ML18100A305

Atlantic Energy Annual Rept for 1992.

ML18100A305
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1992
From:	HUGGARD E D, JACOBS J L ATLANTIC ENERGY, INC.
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ML18100A302	List: ML18100A301 ML18100A304 ML18100A305 ML18100A306
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NUDOCS 9304190163
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9304190163 930414 PDR ADOCK I PDR CONTENTS < > Letter to Shar e holde rs Chairman Doug Huggard and President Jerry Jacobs give their thou g hts on the changing utility industry and on how Atlantic Ener gy will be c ompetitive in thi s new environment.

<+> N ew s ofl992 Atlantic Genera ti o n put two pro j ects in service. Atlantic E n ergy's Common Srock sp lit two-fur.one in May 1992. Atlantic Electric s t eps up its economic development efforts. T ransmisfilon line construction took to the air. <+> Winning Combination s W e are pro ud to fea ture j u s t a f ew of A tlan ti c El e ctri c's products and se rvices that win for our shareholders, our customers and our world. B.E.S. T. Homa-A Pr iz e Wm rungPackap Nig ht Guard LightingPure Gold Ge o t h ermal Energy-For Outstanding Perfo r mance _B T Rl 0 § Coach Vince Lombardi once said, "Winning is not a sometime thing; it's an all-the-time thing." We couldn't agree more, especially it comes to our shareholde our customers and our world. When our business prospers, shareholders win. When our

< *> A tlantic Electric A t-A-Glance The cool summer 0£1992 and the l oss of two m a jor in du s tr ial customers caused sales to decline 3.5% for the year. Sales to the twelve casino/hotels are 7.0% o f total sales. < > Index to Fin a n c i al Informati on < > Investor Info rmati er e to turn with quc on s on your investment in Atlantic Ener gy; C ommon Stock dat a for 1 992; P roposed record and payable dates for dividends; Dividend Reinvestment and Stock Purchase Plan information.

Corporate Address: 680 1 B lack H ors e P i ke Pleasantville,.

'cw Jersey 08232 (609) 645-4500 FAX(609)645-4353 tlantic Energy, Inc. i s the parent holding company for Atlantic City Electric Comp a ny (Atlantic Electric) and four nonutility s ub s idiaries.

Atlantic Energy has paid dividends for 75 consecutive years a nd h as increased the cas h dividend s paid for 40 consecutive years. Total return (dividends paid plus change in s har e price) in 1992 was 20.2%. More th a n 75% of Atlantic Energy's s hare s are owned by individuals.

A tl antic Electri c, a regul a ted utility, i s the co r e busines s and makes up 95% of t otal asse ts. At l ant i c E l ectric serves over 455,000 c u stomers in so uthern N e w J ersey. In th e ne x t few years, i mproved airport facili ti es an d a new co n ven tion center in Atlantic City will bring growth t o the area.

• EARN I NGS

• DIVIDENDS Earnings per s har e of Common Stock i s net income divided by the a v erage number of common s h a re s o ut standing.

Dividends paid per share i s the s um of the quarterly dividend pa y ments made in Januar y, A pril , Jul y a nd October. ATLANTIC ENERGY Earnings and Dividend s* Paid Per Share of Common Stock *adjusted to reflect two-for-one ommon Stock split May 14, 1992 1.84 1.5. 1.39 1.87 1.41 1.51 1.46 1.75 1.67 J.119 1.51 88 89 90 91 92 c Earnings Per Comm on Share (a) Dividends Paid Per Common Share (a) Bo o k Value Per Common Share (a) Number of Comm o n Shares Outstandin g -Year-end {000): (a) Average Actual Return on Average Common Equity Electric Operating Revenues {000) (b) Operatin g E x pen ses (000) (b) Net In come (000) Utility C as h Con s tructi on E xpe nditures {000) Total Assets (000) A Sal es of Electricity t o Ultimat e Custom ers (KWH) (000) Pri ce Paid Per Kil owatt-h our (U ltim ate Customers) al Ultimate Electric Customer Accounts (Year-e nd) ber of Shareholders-Common Stock (Year-end) mb er of Atlanti c Electric Emp l oyees (Y ear-e nd) L $ $ $ 1992 1.67 1.51 15.17 51,592 52,199 H 11.14% $ 816,825 $ 679,657 $ 86,21 0 $ 130 , 700 $2,220,151 7,655,138 10.257¢ 458,549 46,524 2,023 (a) Pri o r yea r am oun ts hav e be e n r e st a t e d to refle c t th e rw o-for-o n e Comm o n Sr oc k s plit in May 1 992. 20.50 19.25 16.38 16.94

• 25 13.13

• 20

• 15

• 10

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• 0 88 89 90 91 92 G %C h a ng e 1 992-1991 H L 1991 ( 4.6) $ 1.75 1.49 14.84 1.3 $ 2.2 $ 5.3 2.6 (7.9) 1.0 2.4 0.7 (2 4.2) 3.2 (3.5) 4.5 1.2 6.2 (0.4) 49,00 8 50 ,896 12.10% $ 808 ,37 4 $ 663 ,5 18 $ 85,635 $ 172,425 $2, 151,416 7,935,600 9.812 ¢ 453,100 43,802 2,032 Thi s i s th e cl os in g price of A tl a n tic Energy's Commo n S t ock on the la st trading date of each year, as r eporte d by t h e New York Stock Exc h a nge Composite Transactions li s tin g. ATLANTIC ENE RGY Market Price* Per Share of Common Stock *adjusted to reflect two-fo r-one Common Stock split May 14, 1992 G % Change 1991-1990 IJ T 1990 15.9 $ 2.1 $ 3.3 $ 1.51 1.46 14.36 7.5 10.8 14.5 9.1 7.7 24.3 3.4 7.2 2.3 5.6 0.8 3.6 (1.1) 45,590 45,952 10.57% $ 740,89 4 $ 616,332 $ 68,879 $ 166 ,8 18 $2,006 , 010 7,756,867 9.288 ¢ 449,717 42,295 2,055 § % Chan ge 19 90-1989 (19.3) 3.5 0.6 5.4 1.9 (22.5) 2.4 4.7 (14.9) 15.0 7.6 1.8 1.4 1.3 (2.5) 1.7 (b) Pri o r y ear a m o unt s ha ve be en r es t a t e d t o refl ec t s al es o f e n e r gy (s al es for r es al e) a nd ca p a city to o ther utiliti es as r eve nu es r a th e r than a s n et ex pen se in acc ord a n ce w ith F e d e ral regul atory r e qu i r eme n ts e ff ec ti ve J a nu ary I , 1 9 92. A t I a n t i c < >E n e r g y

'f 0 0 u R § H A R E lH 0 L D E R § F or Atlantic Energy and the entire . market, the price of this electricity is high. But, electric utility industry, 1992 was a PURPA obligated us to buy it. Ultimately,-c. -memorable year. On October 24, the NJ tomers pay the bill. We owe it to them to do w National Energy Policy Act became law. This new ever it takes to make the energy we sell a good value. law lets competition move a giant step forward in our We have reduced our five-year construction plan by business.

It creates a new breed of nonregulated more than 25%. The economy has slowed, and along power producers called "exempt wholesale genera-with that, the demand for energy is down. Accordingly, tors." And, the law provides them with access to our some major improvements to our power delivery system transmission lines. can be postponed.

Competition isn't new to us. The Public Utility For the first time in many years, we have extra gener-Regulatory Policy Act (PURPA), passed in 1978, was ating capacity.

As a result, we have dropped our plans to the first step towards a nonregulated energy market-build generating equipment during this decade. We also place. That law is affecting us today. In the last sixteen made a tough decision to close two units at our months, two large industrial customers began to supply Deepwater Generating Station in 1994. their own energy needs. The impact is real. Kilowatt-One thing we've learned from all of this is that com-hour sales to industrial customers, our smallest customer petition requires change. Change happens through class, dropped about 10% in 1992. teamwork.

And teamwork require s leadership, not task Certainly, competition makes our work more complex management.

That's how we'll shine in this competitive and demanding.

But, it's also energizing.

If it sounds like world. We're streamlining our organization to make it there's optimism in here, there is. Winners will emerge easier to turn plans into actions. We're giving prudent from these changes, and Atlantic Energy will be among cost control the highest priority.

This i s especially them. We intend to see th a t shareholders, customers and important because our financial performance is infiu-the environment share in the winning. enced by so many outside factors. Our goals are clear. We'll run our business so that five Last year's results were a good example. After atijus. years from now, our customers will pay about the same for a two-for-one Common Stock split, consolidated e price for electricity as others in the region. That's being ings per share for Atlantic Energy were $1.67, a decline competitive and it won't be easy. In the next five years, from the $1. 75 reported last year. Of that, Atlantic our energy costs will include the cost of electricity Electric, our primary business, contributed

$1. 7 4, or generated by four nonutility power producers.

In today's 104% of the total. There were a number of one-tim e A t I a n t i c < >Ene,gy items in the utility business that added about 26 cents to earnings.

The large s t single item, about 15 cents, came from a settlement with Philadelphi a Electric pany (see Note 10 to the Financial Statements for tional detail s). On the nonutility side, .financial performance was mixed. Togeth er, tho se activities re s ulted in a los s of a bout seve n cents per s hare. The good news was that 1992 was a watershed year for Atlantic Generation (A GI). Two lar g e cogeneration project s began tion and ground was broken for a third. As a result, AGI added three cents per share to earnings.

ATE Inve s tment continues to manage its portfolio of inve sments and contributed one cent to earnings. But a weak real estate m ar ket made 1992 a difficult year for both Atlantic Southern Properties and Atlantic Energy Technolo gy, (AE T). AET lo s t nine cents per share marily because of a provision made for a write-off of it s *stment in energy related technologies for homes bu s inesse s. In the y ear s t o come, our nonutility activities will be m o dest and will be directed to ac tivitie s mo s tl y relat e d to the utility busine ss. (See Man age ment's Di sc u ss ion and Analy s i s of Financial Condition and Re s ult s of Op era ti o n s for more d e t a ils.) Despite these events, 1992 was a good year for shareholders.

Total return for Atlantic Energy shares was 20.2% compared to an industry average of about 8.6%. This reflects the June increase in the l y divid e nd rat e to 38 cents per share. Thi s is the 40th co n se cutive year o f in creases in cash dividends paid. Only five other utilities can match that record! E.D. Huggard Chairman and Chief Executive Offic er P.S. On January 14, 1 993, the B oar d of Dir ec tor s announced my p l ans to step d own as Chief Exec utiv e Officer.

• t th e sa me tim e th ey reported their i ntention to elect Jerr y acob s to s ucceed me in that po si tion effective after th e Annual Meeting of Shareholders in April. I will be retiring fro m th e day-to-day ac tivitie s of th e Company after 38 years of vice. For the last e i ght years, I have se rved as Chief A t I a 11 I i r < To top it off, in May we completed a two-for-one C o mmon Stock split. Financial results would have been better if kilowatthour sales had been normal. Three fac tor s are responsible for the 3.5% decrea s e in total s ale s to 7.7 billion watt-hour s: competition, weather and the economy. In a ddition to the indu s trial customers we lo s t to tion, South Jersey had one of the coolest summers on record. This weather caused a 6% drop in peak load to 1, 796 megawatts.

The economy didn't help either. Throughout 1992, weak labor and housing markets tinued. As a result, Atlantic Electric added only 4,500 customers.

But we believe the economy has started a slow improvement and we expect kilowatt-hour sales to increa s e s li g htly. What helps any company throu g h changing tim es is a talented, dedicated Board of Directors s uch as ours. For the past ten years, we have had the pleasure of working with Bo ar d member Madeline McWhinney.

Having reached the mandatory retirement age, Madeline won't be standing for re-election in April. Her involvement and enthusiasm h ave mad e her a true advocate for sholders. The benefits of her tireless efforts will be felt for years to come. We are g rateful for your continued support. Many of you have b e en with us through the good times and the challenging ones. Your reward ha s been a so und investment and steady income. That's o ne thin g in our business that won't change. It's o ur pledge to you. Sincerely, J.L.Jacobs President February 1, 1993 Execut i ve Officer. This tran s iti o n is the resu lt of a compre-.. hen s i ve management succession plan. J erry i s well prepared. For the la st three years of hi s 30-year career h e ha s served as Pr es id ent. I am confident that J erry's leadership, s upported by our exce ll en t mana geme nt t ea m, will co ntinu e to brin g Atlan t ic Energy success in th e co ming years. Sincerely, > E " ' ' g y AGI POWERS UP Atlantic Generation, Inc., one of our nonutility subsidiaries, placed two projects in service this year. The first project, located in Pedricktown, ew J ersey, be gan operating in March. The project serves the electrical an d s t eam needs of a BF Goodrich plant and provides 106 megawatts of capacity and energy t o Atlantic Electric.

The secon d proj ec t, loc a t e d in Binghamton, New York, began opera tin g in the second half of 1992. It serves the s t eam r equireme nt s of an Int ernational P aper Company facility and vi d es 50 megawatts of city and energy to New Y or k St a t e Electric &Gas. A third project, l oca t ed in sou thern ew Jer sey, is under construc tion and cheduled for completion in 1994. It will provide steam ene rgy to the Progresso F oo d s processing facility in Vineland, New Jer sey and will se ll ele c tri c ity to the City of Vineland.

CONSTRUCTION GETS OFF THE GROUND Atlantic Electric broke new gro und thi s ye ar-from the air. For the first time in the United State s, a lar ge construction helicopter, or Skycrane, was u sed to in stall steel caisson foundations for E § 0 a transmission li ne. The line was in a section of wetlands in Salem County, New J ersey. The helicopter, with an attached vibratory hammer, drove the caissons into the gro und , and then l ater set the 100-foo t tall poles in place. Using the Skycrane l eft th e sensitive we tl and area pretty much inta c t. It eliminated the need t o clear away a l arge area for heavy eq uipm en t like groun d cra ne s that would normally do the job. LIGHTING PROGRAMS SHI E Th e Li g ht for Sight program has help ed almost every municipality in South Jer sey save energy. Under th e pgra m, over 24,000 old inc adescent and mercury vapor stree t li g ht s h ave been replaced with energy cient, hi g h pressure so dium li g ht s. For 1992, the program represented an e ner gy savings of ove r e i g ht million kilowatt-hours, while taining a nnual revenue s. Businesses have benefitt ed b y savi n g energy through Atlantic Electric's SWatt program. The program offe r s incenti ves for r ep ling inefficient li g htin g t ems wi th hi gh efficiency ones. The 136 custome r s who joined this pro g ram in 1992 will save over five million kilowatt-hours of electricity. F 1 9 9 NUCLEAR NEWS Atlantic E l ectric is subject to a penalty under the New Jersey nuclear performance standard if the combined capacity tor for its five jointly-owned nuclear units i s below 65% in any year. In 1992, the bined capacity factor, as mined by Atlantic Electric for app lic a ti o n of the nuclear performance standard, was 64.1 %. As a result , Atlantic Electric will be sub je c t to a modest penalty. A final min atio n will b e made in th e 1993 Levelized Energy Clause proceeding.

For th e second year in a row, the In s titute of Nuclear P ower Op era ti ons gave th e Hope Creek Nuclear Generating St a ti on a ra tin g of" l ," th e highest rating given for nuclear operating performance.

SOUTH JERSEY-GOOD FOR BUSINESS Atlantic Electric conducted a Target Indu stry Study in 199 2 as part of it s plan to promote South Jer sey as a prime bu sin e ss l oca tion. The s tud y identified 25 industries that have s tr o n g gro wth potential and co uld opera te well within the regional economy. Stud y re s ult s will be u se d to s upp ort Atlantic Electric's economic d evelopmen t efforts, as well as the effor t s of sta t e and local agencies throughout South Jer sey. Atlantic<4>E n c 'g y 2 PIECES OF THE PAST While performing si t e work at the B.L. England Generating Station, archaeologists uncov ered r e lics from a Native American se ttlem en t that d a tes back about 4,000 years. Over 10 , 000 artifacts were uncovered, includin g s pear tips, pottery fragments a nd arrowheads.

The it ems sugges t that the si t e was u sed as a seaso nal re s id ence for Native Americans. Artifacts a nd photographs of th e si te will be come a perman en t display a t th e B.L. Englan Generating Stati o n. CAPITAL EWS In March, the Board of Direct ors authorized a fo r-one s plit of C ommon Stock, effective Ma y 14, 1992. The Board took thi s action with individual inv es tors in mind: Before the sp lit, Atlantic Energy's price per share h a d bee n trading a t a price hi gher than peer utilities.

The B oar d also voted t o in crease th e ber of authorized s hares ostanding to 75 million. In Ma y, Atlantic Ele ctri c i ss ued and so ld $60 milli o n in Se c ured Medium Term Notes (MTNs) through agents. The MTN s were so ld in two separa te maturities

$30 million maturing in 19 an d $3 0 million maturing 2004. The MT s have a weighted average interest rate of 7. 7 5%. Proceeds were applied t o reduce Atlantic Electric's s hort term debt.

• Built for Energy Saving Tomorrows O ATLANnC aECTRIC 1-800-221-0520 The energy efficiency of a B.E.S.T. Home is a great selling point. "Builders and real tors like to recommend B.E.S.T. because it costs less to operate," said Sharyn Forbes, program manager (above). "And customers lov e the idea of saving money year after year," she added. hen it comes to saving energy, saving money and caring for the environment, nothing is better th an a B.E.S.T Home. How can one home do so much? Simple. A B.E.S.T. Home, Built for Energy Saving Tomorrows, combines high nology with common sense construction to produce a comfortable, economical, total-electric home. One of the features that makes a B.E.S.T Home a winner is its use of a heat pump for both heating and cooling. Advances in technology have yielded a new breed of heat pump (see page 8). These improved heat pumps are more than twice as efficient as traditional electric heat. In fact, these heat pumps make electric heat a clean, safe, affordable choice. Common sense construction is another thing that puts B.E.S.T. Homes on top. The three rules of a B.E.S.T. Home are: insulate -insulate -insulate!

Attics, walls and crawl spaces must meet our high dards for insulation.

Places that are normally looked, like wall outlets, duct work and hot water pipes, are targets for insulation and caulking.

Even the windows must meet efficiency standards to eliminate heat loss. Because of all the insulation, B.E.S.T Home owners get a bonus: they can install a smaller heat pump unit and save on equipment costs. "Prospective home buyers are impressed by the fact that Atlantic Electric inspects the homes at many s tages during construction.

That way, they can be sure that thin gs are being done properly," reports Sharyn Forbes, program manager. Along with the inspection service, customers get a "Comfort Assurance" guarantee from Atlantic Electric.

That means that Atlantic Electric will make certain that they are satisfied with the home. B.E.S.T Home owners save energy dollars. As part of the package, they can become members of our Summer Savers Club. That means that they get cash rebates for participating in Atlantic Electric's direct load control program. Some B.E.S.T. Home owners can save even more through time-of-use rates. They pay less if they use electricity on nights and weekends -times when demand is low. With just a few small changes to their daily routine, customers can save in a big way. B.E.S.T Homes are good for Atlantic Electric.

They help to even out the demand for energy, making the best use of our resources.

In winter, they use energy when there's plenty to spare. In s ummer, they save A t I a n I i < <+> E n t r g y energy because t heir heat pumps operate more ciently than conventional air conditioners.

Saving gy and reducing demand help to delay our need to add new generating sources. Best of all, B.E.S.T. Homes, and their high technology heat pumps, make electricity a competitor once again in the residentia l heating market. B.E.S.T. Homes come in first for t h e env i ronment, too. They are to t al elec t ric, so there are no fuel sions from the home. Any fossil fuel used to ma k e the electricity is b u rned at a power p l ant whe r e specialized e qu ipment contro l s any emissions.

And, since B.E.S.T. Homes don't burn fossil fuel, i n door ai r q u a lit y i s excellent.

B.E.S.T. Homes are tigh tl y sea l ed. Tha t means the heat pump doesn't use as muc h energy to keep t h e house comfo rt ab l e. Any time yo u save e n ergy, yo u are giving our wor ld a bonus. Bu i ld ing a B.E.S.T. Home is a firs t p l ace i d ea. Cus t omers get a comfortab l e h ome th a t cos t s l ess t o operate. A tl antic E l ec t ric ge t s satisfie d cus t ome r s. And t he world aro u nd u s gets a l i ttl e b i t be tt er. 2 ' 'f ' H ow much can a B.E.S.T. Home s ave? Here's ho w h eating a nd co olin g cos t s of a B.E.S.T. Home compare to a good, energy efficie nt-fossil fuel s y s tem. Home#l Home#2 (B.E.S.T.) (Oil) Sizeofhom e 2,400 square feet 2,400 square feet Heati ng system variable speed, air-oil furnace, source heat pump, heatingAFUE heating HSPF of9.4 of.80 O ooling system variable speed, air-electric, central sourc e heat pump, air conditioning cooling SEER 15.0 cooling SEER 10.0 Annual heating cost* 418 923 Annual cooling cost* $ 253 $ 457 Total cos t for the yea r $ 671 $ 1,380 ANNUAL SAVINGS $ 709 s 'Anal ys l

• s base d on a price of elec tri c i ty of 1 0.2¢ pe r kil ow att-hou r and t h e pri c e of o i at 90¢ per gallon. HSPF H e a tin g Seaso nal P e rf o rm a n ce F ac t o r AFUE = Annual Fue l U tili za ti on Effi ciency S EER = S e a so n a l Ene r gy E fficiency R atio Ou r co mpari s on s h ave co n s idered the effi cie n cy of the heating/cooling sys t e m s, the a m o unt of h ea ting a nd c ooling required by the home , the quali ty of co n s tru c ti o n a n d th e so uth e rn ew J e r s ey climate. {Italici z ed wo r d s are d e fin e d in th e Gl oss ary on p age 15.) Here's how a heat pump works during the winter. ..... Heat pumps use thermal energy-heat that s already in th e and turn it into ye a r round h e ating and c o oling comfort. To und estand how they work , heres a bri ef, but not too sci e ntifi c r l!'U i e w of some basi c principl es: First, heat alwa y s ex ists in th e air or th e ground , eve n on cold days. S e cond , heat always tra ve ls from wh e re its w a rm er to wher e it s cold er. Finally, i ncr e as es i n pressur e r es ult in increas e s in temperatur

e. 0 A i r, containing thermal en e rgy , is circulat e d across a n out s ide coil c all e d an e v aporator that contains a liquid refrigerant colder than the air. Th e thermal energy in the air tramfers to the c old e r liquid. The liquid then evaporates into a low pressure gas. f) The low pres s ure gas moves to a pla ce i n th e s y st e m w her e it is c ompr e s s ed into a hot , high pr e s s ure gas. 8 The hot , h i gh pr e ssure gas is pumped to a n in s id e coil call ed a c ondenser.

Cooler air circulates across the hot coils. The heat in the coils transf er s to th e air. The air, now heat e d to about 100 d e gr ee s , mo ves through duct work and provides warmth. As heat is remo v ed from th e high pr e ssure gas , th e g a s cools and cond e ns e s ba c k to i ts liquid s tat e. 0 The liquid flows through a m e t e ring d ev i ce where i t s pr es sure and temperature ar e lowered further. 0 The liquid is then circulated back to the evaporator wh e re th. process begim again. During th e summer, w ith a flip of th e s w it c h, th e cyd e r l!'Uerses.

The h e at pump r e mo v e s heat from the inside air, pro v iding c ool air just like a con v entional air c ondition e r.

B . e: . S . T . "I've been in myhome fora year now, and I'm really pleased with how low my electric bills have been. I was also glad to know the house was inspected while it was being built. That way , I knew I was getting a good home." -Desiree Ledden, Sewell, New Jersey T oday's heat pump is ever. Computer technolo-an energy efficient, gy lets these heat pumps affordable, all electric heat-sense a change in tempera-ing and cooling system. It ture and adjust their speed lives up to its name because of operation as needed. On it "pumps" thermal energy extreme temperature days -heat -from one location more thermal energy has to another. It gets that heat to be pumped. The system from the Sun and it's free. uses more electricity.

On The only co s t to operate a moderate temperature heat pump is the cost of days less thermal energy electricity required to move has to be pumped. The the heat. system uses less electricity. Most heat pumps are These new air-s ource heat "air source"-they use the pumps know just the right thermal energy from the amount of electricity to * . Air-s ource heat pump s u s e. That's efficient.

And e been in use for years. that saves energy dollars. ut there's a new genera-One of the nicest fea-tion of heat pumps on the tures of the new genera-market that are better than tion of heat pumps is the A t I a n t i c < The three rules of a B.E.S.T. Home are: insulate, insulate, insulate!

B.E.S.T. Homes have extra insulation in every nook and cranny. And they top it all off with energy efficient windows. r comfort they give. The marketing engineer. air that is delivered into We're convinced that the home or business is heat pumps are the most spread evenly. That way, affordable, efficient and the temperature inside is environmentally sound kept at a constant level. heating and cooling sys-Hot and cold spots are terns available. We're eliminated.

helping to educate and Heat pumps need sup-train heating and air con-port to work efficiently.

ditioning contractors on Proper installation and proper installation tech-sizing are essential. "Too niques. Along with New many times we hear that Jersey's other utilities, heat pumps don't work. Atlantic E l ectric partici-That's just not true. pates in the New Jersey When we investigate, we Heat Pump Council. The find problems with the Council has developed duct work, the in s talla-s tandard s and criteria to tion of the unit or how certify contractors in the heat pump is used," approved installation explains Dave Crouch, procedures.

>Energy

A BRIGHTER IDEA Lumens produced using 100 watts of power 8,500 1,000 High Pressure Sodium Light Incande sce nt Light Atlantic Electric uses the most energy efficient li g hts on the market today for all its lighting services.

What make s these ts so efficient i s that the y produce re light for the sa me amount of energy. The efficiency i s measured by comparing the number of watts (energy in) to the number oflumens (light out). Most Night Guard lights are high pressure so dium. They are recognized by their golden cast. A I I a n I i c < verybody wins with Night Guard Lighting, Atlantic Electric's private leased lighting vice. Take, for example, Hammonton, New Jersey. This city wanted to brighten up the business district and make it more secure, without spending a bundle. ight Guard Lighting helped Hammonton meet its goals. "We customized fixtures to fit the city's unique lighting needs. And, we topped those fixtures off with high pressure sodium lamps, giving Hammonton the most light for the least amount of energy. For all of that, they pay one low monthly fee," reports Ed Ragazzi, program manager. The city was so pleased with the results that Night Guard lights have spread throughout the city. Atlantic City is changing its lighting image with Night Guard, too. Some areas of the city are being redeveloped with new hou si ng and small parks. Night Guard's decorative fixture s are there to brighten up the scene. One area is Columbus Park, right in the center of town. Night Guard fixtures like the one on page 10 have made the park more attractive and given it a Victorian look. Many area bu si ne sses are lighting up their buildings and facilities with ight Guard light s as well. To date, more th an 2,800 bu sinesses and municipalities are using Night Guard lights. It's good business.

In 1992, the program added about $1 million to Atlantic Electric's revenues.

What's more, these revenues all come from night-time electric sales, when Atlantic Electric has energy t o spare. Helpin g customer s save energy with more efficient lighting is a long-s t anding commitment.

Because we want our customers to know about the benefit s of cient lighting, we became the first New Jersey utility to participate in the U. S. Environmental Protection Agency's Green Lights program. Sometimes, our shareholders and customers ask us to do more. They're concerned a bout "light pollution," the night-time glare from lighting. We are, too. We have experimente d with different l enses an d fixtures that focus light where it's most needed. As a re s ult, we now have spe cialized lighting fixtures available for tomer s who request them. When it comes to saving energy and protecting the environment, we'll alway s go the extra mile. Sl >E11ergy

The process for heating and cooling with al energy is simple. There are three main parts: ray of pipes buried beneath the ground called oop," a heat pump and a duct work system to circulate the air. Here's how the system on page 12, known as a closed loop, works. It gets its name from a uous loop of buried pipes connected to an indoor heat pump. 0 In southern New Jersey, the temperature of the earth is a fairly constant 55 degrees. The sandy soil in our area is well suited for pipes to be buried typically 300 feet deep. The "vertical" loop shown here would use up to 1,200 feet of pipe. f) High strength plastic pipe, that has a 50-year warranty, is used. The pipe i s made of materials that are harmless to the soil and have good heat conducting qualities.

To connect one pipe with another, the pipes are heated and fused to form a joint that is even stronger than the original.

@An environmentally safe water and antifreeze solution flows through the pipes. Heat is exchanged when the liquid absorbs the Earth's natural warmth in the winter or rejects heat to the Earth in the summer. 0 The liquid is pumped to a heat pump that operates just like the system described on page 8. What makes a geothermal energy system so cient is that its heat source is the constant temper-ue of the ground, rather than the fluctuating perature of the air. A I I a n t i c < The southern New Jersey climate, with a ground temperature of about 55 degrees, is ideal for using a geothermal energy system. eothermal energy. The Sun supplies it by heating the Earth. It's all around us, even in our own backyard.

Best of all, it's an energy source that's clean, plentiful, free and renewable.

Geothermal energy systems allow us to harness that energy and turn it into year-round comfort for homes and businesses.

The efficiency and affordability of geothermal gy systems belong in the spotlight.

To provide ing and cooling, they use a heat pump that is four to five times more efficient than any conventional tem. They are also the most economical system to operate of any system available today (see page 14). That gives customers more comfort for their energy dollar. What's more, geothermal energy systems don't have an outside unit. "Customers love that feature. At the shore, there's nothing to corrode in the sea air. And, landscaping is easier when there's no outside unit," explains Richard Rinck, program manager. More than 600 homes and businesses in southern New Jersey are heated and cooled with geothermal energy. Atlantic Electric wants more customers to benefit from these systems. To promote geothermal energy, we met face-to-face with over 900 building contractors, architects and realtors in 1992 alone. We even went national with our story. Atlantic Electric, Stockton State College and the New Jersey Department of Environmental Protection and Energy co-sponsored a local viewing site for a country-wide teleconference on geothermal energy. Over 200 state and local government officials and planners were in the local audience.

The national broadcast reached over 300 viewing sites in all. Following the broadcast, Atlantic Electric representatives participated in a panel of experts to answer questions from the local >Energy

'I audience.

It was so successful that two more national teleconferen ces, for architects, e n gi neers, contractors an d builder s, a re planned for 1993. Cable News Network (CNN) also found th e geothermal de v elopment s in southern New Jersey worthy. As part of its news segment, Science and Technology, CNN featured Atlantic Electric's service area as repre sen t a tive of the progress in geothermal installations.

The program featured construction of a 50-well, vertical loop geothermal system. That system now heats and cools a 22,000 square-foot tion building for the Atlantic County Municipal Utilities Authority.

Atlantic Electric plays a leading role in encouraging and supporting the use of geothermal systems through rebates and financing programs.

Customers a nd contractors ea rn cash rebate s for installing a high efficiency unit that rate s 12 SEER a nd above. Rebates vary based on the size and efficiency ratin g of the unit. And, starting in 1993, the Residential Home Financing Program will provide low interest loan s for high efficiency geothermal and other heatin g and cooling systems. From any perspective, geothermal energy deserves applause. It takes energy efficiency t o new heights and saves money year after year. And, by tapping into the Ear t h's t emperature, we have a clean, safe energy so urce tha t reduces our dependence on fossil fuels. Sl " We moved into our new home two years ago. We knew then that we'd made a good decision to install a geothermal e n ergy system, and we haven't changed our minds. Our heating bills are really low and our house is comfortable in the summer and the win t er. We like ing the money, but we also like the idea that our system is kind to the e nvironment.

Who wouldn't want all of thi s?" -Gay and Larry Blohm, Palermo, New Jerse y A t I a n I i c < \ \ G e othermal E n ergy S ys t e mAn Out s t a ndin g In v e s tm e nt Take a look at how an investment in a closed-loop geothermal energy s tern compares with an investment in a good quality fossil fuel system: Geothermal

• Natural Ga s** (B.E.S.T.) (with central air) Heat pump $ 3,000 Furnace $ 1,700 Air conditioning 1,700 Ductwork 800 600 Fuel piping 300 Labor 1,200 1,200 We ll drilli n g 3,000 (incl u ding materials)

B.E.S.T. Home upgrade 900 Total installatio n $ 8,900 $ 5,500 Less Atlantic E l ectric $ 1,380 $ average re b ate** Total cost to h omeowner $ 7,520 $ 5,500 Cost premium 5 2 , 020 $ Average annual heating co s t s 293 $ 768 Average annual cooling cost 5 184 $ 343 ANNUAL SAVINGS $ 634 $

• New , 1 , 800 s quare-foot borne wit h a three-ton a i r c onditioning load. t St a nd a rd c on s tru c ti o n. **R e b a t e s ar e ba se d o n th e s i ze a nd e ffi c i e n cy of th e unit. While a geothermal energy system costs more initially , there are g reasons to make the investment. First , the system pays for it s elf in just over three years. Second, the extra cost can be financed through the home's mortgage. At today's rates, the added monthly cost is more th a n offset by the monthly energy savi n gs. That means more cash for the homeowner at the end of each month. The b est part is, the energy savings continue for the life of the system. >Energy I C 'I 11 I* R .\ I . \ I , I t isn't every day that a company gets the chance to teach a college something.

But, that's what happened when Stockton State College needed to replace its aging heating, tion and air conditioning system. Atlantic Electric keeps in close contact with large customers like Stockton.

So, when college officers wanted to talk about cutting energy costs, Tom Herzog, energy services engineer, was there to help review some options for air conditioning. "We worked with them to l ook at a lot of ent systems, including a geothermal system. We ho s ted a series of meetings, bringing college nel together with experts in the technology,'

' a dded Herzog. With all of this information and an independent study by Stockton's own neering firm, Stockton decided it had found a winner -a geothermal heating and cooling system. Stockton gets two kinds of savings with a geothermal system: dollar s and energy. "Our engineers project that we'll save about $312,000 each year in energy costs. Our tric usage will go down by 25% and gas usage will drop 75%," reported Dr. Charles Tantillo, chief financial officer of the college. And Stockton has always been a leader in ing the environment, so the geothermal system A I I a n I i c < L* R C \' fits right in. A fossil fuel system this size would give off emissions equal to 400 cars each year. Since the geothermal energy system we're installing gives off no emissions, it's like taking those cars off the road, he added. Construction began on Stockton's new tem in January. It will heat and cool nearly 500,000 s quare feet of s pace in the college comp lex a nd will cost close to $5 million to install. Stockton's system will be one of the largest geothermal installations in the nation. About 400 wells will house the closed-loop piping. Seventy-two heat pump units will provide the heatin g and cooling. Funding for the project also represented a unique partnership effort among ment, education and business.

About three quarters of the funds needed came from ous state agencies.

Atlantic Electric rebates and general funds from the college made up the rest. Good things come from working together.

The Stockton project is another shini ng example. >£,, ergy GLOSSARY Efficiency Describes how well a he ating or cooling system operates.

It compares the a mount of useful heating or cooling produced to the amount of energy city, gas, oil, etc.) consumed.

The more effic ient a system i s, the less energy it uses. The le ss energy it u ses, the l ess it cost s to operate. Atlantic Electric offers rebates for high efficiency heat pumps and air conditioners.

In general , the more e fficient the sys tem, the higher the rebate. The following are terms normally used to d escribe th e efficiency of heating and coo ling systems: Annual Fuel Utilization Efficiency (AFUE) Applies to furnaces, gas, oil, etc. It describes the amount of heat produced for every unit of fuel consumed.

The higher the AFUE, the more efficiently the furnace operates. Heating Seasonal Performance Factor (HSPF) Applies to the heating portion of a heat pump. It compares the heat output to the consumption of electricity. The higher the HSPF, the more efficiently the heat pump operates. Seasonal Energy Efficiency Ratio (SEER) Applies to the cooling portion of a heat pump and to tional air conclitioners.

It pares the cooling output to the consump tion of electricity.

The higher the SEER, the more efficiently the heat pump or air conditioner operates. ABOUT WINNING If yo u'd like to learn more about our winning products and services, we've included a reader service card after page 54. We look forward to h ear ing from you.

A T l A N T 8* 1.421 1.4 1 8 1.43li 1.395 3.147 3.1163 6* 1.917 1.742 4* 3.113 3.11& 3.168 3.370 2* 88 89 90 91 92 (in billion s of killowatt-hour s) ATLANTIC ELECTRIC Energy Sales by Customer Class

• RESIDENTIAL

• COMMERCIAL

• INDUSTRIAL

& OTHER 1.m 3.100 1178 The change in kilowatt-hour sales is determined by how many new customers are added, how much electricity each customer uses a nd weather conditions.

c E l E C T R c A T A Residential Customers Sales to Residential customers declined 2.8% in 1992 due to mild temperatures in the winter and summer months. More than 3,600 Residential customers were added during 1992, a slight improvement from 1991 when just over 3,300 customers were added. For the %Annual Est. % Annual eleven-year period Growth Rate Est. Growth Rate 1987-1997:

1987 1992 '87-'92 1997 '92-'97 Sales (billion kwh) 3.040 3.276 1.5% 3.756 2.8% % ofTotal Sales 43 43 44 0.5 Average Use (kwh) 8,281 8,131 (0.4) 8,629 1.2 Peak(MW) 857 1,007 3.3 993 (0.3) Commercial Customers Sales to commercial customers declined 1.5% as a result of the continued weakness in the regional economy. Sales to the 12 hotel/casinos decreased 1.5% due to the cool weather during the summer months. Sales to the hotel/casinos comprise 7.0% of total sales. For the %Annual Est. % Annual eleven-year period Growth Rate Est. Growth Rate 1987-1997:

1987 1992 '87-'92 1997 '92-'97 Sales (billion kwh) 2.592 3.100 3.6% 3.487 2.4% % ofTotal Sales 37 40 1.6 40 Average Use (kwh) 55,419 59,623 1.5 59,525 Peak(MW) 586 603 0.6 649 1.5 Industrial

& Other Customers Sales to Industrial

& Other customers declined 9.8% in 1992 due to the loss of two customers to cogeneration.

After adjusting for these two customers, the remainder of the Industrial sector increased its energy consumption by 6.9%. For the %Annual Est. % Annual eleven-year period Growth Rate Est. Growth Rate 1987-1997: 1987 1992 '87-'92 1997 '92-'97 Sales (billion kwh) 1.382 1.279 (1.5)% 1.383 1.6% % ofTotal Sales 20 17 (3.2) 16 (1.2) Average Use (000 kwh)* 1,304 1,242 (1.0) 1,322 1.3 Peak(MW) 166 186 2.3 177 (1.0)

• Indu s trial customers only >E r g y G l A 1\ C E Atlantic Electric's Service Area Atlantic Electric serves more than 455,000 customers in a 2, 700 square-mile area i southern New Jers ey. Pe load has occurred during the summer months. Major businesses include tourism, casino gaming, stone, clay, glass, chemical, petroleum, rubber a nd food processing.

< > Report of Management < > Report of Audit Committee

< > Independent Auditors' Report < > Consolidated Statement oflncome < > Consolidated Statement of Cash Flows < > Consolidated Balance Sheet < > Consolidated Statement of Changes in Common Shareholders' Equity < > Notes to Consolidated Financial Statements

< > Management's Discussion and Analysis of Financial Condition and Results of Operations

< > Summary Financial and Statistical Review 17 R E P 0 R T 0 F The management of Atlantic Energy, Inc. and its subsidiaries (the Company) is responsible for the preparation of the cial statements presented in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported.

Management is also responsible for the preparation of other financial information included elsewhere in this Annual Report. Management has established a system of internal accounting and financial controls and procedures designed to provide sonable assurance as to the integrity and reliability of financial reporting.

In any system of financial reporting controls there are inherent limitations.

Management continually examines the effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified.

Management believes that, as of December 31, 1992, the tem of internal accounting and financial controls over financial reporting is effective.

Management also recognizes its bility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest dards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. The financial statements have been audited by Deloitte & Touche, Certified Public Accountants.

Deloitte & Touche vides an objective, independent audit as to management's charge of its responsibilities insofar as they relate to the fairness A I I a n I i c < A G E M E T of the financial statements.

Their audits are based on pr dures believed by them to provide reasonable assurance that the financial statements are not misleading and include a review of the Company's system of internal accounting, financial and operational controls and tests of transactions.

The Company's internal auditing function conducts audits and appraisals of the Company's operations.

It evaluates the system of internal accounting, financial and operational controls and compliance with established procedures.

Both Deloitte & Touche and the internal auditors periodically make dations concerning the Company's internal control structure, and management responds to such recommendations as priate in the circumstances.

None of the recommendations made for the year ended December 31, 1992 represented nificant deficiencies in the design or operation of the Company's internal control structure.

J. L.J ac ob s President J. G. Salomone Vice President and Treasurer

>Energy R E P 0 R T 0 F T H E .e Audit Committee of the Board of Directors is comprised solely of independent directors.

The members of the Committee are: Jos. Michael Galvin, Jr., Gerald A Hale, Matthew Holden, Jr., Madeline H. McWhinney and Harold J. Raveche. The Committee held three meetings during 1992. The Committee oversees the Company's financial reporting process on behalf of the Board of Directors.

In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder ratification, the selection of the Company's independent auditors, Deloitte & Touche. The Committee discussed with the internal auditors and the pendent auditors the overall scope of and specific plans for their respective activities concerning the Company. The Committee also discussed the Company's consolidated financial statements with the independent auditors.

The Committee meets regularly with the Company's internal auditors and independent audi-U D I T C 0 M T T E E tors, without management present, to discuss the results of their activities, the adequacy of the Company's system of accounting, financial and operational controls and the overall quality of the Company's financial reporting.

The meetings are designed to facilitate any private communication with the Committee desired by the internal auditors or independent auditors.

No significant actions by the Committee were required during the year ended December 31, 1992 as a result of any private communications conducted. Matthew Holden,Jr.

Chairman, Audit Committee D E P E D E T A U D T 0 R § R E P 0 R T Deloitte&

Touche Certified Public Accountants Two Hilton Court Parsippany, New Jersey 07054 To the Shareholders and the Board of Directors of Atlantic Energy, Inc.: We have audited the accompanying consolidated balance sheets of Atlantic Energy, Inc. and subsidiaries as of December 31, 1992 and 1991 and the related consolidated statements of income, changes in common shareholders

' equity, and cash flows for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as ing the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic Energy, Inc. and its subsidiaries at December 31, 1992 and 1991 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1992 in conformity with generally accepted accounting principles. February 1, 1993 >Entrgy C O T ED § T A T E M E ' T 0 F

• C 0 J E (Thousands of Dollars) For the Years Ended December 31, 1992 1991 1990 Operating Revenues-Electric $816,825 $808,374 $740,894 ----Operating Expenses:

Energy 161,134 182,972 185,543 Purchased Capacity 103,173 79,314 57,369 Operations 148,917 146,548 133,582 Maintenance 49,837 51,960 52,351 Depreciation and Amortization 69,371 66,023 62,141 Gross Receipts and Franchise Taxes 97,969 88,932 87,314 Federal Income Taxes 37,143 36,244 26,917 Other Taxes 12,113 11,525 11,115 Total Operating Expenses 679,657 663,518 616,332 Operating Income 137,168 144,856 124,562 Other Income: Allowance for Equity Funds Used During Construction 2,212 1,814 1,727 Litigation Settlement, net of tax of $4, 982 9,671 Other-Net 9,519 7,043 7,585 -Total Other Income 21,402 8,857 9,312 Income Before Interest Charges 158,570 153,713 133,874 Interest Charges: Interest on Long Term Debt 53,284 51,601 54,803 Interest on Short Term Debt 1,579 1,946 1,510 Other Interest ense 1,099 1,179 109 Total Interest Charges 55,962 54,726 56,422 Allowance for Borrowed Funds Used During Construction (1,414) (3,059) (2,226) Net Interest Charges 54,548 51,667 54,196 Less Preferred Stock Dividend Requirements of Subsidiary 17,812 16,411 10,799 Net Income $ 86,210 $ 85,635 $ 68,879 Average Number of Shares of Common Stock Outstanding (in thousands) 51,592 49,008 45,590 Per Common Share: Earnings $ 1.67 $ 1.75 $ 1.51 Dividends D eclare d $ 1.515 $ 1.495 $ 1.47 Dividends Paid $ 1.51 $ 1.49 $ 1.46 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. A I I a n I i c < >E n e r g y co 1§0L I D T E D §TATE.IE T 0 F C A § H FL 0 W § ' *-'"""

.-...._. -**.-!::'!'"I' . t : ... _. *t, :--,* £;

• ousand s of Dollars) F o r the Years Ended December 31, 1992 199 1 1 990 Cash Flow s of Operating A cti vi ties: Net Income $ 86,210 $ 85,635 $ 68,879 D eferred Purchased Power Costs 13,410 (12,938) (21,840) D eferred Energy Costs (6,143) 13,180 20,136 Noncash items affecting operating activities:

Preferred Stock Dividend Requirements of Subsidiary 17,812 16,411 10,799 Depreciation and Amortization 69,371 66,023 62,141 Allowance for Funds Used During Construction

{3,626) (4,873) (3,953) Nuclear Decommissioning Reserve 6,424 3,010 Deferred Income Taxes-Net 23,386 13,413 12,828 Net D ecrease (Increase) in Other Working Capital 8,225 (2,821) 9,59 1 Othe r-Net 2,852 7,498 1,290 Net C as h Pro vi ded b y Operating A cti vi ti es 217,921 184,538 159,871 C as h F lo ws o f In ves ting A cti vi ti es: Utility Cash Construction Expenditures (130,700)

(172,425)

(166,818)

Leased Property (9,565) (8,793) (10,576) Nuclear Decommissioning Trust Fund Deposits (6,424) (13,777) (1,920) Utility Plant Removal Costs (4,936) (5,157) (3,912) Other-Net (3,588) (3,400) (336) et C as h U s ed b y In v e s ting A cti vi ti es (155,213) (203,552) (183,562) h Fl ows of F inancing A cti vi tie s: roceeds from Long Term Debt 74,655 38,779 Retirement and Maturity of Long Term Debt (40,599) (50,170) (28,625) (Decrease)

Increase in Short Term Debt (6,000) (23,350) 43,950 Proceeds from Capital Lease Obligations 9,565 8,793 10,576 Proceeds from Common Stock Issued 16,110 72,698 4,694 Proceeds from Preferred Stock Issued 69,720 49,888 Dividends on Preferred Stock (17,812} (16,411) (10,799) Dividends on Common Stock {65,644) (62,769) (56,673) Other-Net (5,403) (9, 1 70) (5,267) Net C as h (U se d) Provided by F inancing A ctivitie s (35,128) 28,120 7,744 Net Increase (D ecrease) in C as h an d Te mpo rary In ves tm e nt s 27,580 9,106 (15,947) Cas h an d Te mpo rary In ves tm e nt s, b eginning o f ye ar 18,067 8,961 24,908 Cas h an d Te mpo rary In vestmen t s, end o f year $ 45,647 $ 18,067 $ 8,961 Supple me nt al Schedule o f P ayme nt s: Interest $ 55,275 $ 57,221 $ 58,080 Federal income taxes $ 24,312 $ 23,721 $ 19,279 N onc as h F in an cing A cti vi tie s: Common Stock issued from dividends declared under dividend reinvestment plan $ 12,692 $ 11,304 $ 10,412 Th e acco mpan ying o t es t o C o n so lid a t e d Finan ci al Stat e m e n ts ar e an integral part of th ese s tat e m e n ts.

• At/an/><< >Ent r g y CO '§OLlDATED (Thousands of Dollars) Assets Electric Utility Plant: In Service: Production Transmission Distribution General Total In Service Less Accumulated Depreciation Net Construction Work in Progress Land Held for Future Use BALA 'CE § H E E T December 31, 1992 1991 $1,044,068

$1,009,776 312,374 295,044 583,890 557,494 155,679 152,441 2,096,011 2,014,755 599,100 545,829 1,496,911 1,468,926 130,685 102,708 5,045 5,045 49,304 53,093 1,681,945 Electric Utility Plant-Net Nonutility Property and Investments:

Investment in Leveraged Leases Nuclear Decommissioning Trust Fund Nonutility Property and Equipment-Net Other Investments and Funds Total Nonutility Property and Investments 76,465 34,617 15,561 11,132 137,775 1,629,772 75,293 26,489 15,039 4,233 121,054 Current Assets: and Temporary Investments Accounts Receivable

Utility Service Miscellaneous Allowance for Doubtful Accounts Unbilled Revenues Fuel (at average cost) Materials and Supplies (at average cost) Working Funds Prepayments Deferred Income Taxes Total Current Assets Deferred Debits: Unrecovered Purchased Power Costs Unamortized Debt Costs Property Abandonment Costs-et Deferred Energy Costs Other Total Deferred Debits Total Assets The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. >Enrrgy 45,647 18,067 47,928 49,842 12,533 16,703 (3,000) (2,400) 39,281 38,078 20,874 21,646 25,763 27,394 15,433 15,955 10,247 11,267 7,031 11,142 221,737 207,694 124,408 137,818 20,693 22,505 10,297 8,502 10,360 23,296 13,711 178,694 192,896 $2,220,151

$2,151,416

• ou s ands of D o llars) De ce mber 3 1 , Liabilities and Capitalization Capitalization:

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

1992 -52,198,624; 1991-50,896,074 Retained Earnings Total Common Shareholders' Equity Preferred Stock of Atlantic City Electric Company: Not Subject to Mandatory Redemption Subject to Mandatory Redemption Lon Term Debt Total Capitaliza

-n-*o_n_(_ex_cluding current portion) Current Liabilities:

Preferred Stock Redemption Requirement Long Term Debt due within one year Capital Lease Obligations due within one year Short Term Debt counts Payable es Accrued erest Accrued Dividends Declared Customer Deposits Deferred Energy Costs Other Total Current Liabilities Deferred Credits and Other Liabilities:

Deferred Income Taxes Deferred Investment Tax Credits Capital Lease Obligations Other Total Deferred Credits and Other Liabilitie s Commitments and Contingent Liabilities (Note 10) Total Liabilities and Capitalization

• At/ant c< >Entrgy 1992 1991 s 549,147 242,768 791,915 40,000 190,250 631,580 1,653,745 1,050 19,356 798 14,600 52,028 7,697 14,706 24,275 2,955 8,089 16,794 162,348 277,305 56,715 48,505 21,533 404,058 $2,220,151

$ 520,345 234,894 755,239 40,000 191,300 565,547 1,552,086 1,050 49,450 740 20,600 57,467 7,367 13,638 23,550 2,988 24,592 16,093 217,535 255,495 59,249 52,353 14,698 381,795 $2,151,416 co. Tso11n. TED STATEJE. TT OF CH

• TGES LT co.t10. *SHAREHOLDERS' EQL'JTY (Thousands of Dollars) Balance, December 31, 1989 Common Stock issued Net Income Capital stock expense of subsidiary Common stock dividends Balance, December 31, 1990 Common Stock issued: Public offering Other Net income Capital stock expense of subsidiary Common stock dividends Balance, December 31, 1991 Common stock issued Net income Common stock dividends Shares 45,091,434 860,542 45,951,976 4,000,000 944,098 50,896,074 1,302,550 Common Stock $421,237 15,106 436,343 66,970 17,032 520,345 28,802 Retained Earnings $222,163 68,879 (208) (67,085) 223,749 85,635 (417) (74,073) 234,894 86,210 (78,336)

Balance, December 31 , 1992 Common Stock issued in 1992, 1991 and 1990 was for the Dividend Reinvestment and Stock Purchase Plan (DRP) and Atlantic City Electric Company (ACE) employee benefit plans. Also, in 1991 Common Stock was issued through a public offering.

In Januar y 1992, an additional 1,800 ,000 shares of Common Stock were registered for issuance under the DRP. At December 31, 1992, 728,167 and 139,455 shares 52,198,624

$549,147 $242,768 were reserved for issuance under the DRP and ACE employee benefit plans, respe ctively. On March 12, 1992, the Company's Board of Directors au rized a two-for-one split of its no par value Common St and increased the number of authorized shares fro 50,000,000 to 75,000,000.

The additional shares were issued May 14, 1992. All shares above reflect the effects of the split. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

A I I a n I t < >Energy SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Atlantic Energy, Inc. (the Company) is the parent of a consolidated group consisting of the following wholly-owned subsidiaries:

Atlantic City Electric Company (ACE), Atlantic Energy Technology, Inc. (AET), Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP) and ATE Investment, Inc. (ATE). ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. Rates for service are regulated by the New Jersey Board of Regulatory Commissioners (BRC).

ACE's service territory encompasses approximately 2, 700 square miles within the sou t hern third of New Jersey. The majority of ACE's customers are residential and commercial.

ACE, with its wholly-owned subsidiary that operates certain generating facilities, is the primary company within the consolidated group. AET invests in companies with energy-related products and technologies and has a majority-owned subsidiary that markets geothermal heating and cooling systems in the Pennsylvania, New York and New Jersey area. AGI and its oily-owned subsidiaries are engaged in the development of neration power pro j ects located in New Jersey and New rk through several partnership arrangements.

ASP owns, develops and manages a commercial office and storage facility located in southern New Jersey. ATE provides fund management and financing to affiliates and manages its portfolio of investments in leveraged leases for equipment used in the airline and shipping industries.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

ACE, AET and AGI consolidate their respective subsidiaries.

AGI accounts for another investment using the equity method by recognizing its proportionate share of the results of operations of that investment.

The results of operations of the nonutility companies are not significant and are classified under Other Income in the Consolidated Statement oflncome.

REGULAT IO N The accounting policies and rates of ACE are subject to the regulations of the BRC and in certain respects to the Federal Energy Regulatory Commission (FERC). All significant accounting policies and practices used in the determination of .s are also used for financial reporting purposes.

A t I a n t i c < CIAL §T

• TEME JT§ ELECTRIC OP ERATING 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. NUCLEAR FUEL Fuel costs associated with ACE's participation in owned nuclear generating stations, including spent nuclear fuel disposal costs, are charged to Energy expense based on the units of thermal energy produced.

ELECTRI C UTILI1Y PLANT Property is stated at original cost. Generally, the plant is s1:1bject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, is capitalized. Included in certain property 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 r easonab l e rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of8.95%, as approved by the BRC, for the years presented.

D EPRECIATI O N ACE 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.

The overall composite rate of depreciation was approximately 3.5% in 1992, 3.7% in 1991 and 3.6% in 1990. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries. Depreciable property of the nonutility companies is not significant.

>Energy NUCLEAR DECOMMISSIONING TRUST ACE has established a trust to fund the future costs of decommissioning each of the five nuclear units in which it has an ownership interest.

The current annual funding amount, as authorized by the BRC, totals $6.4 million and is provided for in rates charged to customers.

The funding amount is based on estimates of the future cost of decommissioning each of the units, the dates that decommissioning activities are expected to occur and the return to be earned by the assets of the fund. The BRC has determined that the total estimated cost to decommission ACE's share in nuclear units is $65.5 million in 1987 dollars. The BRC has further established that decommissioning activities are expected to begin in 2006 and continue through 2032. Actual costs and timing of decommissioning activities may vary from the current estimates.

ACE will seek to adjust these estimates and the level of rates collected from customers in future BRC proceedings to reflect changes in decommissioning cost estimates and the expected levels of inflation and interest to be earned by the assets in the fund. As of December 31, 1992, the trust had a market value of $36.7 million, of which $24. 7 million has been qualified for Federal income tax purposes.

ACE had an associated accumulated liability for decommissioning costs of$33.7 million at December 31, 1992. DEFERRED ENERGY COSTS As approved by the BRC, ACE has Levelized Energy Clauses (LECs) through which the cost of energy is charged to customers.

LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries of energy costs. The recovery of energy costs is made through levelized rates over the period of projection, which is generally a 12-month period. In any period, the actual amount of LEC revenues recovered from customers will be greater or less than the actual amount of energy costs incurred in that period. Energy expense is accordingly adjusted to match the associated LEC revenues.

Any underrecovery or overrecovery of costs is deferred on the Consolidated Balance Sheet as A t I a n t i ' < Deferred Energy Costs, which can be an asset or liabili. appropriate.

These deferrals are recognized in the Consolidated Statement oflncome as Energy expense during the period in which they are subsequently recovered through theLECs. INCOME TAXES Deferred Federal and state income taxes are provided 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 Consolidated Balance Sheet and . recognized in book income over the life of the related property.

The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to each of the companies within the consolidated group based on the separate return method. UNRECOVERED PURCHASED POWER COSTS ACE has agreements for the purchase of 125 megawatts (MWs) of capacity and related energy from Pennsylvania Power and Light Company (PP&L) under two capacity and energy sales agreements.

The agreements provided for the purchase of capacity and energy from PP&L's Susquehanna nuclear Unit 1 and Unit 2 through September 30, 1991, from certain PP&L coal-fired units through September 2000. The base rates approved by the BRC to recover ilie estimated non-fuel contract costs of this arrangement are based on a levelization of the estimated non-fuel contract costs to be incurred over the 17-year period of the agreements. The estimated non-fuel contract costs of the nuclear portion of the agreements are higher than the estimated non-fuel contract costs of the coal portion of the agreements.

During the nuclear portion of the agreements, the estimated non-fuel costs exceeded the levelized revenues.

The excess estimated non-fuel costs were deferred on the Consolidated Balance Sheet as Unrecovered Purchased Power Costs. Related deferred Federal income taxes have been provided.

Beginning with the coal portion of the agreements effective October 1, 1991, the levelized revenues are greater than the estimated non-fuel costs. This enables ACE to amortize the deferred non-fuel costs over the remaining term of the agreements to Purchased Capacity on the Consolidated Statement of Income. Differences between actual non-fuel costs incurred and the estimated costs being recovered are subject to usual base rate recovery procedures .

• TO CO '§OL!DATED Fl1rA 'CIAL §TATEME 1 T§ PER1Y ABAND O NMENTS AND DI SALL O WANCE O F PLANT C O STS A loss is recognized if the carrying amounts of abandoned utility assets exceed the present value of future revenues to be generated by those assets. Any disallowance of the cost of a newly completed utility plant, including an indirect disallowance which provides no return on investment of any portion of the plant, is recognized as a loss. Property Abandonment Costs that are stated at their net present value in the Consolidated Balance Sheet consist of ACE's investment in the following as of December 31, 1992: Net Remaining Present Unamortized Recovery Investment Value(OOO)

Cost(OOO)

Period (years) Offshore Nuclear Generating Units $ 869 $1,322 6+ uclear Generating Unit 3,264 4,472 5 Unrecovered uclear Fuel Advances 1,787 2,865 8+

Plant 1te Costs 1,532 1,927 3+ Additionally, $2.8 million in unamortized cos t within ctric Utility Plant in Service is excluded from rate base for poses of computing a return on the investment in the ope Creek uclear Generating Station. The excess of the carrying values of the above assets over their discounted present values was recognized as a loss at the date of abandonment or exclusion.

This discount is being restored to income by accretion over the amortization/

depreciation period of the abandoned or excluded costs allowed for ratemaking.

FINANCIAL IN S TRUMENT S A number of items within Current Assets and Current Liabilities on the Consolidated Balance Sheet are considered to be financial instruments because they are cash or are to be settled in cash. Due to their short term nature, the carrying A I I a n I i c < values of these items approximate their fair market values. Accounts Receivable-Utility Service and Unbilled Revenues are subject to concentration of credit risk because they pertain to utility service conducted within a confined geographic region. Investments in Leveraged Leases are subject to concentration of credit risk because they are exclusive to a small number of parties within two industries.

The Company has recourse to the affected equipment under lease. Such equipment is of general use within the respective industries.

OTHER Debt premium, discount and expenses of ACE 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 BRC in accordance with FERC guidelines.

Temporary investments considered as cash equivalents for Consolidated Statement of Cash Flows purposes represent purchases of highly liquid debt ments maturing in three months or less. As a result of the two-for-one Common Stock split on May 14, 1992, all common share outstanding amounts and per common share calculations contained in the consolidated financial statements for prior year periods have been adjusted accordingly. Amounts in prior year periods presented in the Consolidated Statement of Income that are associated with sales of energy and capacity to other utilities (sales for resale) are now included in Operating Revenues.

Prior practice had been to account for these sales as a net expense within Energy and Operating expenses.

These reclassifications were made in response to FERC requirements effective January 1, 1992. Net income for the prior year periods presented was not affected by this reclassification.

Certain other prior year amounts have been reclassified to conform to the current year reporting of these items. >Energy

' 0 T E § T 0 c 0 T § 0 L l D A T E D F 1 A c I A L § T A T E J1 E T T § NOTE2. FEDERAL INCOME TAXES (000) The components of Federal income tax expense are as follows: Current Deferred Investment Tax Credits Recognized on Leveraged Leases Total Federal Income Tax Expense Less Amounts Included in Other Income Federal Income Taxes Incl u ded in Operating Expenses Deferred Federal income taxes result from the following:

Liberalized Depreciation Unrecovered Purchased Power Costs Deferred Energy Costs Leveraged Leases Investment Tax Credits Other-Net Total Deferred Federal Income Tax Expense A reconciliation of the reported Federal income tax expense compared to the expected Federal income taxes computed by applying the statutory rate follows: et Income Preferred Stock Dividend Requirements of Subsidiary Federal Income Tax Expense Book Income Subjec t to Tax Statutory Federal Income Tax Rate Income Tax Computed at the Statutory Rate Items for which deferred taxes are not provided:

Difference Between Tax and Book Depreciation Investment Tax Credits Reversal of Excess Deferred Taxes Utility Plant Removal Costs Other-Net Total Federal Income Tax Expense Effective Federal Income Tax Rate In 1992, the Company's computed Federal Alternative Minimum Tax (AMT), attributable to nonutility operations, was less than its regular Federal income tax by $304 thousand.

In 1991 and 1990, the AMT exceeded regular income tax by $2.0 million and $9.4 million, respectively.

A cumulative AMT credit of $17.0 million is available at December 31, 1992. The AMT credit is available for an indefinite carryforward period against future Federal income tax payable, A I I a n t i c < Years Ended December 31, 1992 1991 1990 $ 22,441 $ 24,202 $ 16,652 23,154 13,043 12,292 {233) (500) (752) 45,362 36,745 28,192 8,219 501 1,275 $ 37,143 $ 36,244 $ 26,917 $ 17,762 $ 10,558 $ 11,156 (4,823) 3,477 5,845 3,427 (3,825) (5,781) 12,375 11,623 7,932 (2,534} (2,348) (2,349) (3,053) (6,442) (4,511) $ 23,154 $ 13,043 $ 12,2 $ 86,210 $ 85,635 $ 68,879 17,812 16,411 10,799 45,362 36,745 28,192 $149,384 $138,791 $107,870 34% 34% 34% $ 50,791 $ 47,189 $ 36,676 5,675 3,631 4,661 (2,767) (3,038) (3,277) {757} (2,641) (5,678) (2,575) (2,722) (2,245) (5,005} (5,674) (1,945) $ 45,362 $ 36,745 $ 28,192 30% 26% 26% to the extent that the regular Federal income tax payable exceeds future AMT payable. Federal income tax returns for 1983 and prior years been examined and settled by the Internal Revenue Service. In February 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 109 entitled "Accounting for Income Taxes" which is effective for the Company beginning January 1, 1993. >Energy NOTE§ TO CONSOLIDATED F!1 A 1 CIAL §TATEME 1 T§

• statement supersedes or amends virtually all previously existing standards on accounting for income taxes. Statement No. 109 changes the recording methodology relating to deferred income taxes to an asset and liability approach.

The principal impacts to the Company relate to recording, on a current basis, the effect of changes in enacted income tax rates on the amount of income taxes recorded and the recording of deferred tax liabilities not previously recorded by ACE. At December 31, 1992, the cumulative amount of deferred Federal income taxes under current accounting standards NOTE3. RATEMATTERSOFACE ENERGY CLAUSE PROCEEDINGS Changes in Levelized Energy Clause Rates 1990-1992 Amount Date Filed Re:fil;ested (m " ons) 3/90 $(26.2)[1]

3/91 30.6 (6.6) ne 1990 amended filing Amount Granted (millions)

$(35.8) 21.3 (8.5) Date Effective 6 1 90 6/91 10/92 ACE's Levelized Energy Clauses (LECs) are subject to annual review by the BRC. In January 1990, ACE and other parties signed a joint position designed to settle certain contested issues of a 1988 LEC proceeding.

The joint position provided for an increase in annual base rate revenues of $41.6 million for ACE's year agreement to purchase 200 MWs of capacity and associated energy from Philadelphia Electric Company (PE). Coincident with the base rate increase, LEC revenues were to be decreased by a like amount. In May 1990, the BRC rejected the joint position, ruling that the capacity costs associated with the PE purchase were reasonable, but only would be considered within a formal base rate proceeding.

However, ACE was granted a provisional base rate increase of $41.6 million effective June 1990 (see "Base Rate Case Proceedings").

In March 1990, ACE filed proposed LEC tariffs with the BRC for the period June 1990 through May 1991, which reflected the terms of the joint position discussed above. As a result of the May 1990 BRC action, in June 1990 ACE amended its filing to provide for a decrease in annual LEC revenues of $26.2 million. This amended filing included a *est to begin recovery over three years of certain Salem ear Generating Station replacement power costs deferred e 1984 amounting to $10.4 million, recovery of interest payments previously made by ACE related to the deferred Salem replacement power costs and the nuclear performance A t I a n t i c < which have not been provided on timing differences, principally depreciation, amounted to approximately

$50 million. Upon adoption of Statement No. 109, ACE expects to record an increase to deferred Federal income tax liabilities of approximately

$85 million, after effect for revenue requirements necessary to collect such amounts from ratepayers.

The adoption of Statement No. 109 by the nonutility companies is not expected to have a material effect on the consolidated financial statements.

standard and retention of a portion of fuel and energy savings associated with the PE power purchase agreement.

In June 1990, the BRC approved an interim net decrease in annual LEC revenues of $35.8 million effective June 20, 1990. This ruling was contingent upon subsequent resolution of the rate making treatment of the deferred Salem costs, certain interest calculations on overrecoveries and underrecoveries and ACE's proposal to retain a portion of the fuel savings associated with the PE agreement.

In January 1991, an initial decision issued by an Administrative Law Judge (ALJ) ruled against ACE's requested recovery of the three contested issues remaining in the proceeding.

In March 1991, ACE filed a petition requesting revisions of its LECs to reflect an increase of $30.6 million for the period June 1, 1991 through May 31, 1992. On June 11, 1991, the BRC ordered a net increase in annual LEC revenues of $21.3 million, effective on that date. The June 1991 Order upheld the ALJ's January 1991 decision and, as a result, ACE was not permitted to begin recovery of the deferred Salem costs and associated interest payments previously made by ACE. The June 1991 Order denied ACE 's request to retain a -portion of the fuel and energy savings associated with the PE purchase.

On January 10, 1992, ACE filed a request with the BRC for rehearing and reconsideration of issues relating to the recovery of the $10.4 million deferred Salem costs, recovery of interest payments previously made by ACE relating to the deferred Salem costs and nuclear performance standard, and retention of a portion of fuel and energy savings associated with the PE power purchase agreement.

On February 10, 1992, ACE withdrew portions of its request for rehearing with respect to the issues relating to recovery of interest payments and retention of fuel and energy savings. In late May 1992, ACE and the Staff of the BRC (Staff) entered into a stipulation to settle the open rehearing and reconsideration issue. By the terms of the stipulation, ACE would begin recovery, over a three-year period, of the $10.4 million of >E n*rgy TOTE§ TO co T§O L ID TED F J T c I L §TATEJE TT§ deferred Salem costs. The stipulation provided that in the event the BRC, in a final determination in a Public Service Electric & Gas (PS) base rate proceeding, reverses its 1988 finding that the deferred Salem costs are prudent and reasonable and orders their return to customers, then ACE, after the exhaustion of all administrative, legal and equitable remedies, would be bound by such order. The Department of the Public Advocate-Division of Rate Counsel (Rate Counsel) was not a signatory to the stipulation.

On September 2, 1992, the BRC adopted the stipulation between ACE and Staff and authorized ACE to begin recovery of the deferred Salem costs concurrent with the BRC's approval and implementation of ACE's then pending February 28, 1992 LEC petition.

On February 28, 1992, ACE filed with the BRC a petition relating to its LEC rates for the period June 1, 1992 through May 31, 1993, requesting no change in its current rates. On April 30, 1992, ACE filed revisions to its petition that would result in a rate decrease of $6.6 million, reflecting an allocation to customers of 25% of the net settlement reached in March 1992 in the lawsuit against PE (see Note 10), and an update for the projected overrecovery of prior LEC costs and associated interest.

The parties entered into a stipulation of settlement dated August 14, 1992 regarding the February 28, 1992 petition and April 30, 1992 revisions thereto. In October 1992, the BRC issued its written order adopting the stipulation of settlement which resulted in a reduction in annual LEC revenues of $8.5 million that was implemented October 20, 1992, including the recovery over a three-year period of the $10.4 million deferred Salem costs. The amount allocated to customers from the PE settlement may be reviewed further by the BRC in ACE's next LEC filing, scheduled for February 1993. It is not possible to predict the outcome of such review. BASE RATE C ASE PROC EEDING S C h anges in Base Ra t es 1990-1992 Overall Authorized Amount Amount Rate of Return on Test Dace Requested Granted Date Re rum Common Year Filed (millions) (millions)

Effective Granted% Equity% Ending 9/88 s -S41.6 6190 9190 113.0 50.0 7/91 10.52 12.50 5/91 8/91 25.8 12.9 10/92 In compliance with the May 1990 BRC provisional rate order discussed under "Energy Clause Proceedings," in September 1990, ACE filed a petition with the BRC requesting an increase in base rate revenues of $113.0 million on an annual basis. Additionally in this filing, ACE requested that the $41.6 million provisional base rate revenue increase grante the BRC effective June 1990, as discussed under "Energy Clause Proceedings," be confirmed and placed permanently in base rates. Also, ACE requested recovery of the first year costs of the PE agreement not covered by the provisional increase, plus full recovery of the costs for the remaining three years of the agreement.

In its filing, ACE requested an overall rate of return of 11.13% and a return on common equity of 13.7%. At that time, ACE had an authorized overall return of 11.42% and a return on common equity of 14.1%. On June 24, 1991, the ALJ issued an initial decision accepting a stipulation between ACE and the parties in the base rate proceeding.

The stipulation provided, among other things, for an increase in annual base rate revenues of $50 million based upon a test year ending May 31, 1991, an allowed overall rate of return of 10.52% and an authorized return on common equity of 12.50%. In addition, the parties agreed to confirm and make permanent in base rates the $41.6 million provisional increase.

On July 3, 1991, the BRC adopted the initial decision of the ALJ and the stipulation of the parties and authorized an increase in annual base rate revenues of $50 million. During the course of the proceeding, the ALJ ruled that a Phase II proceeding was appropriate for the determination of regulatory treatment of consolidated Federal incom benefits derived from affiliated nonutility entities.

In its 3, 1991 Order, the BRC ordered that the issue of solidated taxes remain open and that ACE file a petition in this matter no later than 60 days from the date of the BRC Order. The stipulation also provided that ACE would not be prevented from requesting regulatory treatment in a Phase II proceeding of any obligations arising from changes in state law with respect to Gross Receipts and Franchise Taxes (GR&FT) that were enacted on June 30, 1991. One of the changes in the GR&FT law requires parties subject to the law to remit their annual GR&FT obligation in a single payment on April 1 of each year. In addition, ACE will be required to remit an additional year of tax within the two-year period 1993-1994 along with its regular tax payments for these years. The additional payments for 1993 and 1994 will amount to between $46 million and $50 million in each year. On August 30, 1991, ACE filed its Phase II request with the BRC for an increase in annual base rate revenues of $25.8 million to recover the increased costs relating to the changes in the G R&FT law. The petition also addressed the regulatory treatment of consolidated Federal income tax benefits derived from affiliated nonutility entities. The proceeding was transferred to the Office of Administrative Law for hearing. >Entrgy

'O T ES TO C01'§0L J DATED

§TATE 1E1'T§ he annual base rate revenues requested by ACE would recover the additional payments for 1993 and 1994 over a five-year period commencing in 1992, with a return on the unamortized portion. With respect to consolidated income tax benefits, ACE asserted in its petition and supporting testimony filed with the BRC that no changes in cus t omer rates should be made on the basis that the consolidated Federal tax benefits are generated by nonutility affiliates. In May 1992, the ALJ issued an Initial Decision in the proceeding.

The ALJ recommended that a consolidated Federal income tax benefit adjustment be made to reduce ACE's rate base, that Rate Counsel's calculation of cash working capital be adopted and that ACE be provided a year recovery of the additional GR&FT payments with interest on the unamortized balance calculated using the average prime rate. The ALJ's decision did not specify a recommended increase in annual revenue requirements.

ACE estimated that, using a prime rate in the range of 6%-6 1/2%, the ALJ's recommendation would result in an annual revenue requirement of approximately

$8.6 million. On October 20, 1992, the BRC issued its written Order in ACE's Phase II base rate proceeding, accepting the recommendations of the ALJ with certain modifications. By Order, the BRC authorized a net increase in annual base revenues of $12. 9 million effective October 20, 1992. The ange in base rates included the recovery of $95.6 million in additional GR&FT payments over a ten-year period with interest imputed on the unamortized balance at the rate of 7.5%. This amounted to an increase in annual base rate revenues of approximately

$13.5 million. The BRC also granted an increase in annual base rate revenues of $1.6 million to reflect the cash working capital impacts of the NOTE4. RETIREMENT BENEFITS ACE has a noncontributory defined benefit retirement plan covering substantially all of its employees and those of its wholly-owned subsidiary.

Benefits are based on an employee's years of service and average final pay. The plan's policy is to fund pension costs within the guidelines of the minimum required by the Employee Retiremen t Income Security Act and the maximum allowable as a tax deduction.

Each company is allocated its participative share of plan costs and contributions.

Net periodic pension costs for 1992, 1991 and 1990 -udod the following compononr,;, A t I a n I i c < acceleration of GR&FT payments to the State. With respect to consolidated Federal income tax benefits, the BRC ordered that a rate base adjustment be made in the amount of $15.4 million. This represents one-half of the total tax benefits for 1990 and the total tax benefits for 1991 realized by affiliated nonutility entities in filing consolidated Federal income tax returns. This rate base adjustment resulted in a reduction in annual base rate revenues of $2.2 million. On December 23, 1992, Rate Counsel filed a Notice of Appeal with the Superior Court of New Jersey, Appellate Division relating to the BRC's decision allowing ACE to increase its base rates with respect to changes in GR&FT. In its filing Rate Counsel asserts that the BRC's decision was unreasonable, not supported by evidence and results in unjust rates. ACE intends to vigorously defend its position.

ACE cannot predict the outcome of this matter. O THER RA T E PR O CEE D INGS On August 28, 1992, ACE filed a motion with the BRC requesting approval of ACE's proposed deferred accounting treatment of costs, in excess of current costs, resulting from the implementation of Statement of Financial Accounting Standards No. 106. Under Statement No. 106, ACE will be required to account for postretirement benefits other than pensions on an accrual basis. Presently, ACE accounts for its costs related to those benefits on a modified cash basis. Statement No. 106 is effective for ACE beginning January 1, 1993, and ACE requested that the deferred accounting order be effective on that date. On December 22, 1992, the BRC verbally approved ACE's request for deferred accounting of excess costs incurred due to implementation of Statement

o. 106. (See Note 4 for additional information.)

(000) 1992 1991 1990 Service cost-benefits earned during the period $ 7,310 $ 6,662 $ 6,843 Interest cost on .Projected benefit obligation 17,301 16,517 16,179 Actual return on plan (13,283) (22,188) 3,060 assets Deferred gain (loss) (3,623) 7,211 (18,755) Amortization of unrecognized net (172) (172) (172) transition asset Net periodic pension cost s s 7,533 s 8,030 s 7 ,155 >Energy

'OTES T O CO '§O LJ DA T ED FJ.'A1'C J AL STATEME.'TS

-t---*--... --............ _ --* ... -.._ -, -* *--* --*

• Approximately

$4.8 million, $5.1 million and $4.7 million of these costs were charged to operating expense in 1992, 1991 and 1990, respectively, and the remaining costs, which are associated with construction labor, were charged to the cost of new utility plant. A reconciliation of the funded status of the plan as of December 31, 1992 and 1991 is as follows: (000) 1992 1991 Fair value of plan assets $218,800 $204,000 Projected benefit obligation 213,459 208,416 Plan assets over ii under) projected bene 1t obligation 5,341 (4,416) net (2,066) (2,238) trans1t1on asset Unrecognized net loss 7,578 Prepaid pension cost $ 491 $ 924 Accumulated benefit obligation:

Vested benefits $160,507 $160,350 onvested benefits 646 798 Total $161,153 $161,148 At December 31, 1992, approximately 67% of plan assets were invested in equity securities, 21% in fixed income securities and 12% in other investments.

The assumed rates used in determining the actuarial present value of the projected benefit obligation at year-end were as follows: 1992 1991 Weighted average discount 8.00% 8.50% J\nticipated of increase 6.000Ai m compensation 4.50% The assumed long term rate of return on plan assets was 8.00% for 1992, 1991and1990.

In addition to pension benefits, ACE provides certain health care and life insurance benefits for retired employees of ACE and its subsidiary.

Substantially all employees may become eligible for these other postretirement benefits if they reach retirement age while working for the companies. Other postretirement benefits are provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. ACE has a tax qualified trust to fund these other A I I a n I i c < postretirement benefits.

The actuarial present valu. accumulated other postretirement benefits under the plan was $70.6 million and $68.6 million at January 1, 1992 and 1991, respectively, exclusive of the effects of new accounting standards discussed below. The cost of these benefits was $6.0 million in 1992, $4.9 million in 1991 and $3.5 million in 1990. The net asset value of the trust fund was approximately

$13.4 million at December 31, 1992 and $11.0 million at December 3 1 , 1991. In December 1990, the FASB issued Statement of Financial Accounting Standards No. 106 entitled "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires employers to record an obligation for unfunded accumulated other postretirement benefits immediately or, alternatively, on a delayed basis over the active plan participants' future service periods, or 20 years if longer, and to record on the accrual basis the annual cost of benefits earned. ACE will adopt this new standard effective January 1, 1993, and will elect to recognize the unfunded accumulated other postretirement benefits at January 1, 1993 over 20 years. The latest actuarial study, measured in accordance with the new standard, was performed for ACE on its retiree life insurance and medical benefit plans as of January 1, 1992. The study projects that the annual cost these benefits could increase approximately

$6 million t million, with an unfunded accumulated other postretirem benefits obligation of approximately

$60 million to $70 million at December 31, 1992. On December 22, 1992, the BRC verba ll y approved ACE's request for deferred accounting of excess costs incurred due to implementation of Statement No. 106. This permits ACE to accumulate the increased costs as an asset subject to future recovery through rates. ACE cannot predict what ultimate regulatory treatment will be afforded these costs. In November 1992, the FASB issued Statement of Financial Accounting Standards

o. 112 entitled "Employers' Accounting for Postemployment Benefits." This statement is effective for fiscal years beginning after December 15, 1993. This statement requires employers to recognize an obligation for benefits provided to former or inactive employees after employment but before retirement.

The requirements of this standard are not expected to be material to the financial condition or results of operations of the Company. * >Energy

'OTES TO CO '§OLJDATED Fl.'A1rCIAL

§TATEME.IT§ JOINTLY-OWNED GENERATING STATIONS ACE jointly owns with other utilities several electric production The amounts shown represent ACE's share of each plant at facilities.

ACE is responsible for its pro-rata share of the costs of December 31, including AFDC as appropriate.

construction, operation and maintenance of each facility.

Keystone Conemaugh Peach Bottom Salem Hope Creek Energy Source Coal Coal Nuclear Nuclear Nuclear Company's Share(%) 2.47 3.83 7.51 7.41 5.00 Electric Plant in Service (000): 1992 $ 10,422 $ 16,718 $ 121,494 $ 195,201 $ 235,738 1991 9,893 15,825 118,050 186,920 233,985 Accumulated Depreciation (000): 1992 $ 3,068 $ 5,861 $ 48,958 $ 71,511 $ 40,492 1991 2,956 5,507 45,305 68,407 33,743 Construction Work in Progress (000): 1992 I 249 $ 4,718 $ 5,283 $ 7,213 $ 2,268 1991 449 1,383 5,046 10,238 2,060 Operation and Maintenance Expenses (including fuel) (000): 1992 $ 4,976 $ 7,194 $ 29,618 $ 25,461 $ 9,541 1 5,398 10,061 28,651 23,720 9,640 4,855 8,358 27,340 19,154 8,458 eneration (MWH): 1992 294,222 457,771 958,740 737,356 351,672 1991 285,506 463,113 758,637 1,068,307 368,900 1990 276,080 448,978 1,062,569 837,486 404,084 ACE provides financing during the construction period for its share of the jointly-owned plants and includes its share of direct NOTE6. NONUTILI1Y COMPANIES The Company (AEI) is the parent holding company of the consolidated group. Its primary activities are the management of investments in the subsidiary companies, issuance of common equity and performance of administrative functions on behalf of the consolidated group. Principal assets of each of the subsidiary companies are: AET -capital investment and loan principal of approximately

$5.9 million in a geothermal heating and cooling subsidiary; AGI -capital investments of approximately

$19.5 million in cogeneration development rojects and partnerships; ASP -commercial real estate site a net book value of $13.4 million; ATE -leveraged lease stments of approximately

$76.5 million. Other financial ormation regarding the subsidiary companies, and financial information concerning parent-only operations of the Company, is as follows: A t I a n I i c < operations and maintenance expenses in the Consolidated Statement oflncome.

Company et Assets Results of (000) 1992 1991 1992 1991 1990 AET ${5,763) $ (970) ${4,793) $ (970) $ AGI 2,122 (1,981) 1,366 (4,015) (1,162) ASP 5,478 5,741 (263) (415) (417) ATE 9,959 9,292 667 511 1,304 AEI (401) (493) (223) AET's 1992 results reflect a provision for a restructuring of certain of its business activities.

AG I's 1992 results reflect the commercial operation of two cogeneration facilities previously under construction.

AGI's results for 1991 and 1990 reflect development and administrative charges incurred during construction of cogeneration projects.

AGI's 1991 results also > E n t r K. Y

.\ 0 T E § T 0 C 0 * § 0 L l D A T E D F J *

• A * ' C 1 recognized its share of losses attributable to the reduction of carrying values to net realizable values of certain small cogeneration projects held for sale. AGI's current business is focused on the development, construction and operation of large (greater than 40 MWs) cogeneration projects.

ASP's results reflect generally poor market conditions in commercial real estate. ATE's 1992 results benefitted from lower interest NOTE7. CUMULATIVEPREFERREDSTOCKOFACE ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, two million shares of No Par Preferred Stock and three million shares of Preference Stock, No Par 1992 rates on its revolving credit agreement.

Results of operatl. of AEI above exclude its equity in the results of subsidiary companies.

Net assets of AEI are not meaningful as they primarily represent investments in and intercompany balances with the subsidiary companies and common stock issued on behalf of the consolidated group. Value. Information relating to outstanding shares at December 31 is shown in the table below. 1991 Series Par Value Shares Amount (000) Shares. Amount (000) Current Optional Redemption Price Not Subject to Mandatory Redemption:

4% $100 4.10% ,, 100 4.35% 100 4.35% 100 4.75% 100 5% 100 7.52% 100 Total Subject to Mandatory Redemption:

9.96% $100 $8.25 None $8.53 None $8.20 $7.80 Total None None Less portion due within one year Total 77,000 72,000 15,000 36,000 50,000 50,000 100,000 48,000 65,000 600,000 500,000 700,000 Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of ACE. On August 1 of each year, 8,000 shares of the 9.96% Cumulative Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. ACE redeemed 8,000 shares in each of the years 1992, 1991 and 1990. On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. ACE may redeem not more than an additional 2,500 shares on any sinking fund date without premium. ACE redeemed 2,500 shares in each of the years 1992, 1991and1990.

A t I a n t < < $ 7,700 7,200 1,500 3,600 5,000 5,000 10,000 $ 40,000 $ 4,800 6,500 60,000 50,000 70,000 191,300 1,050 $190,250 77,000 72,000 15,000 36,000 50,000 50,000 100,000 56,000 67,500 600,000 500,000 700,000 $ 7,700 7,200 1,500 3,600 5,000 5,000 10,000 $ 40,000 $ 5,600 6,750 60,000 50,000 70,000 192,350 1,050 $191,300 105.50 101.00 101. 101. 101.0 100.00 101.88 $103.54 105.01 104.11 Beginning November 1, 1994 and annually thereafter, 120,000 shares of the $8.53 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of ACE, not more than an additional 120,000 shares may be redeemed on any sinking fund date without premium. Refunding of this series is restricted prior to November 1, 1993. Beginning August 1, 1996 and annually thereaf. 100,000 shares of the $8.20 No Par Preferred Stock mus redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of ACE, not more than an additional 100,000 shares may be redeemed on any sinking fund date without premium. Other than in >Entrgy O T ES 1'0 C01 §O Ll DATED F I 'A 1 CIAL S T A T EME 'TS nection with the sinking fund, this series is not redeemable prior to August 1, 2000. Beginning May 1, 2001 and annually through 2005, 115,000 shares of $7.80 No Par Preferred Stock must be redeemed. through the operation of a sinking fund at a redemption price of $100 per share. On May 1, 2006, 125,000 shares must be redeemed at $100 per share. ACE has the option to redeem up to an additional 115,000 shares without premium on each May 1 through 2005. Other than in connection with the sinking fund, this series is not redeemable prior to May 1, 2006. Redemption aggregate

$1.05 million in 1993, $13.05 million in each of the years 1994 and 1995 and $23.05 million in each of the years 1996 and 1997. The annual minimum sinking fund provisions of the Cumulative Preferred Stock Subject to Mandatory Cumulative Preferred Stock of ACE is not widely held and generally trades infrequently.

The estimated aggregate fair market value at December 31, 1992 of ACE's Cumulative Preferred Stock was approximately

$229 million. This fair market value determination is based on actual trades of certain Series of ACE's Preferred Stock on or nearest to December 31, 1992. Fair market value of other Series of ACE's Preferred Stock is based on actual trades of preferred stock of other companies with similar credit quality, coupon rates and maturities.

NOTES. LONG TERM DEBT Series Long term debt of ACE consists of the following:

First Mortgage Bonds: l/2% 0 8% 7.52% Medium Term Notes 7.54% Medium Term Notes 87/s% 8% 7 1/2% 7 3/.% 7.97% Medium Term Notes 7.98% Medium Term Notes 7%% Pollution Control 6%% Pollution Control 10 1/2% Pollution Control Series B 7%% Pollution Control Series A 10 1/2% Pollution Control Series C 8%% 8 1/.% Pollution Control Series A 911.% 6.80% Pollution Control Series A Total Debentures:

S11.% Maturity Date July 1, 1992 March 1, 1993 February 1, 1996 November 1, 1996 May 19, 1999 May 19, 1999 September 1, 2000 May 1, 2001 April 1, 2002 June 1, 2003 Mayl9, 2004 Mayl9, 2004 January 1, 2005 December 1, 2006 July 15, 2012 April 15, 2014 July 15, 2014 Mayl, 2016 July 15, 2017 October 1, 2019 March 1, 2021 $ December 31 1992 1991 (000) $ 10,350 9,540 9,540 9,980 9,980 95,000 95,000 26,000 4,000 19,000 19,000 27,000 27,000 20,000 20,000 29,976 29,976 10,500 19,500 6,500 6,500 2,500 2,500 850 850 18,200 18,200 23,150 23,150 125,000 125,000 4,400 4,400 135,000 135,000 38865 38 8QL_ 624961 575 311 2,267 2,267 2,619 2,619 February 1, 1996 Mayl, 1998

---

al ---------amortized Premium and Discount-Net

---

Total Long Term Debt of ACE Long Term Debt of Other Subsidiaries Less portion due within one year Total Long Term Debt A t I

• n t i c < >E n t r g y 4,886 4,886 (4,039} (4,300) 625,808 575,897 25,128 39,100 19,356 49,450 $631,580 $565,547

*'\".ti "' /" f < I c t , , , , * ' *

• In May 1992, ACE issued and sold through its agents $60 million of First Mortgage Bonds, Designated Secured Medium Term Notes (MTNs) Series A, in two separate maturities, with $30 million principal amount maturing in May 1999 and $30 million principal amount maturing in May 2004. The Series A MTNs have a weighted average interest rate of7.75%. Sinking fund deposits are required for retirement of the 5'1.% Debentures on February 1 annually through 1995 and for the 7'1.% Debentures on May 1 annually through 1997 in amounts in each case sufficient to redeem $100,000 principal amount. ACE may, at its option, redeem an additional

$100,000 annually in each case. Through December 31, 1992, ACE acquired and canceled $533,000 and $381,000 principal amount of the 5'1.% and 7'/.% Debentures, tively, to satisfy its requirements for 1993 and subsequent years. Certain series of First Mortgage Bonds contain provisions for deposits of cash or certification of bondable property currently amounting to $250,000, which ACE has elected to satisfy through property additions.

Additional sinking fund requirements are as follows: Series Beginning Date 6'1.% Pollution Control Series Due 2006 December 1, 1997 7'/,% Pollution Control Series Due 2005 January 1, 2000 Annual Sinking Fund $ 75,000 500,000 Long term deb t of other subsidiaries consists primarily of debt of ATE of $23.9 million. ATE has a revolving credit and term loan agreement which provides for borrowings of up to $35 million during successive revolving credit and term loan periods. At ATE's request, this commitment was reduced from $70 million in 1992. Borrowings ou t standing under this agreement at December 31, 1992 were $8.9 million. In accordance with provisions of the agreement, the expiration of the revolving credit period was extended from A t I a n t i c < June 1, 1992 to June 1, 1993. Interest rates on borrowings. determined with reference to periodic pricing options available under the facility. Interest rates on borrowings outstanding in 1992 ranged from. approximately

3. 7% to 6.4%. In December 1992, ATE privately placed $15 million principal amount of 7.44% Senior Notes due 1999. Proceeds were used to reduce borrowings outstanding under the revolving credit and term loan agreement.

The aggregate amount of scheduled debt maturities, in addition to sinking fund requirements, of ACE and ATE long term debt outstanding at December 31, 1992 are $18.44 million in 1993 and $107.247 million in 1996. No long term debt of ACE and ATE currently outstanding matures in 1994, 1995 and 1997. In 1993, $916 thousand of outs t anding debt of another of the subsidiary companies matures. ACE's long term debt securities are no t widely held and generally trade infrequently.

The estimated aggregate fair market value of these securities on December 31, 1992 was approximately

$672 million, based on actual trades of ACE's long term debt securities that occurred on or nearest to December 31, 1992. Due to the short term nature of the revolving credit facility and the recency of the senior notes, the carrying values of ATE's long term debt approximate their fair market values at December 31, 1992. In early 1993, ACE issued and sold through its age $144 million principal amount of Series B MTNs interest rates that vary from 6.35% to 7.20% and w1 maturities that vary from 1998 to 2004. The Series B MTNs have a weighted average interest rate of 6. 77%. The proceeds will be applied, together with other funds, to the redemption of ACE's First Mortgage Bonds, $95 million principal amount of 8% Series due November 1, 1996, $19 million principal amount of 8 7/s% Series due September 1, 2000 and $27 million principal amount of 8% Series due 2001 at redemption prices of 100.91 %, 102.47% and 102.53%, respectively, t ogether with accrued interest to March 15, 1993, the date of redemption. * >E n t r g y

'OTES TO CO '§OL I DATED FI.'A.'CI L § T TEilE 'T§ SHORT TERM DEBT As of December 31, 1992, ACE had available for use bank lines of credit of $150 million. ACE is charged commitment fees, which are not significant, for these available credit lines. As of December 31, 1992, ACE had no compensating (000) Commercial Paper Notes Payable to Banks Maximum amount of total short term debt at any month end: Commercial Paper otes Payable to Banks balance requirements.

Short term debt outstanding at December 31, 1992, 1991 and 1990 consisted of ACE borrowings of: 1992 14,600 $107,400 14,600 1991 $20,600 $82,700 1990 $43,950 $46,850 Average amounts 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 NOTElO. COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM ACE's cash construction expenditures for 1993 are estimated to be approximately

$142.5 million. Current commitments for the construction of major production and transmission facilities approximate

$99.9 million, of which it is estimated approximately

$44.8 million will be expended in 1993. These amounts exclude AFDC and customer contributions.

INSURANCE PROGRAMS ACE is a member of certain insurance programs that provide coverage for decontamination and 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 $2.59 billion per site under these programs.

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

Under the property and replacement wer insurance programs, ACE could be assessed rospective premiums in the event the insurers' losses exceed their reserves.

As of December 31, 1992, the maximum amount of retrospective premiums ACE could be A I I a n I i c < s 31,567 2,785 4.0% 3.4% $26,802 6.6% $16,979 8.1% assessed for losses during the current policy year was $4.69 million under these programs.

The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson Amendments Act of 1988, govern liability and indemnification for nuclear incidents.

All nuclear facilities could be assessed, after exhaustion of private insurance, up to $66.15 million each, payable at $10 million per year, per reactor and per incident.

Based on its ownership share of nuclear facilities, ACE could be assessed up to $23 million per incident.

This amount would be payable at $3.48 million per year, per incident.

ENERGY AND CAPACITY ARRANGEMENTS Utility ACE has an arrangement to purchase 125 MWs of capacity and energy from PP&L through September 30, 2000. Costs of the contract, exclusive of energy, are charged to Purchased Capacity on the Consolidated Statement of Income and totaled $25.l million, $28.7 million and $25.8 million in 1992, 1991 and 1990, respectively.

The cost of energy associated with the purchase amounted to $13.4 million, $8.6 million and $6. 7 million, respectively.

Estimated costs, exclusive of energy, are expected to be $24 million, $25 >Entrgy

T O CO '§O L 1DA T ED FJ,JA,'C l AL §T T E ME;\f T§ million, $27 million, $28 million and $29 million in the years 1993-1997, respectively, and aggregate 90 million thereafter.

These amounts include recovery of previously deferred costs. ACE has an arrangement to purchase 200 MWs of capacity and energy from PE through May 31, 1994. Costs of the contract, exclusive of energy, are charged to Purchased Capacity and totaled $52.5 million, $48.2 million and $27.5 million in 1992, 1991 and 1990, respectively.

The cost of energy associated with the purchase amounted to $19.2 million, $22.6 million and $13.7 million, respectively.

ACE is committed to minimum capacity charges of $56 million and $24 million in 1993 and 1994, respectively.

The minimum costs are subject to annual adjustments under certain conditions.

ACE periodically enters into arrangements with certain other electric utilities for the purchase of short term generating capacity, energy and transmission capacity on an as-needed basis, which are utilized to the extent they are economic and available.

ACE is a member of the Pennsylvania-New Maryland Interconnection (PJM), an integrated power pool, that is connected with other utilities for the interchange of energy on an as-needed and as-available basis. ACE is required to plan for reserve capacity based on aggregate PJM requirements allocated to member companies.

ACE has satisfied its current reserve requirements.

ACE also has an interchange agreement with the City of Vineland, New Jersey, which operates a municipal utility located in ACE's service territory.

The cost of purchases incurred through interchange agreements are reported as Energy expense on the Consolidated Statement of Income and totaled $9.4 million, $11.3 million and $28.5 million in 1992, 1991 and 1990, respectively. Nonutility ACE has currently contracted, and received BRC approval, to purchase a total of 569 MWs of energy and capacity from nonutility sources, primarily cogenerators.

Two projects totaling 181 MWs are currently operational.

The remaining two projects, providing 388 MWs, are expected to be in operation beginning in mid-1994.

Based on the terms and conditions of the existing agreements, ACE is obligated to construct transmission facilities related to these projects.

The cost of the transmission facilities is to be shared by ACE and the nonutility producers, with ACE's portion of the cost approximating

$13 million. Certain specified minimum amounts of energy and capacity are to be purchased annually, subject to adjustment for actual performance levels achieved A t I a n t i ' < by these facilities.

Purchases of energy and capacity in 1. and 1991 from nonutility producers amounted to $52.0

• million and $4.3 million, respectively.

ENVJRONMENTALMATIERS The provisions of Title IV of the Clean Air Act Amendments of 1990 (CAAA) will require, among other things, phased reductions of sulfur dioxide (S0 2) emissions by ten million tons per year, and a limit on S0 2 emissions nationwide by the year 2000, and reductions in emissions of nitrogen oxides (NOx) by approximately two million tons per year. ACE's wholly-owned B.L. England Units 1 and 2 and its jointly-owned Conemaugh Station are affected during Phase I (1995) and all of ACE's other fossil-fuel steam generating units are affected by Phase II (2000) of the CAAA. ACE is installing flue gas desulfurization equipment (scrubber) on B.L. England Unit 2 costing approximately

$75 million. By scrubbing B.L. England Unit 2, Phase I S0 2 emission requirements are met for both units. Construction began in 1992 and is scheduled for completion in early 1995. The Conemaugh owners have elected to install scrubbers on Conemaugh Units 1 and 2, with ACE's 3.83% share of the total cost estimated to be $14 million. Construction for Conemaugh Unit 1 is to be completed in 1994, and f; Conemaugh Unit 2 in 1995. The jointly-owned Keyst Station is impacted by the S0 2 and NOx provisions Title IV of the CAAA during Phase II, and the Keystone owners are studying various methods of compliance.

In addition, certain power purchase arrangements will be affected by the CAAA, in amounts that are not presently determinable.

Federal and state legislation authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present danger from releases of hazardous substances.

The various statutes impose joint and several liability without regard to fault for certain investigative and cleanup costs for all potentially responsible parties. ACE has received notification with respect to certain sites as one of a number of alleged responsible parties for cleanup and remedial actions. The total amount of cleanup and remedial measures associated with these sites as claimed by the authorities for all defendants is currently estimated to be $105 million. ACE believes that primary responsibility for the claims rests with other parties and its share, if any, of the claims would not be significant.

ACE plans to pursue these matters aggressively.

At this time, ACE cannot predict the outcome of these matters. >E n t r g y

• T 0 T E § T 0 c 0 s 0 L 1 D A T E D F J 'CIAL ST TE.IE 'T§ .lie concern regarding the possible health effects due to electric and magnetic fields (EMF) is an emerging national health issue, with some states settings limits on EMF. The outcome of EMF study and/or regulations and public cerns regarding EMF could affect ACE's design and location of future electric power lines and facilities and the costs thereo£ Such effects, if any, are not presently determinable.

OTHER In 1990, the New Jersey Department of Environmental Protection and Energy (DEPE) issued to PS a revised Draft Permit for surface water discharges for Salem Station. PS is the operator of the station, in which ACE has a 7.41 % ownership interest. The Draft Permit contained stringent terms and conditions, and, if adopted as proposed, could require the construction of cooling towers and the immediate shutdown of the two generating units for up to a four-year period pending this construction.

Public hearings on the Draft Permit have been held and PS has filed written comments and demonstrations, which PS believes establish its position that cooling towers are not required.

PS estimates that if construction of cooling towers is necessary, under the most adverse scenario, the costs of construction are estimated to be $627 million (in 1990 dollars), of which ACE's share *cl be 7.41%. Replacement power costs during such outage would amount to approximately

$25 million per year for ACE. In addition, a permanent derating of 5% of the station capacity would also occur. ACE has been advised that PS is discussing a proposal with the DEPE that would permit Salem to continue to operate without cooling towers and would require PS to make certain plant modifications and to take certain other actions to enhance the ecology of the affected water body. Any such proposal would be required to be published for public comment before it could be mented. Costs of the proposal would not be material.

The outcome of this matter cannot be predicted.

ACE is subject to a performance standard for all of its jointly-owned nuclear units. This standard is used by the BRC in determining recovery of replacement energy costs. The standard establishes a target aggregate capacity factor within a zone of reasonable performance to be achieved by the units. Performance outside of the zone results in penalties or rewards. Any penalties incurred would not be permitted to recovered from customers and would be charged against mcome. For 1992, the aggregate capacity factor of ACE's nuclear units was below t he minimum target factor principally due to the outage of Unit 2 at the Salem Nuclear Generating Station, as discussed below. Proceeds from replacement energy insurance coverage associated with the 92 Salem outage were allocated to customers and are ected to mitigate any penalty incurred.

Any penalty incurred for 1992 is not expected to be significant.

ACE cannot predict the rate treatment that will ultimately result regarding the nuclear performance standard for 1992. An equipment failure in the non-nuclear portion of the plant caused severe damage to Salem Unit 2 resulting in that unit's shutdown in November 1991 with no release of radiation. The unit returned to service in May 1992. Substantially all of ACE's share of the repair costs, estimated to be between $5 million and $6 million, was covered by property insurance.

To date, ACE has received $3.l million for its share of claims submitted under the property insurance policy. ACE incurred replacement energy costs of approximately

$2.4 million during this outage. Of this amount, ACE received proceeds of $1.3 million from replacement energy insurance, after application of an initial 21-week policy deductible period. ACE and the other nonoperating co-owners of the Peach Bottom Atomic Power Station reached a settlement with PE ' the operator of the station, in connection with litigation regarding the Nuclear Regulatory Commission shutdown of the station from March 1987 through October 1989. According to the terms of the agreement, ACE received $18.5 million in October 1992 as its share of the settlement.

Of this amount, approximately

$3 million represents reimbursement le?al fees previously incurred and expensed during the lit1gat10n, and t he remaining settlement proceeds of $15.5 million were a ll ocated 75% to shareholders and 25% to customers.

This allocation reflects the amount of costs borne by each respective group during the station's outage and is subject to further BRC determination.

ACE recorded approximately

$9.7 million, which is net of related Federal income taxes of approximately

$4.9 million, as Other Income during March 1992, and $3.8 million as a liability to reimburse customers through the LECs. AGI through its subsidiaries has partnership interests in common with affiliates of Columbia Gas System, Inc. (Columbia) in certain cogeneration projects.

In July 1991, Co l umbia filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code. At December 31, 1992, Columbia had not yet filed a plan of reorganization.

AGI cannot predict what effect, if any, Columbia's situation may have on AGI's interests in the commonly-owned cogeneration projects.

The National Energy Policy Act of 1992 permits the Federal government to assess investor-owned electric utilities that have ownership interests in nuclear generating facilities an amount to fund the decontaminating and ing of three Federally operated nuclear enrichment facilities.

ACE currently estimates that, based on its ownership in five nuclear generating units, its assessment could amount to approximately

$8.5 million. ACE has provided a liability in this amount at December 31, 1992. ACE has also recorded a regulatory asset in the same amount and will seek recovery of such assessments in LEC rates in the same manner as the utility's other fuel costs. The regulatory treatment afforded these costs cannot be predicted at this time. At/ant c<9>Entrgy NOTE§ TO CO 1§0LIDATED F[1JA 'C l A L §T TEME.:TS NOTEll. LEASES ACE leases various types of property and equipment for use in its operations.

Certain of these lease agreements are capital leases consisting of the following at December 31: (000) 1992 1991 Production plant $13,521 $13,521 Less accumulated amortization 8,048 7,308 Net 5,473 6,213 Nuclear fuel 43,831 46,880 Leased property-net

$49,304 $53,093 ACE has a contractual obligation to purchase nuclear fuel for the Salem, Hope Creek and Peach Bottom stations.

The NOTEU. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Qyarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows: Operating Ofnerating Revenues ncome Qyarter (OOO) (000) 1992 1st $197,833 $ 33,290 2nd 187,387 24,949 3rd 236,892 54,118 4th 194,713 24,811 Annual $816,825 $137,168 1991 1st $174,980 $ 22,735 2nd 184,163 25,379 3rd 258,349 69,597 4th 190,883 27,144 Annual $808,374 $144,856 Individual quarters may not add to the total due to rounding, as well as the effect on earnings per share of increasing age number of common shares outstanding.

Operating Revenues for 1991 have been restated for sales for resale as explained in Note 1-0ther. Per share amounts for 1991 have A I I a n I i c < asset and related obligation for the leased fuel are reduced as the fuel is burned, and are increased as additional fuel chases are made. No commitments for future payments beyond satisfaction of the outstanding obligation exist. Operating expenses for 1992, 1991 and 1990 include leased nuclear fuel costs of approximately

$13.5 million, $14.7 million and $15.4 million, respectively, and rentals and lease payments for all other capital and operating leases of $4.8 million, $4.5 million and $4.2 million, respectively.

Future minimum rental payments for all noncancellable lease ments are not significant to ACE's operations.

Rental charges associated with other subsidiary companies are not significant.

• Net Dividends Income Earnings Paid (000) Per Share Per Share $27,937 $ .55 $ .375 10,908 .21 .375 39,570 .76 .38 7,795 .15 .38 $86,210 $1.67 $1.51 $ 8,519 $ .18 $ .37 10,667 .22 .37 54,786 1.08 .375 11,664 .23 .375 $85,635 $1.75 $1.49 been adjusted for the two-for-one Common Stock split in Mayl992. The revenues of ACE are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months. >E n e r g y

-. -.... .._ .... ... -. -----. --,...... --. . ------FL'A.'CI L CO.'DlTIO.r A.'D RESULT§ OF OPER TIO.'§ tlantic Energy, Inc. (the Company) is the parent of a solidated group consisting of the following wholly-owned subsidiaries:

Atlantic City Electric Company (ACE), Atlantic Energy Technology, Inc. (AET), Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP) and ATE Investment, Inc. (ATE). ACE, the primary subsidiary, is an electric utility regulated by the New Jersey Board of Regulatory Commissioners (BRC). ACE has a wholly-owned subsidiary that operates certain generating facilities.

AET invests in companies with energy related products and technologies and owns a majority interest in a company that currently markets geothermal heating and cooling systems. AGI is engaged in the development and operation of cogeneration and alternate energy projects through various partnership arrangements.

ASP owns, ops and manages commercial real estate property.

ATE's current business activities include providing financing and fund management to affiliates and managing its existing folio ofleveraged lease investments.

The Company's business plan has been and will continue to be concentrated on the operations of ACE. imately 95% of consolidated assets belong to the utility. The ompany's nonutility business strategy will continue to be servative.

Future investments will be made only in activi-s that utilize existing management skills and resources, provide acceptable returns in relation to the level of risk and are functionally related to the utility business.

The Company reviews and modifies the business plans and operations of the nonutility companies as necessary to reflect changes in solidated tax position, economic conditions in the service ritory and operating results. NOTE: As a result of the two-for-one Common Stock split on May 14, 1992, all common share outstanding amounts and per common share calculations for prior year periods contained herein have been at!justed accordingly.

Due to Federal regulatory requirements effective January 1, 1992, all prior year operating revenues and certain operating expenses have been restated to reclassify energy sales to other utilities

{sales far resale}. FINANCIAL RESULTS Consolidated operating revenues for the twelve months ended December 31, 1992, 1991 and 1990 were $816.8 million, $808.4 million and $740.9 million, respectively.

The increased revenues in 1992 and 1991 reflect the effect of net rate increases effective in October 1992 and July 1991. The revenue increase in 1991 also is due to increased sales of energy. Consolidated earnings per share for 1992 were $1.67 on net me of $86.2 million, compared with $1. 75 on net income $85.6 million in 1991 and $1.51 on net income of $68.9 million in 1990. A t I a n I i c < In 1992, ACE contributed

$1. 74 to reported consolidated earnings.

Of this, approximately

$.15 came from the settlement of a lawsuit with Philadelphia Electric Company (PE) relating to the shutdown of the Peach Bottom Atomic Power Station several years ago. Additional positive nonrecurring items tributing to earnings were interest associated with tax refunds and payments by independent power producers in connection with contracts for purchased power. Earnings in 1992 were adversely affected by lower energy sales resulting from cooler than normal surnrner weather conditions and decreased sales to Industrial customers.

In 1991, earnings increased primarily due to increased ating revenues offset, in part, by the full year costs associated with the purchase of capacity from PE, and increased Federal income taxes and Preferred Stock dividend requirements.

Nonutility operations resulted in losses for 1992, 1991 and 1990 of $3.4 million, $5.4 million and $498 thousand, net of income tax benefits, respectively, or $.07, $.11 and $.01 per share, respectively.

The loss in 1992 is primarily due to sions made by AET relating to restructuring of certain ness activities.

That loss is offset, in part, by positive earnings of AGI resulting from commercial operation of two of its cogeneration projects previously under construction and tive earnings of ATE resulting from lower interest expense. The loss recognized in 1991 is attributable to AGI which lost $.08 per share, due to writedowns of carrying values to net realizable values of certain cogeneration projects and ment and administrative charges incurred during the struction of cogeneration projects.

In June 1992, the quarterly dividend on Common Stock was increased from $.375 to $.38 per share, or an annual rate of $1.52 per share. The dividend rate was adjusted to reflect the effects of the two-for-one split of Common Stock. Cash dividends paid, adjusted for the stock split, have increased for 40 consecutive years. Information with respect to Common Stock for the period 1990-1992 is as follows: 1992 1991 1990 Dividends Paid Per Share $ 1.51 $ 1.49 $ 1.46 Book Value Per Share $15.17 $14.84 $14.36 Annualized Dividend Yield 6.6% 7.3% 8.7% Return on Average Common Equity 11.1% 12.1% 10.6% Total Return (Dividends paid plus change in share price) 20.2% 29.8% (4.4)% Market to Book Value 152% 138% 118%

Price/Earnings Ratio 14 12 11 Closing Price--ew York Stock Exchange $23.13 $20.50 $16.94 >Entrgy ilA.'AGEJE.'T'§ DI§ClJ§SIO.r A.TD A.'ALY§l§ OF FL', 1'CJAL CO.'DJT J O.r A.'D RESULT§ OF OPER TJO,'§ LIQUIDI1Y AND CAPITAL RESOURCES OVERVIEW The Company commenced its business under a holding company structure on November 1, 1987. Since inception, the Company's cash flows have been dependent on the cash flows of its subsidiaries, primarily ACE. Principal cash inflows of the Company are the payment of dividends to it by ACE and funds provided by the issuance of Common Stock. Principal cash outflows of the Company are investments (capital contributions and advances) in its subsidiaries for their investing activities and the payment of dividends to common shareholders.

Cash invested in ACE is utilized marily for the construction of utility generating, transmission and distribution facilities, redemption and maturity of long and short term debt and redemption of Preferred Stock. Investing activities of the nonutility subsidiaries have been primarily for the development of nonutility power generation projects and energy related technologies.

To facilitate the activities and operations of the sidiaries, separate credit support agreements exist between the Company and ATE and ASP. In addition, agreements between the Company and its subsidiaries provide for tion of tax liabilities and benefits generated by the respective subsidiaries.

In 1992, 1991 and 1990, the Company recorded $78.3 million, $74.1 million and $67.1 million, respectively, in dends from ACE. Other sources of funds available to the Company, which include the issuance of common equity through public offerings, optional cash purchases under the Dividend Reinvestment and Stock Purchase Plan (DRP) and ACE's employee benefit plans, are shown as follows: Issuance of Common Stock Public Offerings Shares issued Proceeds (000) 1992 DRP Optional Cash Purchases Shares issued 719,324 Proceeds (000) $16,034 Employee Benefit Plans Shares issued Proceeds (000) 10,897 $ 259 1991 4,000,000

$67,140 301,272 $ 5,537 12,416 $ 249 1990 172,548 $3,012 101,344 $1,753 Additional common equity is provided by reinvested dends through the DRP. Common shares issued in 1992, 1991 and 1990 were 572,329, 630,410 and 586,650, tively. The Company's current financing plans for 1993-1995 contemplate the issuance of approximately

$46.1 million in additional common equity, to be obtained through the operation of the DRP. In 1992, the Company declared $78.3 million in dividends to its common shareholders, and made $24.2 in capital tributions and advances to its subsidiaries.

In 1991 and 1990, the Company declared $74.1 million and $67.1 million, respectively, in dividends.

In 1991 and 1990, $83.8 million and $10.6 million (net of repayments), respectively, in advances and capital contributions were made to subsidiaries.

ACE Cash construction expenditures for the 1990-1992 period amounted to $469.9 million and included expenditures for two new combustion turbine units and upgrades to existing transmission and distribution facilities.

ACE's current mate of cash construction expenditures for the 1993-1995 period is $408.4 million. These estimated expenditures reflect necessary improvements to transmission and tion facilities and compliance with provisions of the Clean Air Act Amendments of 1990. ACE also utilizes cash for mandatory redemptions of Preferred Stock and maturities of long term debt. Optional redemptions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of funds. Redemptions of Preferred Stock (at par or stated value) and redemptions and maturities of First Mortgage Bonds the period 1990-1992 are shown as follows: Preferred Stock (Series) 9.96% $8.25 Amount (000) First Mortgage Bonds Principal Amount Retired (000) 1992 8,000 2,500 $1,050 $10,350 1991 (number of shares) 8,000 2,500 $1,050 1990 8,000 2,500 $1,050 $49,000 $21,215 In July 1992, $10.350 million principal amount of First Mortgage Bonds, 4 1/2% Series due 1992 matured. In March 1991, $10 million principal amount of First Mortgage Bonds, 4 1/2% Series due 1991 matured. In May 1991, $39 million principal amount of First Mortgage Bonds, 11%% Pollution Control Series A due 2011 were redeemed at a price of 103%. In October 1990, ACE redeemed $21.215 million principal amount of First Mortgage Bonds, ll1/2% Series due 2015 at a redemption price of 108.53%. Scheduled debt maturities and mandatory Preferred Stock sinking fund requirements aggregate

$36.690 million for the years 1993-1995.

>E n ' r g y MA.1 GE.1E.1 T'§ DI§CU§§lO.'

1TALY§J§ OF FL 1 A.'Cl L CO.TDlTIO.'

A.'D RESULT§ OF OPERATION§ ACE's cash flows from operating activities after dividends on Preferred Stock and Common Stock (internal generation) amounted to $116.8 million, or 89.3% of 1992 construction expenditures.

In 1991 and 1990, ACE's internal generation was $85.2 million and $75.2 million, and represented 49.4% and 45.1%, respectively, of construction expenditures.

For the three-year period 1993-1995, ACE's internal eration is expected to average 63% of currently estimated construction expenditures.

However, actual levels may vary within the period based upon specific amounts of tion expenditures and internally generated funds in the vidual years. Through 2000, ACE's cash flows will be positively affected by the recovery of its U nrecovered Purchased Power Costs. ACE expects that such recovery will provide $14 million, $15 million and $15 million in cash flows in 1993, 1994 and 1995, respectively.

On an interim basis, ACE finances that portion of its construction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short term debt consisting of commercial paper and ings from banks. Permanent financing by ACE is undertaken by the issuance of i t s long term debt and Preferred Stock and " m capital contributions by the Company. ACE's nuclear 1 requirements associated with its jointly-owned units e been financed through arrangements with a third party. In 1992, ACE received proceeds of$59.7 million from the issuance of $60 million of First Mortgage Bonds, Designated Secured Medium Term Notes (MTNs) Series A. The MTNs were sold with two separate maturities, with $30 lion maturing in 1999 and the remaining

$30 million ing in 2004. The Series A MT s have a weighted average interest rate of 7.75%. ACE also received $14.6 million in capital contributions from the Company. In 1991, ACE received proceeds of$38.9 million and $69.7 million, respectively, from the issuance of First Mortgage Bonds, 6.80% Pollution Control Bonds Series A of 1991 and the issuance and sale of 700,000 shares of $7.80 No Par Preferred Stock and received $78.1 million in capital contributions from the Company. In 1990, ACE received proceeds of $49.9 million from the issuance and sale of 500,000 shares of $8.20 No Par Preferred Stock and received $13.5 million in capital butions from the Company. In early 1993, ACE received proceeds of $143.2 million from the issuance of $144 million principal amount of its Series B MTNs. The MTNs were sold with four separate maturities:

$50 maturing in 1998; $46 million maturing in 2000; $20 million maturing in 2003 and $28 million . in 2004. The Series B MTNs have a weighted average rest rate of 6.77%. The proceeds will be applied, together th other funds, toward the redemption of $95 million cipal amount of ACE's First Mortgage Bonds, 8% Series due 1996, $19 million principal amount of ACE's First Mortgage Bonds, 8 7/s% Series due 2000 and $27 million principal amount of ACE's First Mortgage Bonds, 8% Series due 2001 at redemption prices of 100. 91%, 102.41 % and 102.53%, respectively, together with accrued interest to March 15, 1993, the date of redemption.

During the three-year period 1993-1995, ACE expects to issue $105 million in new long term debt in addition to the $144 million oflong term debt issued for refunding purposes.

Such debt may include First Mortgage Bonds. During the three-year period 1993-1995, ACE expects to receive $46 million in capital contributions from the Company. ACE's debt securities are rated "NA2" by the major rating agencies and its Preferred Stock is rated "A-'.' In December 1992, a major rating agency lowered its ratings on ACE's senior debt to a rating equivalent to "A" from "A+" and Preferred Stock to "A-" from "A'.' Provisions of ACE's ter, mortgage and debenture agreements can limit, in certain cases, the amount and type of additional financing which may be used. At December 31, 1992, ACE estimates additional funding capacities of $3 73 million of First Mortgage Bonds, or $523 million of Preferred Stock, or $381 million of unsecured debt. These amounts are not necessarily additive.

AET AET was formed in April 1991 to invest in and to manage investments in companies with energy-related products and technologies.

AET has a majority equity interest in a ny that owns a patented technology and has proprietary knowledge relating to alternate energy technologies.

Funding of this investment, through a combination of capi t al butions and loans, totaled $5.9 million at December 31, 1992. AET obtained the funds for its investment activity thro u gh advances from the Company. To date, no cash has been erated from operating activities.

AET has made a provision for the restructuring of its business activities that amounts to a 1992 earnings reduction of $.06 per share. AGI et cash outlays for investments by AGI for the period 1990-1992 totaled $5.3 million. AGI's activities are sented by partnership interests in cogeneration projects.

Such activities have been funded by a combination of capital tributions, loans and advances.

AGI's current business plan for the period 1993-1995 is to invest an addi t ional $2.3 lion in cogeneration, generating and alternate power projects.

Two cogeneration projects became operational in 1992 and are providing positive cash flows. Another project is under construction and is expected to become operational in 1994. ASP ASP's real estate investment at December 31, 1992 is a 280,000 square foot office and warehouse facility in Atlantic County, New Jersey, with a net book value of $13.4 million. Atlantic<

J>E n 'r g y

.1A.'AGE11 E.'T'§ D I§CU§§lO.'

.'D A1'A L Y§J§ OF Approximately 56% of the office space is leased to ACE. As of December 31, 1992, ASP's investment has been funded by capital contributions from the Company and borrowings under a loan agreement with ATE. ASP's current agreement with ATE provides for the repayment of such borrowing s on or before Dec em ber 31, 1993, but this date may be extended.

ASP's cash flows from operating activities are principally affected by rental income. ASP estimates that its business activities in the 1993-1995 period will be limited to the opment of the existing property and that additional ments will not be significant.

ATE A TE has invested in leveraged leases of three commercial aircraft and two containerships.

ATE has loans outstanding to ASP, including unpaid interest, which totaled $8.4 million at December 31, 1992. At December 31, 1992, ATE has obtained funds for its business activities and loans to ASP through capital contributions and advances of $17.7 million from the Company. Funds also have been provided by a revolving credit and term loan facility.

In December 1992, ATE privately placed $15 million principal amount of7.44% Senior Notes due 1999. Proceeds were used to reduce rowings outstanding under the revolving credit and term loan facility.

At December 31, 1992, borrowings outstanding under this facility totaled $8.9 million. Future investments by ATE may be undertaken after consideration of the Company's consolidated tax position.

ATE's cash flows from operations are expected to continue to be provided from lease rental receipts and realization of existing tax benefits.

RESULTS OF OPERATIONS Operating results are dependent upon the performance of the subsidiaries, primarily ACE. Since ACE is the principal subsidiary within the consolidated group, the operating results presented in the Consolidated Statement oflncome are those of ACE, after elimination of transactions among members of the consolidated group. Results of the nonutility companies are reported in Other Income. .'[)RESULT§ OF OPER TIO.'§ I.II 1.11 Z.14 O* 88 89 90 81 92 (times coverage)

ATLANTIC ELECTRIC Pre-Tax Interest Coverage Ratio L71 This ratio measures the ability of Atlantic Electric to meet its interest payments to creditors.

It is the number of times that interest charges are "covered" by earnings before the payment ofincome taxes. For an"/'.:.'

rated utility, pre-tax coverage should be between 2.5 and 4.0 times. To calculate the coverage ratio, net income is adjusted for certain amounts and then divided by interest charges. >E n t r g y 10. 11.1 l7 11 u u 4* O* 88 89 90 81 82 (in cents) ATLANTIC ELECTRIC Average Booked Revenue Per Kilowatt-Hour This represents the average amount of revenue recorded for each kilowatt-hour sold. It is calculated by dividing Atlantic Electric's revenue from kilowatt-hour sales by the number of kilowatt-hours sold.

• FL'A.'ClAL CO.'DlTlO:

A. D RE§lJLT§ OF OPERATI01'§ 300. lU 51.1 250. rw m.1 200* VJ 15.1 117J 171l !U 150* 151.J 114.5 115.4 100* 14.5 7U JU so. 88 88 90 81 92

• n millions of dollars) ATLANTIC ENERGY Cash Requirements and Internal Generation of Funds *CO STRUCTIO &OTHER *MATURITIES, RETIREMENTS

& SI IG G FUNDS *INTERNAL CASH GENERATIO This compares the amount of cash expenditures for construction and other capital needs to the amount of cash that is generated internally from the Company's operations after the payment of dividends to shareholders.

The difference between the amount of cash that is required and the amount of cash that is generated internally is the amount of funds that will have to be raised in the capital markets. 100* 41 I 1 31 4Z 41 80. 60* 14 11 11 41 47 44 44 40* 20. 88 89 90 91 82 (in percent) ATLANTIC ENERGY Year-End Capitalization

• COMMON EQUITY

• PREFERRED STOCK *LONG TERM DEBT *SHORT TERM DEBT 1 31 14 47 Atlantic Energy's capitalization is the relative proportion of equity funds provided by its owners, common and preferred shareholders, and borrowed funds provided by creditors, holders of short and long term debt securities.

It is calculated by dividing the dollar amount of each class of security by the total amount of capitalization.

A I I a n I i c < REVENUES Operating Revenues-Electric increased 1.0% and 9.1 % in 1992 and 1991, respectively. Components of the overall changes are shown as follows: (million s) 1992 1991 Base Revenues s 11.0 $ 43.0 Levelized Energy Clauses 23.0 (5.9) Kilowatt-hour Sales (28.7} 17.1 Unbilled Revenues (2.o) 7.3 Sales for Resale 5.5 6.3 Other (0.3} (0.3) Total s 8.5 $ 67.5 Base Revenues increased in 1992 as a result of a $12.946 lion base rate increase effective on October 20, 1992 and a $50.0 million base rate increase effective July 3, 1991. Base Revenues increased in 1991 due to the July 1991 increase and a $41.6 million base rate increase effective June 1990. Levelized Energy Clause (LEC) revenues increased in 1992 as a result of the net effects of an $8.484 million decrease effective October 20, 1992 and a $21.3 million LEC increase effective June 1991. LEC revenues decreased in 1991 as a result of the net effects of the June 1991 LEC rate increase and the impact of a $35.8 million LEC rate reduction tive June 1990. Changes in kilowatt-hour sales are discussed under "Sales." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 4.4% and 5.2% in revenues per kilowatt-hour in 1992 and 1991, respectively.

Changes in operating revenues in the future will result from changes in customer rates, energy consumption and eral economic conditions in the service area, as well as the impacts ofload management and conservation programs tuted by ACE. ACE's revenues could also be affected by the loss of sales through cogeneration and increasing tion in the generation of electricity by utility and nonutility sources. >En , , g y SALES Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions.

Energy sales statistics, stated as percentage changes from the previous year, are shown as follows: 1992 1991 C u s t o m e r Avg Avg# Avg Avg# C lass Sales Use ofCusr Sales Use ofCust Residential (2.8)% (3.7)% 0.9% 3.1% 2.3% 0.8% Commercial (1.5) {3.2) 1.8 2.8 1.1 1.6 Industrial (10.2) (9.4) (0.8) (0.6) (0.2) (0.4) Other (0.3) (0.3) (0.3) 2.2 (2.4) Total (3.5) (4.5) 1.0 2.3 1.4 0.9 In 1992, total kilowatt-hour sales declined 3.5% primarily due to lower sales to Industrial customers.

In the last 15 months, two industrial customers that had received primary service from ACE now have their energy supplied by tility sources. Energy sales in 1992 were also affected by milder weather in both the heating and cooling seasons. Total energy consumption was affected by a significant decline in sales to Residential and Commercial customers in July and August of 1992 compared to the same months in 1991 when extraordinarily hot weather was experienced.

In 1991, the increase in total kilowatt-hour sales resulted from greater average use by Residential and Commercial customers primarily as a result of the unusually hot summer weather. ACE is experiencing the effects of legislated competition and structural changes in the electric utility industry.

In October 1991, ACE's then largest industrial customer began self-generating its principal elec t ric needs. In Marc h 1992, another l arge industrial customer of ACE began receiving primary service from a nonutility source. ACE expects that by 1995 two more exis t ing customers will receive primary service from nonutility sources. In 1992, these two existing customers accounted for approximately 12% of Industrial kilowatt-hour sales. C O ST S AND EXPENSES Total Operating Expenses increased 2.4% and 7.7% in 1992 and 1991, respectively.

Included in these expenses are the costs of energy, purchased capacity, operations, maintenance, depreciation and t axes. Energy and Purchased Capacity expenses in all periods presented have been impacted by the Federal regulatory requirement effective January 1, 1992 to classify amounts associated with sales of energy and capacity to other utilities (sales for resale) as revenues.

This is a change from the prior practice of netting these amounts against expenses.

et income was not affected by this change. A t I a n I c <

• Energy expense reflects the amount of energy needed to meet load requirements, as well as the various fuel and chased energy sources used and operation of the LECs. Changes in costs reflect the varying availability of low-cost generation from owned and purchased energy sources and in the unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the Pennsylvania

-New Jersey-Maryland Interconnection.

The cost of energy is recovered from customers principally through the operation of the LECs. Earnings are not ed by Energy expense because these costs are adjusted to match the associated LEC revenues.

In any period, the actual amount of LEC revenue recovered from customers will be greater or less than the actual amount of energy cost incurred in that period. Such respective overrecovery or underrecovery of energy costs is recorded on the Consolidated Balance Sheet as a liability or an asset as appropriate.

Amounts in the balance sheet are recognized in the Consolidated Statement oflncome within Energy expense during the period in which they are subsequently recovered through the LECs. ACE was overrecovered by $8.1 million and $24.6 million at December 31, 1992 and 1991, respectively.

The 1991 recovery balance excludes $10.4 million in replacement ene gy costs rela t ing to a 1984 outage at the Salem Nucl Generating Station. During 1992, the BRC authorized A C to recognize the recovery of these costs through the LECs. Energy expense consists of the following:

(000) 1992 1991 1990 Owned Fuel $ 77,337 $ 93,081 $ 90,305 Purchased Fuel 80,960 64,023 44,535 Interchanged 10,776 12,688 30,567 Deferred Energy (7,939) 13,180 20,136 Energy Expense $161,134 $ 182,972 $185,543 In 1992, Energy expense decreased

11. 9% because energy revenues collected from customers during the period were less than energy costs incurred by ACE resulting in a tion of previously deferred energy costs. Production-related energy costs (owned and purchased fuel and interchanged) for 1992 were slightly less than those in 1991 due to a decrease in net generation.

Average unit cost for energy in 1992 increased to 1.80 cents per kilowa tt-hour compared to 1.78 cents per kilowatt-hour in 1991. The increase in the per unit cost is a result of increased amounts of higher cost gy from nonutility sources and decreased supply oflower cost nuclear energy. Energy expense for 1991 decreased 1.4% marily due to a reduced level of energy costs deferred duri the year. The decrease was partially offset by increased p duction-related energy costs associated with a 3.4% increa >E n t r g y MA JAGEMEN'f'§ DI§CU§§J O A IJD ANALY§J§ OF . -'::..-

-' . ' ; -... ;.. ' m net generation.

The 1991 average unit cost for energy of 1.78 cents per kilowatt-hour decreased from 1.85 cents per kilowatt-hour in 1990 primarily due to the availability of lower cost energy associated with the PE arrangement ning in June 1990. Purchased Capacity expense reflects entitlements to ating capacity owned by others. Purchased Capacity expense increased 30.1% in 1992 primarily due to capacity supplied by two nonutility power producers beginning in September 1991 and March 1992. Purchased Capacity expense increased in 1991 by 38.3% a result of the PE arrangement.

Excluding the effects of certain regulatory matters, Operations expenses increased 2.8% in 1992 primarily due to nuclear decommissioning expenses previously classified as depreciation expense, in accordance with BRC requirements.

Operations expenses in 1991 increased 8.2%, excluding the effects of certain regulatory matters, due to nuclear missioning charges, increased expenses associated with ACE's marketing efforts and expenses incurred for regulatory proceedings during the year. Maintenance expense decreased 4.1% and 0.7% in 1992 and 1991, respectively, due to the scheduling of maintenance projects.

Various cost contain-ent programs have been successful in controlling the wth of ACE's operation and maintenance costs. Depreciation and Amortization expense increased 5 .1 % and 6.2% in 1992 and 1991, respectively, due to net increases in ACE's depreciable plant in service in each of these years. The method of computing Gross Receipts & Franchise Taxes (GR&FT) was changed by legislation in 1992 to a unit tax that is based on kilowatt-hours sold during the year. In prior years, GR&FT was based on revenues collected from customers.

GR&FT increased in 1992 and 1991 by 10.2% and 1. 9%, respectively.

The increase in 1992 reflects the accrual of additional GR&FT liabilities, incurred as a result of changes in G R&FT legislation, that are currently being recovered from customers.

Federal Income Taxes increased 2.5% and 34.7% in 1992 a nd 1991, respectively, due to an increased level of taxable income. Changes in Federal Income Taxes are detailed in Note 2 of the Notes to Consolidated Financial Statements.

Interest on Long Term Debt increased 3.3% in 1992 reflecting the net effects of the issuance of $60 million of MTNs in May 1992, with a weighted average interest rate of 7.75%, and the maturity of $10.35 million principal amount of First Mortgage Bonds, 4 Y.i% Series due 1992 in July 1992. Interest on Long Term Debt decreased 5.8% in 1991 as a result of various redemptions and maturities of certain series First Mortgage Bonds having higher average rates than long term debt issued in 1991. In March 1991, ACE issued $38.865 million principal amount of its First A t I a n t i c < Mortgage Bonds, 6.80% Pollution Control Series A due 2021. In May 1991, ACE redeemed $39 million principal amount of First Mortgage Bonds, 11%% Pollution Control Series A due 2011. At December 31, 1992, 1991 and 1990, ACE's embedded cost of long term debt was 8.8%, 8.9% and 9 .2%, respectively. Preferred Stock Dividend Requirements of ACE increased 8.5% and 52.0% in 1992 and 1991, respectively, and reflect the issuance and sale of 700,000 shares of $7.80 No Par Preferred Stock in May 1991. The increased ments were partially offset by the operation of sinking funds of certain series of Preferred Stock. Embedded cost of Preferred Stock as of December 31, 1992, 1991 and 1990 was 7.7%, 7.8% and 7.7%, respectively.

OUTLOOK The nature of the electric utility business is capital intensive.

ACE's ability to generate cash flows from operating activities and its continued access to the capital markets is affected by the timing and adequacy of rate relief, competition and the economic vitality of its service territory.

Net Income of ACE can be affected by the operational performance of nuclear generating facilities.

ACE is subject to a BRC-mandated nuclear unit performance standard.

Under the standard, penalties or rewards are based on the aggregate capacity factor of ACE's five jointly-owned nuclear units. Any penalties incurred would not be permitted to be recovered from customers and would be charged against mcome. Certain accounting standards applicable to the Company have been issued by the Financial Accounting Standards Board but not yet adopted by the Company. One standard, effective in 1993, relates to the accounting for income taxes and is not expected to have a material effect on the results of operations or financial position.

Another standard, also effective in 1993, relates to the accounting for postretirement benefits other than pensions and will significantly increase the annual costs of benefits recognized in future years over the amount now recognized.

ACE currently estimates that the annual cost for such benefits could increase approximately

$6 million to $9 million and result in an unfunded accumulated other postretirement benefit obligation of approximately

$60 million to $70 million at December 31, 1992. ACE expects this impact to be lessened by rate regulation; however, it not predict the ultimate regulatory treatment that will be afforded these costs. A standard effective in 1994 that addresses postemployment benefits is not expected to have a significant impact. >E n e 'g y FlNA 1 ClAL CO. DITIO r AND RESULT§ OF OPERAT I O I§ The financial performance of ACE will be affected in the future by the level of sales of energy and the impacts of lation. The amount earned on capital investments by the ity is subject to general business conditions and regulations.

Other issues which may impact the electric utility business include public health, safety, environmental legislation and competition.

Recent Federal legislation has served to encourage the development of electric generating facilities by nonutilities.

Orte such project, in which AGI is a partner, was placed in service in March 1992 and serves one of ACE's then largest industrial customers.

Two other projects, expected to serve other large industrial customers, are currently underway in ACE's service territory and are expected to be in service by 1995. It is estimated that these two projects, if completed when expected, could displace the equivalent of 2.0% and 1.2% of 1992 total kilowatt-hour sales and revenues, tively. These effects could be offset to some extent by natural growth in the service territory and additional efforts by ACE to reduce the impact of the potential loss of kilowatt-hour sales and revenues.

As a result of economic conditions in the service territory, ACE estimates that the rate of growth of overall sales of energy will be modest. The amount and ing of ACE's projected construction program is premised on the availability of generating capacity from nonutility sources described above. If for any reason these projects are delayed or do not materialize, or if load growth is greater than mated, it may become necessary for ACE to increase its struction expenditures.

Such an increase would put additional burdens on ACE to generate cash from operations and on ACE's financing programs.

The Clean Air Act Amendments (CAAA) enacted in 1990 relating to acid rain and limitations on emissions at electric generating plants will require modifications at certain of ACE's facilities.

Compliance with the CAAA will cause ACE to incur additional operating and/or capital costs. Presently, ACE's construction budget for 1993 through 1995 includes approximately

$80 million related to the cost of compliance.

In addition, certain power purchase ments will be affected by the CAAA, the effects of which are not presently determinable.

The New Jersey Department of Environmental Protection and Energy (DEPE) has proposed modifications to certain environmental permits at Salem. The Salem owners have opposed these modifications that would require the immediate A t I a n t i c < shutdown of both Salem units, the construction of cooling towers at costs which are estimated to be substantial, and extended outages for the design, licensing and construction of such towers. In addition to the cost of construction, ACE would be required to purchase replacement energy, the cost of which could also be substantial.

The retrofitting of cooling towers at Salem would also result in a permanent capacity derating of up to 120 MWs, as well as increased operation and maintenance costs. PS, the operator, has filed written ments and demonstrations which establish its position that cooling towers are not required.

ACE has been advised that PS is discussing a proposal with the DEPE that would permit Salem to continue to operate without cooling towers and would require PS to make certain plant modifications and to take certain other actions to enhance the ecology of the affected water body. Any such proposal would be required to be lished for public comment before it could be implemented.

Costs of the proposal would not be material.

The outcome of this matter cannot be predicted.

The National Energy Policy Act of 1992 was signed into law in October 1992. This legislation includes amendments to the Public Utility Holding Company.J Act of 1935 and ' Public Utility Regulatory Policies Act of 1978. The legi tion creates a new class of independent power produce called exempt wholesale generators and provides for wholesale transmission access, and is expected to increase tion in the area of whole.sale electric generation.

As a result of Federal, state and other initiatives, competition in the energy supply industry has increased significantly in recent years. ACE has been impacted by the loss of two large customers who now obtain their energy supply from nonutility sources. This trend is expected to continue.

ACE's strategy is to keep its customers' rates at a competitive level in order to retain existing customers and to expand the customer base without compromising quality of service and reliability.

ACE's ing plans reflect this strategy.

This strategy will also affect how ACE evaluates issues concerning capacity needs, energy mix and compliance with legislative mandates, such as the CAAA and the National Energy Policy Act of1992. INFLATION Inflation affects the level of operating expenses and also the cost of new utility plant placed in service. Traditionally, the rate making practices that have applied* to ACE have involved the use of historical test years and the actual cost of utility plant. However, the ability to recover increased costs through rates, whether resulting from inflation or otherwise, depe upon the frequency, timing and results of rate case decisio >E n c r g y I.I U S* 4* u u u 3* 2* 1* 0 88 89 90 91 92 percent) TL.A.'llTIC ENERGY Allowance for Funds Used During Construction (AFDC) as a Percent of Net Income Atlantic Energy's net income includes an accounting ance for the utility's cost of borrowed and equity funds u sed for some construction projects.

It is calculated by dividing total AFDC (borrowed

+equity) by net income. Because AFDC represents a noncash addition to net income, it is preferable to maintain a low ratio.

• NONUTILITY PURCHASES

• PURCHASED POWER &INTERCHANGED

• OIL& ATURALGAS

• NUCLEAR *COAL 10* 8* 6* 4* 2* O* 11% 111'11 11% 111'11 m m 54% 88 89 (in billions of kilowatt-hours)

ATLANTIC ELECTRIC Total Sources and Costs of Energy" Ill 11% 90 *Amounts in )Can. prior to 1992 have hccn recalrnlatcd to exclude the effects of sales for resale. 91 1% m In the last .five years, coal and nuclear fuel sources combined have provided on average more than 70% of Atlantic Electric's total energy requirements. onutility purchases are from an independent power producer and a cogeneration facility.

Cost of Energy (in cents per kilowatt-hour) 88 89 90 91 92 COAL 2.09 2.20 2.20 1.99 1.76 NUCLEAR 0.89 0.87 0.83 0.78 0.73 OIL & ATURAL GAS 3.53 3.45 4.17 3.97 3.92 PURCHASED POWER &I TERCHANGED 3.32 3.29 2.45 1.95 1.75 NO UTILITY PURCHASES 3.95 3.62 YEARLY AVERAGE 2.06 2.08 1.85 1.78 1.80 A t I a n t i c < >E r g y

§t;J MA RY F A c A L A D . .. . '" . --..,. . " --" . --.. ... .. . ' . . --.-... -, ' .. * ., * * * * * " * :1. * ' * ..:: ' .; ... -' A tlantic E n ergy, In c. Investor Information Operating Revenues (000) (a) Net Income {000) Average Number of Common Shares Outstanding (000) (b) Earnings per Average Common Share (b) Total Assets (Year-end)

{000} Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year-end)

{000) Capital Lease Obligations (Year-end)

{000} Dividends Declared on Common Stock (b) Dividend Payout Ratio (b) Book Value per Share (Year-end) (b) Price/Earnings Ratio (Year-end) (b) Times Fixed Charges Earned (pre-tax, Atlantic Electric)

Common Shareholders (Year-end)

Employees (Atlantic Electric) (Year-end)

Atlantic City E l ectric Comp any (Principal Subsidiary)

Faci l ities for Service Total Utility Plant (000) Additions to Utility Plant (000) Generating Capacity (Kilowatts) (Year-end) (c) (d) Maximum Utility System Demand (Kilowatts)

Capacity Reserve at Time of Peak (% oflnstalled Generation)

Energy Supply (mwh): Net Generation Purchased and Interchanged Total System Load Electric Sales t o Ul timate C us t o mers (mwh): Residential Commercial Industrial All Others Total (c) R e s i d ential E l ectric Serv i ce (Average per Customer)

Amount of Elec t ricity Used During the Year (kwh) Revenue for a Yea r's Service Revenue per Kilowatt-hour Ultimate C u st o mer D ata (Average)

Residential With Electric Heating Residential Without Electric Heating Total Residential Commercial Industrial All Others Total Ultimate Customers (e) Op erati n g (000) Elect n c Service: Residential Commercial Industrial All Others Total from Electric Service Unbilled Revenues-Net Sales for Resale Other Electric Revenues Total Operating Revenues (a)(e) 1992 $ 816,825 $ 86,210 51,592 s 1.67 $2,220,151 s 842,236 s 49,303 s 1.515 90% s 15.17 14 3.76 46,524 2,023 $2,281,045 s 134,326 2,160,700 1,796,000 16.9% 5,775,098 3,553,247 9,328,345 3,276,330 3,100,132 1,229,211 49,464 7,655,137 8,131 $ 903.91 11.12¢ 82,206 320,744 402,950 51,996 990 524 456,460 $ 364,232 299,866 97,475 10,548 772,121 1,203 35,884 7,723 $ 816,931 1991 $ 808,374 $ 85,635 49,008 $ 1.75 $2,151,416

$ 807,347 $ 53,093 $ 1.495 85% $ 14.84 12 3.68 43,802 2,032 $2,175,601

$ 177,298 2,090,700 1,911,000 52% 6,300,89 1 3,124,024 9,424,915 3,370,327 3,147,318 1,368,329 49,626 7,935,600 8,440 $ 906.66 10.74¢ 81,838 317,486 399,324 51,077 998 524 451,923 $ 362,050 292,349 102,202 10,136 766,737 3,229 30,404 8,112 $ 808,482 1990 $ 740,894 $ 68,879 45,590 $ 1.51 $2,006,010

$ 747,877 $ 57,971 $ 1.47 97% $ 14.36 11 2.94 42,295 2,055 $2,027,138

$ 170,772 1,959,700 1,741,000 10.9% 6,267,559 2,606,067 8,873,626 3,267,606 3,063,069 1,376,423 49,769 7,756,867 8,251 $ 844.37 10.23¢ 81,479 314,529 396,008 50,274 1,002 537 447,821 $ 334,375 271,688 96,766 9,668 712,497 (4,055) 24,115 8,448 $ 741,005 1989 $ 723,216 s 80,964 43,268 $ 1.87 $1,864,461

$ 725,329 $ 33,146 $ 1.425 75% $ 14.27 10 3.19 43,383 2,021 $1,846,122

$ 147,886 1,879,700

1,700,000 9.6% 3,265,918 2,917,162 1,380,832 53,872 7,617,784 8,382 $ 840.34 10.03¢ 80,409 309,245 389,654 49,509 1,008 549 440,720 $ 327,443 256,199 94,634 9,901 18,1 9,76 $ 723,353 (a) Prior year amounts restated to reflect sales of energy and capacity to other utilities (sales fo r resale) as revenues rather than as net expense in accordence with Federal regulatory requirements effective January 1, 1992. (b) Prior year amounts restated to reflect the rwo-for-onc Common Stock split in May 19 92. (c) Excludes capacity allocated to a large industiral custome r. (d) 1 ncludes unit purchases and sales of capacity under contracts with certain other utilities and nonutilities. (e) Includes sales to an affiliate within the At1antic Energy consolidated group. (£) Restated to reflect overrecovered energy costs recognized as energy costs rather than as revenues.

A t I a n t r c < >E n t r g y S T A T S T C A L R E V E W 1 9 9 2 1 9 8 2 * -** -* * * *.., -' -r -* * * , -'*' '; "' ' ' \ -..

• 1. -"'" ; ** .... -* .. .. -* * ' 988 1987 1986 1985 1984 1983 1982 $ 687,335 $ 635,657 $ 604,716 $ 612,035 $ 582,386 $ 526,681 $ 489,415 $ 72,171 $ 73,765 $ 54,946 $ 46,150 $ 56,433 $ 59,717 $ 42,381 39,186 36,622 36,532 36,138 35,162 33,846 30,232 $ 1.84 $ 2.01 $ 1.50 $ 128 $ 1.60 $ 1.76 $ 1.40 Sl,660,286

$1,499,381

$1,401,064

$1,319,027

$1,253,083 Sl,170,993

$1,101,318 s 594,461 522,815 $ 534,822 s 521,612 $ 473,462 $ 459,366 $ 462,650 $ 32,880 $ 37,694 $ 37,603 s 38,857 $ 41,722 $ 39,228 $ 33,178 s 1.37 $ 1.3575 $ 1.305 $ 12775 $ 1225 $ 1.16 $ 1.12 75% 66% 87% 99% 76% 65% 79% $ 13.58 $ 12.86 $ 12.18 $ 11.98 $ 11.95 $ 11.60 $ 11.00 9 8 12 11 8 7 7 3.06 3.68 2.99 3.06 3.62 4.14 2.59 44,473 45,586 47,133 48,635 47,446 48,299 48,790 2,092 2,148 2,168 2,099 2,012 1,995 2,022 $1,712,614 Sl,602,801 Sl,503,010 Sl,438,643

$1,351,392

$1,265,393

$1,186,499

$ 130,281 $ 105,521 $ 109,303 $ 105,213 $ 95,388 s 83,673 $ 126,893 1,807,700 1,660,700 1,660,700 1,605,700 1,594,200 1,594,200 1,531,200 1,636,000 1,609,000 1,459 ,000 1,432,000 1,298,800 1,346,700 1,264,200 9.5% 3.1% 12.1% 10.8% 18.5% 15.5% 17.4% 6,157,938 5,966,600 5,817,254 6,237,724 5,913,196 5,676,118 1,773,837 1,454,491 1,333,174 940,987 1,065,704 966,951 7,931,775 7,421,091 7,150,428 7,178,711 6,978,900 6,643,069 3,213,010 3,040,410 2,839,114 2,638,121 2,646,813 2,545,351 2,415,292 2,741,976 2,592,232 2,401,199 2,298,895 2,150,464 2,019,468 1,894,535 1,339,005 1,323,567 1,222,981 1,204,971 1,197,392 1,225,637 1,218,520 56,289 58,191 58,120 57,685 59,122 60,978 63,770 7,350,280 7,014,400 6,521,414 6,199,672 6,053,791 5,851,434 5,592,117 8,460 8,281 7,982 7,643 7,866 7,715 7,444 $ 838.70 $ 808.14 (f) s 791.09 (f) $ 79929 (f) $ 783.47 $ 713.79 (f) $ 668.52 (f) 9.91¢ 9.76¢ (f) 9.91 ¢ (f) 10.46 ¢ (f) 9.96¢ 925 ¢ (f) 8.98 ¢ (f) 78,805 75,900 72,640 68,871 65,261 62,272 59,319 300,974 291,253 283,062 276,305 271,207 267,642 265,124 379,779 367,153 355,702 345,176 336,468 329,914 324,443 48,398 46,775 45,359 44,256 43,615 43,152 42,885 1,014 1,015 1,022 1,020 1,015 1,021 1,018 552 554 554 554 544 549 627 429,743 415,497 402,637 391,006 381,642 374,636 368,973 $ 318,520 $ 296,712 $ 281,393 $ 275,897 $ 263,612 $ 235,488 $ 216,897 240,890 222,129 214,230 216,052 190,435 169,795 160,837 91,661 84,476 80,037 83,628 79,123 72,633 75,143 9,935 10,199 10,230 10,470 10,405 9,960 9,459 661,006 613,516(£)

585,890 (f) 586,047 (f) 543,575 487 , 876 (f) 462,336 (f)

• 6,716 385 (1,813) 3,076 (1,340) 5 , 671 (6,795) 11,476 12,840 13,045 15,656 32,855 26,130 27,394 8,137 8,916 7,594 7,256 7,296 7,004 6,480 $ 687,335 s 635,657 $ 604,716 $ 612,035 $ 582,386 $ 526,681 $ 489,415 Atlantic< >Energy V E § T 0 R I F 0 R T 0 as of D ecember 3 1 , 19 92 Dividend and share price information have been adjusted to reflect a two-for-one Common Stock split that was rized in March 1992 and effective May 1992. Where should I send inquiries concerning my investment in Atlantic Energy, Inc.? The Company serves as recordkeeping agent, dividend bursing agent and also as Transfer Agent for Common Stock. Correspondence concerning such matters as the replacement of dividend checks or stock certificates, address changes, transfer of Common Stock certificates, Dividend ment and Stock Purchase Plan inquiries or any general mation about the Company should be addressed to: Atlantic Energy, Inc. Investor Records 6801 Black Horse Pike P.O. Box 1334 Pleasantville, New Jersey 08232 Telephone (609) 645-4506 or (609) 645-4507 Ms. S. D. McMillian, Secretary, is the corporate officer responsible for all investor services.

When are dividends paid? The proposed record dates and payable dates for dividends on Common Stock are as follows: Record Dates March 22, 1993 June 21, 1993 September 20, 1993 December 20, 1993 Payable Dates April 15, 1993 July 15, 1993 October 15, 1993 January 17, 1994 The following table indicates dividends paid per share in 1992 and 1991 on Common Stock: 1992 1991 First 01iarter $ .375 $ .37 Second 01iarter .375 .37 Third 01iarter .38 .375 Fourth 01iarter .38 .375 Annual Total $1.51 $1.49 Dividends paid on Common Stock in 1992 and 1991 were fully taxable. Some state and local governments may impose personal property taxes on shares held in certain corporations.

Shareholders residing in those states should consult their tax advisors with regard to personal property tax liability.

Who is the trustee and interest paying agent for Atlantic Electrics bonds and debentures?

First Mortgage Bond recordkeeping and interest disbursing are performed by The Bank of ew York, 101 Barclay Street, New York, New York 10286. Debenture recordkeeping and interest disbursing are performed by First Fidelity Bank, N.A., 765 Broad Street, Newark, New Jersey 07102. A t I a n t c < Whom can I contad regarding the Preferred Stock of Atl . Electric?

Atlantic Electric serves as recordkeeping agent, dividend bursing agent and Transfer Agent for its Preferred Stock. Inquiries regarding such matters can be directed to Investor Records at the address listed. Does the Company have a Dividend Reinvestment and Stock Purchase Plan? Yes. The Plan allows shareholders of record and interested investors 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 or interested investors desiring to enroll in the Plan should contact Investor Records at the address listed. In addition, ers whose stock is held in a brokerage account may be able to participate in the Plan. These shareholders should contact their broker or Investor Records for more information.

Where is the Company's stock listed? Common Stock is listed on the New York, Pacific and Philadelphia Stock Exchanges.

The trading symbol of the Company's Common Stock is ATE; however, newspaper ings generally use AtlEnrg or AtlanEngy.

The high and low sale prices of the Common Stock repo in the Wall Street Journal as New York Stock Exchange-C posite Transactions for the periods indicated were as follows: First 01iarter Second 01iarter Third 01iarter Fourth 01iarter 199 2 1991 High Low High L o w $21.000 $18.000 23.500 20.813 24.625 22.500 23.500 21. 750 $18.063 $16.063 18.563 17.063 19.313 17.250 20.875 19.000 Who are the independent auditors far Atlantic Energy, Inc. ? Deloitte & Touche Certified Public Accountants Two Hilton Court, P.O. Box 319 Parsippany, New Jersey 07054-0319 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: Atlantic Electric Financial Services Department 6801 Black Horse Pike Pleasantville, New Jersey 08232 Telephone (609) 645-4655 or (609) 645-4888 FAX(609)645-4132

>Energy *

/< ears of service} as of December 31 1 9 9 2 OUGIAS HUGGARD (5 9/37) hairman and Chief Executive Officer of Atlantic Energy Director of Atlantic Energy and all subsidiaries Chairman and Chief Executive Officer of Atlantic Electric Mr. Huggard has served as Chairman and Chief Executive Officer since 1990. He was President and Chief Executive Officer from 1985 to 1989. He joined Atlantic Electric in 1955 as an engineer.

JERROLD L.JACOBS (53/3 1) President of Atlantic Energy Director of Atlantic Energy and all subsidiaries President and Chief Operating Officer of Atlantic Electric Mr. Jacobs has served as President of Atlantic Energy and President and Chief Operating Officer of Atlantic Electric since 1990. He was Executive Vice President of Atlantic Electric from 1988 to 1990. He joined Atlantic Electric in 1961 as an engineer.

MEREDITH I. HARIACHER,JR.

(50127) Vice President of Atlantic Energy Director of Atlantic Energy Technology, Atlantic Southern Properties and ATE Investment Senior Vice President-Utility Operations of Atlantic Electric Mr. Harlacher has served as Vice President of Atlantic Energy since 1987 and was named Senior Vice President-Utility Operations of Atlantic Electric in 1991. Prior to that he was Senior Vice President--

orate Planning and Services of Atlantic Electric. He joined tic Electric in 1965 as an engineer.

HENRYK. LEVA.Rl,JR.

(44/21) Vice President of Atlantic Energy Director of all subsidiaries Senior Vice President-Corporate Planning and Services of Atlantic Electric Mr. Levari was named Vice President of Atlantic Energy and Senior Vice President-Corporate Planning and Services of Atlantic Electric in 1991. Prior to that, he served as Atlantic Electric's Vice Power Delivery.

He joined Atlantic Electric in 1971 as an engineer.

JOHN R. LILLY (64/4) Vice President of Atlantic Energy President and Director of Atlantic Southern Properties, Atlantic Generation, Atlantic Energy Technology and ATE Investment Mr. Lilly joined Atlantic Energy in 1988 as Vice President.

He was self-employed as a financial management consultant. Mr. Lilly is an attorney. J.G. SALOMONE (5 2/1 6) Vice President and Treasurer of Atlantic Energy Director of all subsidiaries Senior Vice President-Finance

&Accounting and Treasurer of Atlantic Electric Certified Public Accountant Salomone has served as Vice President and Treasurer of Atlantic since 1987. He has served as Chief Financial and Accounting cer of Atlantic Electric since 1984. He joined Atlantic Electric as Assistant Controller in 1976. A t I a n I c < SABRINA D. McMILLIAN (3717) Secretary of Atlantic Energy Secretary of Atlantic Electric Ms. McMillian was elected Secretary in 1986. She joined *Atlantic Electric in 1985 as Assistant to the Corporate Secretary.

Ms. McMillian is an attorney.

JOHN M. CARDEN (54/25) Vice President-Customer Service of Atlantic Electric Mr. Carden has served as Vice President-Customer Service of Atlantic Electric since 1988. Prior to that, he was Atlantic Electric's Vice President-Administrative Services.

He joined Atlantic Electric in 1967 as an engineer.

THOMAS E. FREEMAN (62/12) Vice President-Human Resources of Atlantic Electric Mr. Freeman has served as Vice President-Human Resources of Atlantic Electric since 1981. He joined Atlantic Electric in 1980 as Manager of Administration. (Retired effective 1/1/92) JAMES J. LEES ( 48/22) Vice President-Marketing and Rates of Atlantic Electric Mr. Lees has served as Vice President-Marketing and Rates of Atlantic Electric since 1989. He was Vice President-Rates of Atlantic Electric from 1987 to 1989. He joined Atlantic Electric in 1970 as an engineer.

J. DAVID McCANN (41/20) Vice President-Power Delivery of Atlantic Electric Mr. McCann was named Vice President-Power Delivery of Atlantic Electric in 1991. Prior to that, he was Vice President, Treasurer and Assistant Secretary of Atlantic Electric from 1985 to 1991. He joined Atlantic Electric in 1972 as an engineer.

HENRYC. SCHWEMM,JR. (51/23) Vice President-Production of Atlantic Electric Mr. Schwemm has served as Vice President-Production of Atlantic Electric since 1980. He joined Atlantic Electric in 1969 as an engineer.

JOHN P. SMALLING (32/2) Vice President and Secretary of Atlantic Southern Properties and Atlantic Energy Technology Secretary of Atlantic Generation and ATE Investment Mr. Smalling was elected to the above positions and has served as Manager of Diversified Activities since joining Atlantic Energy in 1991. He has previously held positions in corporate finance and banking with other corporations.

LOUIS M. WALTERS (40/1 4) Treasurer of ATE Investment, Atlantic Southern Properties and Atlantic Energy Technology Certified Public Accountant Mr. Walters was elected to the above positions and was named General Manager-Treasury and Finance of Atlantic Electric in 1991. Prior to that, he held managerial positions in treasury, taxes and accounting.

He joined Atlantic Electric in 1978 as an accountant. E RNEST L.JOLLY (40/1 2) Vice President-External Affairs of Atlantic Electric Mr. Jolly was named Vice President of External Affairs of Atlantic Electric in 1992. Prior to that, he held Station Manager positions at the Deepwater Generating Station from 1987 to 1992. He joined Atlantic Electric in 1980 as an engineer.

>E n t r g y BOARD OF D I RECTO R S OF as o f D ecem b JOS. MICHAEL GALVIN,JR.

Mr. Galvin, a Director since 1978, is president and chief executive officer of the South Jersey Health Corporation-The Memorial Hospital of Salem County. He is a graduate of the University of Scranton and holds a Master of Business Administration from Xavier University.

Age: 47. Professional Experience:

personnel, health care management.

Committee Chairman:

Personnel.

Committee Membership:

Audit; Energy, Operations

& Research; Pension & Insurance.

GERALD A HALE Mr. Hale, a Director since 1983, is president of Hale Resources, Inc., an investment and management company. He is chairman of Evans Clay Company and a director of New Jersey Manufacturers Insurance Company, New Jersey Business and Industry Association and Strong Systems, Inc. He is a graduate of Western University.

Age: 65. Professional Experience:

industrial minerals, chemicals and fabricated O.E.M. products.

Committee Chairman:

Energy, Operations

& Research.

Committee Membership:

Audit; Corporate Development; Personnel.

MATIHEW HOLDEN, JR. Mr. Holden, a Director since 1981, is the Henry L. and Grace M. Doherty Professor of Government and Foreign Affairs at the University of Virginia.

He is a former commissioner of the Federal Energy Regulatory Commission and the Wisconsin Public Service Commission.

He holds a Doctorate of Political Science from Northwestern University.

Age: 61. Professional Experience: tory affairs, energy consultation, arbitration.

Committee Chairman:

Audit. Committee Membership:

Corporate Development; Pension &Insurance; Personnel.

CYRUS H. HOLLEY Mr. Holley, a Director since 1990, is president of Management Consulting Services.

He was formerly chief operating officer, tive vice president and director of Engelhard Corporation.

He is a graduate of Texas A & M University.

Age: 56. Professional Experience:

industrial minerals, chemicals and precious metals. Committee Membership:

Corporate Development; Energy, Operations

& Research; Finance & Investor Relations; Personnel.

E. DOUGIAS HUGGARD Mr. Huggard, a Director since 1984, was elected Chairman and Chief Executive Officer in 1990, and has been Chief Executive Officer since 1985. He serves as a Director of all of the Company's subsidiaries and has been with the Company for 37 years. He is rently a director of the New Jersey State Chamber of Commerce and the Edison Electric Institute.

He is a former Navy engineering officer and holds a Master of Mechanical Engineering from the University of Delaware.

Age: 59. Professional Experience:

utility operations.

Committee Membership:

Ex-officio member of all committees except Audit and Personnel.

A t I a n I 1 c < TLA 'TlC E 'ERGY, . c . e r 3 1

• 1 9 9 2

• JERROLD L.JACOBS Mr. Jacobs was elected President and a Director of the Company in 1990 and serves as President and Chief Operating Officer of Atlantic Electric.

He is a Director of all of the Company's subsidiaries and has been with the Company for 31 years. He is a graduate of the Newark College of Engineering ( ew Jersey Institute of Technology).

Age: 53. Professional Experience:

utility operations.

• Committee Membership:

Ex-officio member of all committees except Audit and Personnel.

RICHARD B. McGLYNN Mr. McGlynn, Attorney at Law and partner in the law firm of LeBoeuf, Lamb, Leiby & MacRae, has been a Director since 1986. He is a member of the American and New Jersey State Bar Associations, as well as the American Bar Foundation and the American Law Institute.

He is a former commissioner of the New Jersey Board of Public Utilities and a former judge in Essex County, New Jersey. He is a graduate of Rutgers Law School and Princeton University. Age:

54. Professional Experience:

law, utility regulation.

Committee Chairman:

Pension & Insurance. Committee Membership:

Corporate Development; Energy, Operations

& Research; Finance & Investor Relations.

MADELINE H. McWHINNEY Ms. McWhinney, a Director since 1983, is president of Dale, Elliott & Company, management consultants.

She is a trustee of. Charles F. Kettering Foundation, the Institute of Internati Education and the Managers Mutual Funds. She holds a Maste Business Administration from New York University.

Age: 70. Professional Experience:

finance, management.

Committee Chairman:

Finance & Investor Relations.

Committee Membership:

Audit; Energy, Operations

& Research; Pension & Insurance.

BERNARDJ.MORGAN Mr. Morgan, banking industry executive, was elected as a Director in 1988. He is a director of St. Joseph's University.

He is also chairman of the Business Advisory Group of the Greater Philadelphia Girl Scouts. He holds a Master of Business Administration from the Wharton School of the University of Pennsylvania.

Age: 56. Professional Experience:

banking, finance. Committee Chairman:

Corporate Development.

Committee Membership:

Finance & Investor Relations; Pension & Insurance; Personnel.

HAROLD J. RAVECHE Dr. Raveche, who became a Director in 1990, is president of the Stevens Institute of Technology.

He was formerly the Dean of Science of the Rensselaer Polytechnic Institute.

He is a director of National Westminster Bank, both Bancorp and New Jersey; a missioner of the New Jersey Commission on Science and Technology and a member of the Newark International Airport Advisory Committee. He holds a Doctorate of Physical Chemistry from. University of California.

Age: 49. Professional Experience:

hi education, science and technology policy. Committee Membership:

Audit; Corporate Development; Energy, Operations

& Research; Finance & Investor Relations.

>Entrgy WE'D LliKE TO HE R YOUR COMMENT§ ID SUGGESTION§ ON THK§ NNU L REPORT. Please take a few minutes to complete this survey. 0 Which sections of the Annual Report did y ou find mo st u s eful? (select all th a t apply) a) Letter to Shareholders (p. 2) b) News of1992 (p. 4) c) Winning Combinations (pp. 5-15) d) Atlantic E l ectric At-A-G l ance (p. 16) e) Fina n cial S t atemen t s and Notes (pp. 17-51) f) Investor I nforma ti on (p. 52) g) Officers &D irec t ors (p. 53) 8 How would y ou rate the information given in this Annual Report? a) too comp li cated b) just right c) too informal 8 Through our Annual Report and Interim Letters , we provide you with information about five times a year. Would you sa y that this amount of communication is: a) too much b) just righ t c) not enough If y ou'd like more information on Atlantic Electric's product s and s ervice s, call our Selectricity Hotline a t 1-800-221-0520 or :fill o ut thi s ca rd a nd retu r n it to u s. De t ach & Mail Please check your answers below 0 0@0@) 0 CD 8 0@0 8 0@0 If you receive more than one copy of this Annual Report and would like to elimina t e the cate(s ), please comple t e the information a t rig ht. Note: Yo ur account n u mber appears on your proxy card. Additional Comments:

Name (please print) Address Account Number(s)

ZIP "------------------------------------------------------------------------------------------------------------------------------

---

Thank you for your response!

D etach & Mail .. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1 Please send me more information on the products and services featured in this Annual Report. (c h eck b e l ow) 0 B.E.S.T. H omes 0 Nig ht G u ar d L eased L ighti n g 0 G eo the r m al e n e r gy sys t ems Are you an Atlantic Electric customer?

0 Y es (Acco u n t# ONo Name (plea se print) Address City State Teleph o n e (op ti onal) Be s t tim e t o call ZIP BUSINESS REPLY MAIL FIRST CLASS MAJL PERMIT NO. 29 PLEASANTVILLE , NJ POSTAGE WILL BE PAID BY ADDRESSEE ATLANTIC ELECTRIC FINANCIAL SERVICES I B. KAMINSKY. 6801 BLACK HORSE PIKE PLEASANTVILLE NJ 08232-9856 111 *** 1 ** 1 *** 1.1 ** 11 *** 1.11.1 ** 1 ** 1 ** 1.1 ** 11 ** 1 *** 11 BUSINESS REPLY MAIL FIRST CLASS MAJL PERMIT NO. 1000 PLEASANTVILLE , NJ POSTAGE WILL BE PAID BY ADDRESSEE ATLANTIC ELECTRIC MARKETING I]. SHENK 6801 BLACK HORSE PIKE PLEASANTVILLE NJ 08232-9856 111 *** 1 ** 1 *** 1.1 ** 11 *** 1.11.1 ** 1 ** 1 ** 1.1 ** 11 ** 1 *** 11 NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES

• BOARD OF Jos. Michael Galvin, Jr. Gerald A. Hale Matthew Holden, Jr. Cyrus H. Holley Bernard].

Morgan BULK RATE U.S. POSTAGE PAlD PERMIT NO. 11 SOUTH JERSEY NJ 08031