas i s p o int s t o 8.9% a n d i t s em b e dd e d cos t of pr efe rr e d stock b y a b o u t 30 b as i s p o int s t o 7.2%. Customer Service -A t yea r e nd 1 98 6 , th e to t a l numb e r o f c u s tom e r acco unt s was a p proxi m ate l y 40 8 , 0 00 , a 3.2% in crease over 1 985. T h e numb e r of R es id e n t i a l a nd Co mm ec i a l c u s t o m e r s in c r ease d 3.2% a nd 3.1%, r es p ec ti ve l y , w h i le t h e numb er of In d u s t r i a l c u s t o m e r s d ec r eased slig h t l y. -T wo a dditi o n a l cu sto m e r co urt esy ce n ters were opened in t h e serv i ce t errito r y in 1 986. T h ese l oca ti ons p rov ide c u sto m ers w i t h co n ve ni e n ce a nd dir ec t access to Co mp a n y p e r so nn e l fo r h a ndling a fu ll s p ec trum of cus t o m e r se r v i ces. -Th e co rp ora t e pl a nnin g pr o c ess was furth e r r efi n e d in 1 98 6 w ith the es t a bli s hm e nt o f s p ec ifi c S t ra t eg ic a nd O p era ti o n a l Pl a nnin g Co mmitt ees. Th e St r a t eg i c Pl a nnin g Co mmitt ee coo rdin a t es th e ac ti v iti es th at d ea l w ith th e n a ture a nd t h e di rec ti on of th e Co mp a n y w hile t h e Ope rati o n a l Pl a nn ing Co mmitt ee co n ce nt ra t es o n o p e rati o n a l pl a nning a n d o b jec ti ves. S p ec i a l m ee tin gs o f th e Co mp a n y's B oa rd o f Dir e ctor s w e r e h e ld durin g 1 986 t o eva luate ce rt a in strateg ic pl a nnin g i ss u es including o pp o rtuniti es fo r di ve r s ifi ca ti o n , c h a n ges in utilit y r eg ul a ti o n a nd a lt e rn a te e n e r gy t ec hn o l og i es. -on Jul y 2 , 1 98 6 memb e r s o f th e Co mp a n y's se ni or m a n age m e nt a pp ea r ed b efo r e th e New Y o rk Soc i ety o f Sec urit y A n a l ys t s to di sc u ss th e Co mp a n y's fi n a nci al p e r fo rm a n ce a nd it s l eas t cos t plannin g s tr a t egy. -Durin g 1 986 , th e fir s t m o dule o f th e n ew Cos t Ce nt er M a n age m e nt Sys t e m was u sed t o d evelo p p o rti o n s of th e Co mp a n y's 1 987 o p era ti o n a nd m a int e n a n ce bud ge t. O th e r m o dul es o f thi s acco untin g in fo rm a ti o n sys t e m a r e b e ing impl e m e nt e d as p a n o f a l o n g-te rm pl a n to prov id e b e tt e r co nt ro l of cos t s. -Co n se r v ati o n a nd l oad m a na ge m e nt pro g ram s p rov id e d cu s t o m e r s w ith o pp o rtuniti es t o co nt ro l th e ir cost of e l ec tri c it y in 1 986. Over 5,2 00 h o m e e n e r gy a udit s w e r e co mpl e t e d a nd a b o ut 4 ,7 0 0 cu sto m e r s t ook a d va nt age of c u s t o m e r sea l-up p rogra m s. -Over 9 0 0 e mpl oyees fr o m a ll a r eas o f th e C u s t o m e r Se r v i ce sec ti on p a rti c ip a t e d in o n e of t h e Co mpan y's l a r ges t tr a inin g p rog ram s. Th e m o tiva ti o nal pro g ram focu s ed o n th e imp o rt a n ce o f goo d c u sto m e r se r v i ce in a n e m e r g in g co mp e titi ve e n v i ro nm e nt. 5 6 -"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 7

8 -"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 f( "M!N u. Of 1f A1E'S 10 ll)[

WlfH C'#o1c.ts v'ElDplf)Etlf Of i:-DF -u se. Rti.: rfs OAo-5hAp!S. LHIVS Co sn o f 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. Rat e 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.

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 Manag e ment 11 12 -"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

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

Over 9,700 new residential dwellings were connected in 1986 , with the majority located in the coastal area. Est. 1986-2001 Annual Growth 1986 2001 Rate Energy (billion kwhrs) 2.839 3.577 1.55% Peak (Mw) 786 988 1.54% Commercial The Company's average number of commercial customers increased 2.5% to 45,359. Overall, commercial sales rose 4.5%. Sales to the eleven hotel casinos increased over 7% from 1985, and represented 5.9% of 1986 total energy sales. Two additional hotel casinos are expected to be in operation by year-end 1987. Est. 1986-2001 Annual Growth 1986 2001 Rate Energy (billion kwhrs) 2.401 3.128 1.78% Peak (Mw) 528 711 2.00% Industrial

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

The Company's 1,022 industrial customers, whose average use per customer increased slightly in 1986, are located primarily in the inland and western sections of the Company's service territory.

Energy (billion kwhrs) Peak (Mw) Est. 1986-2001 Annual Growth 1986 2001 Rate 1.281 1.192 -0.48% 145 124 -1.04% (billions of kwh) 4 3 -2 r -I I' I* 0 '82 '83 '84 '85 '86 2001 average customer 7.4 7.7 use 7.9 7.6 8.0 7.4 (000 kwh) % of total 43 43 44 43 44 45 s ale s (billions of kwh) 4 3 2 0 '82 '83 '84 '85

'86 2001 average customer 44.2 46.8 49.3 51.9 52.9 67.7 use (000 kwh) % of total 34 35 35 37 37 40 sales (billions of kwh) 4 3 2 -.. -I----I 0 '82 '83 '84 '85 '86 2001 average customer 1197.0* 1200.4* 1179.7* 1181.3* 11%.7* 1115.2* u s e (000 kwh) % of total 23 22 21 20 19 15 sale s *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 Statement of Income and Retained Earnings Statement of Cash Flows Balance Sheet Notes to Financial Statements 16 ' .

Management's Discussion and Analysis of Financial Condition and Results of Operation OVERVIEW The nature of the Company's operations is capital intensive.

A significant amount of funds are invested in property and plant to generate, transmit and distribute electric energy service to customers.

At December 31, 1986, gross investment in property and plant was approximately

$1.5 billion. As a utility, the Company is generally subject to regulation by the New Jersey Board of Public Utilities (BPU). The Company seeks to maintain a level of rates which will allow it to meet daily working capital ments, long term obligations, and to provide a fair return on investment to its shareholders, while maintaining service reliability.

LIQUIDITY AND CAPITAL RESOURCES Construction Program During 1986, cash construction expenditures aggregated

$92 million, which is a 2% decrease from the $94 million expenditure level experienced in 1985 and a 9% increase from the level in 1984. A major element of the construction program during the past several years has been the Company's 5% interest in the Hope Creek Generating Station. Cash construction expenditures associated with Hope Creek during 1986, 1985 and 1984 amounted to $17 million, $31 million and $23 million, respectively.

The construction program and the forecast of related tion expenditures is reviewed regularly and is designed to meet customers' demand for electric energy service for the present and the future. The current forecast of peak load growth for 1987 through 1991 is 1.4% per year. This forecast reflects a continuing commitment to promote energy conservation among customers, and alternatives to conventional energy supply, including cogeneration.

In response to customers' needs, the construction program includes elements to improve or replace existing tion plant, and upgrading of the transmission and distribution system. Financing Program The Company's financing program is determined by the excess of its total cash requirements over the level of cash generated by its operations.

Cash requirements are affected not only by the levels of construction expenditures, but also by requirements associated with normal operations, redemptions, retirements, sinking funds and maturities of outstanding debt and senior equity. Interim financing of cash requirements is accomplished by means of short term debt, which is periodically repaid with the proceeds from permanent financings.

The types of permanent financings employed by the Company are determined after tion of such factors as cost of capital, leverage and term capital structure goals. Flexibility in financing needs is complemented by maintaining short-term lines of credit with lending institutions, which aggregated

$ll5 million at December 31, 1986. Atlantic Cit y Electric Company The aggregate dollar amounts of major external ings for the past three years are summarized as follows: (Millions of Dollars) 1986 1985 1984 First Mortgage Bonds Common Stock $220.0 .4 $70.0 11.2 $42.2 12.2 Total $220.4 $81.2 $54.4 Financings in 1986 included the sale of two series of First Mortgage Bonds: $125 million of the 8 7/s% Series due 2016 and $95 million of the 8% Series due 1996. Portions of the proceeds of these financings were used to redeem ing indebtedness which had been issued at higher interest rates. The 1986 Common Stock issuances related to shares issued through the Employee Stock Ownership Plan (ESOP). Effective January 1, 1986 the Company's Dividend Reinvestment and Stock Purchase Plan (DRP) was fied so that shares issued under the DRP would be shares purchased in the open market rather than newly issued shares. The 1985 financings included the sale of $70 million of ll Y2% Series of First Mortgage Bonds, $10.8 million of Common Stock issued through the DRP, and $.4 million of Common Stock issued through the ESOP. In 1984 the Company issued three pollution control series of First Mortgage Bonds: $.85 million of a lO Y2% Series, $18.2 million of Adjustable Rate Series, and $23.15 million of a separate 10 Yz% Series. Also issued was $11.4 million of Common Stock through the DRP and $.8 million through the ESOP. The timing and amount of security issuances are guided, in part, by the Company's capital structure goals. Capitalization ratios as of December 31 for the last five years are set forth in the accompanying chart. Approximately 34% of the cash requirements for struction, maturities, sinking funds, optional retirements and redemptions associated with long term debt and preferred stock, and for other capital purposes during the period 1984-1986 was generated from operations after deductions for dividends and working capital needs, but exclusive of changes in temporary cash investments.

Excluding the early retirement of all of the 12 5/s% Series First Mortgage Bonds and a portion of the 1F/s% and ll Y2% Series First Mortgage Bonds in 1986, approximately 46% of cash requirements during the period 1984-1986 were generated internally.

Provisions of the Company's charter, mortgage and debenture agreements can limit, in certain cases, the amount and types of additional financing which may be used. At December 31, 1986 the Company estimates additional funding capacities at $314 million for First Mortgage Bonds, or $373 million for Preferred Stock, or $213 million for unsecured debt. These amounts are not necessarily additive.

17 Management's Discussion and Analysis of Financial Condition and Results of Operation (co ntinu e d) RESULTS OF OPERATIONS The tabulation on pages 38 and 39 includes key historical indicators which may be helpful in evaluating the mance of the Company over the past ten years. Earnings Earnings per share of Common Stock, based on the weighted average number of shares outstanding, were $3.50 in 1986, compared to $3.00 in 1985 and $3.20 in 1984. The increase in 1986 earnings per share is primarily attributable to increased sales, while the decrease in earnings per share in 1985 is attributable to increases in operating expenses without corresponding rate relief. In addition, earnings are sensitive to other changes in revenues and expenses as discussed below. Revenues Operating revenues increased

.6% in 1986 to $583.0 million compared to $579.7 million in 1985. The 1985 level of revenues represented a 5.5% increase compared to 1984. These overall increases reflect the net results of base revenue increases, changes in Levelized Energy Clause revenues and changes in kilowatt-hour sales as shown below: (Thousands of Dollars) 1986 1985 Base and Unbilled Revenues $ 7 , 527 $24,142 Levelized Energy Clauses (33 , 849) (7 ,039) Kilowatt-hour Sales 29,550 13,099 Total $ 3,228 $30,202 Future changes in operating revenues will reflect the timeliness and adequacy of rate relief, general economic conditions in the service area and the results of load management and conservation programs.

Sales Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is also affected by weather conditions.

Energy sales statistics, stated as percentage changes from prior years, are shown below: Customer Class Residential Commercial Industrial Other Total Increase (Decrease) from Prior Year 1985 Average Average # of #of Sa l es Use C u s t. Sales Use Cust. 7.6% 4.4% 3.0% (.3)% (2.8)% 2.6% 4.5 1.9 2.5 6.9 5.4 1.5 1.5 1.3 .2 .6 .1 .5 .8 .8 (2.4) (4.2) 1.8 5.2 2.2 3.0 2.4 2.5 The 5.2% and 2.4% increases in total kilowatt-hour sales in 1986 and 1985, respectively, are largely attributable to the number of new customers added to the system. The growth of electricity consumption within the service territory is related to improving economic conditions , enhanced in part by the hotel/casino industry.

Overall, the combined effects of the changes in sales and rates have resulted in a decrease in revenues per hour of 3.6% in 1986 compared to 1985, and an increase of 2.3% in 1985 compared to 1984. Cash Requirements and Internal Generation of Funds (in millions of dollars) Year-end Capitalization (in per c ent) Total Energy Sales (in billions of kiluwau-h o ur s) 2SO JOO 7.0 200 80 6.S ISO 60 6.0 ------JOO 40 s.s -----so 20 s.o I I I I I 0 '8 2 '83 '8 4 '85 '86. 0 '82 '83 '8 4 '85 '8 6 0 '82 '8 3 '84 '85 '86 Construction and Other Common Equity

• L o n g term Debt Maturitie s , Retirement s and Sinking Funds

• Preferred Stock

• Short term Debt 18

• Int ernal Cash Generation

• Excludes cer tain op tional r e tirement s.

Costs and Expenses Total operating expenses decreased

.6% in 1986 compared to 1985. The 1985 operating expenses represented an increase of 7.0% compared to 1984. Excluding depreciation and taxes , operating expenses fell to $328.6 million in 1986, a decrease of 1.3% from 1985, which bad increased 6.9% from 1984. Net Energy Costs reflect the amount of energy duced , the various fuel and purchased power sources used to produce it , as well as the operation of the levelized energy clauses (LEC's). Information on the sources and costs per kilowatt-hour of energy is shown in the panying graph and table. During 1986 the Company was in an overrecovery position with respect to the LEC's. For 1985 , Net Energy Costs include $5,865 , 000 of previously Deferred Energy Costs representing fuel costs recovered under the LEC's. In 1984 Net Energy Costs were reduced by $6 , 969,000 reflecting the deferral of fuel costs incurred in excess of revenues collected under the LEC's effective for that year. At December 31, 1986 , $13 , 177 ,000 is shown on the balance sheet as Deferred Energy Revenues associated with the current energy clause, compared to $4 , 466,000 at December 31, 1985. The Company's annual fuel, interchange and purchased power co s ts reflect changes in availability of low-cost generation from Company-owned and purchased sources , as well a s changes in the needs of other utilities ing in energy interchange. Certain costs associated with purchased power are deferred on the balance sheet since rates are levelized to collect the s e costs over the 17-year life of the agreements with Pennsylvania Power & Light Company. Pre-Tax Interest Coverage Ratio (times coverage) 5 4 3 2 I I: .. ,, l' -! l.< I. 1:. 11 I'. ,______ Average Annual Price Per Kilowatt-Hour (in cents) JO 8 6 4 2 Atlantic Cit y Electri c Compan y Operation and maintenance costs include the costs of both wholly-owned and jointly-owned generating units. At the Company's wholly-owned units, programs have been instituted to upgrade these facilities to improve efficiency and extend the service life of the generating units. Additionally, operating and maintenance costs are jected to price increases relating to materials, supplies and services, and include wages and employee benefits.

Changes in depreciation expense generally represent changes in the value and mix of electric utility plant in service and the respective in-service dates. The components of federal income taxes are detailed in the notes to the financial statements.

Interest charges before the allowance for borrowed funds used during construction rose to $46.l million in 1986 compared to $41.6 million in 1985 and $40.3 million in 1984. These increases reflect net effects of principal amounts and interest rates of debt outstanding in the periods. A total of $332.2 million of long term debt was issued during the 1984-1986 period as described under "Financing Program" above. In the same period, rities of long term debt included $5 million of 3% Series First Mortgage Bonds and $21 million of 9% Pollution Control Series First Mortgage Bonds in 1984, $10 million of 3 Y 4% Series First Mortgage Bonds in 1985 and $45 million of floating rate notes in 1986. In addition, $63. 75 million, $36.675 million and $48. 785 million principal amounts, respectively, of the 12 5/s%, 1F/s% and l1 Y2% Series of First Mortgage Bonds were retired early in 1986. The decrease in short term interest expense in 1986 from 1985 reflects lower average balances and lower average rates. The increase in short term interest expense in 1985 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 AFDC as a Percent of Net Income 25 20 15 JO 5 0 '82 '83 '8 4 '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 debt, but to a lesser degree, to finance the construction and working capital needs on an interim basis, replacing it with long term issues as permanent financing.

The Allowance for Funds Used During Construction (AFDC) including both the Borrowed Funds portion, which is used to reduce interest charges, and the Equity Funds portion, shown under Other Income, was $17.0 million in 1986 compared to $11.2 million in 1985 and $10.8 million in 1984. The increases are due to increases in the average balances of construction work in progress, as well as an increase in the rate from 8.5% to a semi-annually compounded 8.95%. AFDC as a percent of net income for 1986, 1985 and 1984 was 24.5%, 18.5% and 17.0%, respectively.

OUTLOOK The Company has positioned itself to remain flexible in responding to the external forces that may affect it. This strategy is evident in the diversity of power supply sources, which include investments in both wholly-owned ing facilities, as well as ownership interests in owned facilities, purchased power contracts and a diversity in fuel mix including coal, nuclear, oil and natural gas. This strategy is also evident in the proposed plans to form a holding company, Atlantic Energy, Inc. This corporate restructuring is expected to allow additional flexibility to take advantage of opportunities which may arise in energy related or other areas, and to respond more quickly to changes which may affect the Company. Total Sources and Costs of Energy (in billions of kil owau-h o ur s) 7 2% 7% 11% 2% 2% 2% 3% 20% 21% 10% 10% 5 16% 22% 32% 35% 4 31% 3 62% 60% 2 48% 49% 42% L 2)% --L (l)O/o 0 '8 2 '8 3 '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 Int erchange 5.43 5.21 6.02 3.65 2.48 \i?arl y A v era ge 2.38 2.54 2..13 2.17 1.81 -ce nt s per kil o w a ll*h o ur 20 ----There are external forces which the Company may be unable to influence.

The ability to raise adequate capital when needed, at the lowest possible cost, depends upon such factors as regulatory treatment of cost of service and the maintenance of good credit ratings. The recent tax law changes enacted in the Tax Reform Act of 1986 will affect the Company in certain respects , some of which will be unfavorable.

For instance , the repeal of the investment tax credit provisions are not favorable to a business such as the Company's which historically invests heavily in plant and equipment.

A positive impact is an overall reduction in the corporate income tax rate from the current maximum of 46% to a composite rate of 40% in 1987 and 34% beginning in 1988. Coupled with this is a possible change in accounting for income taxes for financial reporting purposes, principally with respect to deferred income taxes, as proposed by the Financial Accounting Standards Board for implementation in 1987. If adopted in its current form, the proposal would require the Compan y to record certain deferred tax liabilities previously corded in accordance with rate regulation treatment, and to adjust deferred tax liabilities to be computed at tax rates currently in effect. The Company believes the recording of previously unrecorded deferred tax liabilities would not have a material impact on its financial results because rate regulation should allow recovery of these costs and thus create an offsetting asset. The effect of calculating rently existing deferred tax liabilities at the new rates as enacted by the Tax Reform Act will be lessened because deferred taxes relating to utility plant would be adjusted over the remaining lives of the related assets using an "average rate assumption" as provided in the Tax Reform Act. Other potential deferred tax amount adjustments would be subject to rate treatment, and thus may occur over more than one year. Therefore, the major concern of the Company relating to these changes is the impact on cash flows, since taxes currently payable are expected to increase.

In addition, the impact of the Tax Reform Act of 1986 is the subject of a proceeding before the BPU to determine the appropriate amount of decrease in the Company's revenue requirements which should be reflected in customer rates, since overall tax expense i s expected to decrease as a result of the Act. In summary, management believes the Compan y is ready to meet the challenges and take advantage of the tunities of the future, but continues to monitor and develop appropriate responses to the changing ment in which the Company operates.

Report of Management The management of Atlantic City Electric Company is responsible for the financial statements presented herein. !hese were prepared by management m

with generally accepted accounting 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 Energy Regulatory Commission.

In preparing the financial statements, management made informed ments and estimates relating to events and transactions being reported.

The Company has established a system of internal and financial_

controls and procedures designed to msure that the financial records reflect the transactions of the Company and that assets are safeguarded.

This system is_ examined by management on a continuing basis for effectiveness and efficiency and is reviewed on a regular by an audit staff that reports directly to the Audit Committee of the Board of Directors.

The financial statements have been examined by Deloitte Haskins & Sells, Certified Public Accountants.

The auditors provide an objective, independent review as to management's discharge of its responsibilities insofar as they relate to the fairness of reported operating results and condition.

Their examination includes procedures believed by them to provide reasonable assurance that the financial statements are not misleading and includes a 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 of financial statements and the ongoing exammation of the Company's system of internal ing controls.

The Audit Committee, which is composed solely of outside directors, meets regularly with 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.

Auditors' Opinion Deloitte Haskins+ Sells Certified Public Accountants One World Trade Center New York , New York 10048 To the Shareholders and the Board of Directors of Atlantic City Electric Company: We have examined the balance sheets of Atlantic City Electric Company as of December 31, 1986 and 1985 and the related statements of income and retained earnings and of cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and accordingly, included such tests of the accounting records ' and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying financial statements present fairly the financial position of the Company at December 31, 1986 and 1985 and the results of its operations and its cash flows for each of the three years in the period ended December 31 , 1986, in conformity with generally accepted accounting principles applied on a consistent basis. January 30, 1987, except for the seventh paragraph of Note 11 as to which the date is February 6, 1987 21 Statement of Income and Retained Earnings Atlantic City Electric Compan y 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 accompanyi ng Notes to Financial Statements are an integral part of these s tatement s. 22 Statement of Cash Flows Atlantic City Electric Compan y 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) b y Tru s tee (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 , 3 5 7) $ 14,245 $ (7 51) *E xcludin g ca s h a nd temp o rar y inve s tm e nt s. Th e ac c o mp a n y ing N o te s 10 Fin a n c ial S t a tement s are an int eg ral pan o f th e s e s ta t e m e nt s. 23 Balance Sheet (Thousands of Dollars) Assets Electric Utility Plant: In Service: Production Transmission Distribution General Total Less Accumulated Depreciation Net Construction Work in Progress Land Held for Future Use Electric Utility Plant-Net Nonutility Property and Investments Pollution Control Construction Funds Current Assets: Cash and Working Funds Temporary Cash Investments Accounts Receivable:

Utility Service Miscellaneous Allowance for Doubtful Accounts Unbilled Revenues Fuel (at average cost) Materials and Supplies (at average cost) Prepayments Total Current Assets Deferred Debits: Property Abandonment Costs Unrecovered Purchased Power Costs Unamortized Debt Costs Other Total Deferred Debits Total Assets The accompanying Notes to Financial Statements are an integral part of these s tatement s. 24 December 31 1986 1985 $ 557,257 $ 553,253 206,198 200,517 367,932 345,177 70,709 63,590 1,202,096 1,162,537 350,873 330,895 851,223 831,642 282,079 237,310 5,623 6,849 1,138,925 1,075,801 11,397 4,298 5,426 2,871 7,522 5,379 18,500 41,744 42,899 13,434 8,386 (1,600) (1,600) 24,588 26,401 22,899 29,828 17,438 17 ,223 9,280 8,382 135,305 155,398 24,815 19,878 48,360 32,660 27,240 5,220 7,418 3,507 107,833 61,265 $1,398,886

$1,299,633 (Thousands of Dollars) Liabilities and Capitalization Capitalization:

Common Shareholders' Equity: Common Stock Premium on Capital Stock Capital Stock Expense Retained Earnings Total Common Shareholders' Equity Cumulative Preferred Stock Not Subject to Mandatory Redemption Cumulative Preferred Stock Subject to Mandatory Redemption Long Term Debt Total Capitalization Current Liabilities:

Current Portion: Cumulative Preferred Stock Subject to Mandatory R edemption Long Term Debt Short Term Debt Accounts Payable Taxes Accrued Interest Accrued Dividends Declared Customer Deposits Deferred Taxes Deferred Energy Revenu es-Net Other Total Current Liabilities Deferred Credits: Deferred Investment Tax Credits Deferred Income Taxes Other Total Deferred Credits Commitments and Contingent Liabilities (Note ll) Total Liabilities and Capitalization Atlantic City Electric Company December 31 1986 1985 $ 54,821 $ 54,771 229,788 229,287 (1,555) (1,607) 185,969 169,646 469,023 452,097 41,154 41,353 24,800 34,100 494,972 437,462 1,029,949 965,012 5,050 5,050 10,000 45,000 12,900 26,094 28,755 8,817 5,372 9,509 12,865 13,195 13,224 3,408 2,945 14,153 17,747 13,177 4,466 18,463 5,681 134,766 141,105 69,997 65,412 156,242 120,464 7,932 7,640 234,171 193,516 $1,398,886

$1,299,633 25 Notes to Financial Statements NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Regulation The accounting policies and rates of the Company are subject to the regulations of the State of New Jersey , Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission (FERC). All significant accounting policies and practices used in the determination of rates are also used for financial reporting purposes. The financial statements are prepared on the basis of the Uniform System of Accounts prescribed by FERC. Operating Revenues Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the period for energy used subsequent to the last billing cycle. Electric Utility Plant Property is stated at original cost. Generally the plant is subject to a first mortgage lien. The cost of property additions , including replacement of units of property and betterments, is capitalized.

Included in certain additions is an Allowance for Funds Used During Construction (AFDC) which is defined in the applicable regulatory system of accounts as the cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of 8.95% for 1986 and 8.5% for 1985 and 1984. Deferred Energy Costs and Revenues The Company has a Levelized Energy Clause which is based on projected energy costs and includes a provision for prior period under or over recoveries.

The recovery of energy costs is made through levelized monthly charges over the period of projection.

Any under or over recoveries are deferred in balance sheet accounts as a current asset or current liability as appropriate.

These deferrals are nized in the Statement of Income during the period in which they are subsequently recovered through the clause. Depreciation The Company provides for straight-line depreciation based on the estimated remaining life of transmission and distribution property and, based on the estimated average service life , for all other depreciable property.

Depreciation applicable to nuclear plant includes amounts provided for decommissioning.

The overall composite rate of tion was approximately 3.7% for 1986 and 1985, and 3.6% for 1984. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries.

26 Nuclear Fuel Fuel costs associated with the Company's participation in jointly-owned nuclear generating stations , including a provision for estimated spent fuel disposal costs, are charged to Fuel Expense based on the units of thermal energy produced.

Federal Income Taxes The Company provides deferred Federal Income Taxes on all significant current transactions for which the timing of reporting differs for book and tax purposes.

Investment tax credits, which are used to reduce current federal income taxes, are deferred on the balance sheet and recognized in book income over the life of the related property.

Retirement Plan The Company has a noncontributory defined benefit retirement plan covering substantially all employees.

The Company's policy is to fund pension costs as accrued. Costs of the plan are determined actuarially under the aggregate cost method. Property Abandonment Costs These costs consist principally of the Company's tized investment in Hope Creek Unit No. 2, a nuclear generating unit which was cancelled in 1981, offshore nuclear units which were cancelled in 1978, unrecovered nuclear fuel advances associated with uranium supply contracts which were terminated in 1985 and study costs associated with a proposed plant site. The Hope Creek Unit No. 2 investment is being amortized over a 15-year period that began in 1983. The investment in the offshore nuclear units is being amortized over a 20-year period that began in 1979. Unrecovered nuclear fuel advances are being amortized over 15 years, beginning in 1986. The study costs are being amortized over 10 years beginning in 1986. The unamortized amounts are $11,701,000, $2 , 542,000, $4,948 , 000 and $5,484,000, respectively, at December 31, 1986. Unrecovered Purchased Power Costs These represent purchased capacity costs, relating to the Company's purchased power agreements with Pennsylvania Power & Light Company, which are not being recovered currently, but for which recovery has been specifically vided in a levelized component of future rates by the BPU. Other Debt premium, discount and expenses are amortized over the life of the related debt. Costs associated with debt reacquired by refundings are amortized over the life of the newly issued debt as permitted by the BPU. Gains and losses relating to other reacquired debt are recognized currently.

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

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: (Thousands of Dollars) Net Income Federal Income Tax Expense (as below) Book Income Subject to Tax Income Tax Computed at the Statutory Rate Items for which deferred taxes are not provided:

Difference between Tax and Book Depreciation Allowance for Funds Used During Construction Capitalized Overheads Investment Tax Credits Other Total Federal Income Tax Expense Components of Federal Income Tax Expense: Federal Income Taxes Currently Payable Deferred Federal Income Taxes: Liberalized Depreciation Unbilled Revenues Unrecovered Purchased Power Costs Deferred Energy Costs Costs Associated With Reacquired Debt Other Deferred Investment Tax Credits Employee Stock Ownership Plan Credits Total Deferred Federal Income Tax Expense Total Federal Income Tax Expense Less Federal Income Taxes Included in Other Income Federal Income Taxes Included in Operating Expenses The Company's federal income tax returns for 1981 and prior years have been examined by the Internal Revenue Service (IRS) and the Company's federal income tax liabilities for all years through 1976 have been determined and settled. The IRS has proposed certain deficiencies in taxes for the years 1977 through 1981. The Company has protested the proposed deficiencies and is of the opinion that the final settlement of its federal income tax liabilities for these years will not have a material adverse effect on its results of operations or financial position. At December 31, 1986 the cumulative amount of deferred income taxes which have not been provided on timing differences, principally depreciation, amounted to approximately

$87 ,000,000 computed at the current statutory rate of 46%. On October 22, 1986, the Tax Reform Act of 1986 was signed into law. Some of the provisions of the Act, principally those dealing with the repeal of the Investment Tax Credit, impacted the Company's 1986 tax provision.

1986 $ 69,550 37,911 $107,461 $ 49,432 2 , 842 (7 ,684) (1 , 431) (2 , 026) (3,222) $ 37,911 $ 790 17 , 756 (834) 7,222 10,078 (2 , 038) 4,585 352 37,121 37,911 1,157 $ 36,754 Atlantic City Electric Company Years Ended December 31 1985 $ 60,519 36,317 $ 96,836 $ 44,544 2,801 (5,029) (1,209) (2,178) (2,612) $ 36,317 $ 12,956 11,899 1,415 6,753 (2,551) (1,787) 7,261 371 23,361 36,317 9 $ 36,308 1984 $ 63,277 41,876 $105,153 $ 48,370 (250) ( 4,832) (1,221) (1,842) 1,651 $ 41,876 $ 15,512 18,335 (616) 3,004 3,205 (1,034) 2,765 705 26,364 41,876 649 $ 41,227 The effects of applying these provisions were recorded by the Company in the fourth quarter of 1986 in accordance with generally accepted accounting principles.

The recording of these adjustments did not have a material effect on the Company's results of operations or financial position.

The Financial Accounting Standards Board has issued an exposure draft of a proposed Statement of Financial Accounting Standards entitled "Accounting for Income Taxes." If adopted in its current form, the statement would change the recording methodology relating to deferred income taxes to a liability approach.

The principal impact of such a change to the Company would relate to the recording of changes in the tax rates on a current basis, and the recording of deferred tax liabilities not previously recorded.

The Company expects the impacts of such a change would be lessened due to rate regulation, and in the opinion of management, would not have a material adverse 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 Petition Requested Effective (millions) January 1983 $30.8 October 7 , 1983 October 1983 25.3 August 17, 1984 October 1984 24.1 February 13, 1985 April 1985 63.3 April 3, 1986 The October 1983 increase relates to the first half of the purchase of 125 megawatts of capacity and related energy from Pennsylvania Power & Light Company (PP&L) under two Capacity and Energy Sales Agreements (the PP&L Agreements

), which commenced with the start of commercial operation of PP&L's Susquehanna Unit 1. The February 1985 increase relates to the second half of the Company's agreements with PP&L and commenced with the start of commercial operation of PP&L's Susquehanna Unit 2. The PP&L Agreements provide for the purchase by the Company of capacity and energy from the Susquehanna Units through September 30, 1991, and then from certain PP&L coal-fired units through September 30, 2000. Through September 30, 1991, the estimated costs to be incurred by the Company for purchases of capacity and associated energy from the Susquehanna Units will exceed the levelized costs to be recovered by the Company from its customers.

Such unrecovered costs will be accumulated and deferred.

Such costs are included in the balance sheet as Unrecovered Purchased Power Costs along with a related provision for deferred taxes. The level of rates approved by the BPU is designed to enable the Company to recover these deferred costs and associated carrying charges during the balance of the 17-year period. The stipulation provided that any difference between actual costs incurred by the Company under the agreements and the estimated costs on which the increased rates were based will be recognized in future base rate proceedings if such costs are found to be reasonable.

The BPU order prescribes a revenue reduction formula in the event that the Susquehanna Units fail to meet a combined minimum performance standard lished by the stipulation which could subject the Company, under the most adverse circumstances, to a revenue reduction not to exceed $15,000,000 per unit per year. In August 1984, the BPU denied the Company's October 1983 request for the $25 ,300,000 increase in base rates. The BPU, in denying rate relief, made several adjustments to the Company's requested rate base, test year operating income and rate of return, providing for an overall rate of return of 11.35% and a return on common equity of 28 Amount Increase Test Approved In Revenue Year (million s) $24.5 4.5% September 30, 1982 December 31, 1983 24.0 4.3% September 30, 1982 13.6 2.1% September 30 , 1985 14.30%. Prior to the BPU decision, the Company had been authorized to earn an overall rate of return of 11. 7% and a return on common equity of 15.0%. In November 1985 the decision by the BPU was affirmed by the New Jersey Superior Court. The Company subsequently filed a request with the New Jersey Supreme Court for review of the appellate ruling. This request was denied on March 23, 1986. In April 1985, the Company filed a petition requesting a net increase of $91,850,000 to be implemented in two phases. The first phase request, for $63,316,000, related to increased operations and maintenance costs, and capital investment, and was based upon a test year of September 30, 1985. In April 1986, the BPU issued an Order relating to the first phase granting the Company an increase in annual revenues of $13,587 ,000. The BPU order reflects an overall rate of return of 11.42%, with a return on common equity of 14.10%. The second phase request, for a net increase of $28,534,000, relates to the Company's 5% ownership in the Hope Creek Generating Station, and would become effective upon commercial operation of the unit. In March 1986, the Company filed revised testimony in its second phase with respect to Hope Creek and other matters. The Company requested a net increase in annual revenues of $34.9 million, of which approximately

$32.2 million related to costs associated with the Hope Creek Station. In April 1986, the Company updated its second phase request to reflect certain of the decisions set forth in the BPU's Order in the first phase, resulting in an updated request for a net increase of $36.4 million, with imately $33.6 million of such amount related to Hope Creek. As of December 31, 1986, the Company had expended $236 million, including AFDC, for Hope Creek. For purposes of applying the provisions of a cost ment agreement approved by the BPU in 1983, the Company currently projects its share of the final cost of Hope Creek to be approximately

$240 million, including AFDC, compared with an estimate of the targeted costs of approximately

$202.2 million. The cost containment agree-ment provides for a graduated disallowance of a return on reasonable project costs in excess of the targeted amount. The amount requested by the Company for Hope Creek reflects the estimated effects of the provisions of the cost containment agreement.

Hearings in the second phase rate request commenced in mid-April 1986. As discussed more fully in Note 11, the BPU has also examined in a separate proceeding, in which the Company was granted intervenor status, the reasonableness of costs associated with the Hope Creek project. The BPU has issued an interim accounting order to permit the Company to defer the operating costs of Hope Creek and a related return on the plant costs until a final BPU decision resolving the issues concerning Hope Creek. The Company cannot predict the final cost of Hope Creek which will ultimately be allowed for ratemaking purposes, or the outcome of these ings, or their ultimate effect on the Company. The Company has requested that changes to its customer rates be synchronized to implement all changes expected ing from these proceedings and its energy clause proceeding, as discussed below, and expects a BPU Order in February 1987. The Company has evaluated the impact of the Tax Reform Act of 1986 and its effect on tax expense and related revenue requirements.

The Company expects the overall impact of the Act to reduce revenue requirements primarily as a result of the decrease in corporate tax rate; offset in part by the elimination of the investment tax ' credit, the capitalization of construction interest and the taxation of unbilled revenues and contributions in aid of construction.

The Company has submitted data on this impact to the BPU for their consideration.

Energy Clauses The Company's energy clauses are reviewed annually by the BPU and the most recent decisions are shown above: NOTE 4. RETIREMENT BENEFITS The cost to the Company in providing a retirement plan for its employees was $4,300,000, $6,465,000 and $7,555,000 in 1986, 1985 and 1984, respectively. imately 80% of these costs were charged to operating expense and the remainder, which was associated with construction labor, was charged to the cost of new utility plant. The weighted average assumed rate of return used in determining the actuarial present value of accumulated plan benefits was 8% for 1986 and 1985. The Company's Plan is in compliance with the Employee Retirement Income Security Act of 1974 as amended. Atlantic City Electric Company Date of Amount Date Amount Petition Requested Effective Approved (millions) (millions) October 1983 $ 28.1 January 20, 1984 $ 28.1 October 1984 25.4 February 13, 1985 4.8 September 1985 (37.1) January 1, 1986 (44.0) As part of the February 1985 energy clause approval, $1,639,000 of the costs associated with an extended outage of Salem Unit 1during1983 were excluded from recovery , and $4,298,000 of Deferred Energy Costs were reclassified to Unrecovered Purchased Power Costs. The Company also agre7d to defer $7 ,500,000 of Deferred Energy Costs, relatrng to costs associated with certain nuclear unit outages in 1984. As part of the January 1986 energy clause approval, the Company agreed to expense $3,975,000 of replacement power costs associated with maintenance and repair ages at Peach Bottom Unit 2 and Salem Unit 2. Also , the Company agreed to increase the 1985 deferral of $7 ,500,000 of Deferred Energy Costs to $12,179,000.

These costs represent the Company's pro rata impact of BPU findings in proceedings related to other co-owners with respect to replacement power costs associated with certain outages at the Salem Nuclear Generating Station and are subject to later review by the BPU. ' In September 1986, the Company filed petitions with the BPU requesting a reduction of $14. 9 million in annual energy clause revenues.

This reduction reflects lower fuel costs experienced in 1986 and projected fuel costs for 1987. The Company had originally requested that the change be effective for service rendered on and after January 1, 1987, but has requested that changes to its customer rates be synchronized to implement all changes, as discussed above, at one date. A comparison of accumulated plan benefits and plan net assets (including purchased annuity contract amounts) for the Company's Plan, as of the most recent actuarial valuation dates, is as follows: (Thousands of Dollars) Actuarial present value of lated plan benefits: Vested Nonvested Total Net Assets available for benefits January I 1986 1985 $ 96,849 2 , 045 $ 98,894 $146,473 $ 84,563 4,459 $ 89 , 022 $121,778 29 N Otes (continued) In December 1985 the Financial Accounting Standards Board adopted an accounting standard which will require the Company to modify the financial accounting and reporting for its retirement plan beginning in 1987. The Company believes the adoption of this new standard will not have a material adverse effect on its results of operations or financial position.

In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees.

Substantially all of the Company's employees may become eligible for those benefits if they reach retirement age while working for the Company. Benefits have been provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. The cost of these premiums and related plan costs expensed in providing those benefits totalled $1 , 537 ,000 for 1986, $992 , 000 for 1985 and $845,000 for 1984. In December 1986, the Company established a trusteed plan to begin funding for these post-employment benefits.

The Company made an initial contribution of $2,900,000 to the trust. Funding on behalf of active employees is based on the aggregate cost method over their service lives and is equivalent to normal cost. For current retirees, funding is based on current actual experience and zation of expected benefits over the remaining life expectancy of the retiree group. The actuarial present value of accumulated post-employment benefits under the plans was $23,700,000 at January 1, 1986. NOTE 5. JOINTLY-OWNED GENERATING STATIONS The Company participates with other utilities in the construction and operation of several electric production facilities. The amounts shown represent the Company's share of each plant at December 31, and includes an allowance for 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 (Thousand s 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 The Hope Creek Station completed its power ascension program and was released to the Pennsylvania-New Maryland power pool for dispatch on December 20 , 1986. Public Service Electric & Gas Company, the operator of the station, has not declared the unit commercial, pending receipt of a BPU Order. The operators of the Salem and Peach Bottom Nuclear Generating Stations entered into contracts with the United States Department of Energy for spent nuclear fuel 236,055 203,656 53 , 766 disposal, requiring the payment of fees related to the Company's ownership interests in the stations.

Current recovery of these spent nuclear fuel disposal costs is provided as part of the Company's energy clause. The Company provides its own financing during the construction period for its share of the jointly-owned plants and includes its share of direct operations and maintenance expenses in its Statement of Income. NOTE 6. INVESTMENTS IN OPERATING SUBSIDIARIES The Company's investment in Deepwater Operating pany (Deepwater), a wholly-owned subsidiary which operates generating and process steam units owned by the Company, was $3,291,000 at December 31, 1986 and 1985, respectively.

The principal asset of Deepwater is working capital in which the equity of the Company is fairly represented by its investment.

The net production costs of 30 Deepwater are included in the Company's accounts fied as to operation, maintenance and taxes. The Company's investment in Atlantic Housing , Inc., a wholly-owned subsidiary, was $6,404,000 at December 31, 1986 and $1,000 at December 31, 1985. Atlantic Housing, Inc. was inactive during 1985, and in 1986 made an investment in a commercial real estate property.

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:

Beginning of Year Dividend Reinvestment and Stock Purchase Plan Employee Stock Ownership Plan Conversion of Preferred Stock End of Year At $3 Par Value Premium on Capital Stock was credited in 1986 and 1985 with $501,000 and $10,209 , 000, respectively, representing the excess of proceeds over the par value of shares of Common Stock issued, sold and converted.

At December 31 , 1986 there were 47 ,514 shares of Common Stock NOTE 8. CUMULATIVE PREFERRED STOCK The Company has authorized 799 , 979 shares of Cumulative Preferred Stock, $100 Par Value, 2,000 , 000 shares of No Par Preferred Stock and 3 , 000,000 shares of Preference Stock, No Par Value. Unissued shares ma y, or may not , possess mandatory redemption characteristics NOTE 8(A). Cumulative Preferred Stock Not Subject To Mandatory Redemption:

$100 Par Value-Cumulative and Non-participating s hares is s ued and outstanding:

Series: 4% 77 , 000 Shares 4.10% 72 , 000 Shares 4.35% 15 , 000 Shares 4.35% 36 , 000 Shares 4.75% 50 , 000 Shares 5% 50,000 Shares 5 7/s% Convertible Series: 11 ,5 35 Shares (1986) 13,530 Shares (1985) 7.52% 100 , 000 Share s Total Atlantic Cit y Electric Compan y 1986 1985 1984 18,257,009 17,821,346 17 , 250,882 408 , 999 525,118 9,665 14,306 36,009 6,981 12 , 358 9,337 18,273,655 18,257 ,009 17 , 821,346 $54,820,965

$54,771,027

$53,464,038 authorized for issuance pursuant to the Employee Stock Ownership Plan and 40,394 shares of Common Stock reserved for the conversion of 5 7/s% Convertible Series of Preferred Stock. upon issuance.

In certain circumstances, if dividends on issued Preferred Stock are in arrears, voting rights for the election of a majority of the Board of Director s become s operative.

De ce mber 31 1986 1985 (Thousands of Dollar s) $ 7,700 $ 7 , 700 7,200 7,200 1,500 1,500 3,600 3 , 600 5,000 5,000 5,000 5 , 000 1,154 1 ,353 10,000 10 , 000 $41,154 $41 , 353 Current Redemption Price Per Share $105.50 101.00 101.00 101.00 101.00 100.00 101.50 104.89 31 N Otes (continued) Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of the Company upon payment of the redemption price plus accumulated and unpaid dividends to the date fixed for redemption.

Premium on such Preferred Stock was $93,000 at December 31, 1986 and 1985. NOTE 8(B). Cumulative Preferred Stock Subject To Mandatory Redemption:

The 5 7/s% Convertible Series, of which 1,995 and 3,531 shares were converted in 1986 and 1985, respectively, is convertible, subject to adjustment in certain events, into Common Stock at the rate of 3.5 shares of Common Stock for each share of Preferred.

December 31 Current Refunding Restricted Prior to Par 1986 1985 Redemption Shares Issued and Outstanding:

Value (Thousands of Dollars) Price Per Share Series: 9.96% 96,000 Shares (1986) $100 $ 9 , 600 104,000 Shares (1985) $8.25 82,500 Shares (1986) None 8 , 250 87 ,500 Shares (1985) $9.45 120,000 Shares (1986) None 12,000 200,000 Shares (1985) 29,850 Less portion due within one year 5,050 Total $24,800 On February 1, 1985, the Company redeemed 8,000 shares of its 8.40% Preferred Stock Series through the operation of the sinking fund and optional redemption provisions at a redemption price of $100 per share. On August 2, 1985 the Company reacquired all of the remaining shares (92,000) of this series, with an aggregate par value of $9,200,000 for $9,177 ,000. On August 1 of each year, 8 ,000 shares of the 9. 96% Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of the Company, an additional 8,000 shares may be redeemed on any sinking fund date, without premium, up to 40,000 shares in the aggregate.

The Company redeemed 8,000 and 16,000 shares at par, in 1986 and 1985, respectively, through the operation of the sinking fund and optional redemption provisions.

As of December 31, 1986 the Company had redeemed the maximum 40,000 shares. 32 $ -$105.70 10 , 400 106.35 November 1 , 1987 8,750 103.15 November 1, 1989 20,000 39,150 5,050 $34,100 On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of the Company, not more than an additional 2,500 shares may be redeemed on any sinking fund date without premium. The Company redeemed 5,000 and 2,500 shares at par in 1986 and 1985, respectively.

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

The Company redeemed 80,000 shares at par in 1986. 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.

NOTE 9. LONG TERM DEBT (Thousands of Dollars) First Mortgage Bonds: 4 1/2% Series due (January 1) 1987 3 1/s% Series due (April 1) 1988 4 1/2% Series due (April 1) 1989 4 1/2% Series due (March 1) 1991 4 1/2% Series due (July 1) 1992 4 3/s% Series due (March 1) 1993 l l7/s% Series due (November 1) 1993 5 l/s% Series due (February 1) 1996 8% Series due (November 1) 1996 8 7/s% Series due (September

1) 2000 8% Series due (May 1) 2001 7 1/2% Series due (April 1) 2002 7 314% Series due (June 1) 2003 7 5/s% Pollution Control Series due (Januar y 1) 2005 6 3/s% Pollution Control Serie s due (December 1) 2006 12 5/s% Series due (January 1) 2010 ll5/s% Pollution Control Series due (May 1) 2011 10 1/2% Pollution Control Series B due (July 15) 2012 Adjustable Rate Pollution Control Series A due (April 15) 2014 (7 1/4°/o Until 4-15-87) 10 1/2% Pollution Control Series C due (Jul y 15) 2014 11 1/zO/o Serie s due (October 1) 2015 8 7/s% Serie s due (May 1) 2016 Total Debentures:

5 1/4% Sinking Fund Debenture s due (F e bruar y 1) 1996 7 1/4% Sinking Fund Debenture s due (Ma y 1) 1998 Total Notes-Variable Rate Notes due (April 30) 1986 Unamortized Premium and Dis c ount-N e t Total Le ss portion due within one y ear Total On January 1 , 1986 the Company redeemed $6 , 000,000 principal amount of the 12%% Series bonds through the operation of the sinking fund and optional redemption provisions.

On June 12, 1986 the Company redeemed all of the remaining principal amount, $57 , 750 , 000 , at a redemption price of 109. 92%. The aggre ga te costs of the reacquisition were $3,288 , 000 , net of rel a ted income tax es. These cost s , including unamortized debt e xpense s related to the issuance of the debt and other expenses , and the related deferred income taxes , are being amortized over thirty years beginning in June 1986. On November 5, 1986 the Company tendered for all of the outstanding principal of the $50,000,000 , 1F/s% Series due 1993 and the $70,000 , 000, ll Y2% Series due 2015 at redemption prices of 112.570% and 121.125% of the principal amount , respectively.

At December 31 , 1986 Atlantic Cit y Electri c Comp a n y D e c e mber 31 1986 1985 $ 10,000 $ 10 , 000 10,000 10 , 000 2,775 2 ,7 75 10,000 10 , 000 10,350 10 , 350 9,540 9 , 540 13,325 50 , 000 9,980 9,980 95,000 19,000 19 , 000 27,000 27 , 000 20,000 20 , 000 29 , 976 29 , 976 6 , 500 6 , 500 2 , 500 2 , 500 63 , 750 39 , 000 39 , 000 850 850 18,200 18 , 200 23 , 150 23 , 150 21,215 7 0 , 000 125,000 503 , 361 4 3 2, 5 7 1 2,267 2 , 267 2 , 619 2 , 619 4 , 886 4,8 8 6 45 , 000 (3 , 275) 5 504 , 972 48 2 , 46 2 10 , 000 45 , 000 $494 , 972 $437 , 462 principal amounts of $36 , 675 , 000 and $48 , 785 , 000 , re stivel y, were reacquired.

The aggregate cost of these redemptions was $8,750,000, net of related income taxes. These costs , including unamortized debt expenses related to the issuances of the debt and other expenses , and the related deferred income taxe s , are being amortized o ver t e n y ear s beginning in November 1986. In Januar y 1987 , th e Compan y r eac quired an addit i onal $300 , 000 principal amount of th e ll 'l's% Ser i e s rel a ti v e to the November 5 , 1986 tender. Depo s its in sinking funds for retirement of debenture s are required on February 1 of each y ear through 1995 for the 5 Y 4% Debentures , and on Ma y 1 of each y ear through 1997 for the 7 Y4% Debentures in amounts in each ca s e s ufficient to redeem $100,000 principal amount plu s, at the election of the Compan y, up to an additional

$100 , 000 33 N Otes (continued) principal amount in each year. By December 31, 1986 the Company had reacquired and cancelled

$1,133,000 and $981,000 principal amount of the 5Y4% and 7Y4% tures, respectively, toward its requirements for 1987 and subsequent periods. Regular redemption prices on a face value per bond basis are currently in effect for each series of First Mortgage Bonds except for certain pollution control series in which regular redemption is restricted by agreement prior to specified dates. Also, certain pollution control series contain future sinking fund requirements. tion of certain series of the First Mortgage Bonds are restricted prior to specified dates if the redemption is for the purpose or in anticipation of refunding through the direct or indirect use of funds borrowed by the Company at effective interest costs to the Company of less than specified rates. Current sinking fund requirements of $750,000 in connection with certain First Mortgage Bonds outstanding may be satisfied by certification of property additions as provided for in the related mortgage indentures.

The aggregate amount of debt maturities, in addition to sinking fund requirements, of all long term debt ing at December 31, 1986 are $10,000,000 in 1987 and 1988, $2,775,000 in 1989 and $10,000,000 in 1991. No 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 credit available for use of $115,000,000.

The Company is required, with respect to $14,000,000 of these credit lines, to maintain average compensating balances of $455,000.

These compensating balances are maintained in demand deposits which are not legally restricted.

The Company is in compliance with such compensating balance ments. With respect to the remaining available credit lines, the Company pays commitment fees (generally Y4%) for which charges amounted to $248,000 for 1986, $235,000 for 1985 and $242,000 for 1984. The Company had (Thousands of Dollars) For the year ended-Maximum amount of total short term debt at any month-end:

Commercial Paper Notes Payable to Banks Average amount of short term debt (based on daily outstanding balances): Commercial Paper Notes Payable to Banks Weighted daily average interest rates on short term debt: Commercial Paper Notes Payable to Banks NOTE 11. COMMITMENTS AND CONTINGENCIES Construction Program Total cash construction expenditures for 1987 are estimated at approximately

$109,783,000, which includes $17 ,611,000 for jointly-owned facilities.

Current commitments for the construction of major production and transmission ties amount to approximately

$52,577 ,000 of which it is estimated approximately

$16,771,000 will be expended in 1987. These amounts exclude allowance for funds used during construction and customer contributions.

34 $12,900,000 of short term debt outstanding at December 31, 1986, consisting of $8,500,000 of commercial paper, and $4,400,000 of notes payable. The notes payable represent two separate pollution control financings at respective interest rates of 4. 7% and 5 .5%. These notes will mature in July 1987. The Company expects to refinance these short term borrowings on a long term basis during 1987. The Company had no standing short term debt at December 31, 1985 or 1984. Additional information regarding short term debt follows: 1986 1985 $10,500 $55,700 $ 5,000 $10,000 $ 2,256 $19,905 $ 123 $ 4,239 6.3% 7.9% 6.8% 8.1% Insurance Programs 1984 $35,000 $17,519 $ 301 10.6% 9.2% The Company is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek Stations are insured against property damage losses up to $1.16 billion per site under these programs.

In addition, the Company is a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specific conditions.

Under the property and replacement power insurance programs, the Company could be assessed retrospective premiums in the event the insurers' losses exceed their reserves.

As of December 31, 1986, the maximum amount of retrospective premiums the Company could be assessed for losses during the current policy year was $9.05 million under these programs.

In the event of a nuclear incident at any of the facilities covered by the federal government's third-party liability indemnification program, the Company could be assessed up to $2.34 million per incident, but not more than $4.67 million in a calendar year , in the event more than one incident is experienced.

The Company is also a member of several owned mutual insurance companies providing various other liability insurance coverages as part of the Compan y's overall insurance programs.

As of December 31, 1986, under these policies the maximum amount of retrospective premiums the Company could be assessed for losses during the current policy year was $6.8 million. Purchase Power Agreements The Company has an arrangement for a limited term purchase of energy and capacity from Allegheny Power System which is subject to annual extensions. The Company also has agreement s to purchase certain capacity and energy output from units of Pennsylvania Power & Light Company. Hope Creek Nuclear Generating Station The Compan y owns 5% of the Hope Creek Nuclear Generating Station, along with Public Service Electric & Gas Company (PSE&G), which owns the other 95% of the unit. In July 1983, the BPU approved an Agreement between the Company, PSE&G , the New Jersey ment of Energy and the New Jersey Department of the Public Advocate which establishes a program to contain the continuing construction costs of Hope Creek. The cost containment agreement established a targeted in-service date of December 1986 and a targeted cost of $3. 7952 billion and provides for penalties for overruns based on the final cost of the unit. The Company's portion of the targeted cost is approximately

$202 million. However, the targeted amount may be subject to adjustment due to changes in the regulatory treatment of Construction Work In Progress and the Allowance for Funds Used During Construction, as well as changes due to certain nary events not contemplated by the parties in 1983. At December 31 , 1986 the Company's costs associated with Hope Creek amounted to approximately

$236 million. In 1985, the Company filed a petition with the BPU to recognize Hope Creek in its rate base. In late 1986, a separate proceeding involving Hope Creek was conducted by the BPU to examine .the reasonableness of the total costs of the unit. On February 6, 1987, the BPU issued an Atlantic Cit y Ele c tri c Co mpany oral decision involving PSE&G, ruling that a total of $455.2 million of costs associated with the Hope Creek project would be disallowed for ratemaking purposes.

Pending issuance of a written order in the PSE&G case, as well as a ruling in our separate proceeding, the Company cannot predict the outcome of these proceedings or their effects on the Company. Nuclear Plant Outages The BPU has deferred consideration of $12,179,000 of replacement power costs associated with certain nuclear outages relating to generator failures at Salem Station pending the development of the record on such outages in the next energy clause adjustment proceeding of the operator of the station , Public Service Electric & Gas Company. The co-owners of the station have instituted litigation against the supplier of the affected equipment.

The Company cannot predict the outcome of this matter or its ultimate effect on the Company. Nuclear Fuel The Company's contractual liability to purchase nuclear fuel from Pearl Fuel Corporation for Salem and Hope Creek Generating Station s as of December 31 , 1986 was approximately

$29,700,000. Under certain conditions of termination, the Company will be required to purchase all nuclear fuel then existing at a price which will allow Pearl Fuel Corporation to recover its net investment costs. Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract.

The Company is responsible for payment of its share of fuel consumed and related operating costs and interest expense. These cost s are included in fuel expense. Accounting Standards In December 1986 the Financial Accounting Standards Board issued a new accounting standard entitled "lated Enterprises-Accounting for Abandonments and Disallowances of Plant Cost s" , which is an amendment to existing accounting standard s for regulated enterprises, such as the Company and is effective for fiscal years beginning after December 15 , 1987. Thi s standard alters current accounting for the types of events enumerated and requires the Company to reduce the carrying value of certain assets on the balance sheet , principally the unamortized costs of abandoned plant projects.

The effects of such an adjustment would not be material in relation to the Company's financial position.

Additionally, the new standard will affect the accounting for the Hope Creek Generating Station depending upon the outcome of those proceedings as discussed above. Depending on the outcome of the proceedings, the new standard could require the Company to recognize a loss on any disallowed costs based on prudenc y or recognize a loss for any costs on which a return is not allowed. The Company cannot predict the ultimate impact of the new standard.

35 N Otes (continued) NOTE 12. LEASES The Compan y ha s certain obligation s which , in accordance with criteria established by the Financial Accounting Standards Board (FASB), are capital leases, but are accounted for as operating leases in accordance with the ratemaking treatment.

An accounting standard issued by the FASB requires that the Company record such leases on its balance sheet beginning in 1987. Recording capital (Th o usands of D o llars) Nuclear Fuel Other Total 1986 $14,872 4,033 $18,905 The future minimum rental commitments under all noncancelable lease agreements are not significant.

Atlantic City Electric Company leases would not have a material effect on a s sets or liabilities, and would not affect income, since the total amortization of the leased assets and the interest on the lease obligation would equal the rental expense currently allowed for ratemaking purpo s es. Rentals charged to operating expenses were as follows: 1985 $11 , 800 4 , 511 $16 , 311 1984 $ 8 , 457 4,759 $13 , 216 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 Revenues Income Income Common Stock (Th o usand s of Dollars E xce pt P e r Share Amount s) 1986 1st $136,520 $20,339 $13 , 316 $11 , 868 2nd 134,433 20 , 858 14 , 480 13 , 033 3rd 179 , 310 37 , 826 31 , 008 29 , 575 4th 132 , 698 16 , 431 10,746 9 , 447 $582 , 961 $95 , 454 $69 , 550 $63,923 1985 1 s t $140 , 491 $19 , 104 $12 , 658 $10 , 962 2nd 134 , 214 15 , 683 8 , 866 7 , 176 3rd 180 , 411 35 , 630 27 , 815 26,283 4th 124 , 617 18 , 989 11 , 180 9 , 729 $579 , 733 $89 , 406 $60 , 519 $54 , 150 (l) Th e indi v id ua l q u a rt e r s m ay n o t a dd to th e tota l du e t o th e in c r eas in g average numb e r of Co mm o n s hares o ut s t a nd i ng a t the e nd of e ac h quart e r. The revenues of the Company are subject to seasonal fluctuation s due to increased sales and higher residential rates during the summer months. 36 Earnings Per Share $ .65 .71 1.62 .52 $3.50 $ .61 .40 1.45 .53 $3.00(1)

Investor Information Where should I send inquiries concerning my investment in Atlantic City Electric Company? The Company staffs an Investor Records Department which serves as recordkeeping agent, dividend disbursing agent and also as Transfer Agent for Common and Preferred Stocks. Correspondence concerning such matters as the replacement of dividend checks or stock certificates, address changes, transfer of Common and Preferred Stock certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general information about the Company should be addressed to: Atlantic City Electric Company Investor Records Department P.O. Box 1334, 1199 Black Horse Pike Pleasantville, New Jersey 08232 Telephone (609) 645-4506 or (609) 645-4507 Ms. S. M. Dodd, Secretary, is the corporate officer responsible for all investor services-Mr.

R. E. Moeller is Manager of Investor Services and Mrs. M. T. Lindsay is Supervisor of Shareholder Recordkeeping. Does the Company have a Dividend Reinvestment and Stock Purchase Plan? Yes. The Plan allows shareholders and employees to automatically invest their cash dividends and/or optional cash payments in shares of the Company's Common Stock. Holders of record of Common Stock interested in enrolling in the Plan should contact the Investor Records ment. See the address above. Where is the Company's stock listed? Common Stock and 5 7/s% Cumulative Convertible ferred Stock are listed on the New York Stock Exchange.

The Company's Common Stock is also listed on the Pacific and Philadelphia Stock Exchanges.

The trading symbol of the Company's Common Stock is ATE; however, paper listings generally use AtCyEI. The high and low sales prices of the Common Stock as reported in the Wall Street Journal as New York Stock Exchange-Composite Transactions for the periods cated were as follows: 1986 1985 High Low High Low First Quarter 36 Y4 28 Y 4 25Y 4 23% Second Quarter 38 7/s 32 Y 2 29% 24% Third Quarter 46 5/s 337/s 29 Y4 25 5/s Fourth Quarter 413/s 37 29% 26 Atlantic City Electric Company Is additional information about the Company available?

The annual report to the Securities and Exchange mission on Form 10-K and other reports containing financial data are available to shareholders.

Specific requests should be addressed to Mr. R. E. Moeller, Manager of Investor Services, or the Investor Records Department, at the address shown. Who is the trustee and interest paying agent for the Company's Bonds and Debentures?

First Mortgage Bond recordkeeping and interest ing are performed by Irving Trust Company, One Wall Street, New York, New York 10015. Debenture recordkeeping and interest disbursing are performed by First Fidelity Bank, N .A., 765 Broad Street, Newark, New Jersey 07101. When are dividends paid? The proposed record dates and payable dates for dividends on Common Stock are as follows: Record Dates March 19, 1987 June 18, 1987 September 17, 1987 December 17, 1987 Payable Dates April 15, 1987 July 15, 1987 October 15, 1987 January 15, 1988 The following table indicates dividends paid in 1986 and 1985 on Common Stock: 1986 1985 First Quarter $ .645 $ .62 Second Quarter $ .645 $ .62 Third Quarter $ .655 $ .645 Fourth Quarter $ .655 $ .645 Annual Total $2.60 $2.53 Dividends paid on Common Stock in 1986 and 1985 were fully taxable. 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 indu s trial customer.

(b) Includes unit purchase of capacity under contract s with Penn s ylvania Power & Light Company (commencing in 1983) and Delmarva Power & Light Company (from 1980 through 1984). (c) Net income and earning s calculation s include the cumulative effect of an a cc ounting c hange. Financial ratio i s computed excluding the c umulative effect. 38 Atlantic Cit y 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 , 97 3 364 , 889 359 , 175 3 5 2 , 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 ,7 33 $ 135 , 178 $ 121 , 440 $ 109 , 818 $ 98 , 904 154,792 156 , 624 115 , 973 8 8 , 819 80 , 539 73 , 354 66 , 354 71,255 82 , 908 60 , 512 4 7, 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 , 30 7 $ 30 , 064 $ 27 , 358 $ 30 ,7 96 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 $ 77 9 , 026 $ 699 , 861 $ 662 , 614 $ 633 , 058 $ 462,470 $ 447 , 389 $ 394 , 288 $ 324 ,8 48 $ 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 4 8, 790 48 , 424 47 ,7 62 48 , 194 44 , 490 43 ,8 26 42 , 516 2,022 2 , 035 1 , 96 8 1 , 903 1 ,7 97 1 ,7 39 1 ,7 14 T h is A nnu al R eport has bee n pre p a r ed for t he p ur pose of providi n g ge n era l and s t atistica l i n fo rm ation co n ce rn ing t h e Co m pa n y a nd n ot i n co nn ec t ion w ith a n y sa l e , offer fo r sa l e or solic i ta ti o n o f a n offer to b uy a n y securi ti es. 39 Board of Directors ELEANOR S. DANIEL Self-employed, Vice President and director of several real estate corporations RICHARD M. DICKE Counselor-at

-law , partner of the law firm of Simpson, Thacher & Bartlett JOHN D. FEEHAN Chairman of the Board of the Compan y JOS. MICHAEL GALVIN, JR. President and Chief Executive Officer of Salem County Memorial Hospital GERALD A. HALE President of HHH, Inc., an investment and management company MATTHEW HOLDEN, JR. Professor of Government and Foreign Affairs , University of Virginia E.DOUGLASHUGGARD President and Chief Executive Officer of the Company IRVING K. KESSLER Retired , Former Executive Vice Pre s ident, RCA Corporation RICHARD B. McGLYNN Counselor-at-Law , Attorney with the firm of Stryker , Tams & Dill MADELINE H. McWHINNEY President of Dale, Elliott & Company , a management consulting firm providing s ervices to the banking industry JOHN M. MINER Financial Consultant Officers Years of Service E.DOUGLASHUGGARD President and Chief Executive Officer 31 JERROLD L. JACOBS Senior Vice President-Utility Operations 25 MICHAEL A. JARRETT Senior Vice President-Corporate Services 11 BRIAN A. PARENT Senior Vice President-Planning and Rates 19 J. G. SALOMONE Senior Vice President-Finance and Accounting 10 40 Director Committees Audit Corporate Development Energy, Operations

& Research Finance Pension & Insurance Personnel Shareholder, Community

& Government Relations

• Committee Chairman Committee Membership

• Ex Officio Membership Years of Service JOHN M. CARDEN Vice President-Administrative Services 19 LANCE E. COOPER Vice President-Control and Assistant Treasurer 4 SABRINA M. DODD Corporate Secretary THOMAS E. FREEMAN Vice President-Human Resources 6 MEREDITH I. HARLACHER, JR. Vice President-Customer Service 21 Years of Service JOSEPH T. KELLY, JR. Vice President-Interconnection Operations 36 BERTRAM LeMUNYON Vice President-Power Delivery 27 HENRY K. LEVARI, JR. Vice President-Corporate Planning 15 J. DAVID McCANN Vice President , Treasurer and Assistant Secretary 14 HENRY C. SCHWEMM, JR. Vice President-Production 17 Front row [I to r ]: M. Holden M.H. McWhinne y J.M. Galvin , Jr. R.B. McGl y nn Back row [I tor]: I. K. Ke ss ler G.A. Hale E.D. Hu gga rd J.D. Feeh a n R.M. Dick e J.M. Miner E.S. Daniel De s ign: Mu e ll er & Wi s t e r , In c. Major Phot og r ap h y: K e ll y/Mooney ARANTIC ELECTRIC P.O. Box 1264 1199 Black Horse Pike Pleasantville, NJ 08232 BULK RATE U.S. POSTAGE PAID PERMIT NO. 11 SOUTH JERSEY , N .J. 08031