ML18101A643

Atlantic Energy,Inc Annual Rept 1994.

ML18101A643
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1994
From:	Huggard E, Jo Jacobs ATLANTIC ENERGY, INC.
To:
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ML18101A636	List: ML18101A635 ML18101A637 ML18101A638 ML18101A639 ML18101A643
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NUDOCS 9504180357
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IN 1994 ATLANTIC ENERGY SET IN MOTION A BOLD STRATEGIC PLAN THAT WILL TRANSFORM THE VERY NATURE OF OUR CORPORATION.

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

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

'SHAPING THE FUTURE 12 .. n II the right elements are in place to transform Atlantic Energy into the kind n of company that will win in the competitive energy industry.

A dynamic organ i zation is developing , in which the skills and creativity of all our ees are focused on building an endless stream of opportunities to satisfy our ers' needs. We're capitalizing on the new freedom in the competitive market, and we are venturing far beyond our traditional role of selling generic kilowatt-hours.

There are tremendous opportunities for growth in the non-regulated side of our business , and we're investing in ventures that will deliver value to our tomers as well as our shareholders. We haven't overlooked the fact that price wins the day in the competitive world and our people are finding innovative ways to use our generation and sion investments to deliver competitively priced power to our customers.

Underpinning these initiatives are strategies to foster a business and regulatory community that will support our growth and join us in our work to shape a new energy marketplace. Transformation i s just the fir s t step in our mi ss ion. Strong competitor s never re s t. They're alway s finding ways to improve their products and market share. The Atlantic Energy we're building will have the momentum and ability to respond quickly to the ever-changing demands of our markets. We're proud of how far we've come over the last year , and we like the way our future is taking shape. 11( <T ,,,

ome partic i pants in t he e l ect r ic uti li ty industry view t h e changes taking place i n our business as threatening.

We fi n d these changes s exhilarating and are busy discovering new opportun i ties for growth they've created. The aggressive business agenda we've set will be supported by a n eq u a ll y progressive pl a n to shape new reg u latory , governmenta l and financ i al enviro n ments. We've esta bl is h ed o u rse l ves as a n advocate for constructive change in our industry.

We're s h ari n g our visio n for the new ind u stry a nd offer in g so l ut i o n s to get u s th ere. We saw some prom i sing res ul ts i n 1 994. Two i nn ovat i ve r eg ul a t ory c h a n ges tha t we s u ccessfu lly i mpl e m e n ted h ave h e l ped u s offer more com p e tit ive rates to o u r largest cus t o m ers. T o d ay, o ur ex t e rn a l e n v i ro nm ent is a h y brid of W oodrow W il so n-era r eg ul ati o ns a nd 2 1 s t ce ntur y co mp e tit ive n ess. A n o r de rl y t ra n s iti on b etwee n t h e t wo wo rld s w ill b e in th e b es t int e r es t s of eve r yo n e in vo l ved. New J e r sey's utilit y r eg ul a t ors agree, a nd t h ey a re a ddr ess in g th e i ss u e h ead-o n. Th e New J e r sey B oa rd of Publi c U tili t i es b ro u g ht toget h er a d i ve r se tea m of o ur s t a t e's e n e r gy indu s try p l aye r s, w ith A tl a n t i c En ergy taki ng a l ea d e r s hip ro l e , t o craft n ew rul es t h at r eflec t to d ay's vas tl y di ffe r e nt indu s t ry. The c h a n ges occ u r rin g in o ur indu s tr y h ave h e i g ht e n e d th e imp o rt a n ce o f s t ro n g r e l a ti o n s hips w ith th e l ea d e r s in o ur finan c i a l a nd in ves tm e nt co mmuniti es. W e are in co n s t a nt co mmuni c ati o n wit h th ese gro up s, k ee pin g th e m up-t o-d a te o n w h at we'r e d o in g t o m a ke o u r co mp a ny a so lid va lu e for in ves t o r s. We know we ca n't ac hi eve o u r vis i o n w i t h o ut the s upp o rt of o th ers. W e'r e BUILDING A SUPPORTIVE GOVERNMENTAL AND REGULATORY ENVIRONMENT int ro du c ing t h e p owe r ful co n ce pt of p artn ers hip s int o r e l at i o n s hips t h at h ave t raditi o n a ll y bee n a d ve r sa ri a l. The o ld r egl ato r y fra m ewo r k fo r ced u s to think in ter m s of "w inn ers a nd l ose r s" -a set th at t e nd s to limit th e fie l d of ps ibl e so luti o n s. As w e c a rry o ut o ur age nd a fo r tra n sfo rm a ti o n , we w ill seek co mm o n gro und a nd o ff e r so luti o n s th a t " We've es t ablished ou1fselves as an advocate fo1f sound and constructive change in ou1f industry. We a1fe no t content to sit and watch ou1f wo1f 1 d t mns f o1fm arnund us and hope f o1f t he best. I nstead, we 1 1fe stepping f o1fWa1fd and t aking a 1 eade1fship rn l e in shaping new policies and 1fegu l at ions t hat wi ll bene f it OU1f cus t ome1fs and communi t ies." S haron E. Schulman , D e partm e n t H e ad-External Affai r s , Atlanti c Electric c r ea t e b e t te r o u tco m es fo r eve r yo n e. We p ut thi s co n ce p t in to a c ti o n w h e n we h e lp e d fo und t h e St ock t o n A lli a n ce -a p ar tn e r s hip of New J e r sey's m a j o r bu s in esses a nd e n v i ro nm e nt a l o r ga ni zat i o n s. C o-c h a ir e d b y Pr es id e nt a nd CE O Je rry Ja co b s , the a lli a n ce h as pu s h e d areas of d i s a g r ee m e nt as ide a nd h as e n gage d in co n s tru c t ive dil og ue w i t h so m e ve r y p os iti ve res ult s. Dur i n g 1 994 th e gro up p rese nt ed j o int p ro p osa l s t o New J e r sey's gove rn o r o n severa l k ey bu s in ess a nd e n v i ro nm et al i ss u es, in c luding t he s t ate's m aster d eve l op m e nt pl a n. To s tr e n g th e n o ur p os iti o n in o ur l oca l co mmuniti es, we'r e buildin g so lid r e l a ti o n s hips w ith l oca l govern m e nt a nd co mmun i t y l eade r s. K ee pin g close t i es wit h o u r co mm u niti es h e lp s u s res p o nd q uic k l y to o ur regio n's e ne r gy n ee d s. P a r t of thi s initi a ti ve i n c lu des buil di ng a grass-roo ts e mpl oyee n e t wo r k th ro u g h w hi c h va lu a bl e co mm uni t y-re l a t e d i n fo rm at i on can be s h a r ed across o u r organizatio

n. O ur employees have trad i tio n a ll y been l eaders i n their comm u nities and t hi s wi ll be just one more way to strengthe n the bond betwee n Atlantic Energy and the communities we serve. ; ltlunf1 1'.nug\ fill.* l 1

\FOSTERING A VIBRANT REGIONAL ECONOMY fl s so uth e rn New J e r sey's e l ec tri c utilit y , w e p l ay a uniqu e ro l e in s upp o rtin g t he v it a lit y of o ur r eg i o n's eco n o m y. B y pro v idin g exce llent produ c ts a n d se r v i ces to o ur bu s in ess c u s t o m e r s, we can h e lp th e m g ro w s t ro n ger a nd m o r e co mp e titi ve. A nd a h ea lth y bu s in ess e n v ir o nm e nt , in turn , s up po rt s th e fa mili es w h o li ve a nd wo r k h e r e. A s co mp e ti t i ve p r essure s co m e t o b ea r o n o ur utilit y bu s in ess , it w ill bco me v it a l for u s to s tr e n g th e n a nd ex p a nd th e r eg i o n al m a rk e t fo r e n e r gy se rvi ces. We'r e ca rr y ing o ut t h is s t ra t eg y b y h e lp ing ex i s tin g bu s in e s se s b eco m e m o r e co mp e titi ve a nd by a tt rac tin g n ew bu s in esses a nd j o b s t o th e r eg i o n. W e're a l so m o bili zin g t he r eg i on's b u s in e ss e s a nd gove rnm e nt s t o p a rtn e r w i th u s t o revi t a li ze urb a n ar eas , and d ev elop pro g ram s to impro ve o ur s ch o ol s and c o mmuniti es. Our eco n o m ic d eve l o pm e nt s t aff wo rks w ith bu s in es s es th ro u g hout o ur s erv ice a rea , h e l pin g them ov ercome a variety of bu s in ess ch a ll e n g es , fr o m int e rpret i n g co mpl ex e n v i ro nm e ntal co d es t o h e lpin g s t a rt-up co mp a ni es find th e id eal l oca ti o n and g ain ac ce ss t o low-int e re s t lo a n s. Bu s in e ss e s n ee d a ll th e h e lp th ey ca n get t o k e ep th e c os ts o f ex p a n s i o n d ow n. Our eco n o mi c d eve lopm e nt ra t e i s h e lping g ro w in g firms a ll ove r our " Th e st r ength o f o u r bu s ines s is di r ectly tied to the v itality of ou r r e g ion's e conomy. 'We've de v e l oped a comp re hensi v e business de v e l opment program tha t is a tt rac ti ng n ew businesses t o t he region as we ll as helpi n g the o n es t hat a r e al re ady he r e beco m e m o r e p r ofitable." r eg i on t o ge t firmly o n t h e ir fee t. T o d a t e , the rat e has s upport e d th e ex p a n s i o n of m o r e th a n 7 50 , 000 s quar e f ee t o f o ffic e , wa r e h o u se a nd manu fa cturing s p ace a nd the c r ea ti o n of 530 full-tim e j o b s. That tran s lat es int o grow th in o ur busin ess , a n es tim a t e d $2.5 milli o n in a nnu al r eve nu e I o K e n n eth C. LeFevre, Dir ec t o r-Eco n o mi c D e v e l op m e nt , At la nti c El ec tri c so far. A tl a nt ic C it y co ntinu e s t o b e th e hub of eco n o mi c ex p a n s i o n in soe rn New J e r sey. W e'r e s upp o rtin g th e grow th o n a ll l eve l s. Durin g 1 994 we o p e n e d a n ew r eg i o n a l o ffic e in th e d ow nt ow n ar ea t o b e tt e r se r ve the c it y's eve r-grow ing e n e r gy r e quir e m e nt s. W e're in o n the g round fl oo r of num e rou s h o t e l-ca s in o ex p a n s i o n project s t o en s ure th a t our c as ino c u s t o m e r s m a k e th e b e s t c h o i ces to m ee t a ll t h e ir e n e r gy n ee d s. W e're a l so wo rking w ith the c ity o n m a n y o f th e red ev elopm e nt a nd beautification proj ec t s th a t a r e und e r way , l ein g va lu a ble e n g in ee ring a nd co n s ulting s upp o rt. In co njun c ti o n w ith t he c it y's s p ec i a l impro ve m e nt di s trict , we'v e in s talled more than l , 000 d eco rative s tr ee t li g h t s t o m a ke t he c it y s a f er a n d m ore a tt rac ti ve t o v i s it ors. W e're e nj oy in g bu s in ess g rowth in our inland a nd w es t e rn r eg ion s as well. Dur i n g 1 99 4 num e rous w areh o u s ing a nd m a nu fact urin g fi r ms e nt e r e d o ur r eg io n , attract ed b y e x c e ll e nt r oa d wa y s that pro v ide c ri t i ca l ac c ess t o the e ntir e ea st c oa s t. With s upp o rt fro m o ur econo mi c d ev el o pm e nt p rog rams a nd a b o l d a d ve rti s in g ca mp a ign , firm s fr o m c iti es s u ch a s B a ltim o r e and Phil a d e lphi a h ave found th e m ove t o S o uth J ersey wo rth it.

0 ur partnerships won't be confi n ed to o ur core utili ty business.

We're expanding o ur so ur ces of revenue and strengthening our growth tential by investing in non-regulated enterpr i ses that wi ll penetrate promising new energy-r e l ated markets. During 1994 we committed additional financial and staffing resources to o ur non-regulated s ub sidiary, At l ant i c Energy En t er pri ses (AEE), to develop new businesses and markets. And over the next few years we will continue expan din g ou r non-regulated activi ti es. Our phil oso ph y for growth is founded on th e sound principles of staying c l ose to what we know best , building o n e success upon another and having the r i ght people in place to m ake positive thin gs happen. Our business development stra t egy targets thr ee sec t ors of the industry:

who l esa le e nergy s uppl y, energy-r e l a t e d sys tem s a nd se r v ic es and e n e r gy t ecn o l og i es. As we grow in each of these areas , we wi ll first draw o n the sk ill s , ex p e ri e n ce a nd t ec hni ca l expertise we've built in our own bu s ine ss. W e'll a l so fo rm strateg ic a lli a nces w ith ot h er businesses to gai n access to n ew u cts, se r v ic es a nd mark e t s. DEVELOPING INNOVATIVE BUSINESS ENTERPRISES Our s ub s idiar y, Atl an tic m al S ys tems (ATS), i s aggressively ve l o pin g it s m a rk et for h eat in g a nd cooin g se r v i ces as we ll as o th e r e n e r gy manageme nt a nd fac ilit y operation s function s. In ad dition to de ve l opi n g h ea ting a n d coo lin g sys tem s capab l e of serv ing s in g l e faci liti es or w h o l e c it y blo cks, ATS i s "T he changes taking place in ou1f indust1fy a1fe opening up tremendous business oppo1ftunities th at we're wo1fking t o captu1fe.

We'1fe expanding ou1f non-utility activities by pu1!suing eme1fging ene1fgy-1fe lated businesses th at o ff e1f strong potential f o1f grnw th and earnings." m ar k et ing serv ice s that w ill h e lp customers find the most eff i cient energy sotions fo r th eir bu s in esses. Durin g 1 994 A TS saw it s fir s t proj ec t go co mm erc i a l w h e n i t beg a n s uppl y in g h eat ing a nd coo lin g se r v ic es t o th e ne w Warner Broth e r s Studio St or e , l oca ted on the B oardwa lk in At lanti c C it y. Al so in 1 994 ATS b ega n cons tru ct i on of a fac ilit y th a t wi ll produc e he a ted a nd c hill e d wa t e r for th e n ew At l a nti c City Conventi o n Center's heatin g a nd coo lin g sys tem s. At l a nti c Gene ra ti on In c. (A GI), o ur non-utility power ge neration ss idiar y, wi ll co ntinu e i ts acti v iti es in th e independent power production arena. It s third pr oject, a 46.5-me gawa tt gas-fir e d cogeneration unit , we nt into o p eration in 19 94. AGI is a l so worki n g t o increase i t s pre s ence in the rap idl y expanding w h o le sa l e po wer market. W e belie ve there is a s tron g potenti a l for growt h in t h e energy te c hnolo gy indu s try. T o cap ture a s h are of the market , we re ce ntl y fo rm e d Ener gy T ec hn o l ogy In vestme nts (ETI), a division of AEE, to in vest in technology com p an i es th at pro v id e energy-re l a t ed produ c t s an d se r v ice s. Initi a ll y, ET I w ill l ook to acq uir e co ntrollin g int e r est in m a tur e companies that h ave a n established mark e t ba se. ETI's l o nt e rm s t ra te gy ca ll s for in ves tment s in emerg in g technology compa ni es, w ith a primary financial object i ve of reali z in g s trong capital appr e ciation. E I Scott B. U ngerer , Pr es ident and COO , Atlanti c En e rgy Ent e rpri ses FORGING PROF I TABLE CUS T OMER PARTNERSH I PS 0 ur relationship s with our customers have traditionally been ba se d on a matter of geography

-if you live or operate a bu s ine ss i n ern New Jersey , then you buy yo u r power from o u r u tility , At l antic Electric.

In the future things won't be quite so s imple. A s we emerge from the protective walls of regu l a t i on, our customer r e lation s hips are becoming much more dynamic and complex. To crea te a loyal and profit ab l e customer b ase, we're building so lid p a rtner s hip with our customers.

Our contribution to the re l ationship will be a s tream of product s a nd services th at , a bo ve all else , d e li vers va lue be yon d our customers' tations. One way we're creat i ng this va l ue i s by turni n g our focus outward and collaboratin g with our customers to bui l d thei r future s u ccess. That mean s going far beyond the rig i d bo u ndar i es of our o l d ro l e of power s u pp li er -a job that ha s traditional l y ended at our customer's meter. We're blurrin g the lin es between u s and our customers b y getting in s ide their facilities , talking to them a bout their bu s i ne ss, understanding t heir problem s and working with them so we b oth l ea rn mor e about how the y u se energy. We're u s ing what we di scove r t o design lon g-term partnership plan s, tailor e d to each customer's unique need s. As we help them improve their efficiency and s trengthen their bottom line , we s tren g th e n ours as well. As an examp l e, we're deve l oping a pla n with a l arge comme r c i a l tomer that offers a h ost of i nnovat i ve se rvices and agreements, incl u ding a "Success in the cowipetitive ma1fketplace will come frnm building w iutuall y beneficial pa1!tne 1f ships with oulf custome1fs , frn m the la Fges t industrial custow1e1f to the single homeowne1f. We'll do this by fiFst unde1fstanding what's impoFtant to these custome1fs and then by mal\?ing o ff e1fs that delive1f value. We'll 1fespond to thei1f Feques ts quickly and in a way that demonstrates that thei1f p7!io1fities a1!e ou1f p7!io1fities." lon g-term he a ting and cooling ment , replacement of old, inefficient equipment , and the in s tall a tion of a mon ey-sav ing energy mana ge ment t em. Agreements like this are a perfe c t fit for us a nd our customers

-we expand our l evel of b u siness, and o u r cus ters are a ble to leave their energy cerns to a tru s ted expert. Mar il y n T. Powe ll , Vice Pr es id en t-Mark et in g , Atlanti c Electri c As we expand our portfolio of we're also discov er in g ways to turn o ur existing sk ill s and r eso urce s into new market opportunities.

I n 1994 we began marketing a m ai n te nan ce and repair se r v ice for c u sowned high-voltage eq uipm e nt. We s t arte d se llin g this se r v i ce after we learn e d that many of our c ustomer s don't want to t ake on this job t h emse l ves. Thi s n ew service h as ea rned high mark s from o ur lar ge co mmercia l and indu s tri a l customers.

Keepin g our c u stomer partner s hips s trong and profitab l e w i ll be a co ntinu o u s proc ess. Our customers' need s and expectat i ons are constantly changing, a nd we i ntend to move right with them. To be fast on our feet, we're creating a n ew m arke tin g proce ss th at will h e lp u s r es pond quickl y t o uniqu e r equests from o ur customers, and h elp u s make innovative offe r s t o th e m arketplace th at n ot o nl y m eet but excee d expectations.

Our l o n g-t erm goal i s t o directly allocate a ll of o ur resources to activities that deliver th e hi g h es t va lu e to our c u tomers. When th a t day co me s, we'll be well on our way to b eco min g a c u s tom er-dri ve n organization.

T o be s u ccessfu l in the new energy marketplace , we've got to se ll our core produ ct -electricity

-at co mpetiti ve prices. We're building a n energy s uppl y portfolio

-consist in g of our fu ll y and jointly owned generating units and power purchase contracts

-that wi II co mp ete effective l y in this market. Our goal is to create a flexible, diversified portfolio with a cost s tructure th at's compet iti ve in th e open m a r ket. To reduce the cost of power produced at our ge n erating units , we're agg re ssive l y negotiating with fuel suppliers for m ore attractive pri ces. Thi s strategy ha s a lre a d y reduced our 19 95 natural gas expense b y about $2 mill i on. Working wit h o ur union l eaders, we've also cut labor costs at our pl ants b y increasing t h e ibility of our labor force. T h e power we purchase from ind epe n dent power producer s (IP P s) now resents a full 25 percent of our portfolio.

Keeping the se costs com p e titi ve is a key e l ement of o ur s trate gy. We've renegotiated two IPP con tract s, bringing their assoc i ate d energ y co s t s m ore in line w ith market pri ces. To date, our efforts in this area wi ll save our cus t ome rs at l east $80 million over th e li fe of the c o ntract s. We're trimming o ur overall energy co s t s even further by stepping up our participation in the w h o l esale p owe r market. Our expa nded bulk p ower marketing team i s making m o r e aggress i ve pur c h ase a nd sa l e arra n gements, cap turin g th e be s t price s th e market h as to offer. As a res ult of ou r hei g ht e n ed effo rt s in th e wholesa l e m arket, we expect t o achieve an add iti o n a l $5 milli o n in savi n gs during 1 995. B eco min g m ore co mp et itive a l so m ea n s u s ing our p ower d e li very sys tem more effec ti ve l y. W e're tak in g a m ore st rategic , incremental approac h to the s ion of o ur tran sm i ss i on, d i s tribution a nd s ubstation facilitie s, no longer auto m atca ll y making l arge cap ital in ves tment s th at are capab l e of handling 20 t o 30 OPTIMIZING OUR POWER SYSTEM yea rs o f ad ditional g rowth. Thi s new cap it al in ves tment s tra tegy ha s help ed u s red uc e ou r project e d five year ca pit a l expenditure s b y more than $1 00 mill ion. Adva n ced t ec hn o l ogies w ill p l ay a n incr eas in g l y imp ortant r o l e in h e lping u s get "Ou r power sys t em s t rategy pu t s together the right mix of competitively priced power, innovative opera ting policies and new technologies to deliver great value to our customers.

And that's ju s t what it wi ll tal'?e to be s t rong in th e new energy marke tpl ace." the mo s t out of o u r p o w e r sys t e m. F o r Robert F. Fatzinger , M anager-P ow e r Delivery , Atlantic Electric example, we're exp l o rin g th e use of s m a ll p ower ge n e rator s, s t ra t eg i ca ll y pla ce d in o ur se r v i ce a re a. Th e units ca n allow u s t o by-pass hea v il y u sed p ort ion s of o ur power net wo r k durin g p eak periods a nd , in turn , help u s d e l ay the construction of cost l y n ew faci l ities. We're also inve st in g in an e nhanced power n etwork m a n age ment system , sc h e dul e d fo r co mpl et i o n in 1 997, that will give u s m ore and bett er inm ation abo ut w hat's go in g on in o ur deli ve r y sys t em. Lookin g t o th e future, n ew power sys tem t ec hn o l og i es w ill c r eate a direct com put er link to o ur c utomer s, h e lping u s bring a n a rr ay of adva n ced product s a nd se r v ic es right into th e ir h o m es. 1 th I /( l Ill I T I l 7

'CREAT I NG A WINNING BUSINESS CULTURE 7 h e p ower t o tr a n sfo rm o ur co mp a n y co m es fro m o ur h ea rt a nd so ul , o ur p eo pl e. Our e mpl oyees a r e the c at a l ys t fo r c r ea ting a n A tl a nti c E n e r gy th a t w ill co mp e te a nd w in in the e m e r g ing e n e r gy m a rk e t. We a r e building a n ew wo rk e n v ironm e nt w h e re o ur e mplo yees ca n exce l in th e mid s t of c h a n ge a nd co ntinu o u s ly a ri s ing o pp o rtuniti es. W e'r e c ulti vat in g sk ill s a nd ca p a biliti es th a t w ill g i ve u s th e p ower t o m ove in to n ew a n d di verse dir ect i o n s. We'r e findin g ways t o b eco m e m o r e ef fi c i e nt , m o r e fl ex ibl e, a nd we'r e pl ac in g g r ea t e r e mph as is on t eam w o rk a nd s up e ri o r l eae r s hip. Our l ea d e r s a r e se ttin g th e p ace fo r c h a n ge. Durin g 19 9 4 we wo rk e d t o d eve lop a l ea d e r s hip t ea m t h at s h a r es a co mmon v i s i o n o f o ur future a nd i s r e ad y to a chi e v e it w ith the h e lp o f a ll e mpl oyees. R ec o g ni z in g th e p ow er o f op e n a nd h o n es t c ommunicati o n , our l ea der s initi a t e d a forum , call e d Fac e T o F ace, w h e re e mpl oyees s h a r e th ei r v i ews and id eas w ith man age ment a nd ge t a n swe r s t o t o u g h qu es ti o ns a b o ut o ur co mp a ny a nd th e ir j o b s. Th e forum h as p roven t o be a n id e al pl ace fo r o ur l ea d e r s t o build r e l a ti o n s hips a nd fo r "T he key t o bui l ding a new o1fgani:l:a ti on is ene1fgi:l:

i ng ou1f employees. We'1fe bui l ding t he too l s, the envirnnment and t he wi ll t o help us take t hat g 1f ea t leap f rnm a 1fegu l a t ed u t i l i t y to a t1fu l y competitive company." eve r yo n e t o t a lk a bout th e m a n y i ss u es fac ing o ur co mp a n y and o ur indu s tr y. Th ro u g h th e t ra n sfo rmati o n cess, we're c r ea ting a m o re e ffi c i e nt a nd foc u sed c o r e utilit y bu s in ess. W e'r e lin king e v e r y ac ti v it y w e're e n ga g e d in, 6 Erne s t L. Joll y, Vice Pr eside nt-Atlanti c Tran sfo rma t ion, Atlantic Electric a l o n g with ever y d o ll a r we s p e nd , to o n e of o ur s t rateg ic o bj ect i ves. W e'r e h o lding on t o ac ti v iti es th a t s upp o rt o ur s t ra t eg i es a nd l ett in g go of th e o n es th at n o l o n ger a ppl y in a co mp e titi ve o r ga ni za ti o n. Eve r y ac ti v ity a n d p rocess we ca rry w ith u s int o the f utur e w ill b e co n s t a ntl y imp roved to e n s ur e it s effec ti ve n ess. U ltimat e l y, thi s m e th o d w ill fully a li gn u s w i t h the c u s t o m e r s a nd m a rk e t s we se rv e. W e'r e a l so t ak in g fun c ti o n s that are c riti ca l to o ur s u ccess , s uch as m a rk e tin g and p ower d e li ve r y, a nd co mpl e t e l y r e de s i g ning t h e m. W e'r e lite rall y s t a rting w ith a c l ea n s h ee t of p a p e r to c r ea t e n ew pro cesses th a t a r e foc u se d o n o ur c u s t o m e rs a nd h ave th e s tr e n g th t o handl e th e d e m a nds o f a dy n a mic a nd co mp e titi ve bu s in ess e n v i ro nm e nt. In ad diti o n , we'r e u s in g tec hn o l ogy t o imp rove o u r wo rk o r ga niti o n. F o r exa mpl e , we've s t a rt e d g i v ing o ur fie ld c r ews th e sa m e p ower ful co mput er t ec h no l ogy t h a t's c r ea t ed eff i c i e n cies in o ur of fi ce e n v i ro nm e nt s fo r yea r s. R o utin e fi e ld r e p a ir s th a t o n ce ge n e rat ed m o und s of p a p e r wo rk c an n ow b e sc h e dul e d , co mpl e t e d , r eco rd e d a nd p e rm a n e ntl y fil e d w ith o ut u s ing a s in g l e s h ee t of p a p e r. That saves m o ne y , time a nd imp roves se r v i ce to o ur c u s tom ers. T e am wo rk i s th e fo und a ti o n of a ll o ur ac ti v iti es. E ve r y d ay we l ea rn m o re a b o ut h ow co mmitt e d a nd e n e r g i zed t ea m s of p eo pl e ca n build p o w e rful s o l u ti o n s to c h a ll e n ges. Wh e n we g i ve o ur e mpl oyees th e b es t to o l s, th e ri g ht e n v i ro nm e nt and s upp o rti ve l eade r ship, a ll we h ave t o d o is s t a n d bac k a n d wa t c h t h e m ag i c h a p pe n!

DEFINING TRANSFORMAliION 7 ransformation

-It's a word said a lot these days around Atlantic Energy. We u se it when we talk about the unprecedented changes taking place in the electric utility industry.

We also u se it to describe the work we're doing to become a winning competitor in the new energy marketplace.

The forces of competition have been working at the fringes of our industry for years, sta rting with the creation of independent power producers in 1978, to today's experimentation with open energy markets in some areas of the country. Over the years we've recognized these changes and have adapted our egies and operations accordingly.

Although we've made a great deal of progre ss toward becoming a more competitive business , we never let go of our traditional utility mind-set.

All that changed in 1994. We took an eve n hard er look at where our try i s headed and concluded that s imply making s light course corrections will not position us to succeed in a competitive marketplace. To be among the winners, we must transform ourselves into a new kind of corporation:

one with new form and dimensions

one that is driven by a s in gle mission -to serve our customers beyond their expectations.

Early in the year, we set in motion AE2000, a ground-breaking initiative to achieve our new vision. We assemb l ed teams of some of the brighte s t and mo s t innovative thinkers in our company, drawing from every area and level of our ration. More than 300 people in all, including member s of our board of directors , were charged w ith creating a new strategic direction for Atlantic Energy. Through this process , we examined who we are as a corporation and affirmed our core va lue s. We identified future challenges and opport uniti es "W e are committed to winning in the competitive marketplace. 7o achieve that goal, we've built a new strategy that wi11 transform our company -starting f r om our very core -into a competitive business that is aggressive, market-f ocused and driven by our customers' needs." and assessed how we'll stack up against the competition.

We looked outside to learn from some of the best in the competitive wo rld and studied other tries that have experienced deregulation.

Through the entire process we kept a steady eye on th e mo s t important factor ltf I I f I Michael J. Chesser, Chi e f Op erating Offic e r, Atlantic El e ctri c of all -our customers.

What we created is a strategy to build a new energy company that meets a wide range of c u s tom er needs. In the process, we will take full advantage of our stro ng customer relationships a nd talented work force. We h ave identified s ix mutually supportive strategic elements that we will u se as our basic buildin g blocks as we transform ourselves into a fully competitive organization. The six e lements of transformati on are:

• crea te a winning busin ess culture

• optimize th e use of our power system

• forg e strong partnerships with our custo mers

• pursue new business and profit opportunities

• foster a vibrant regional economy

• build a supportive governme ntal and regulatory environment Using these s trate g ic building block s , we will create a firm foundation in the compe titi ve e n ergy marketplace.

In the pages t hat follow, we'll give you a glimpse of the shape of things to come at Atlantic Energy. _j

' ! QQ.4 IN REVIEW B I LLING S Y STEM SAVES MONEY The o ld principle that time is mone y guided a team of Atlantic E l ectr i c emp lees to develop a quicker c u stomer billing system. The team fou nd a way to cut the t ime it takes to ma il the bill afte r a customer's meter i s read from three days to just one. Tha t quicker turnaround means revenue comes in faster. Initiated in September, the new sys-n a ti ve t o coa l , tir e chips produce fewer emissio n s. On a n an nual b as i s, up to 2.5 milli on tires co uld be burned in unit #1 , translating into about $500,000 in fuel sav in gs. r---------------

0 today's work place. The yo un g women h ad a c h a n ce to exp l ore a ll areas of t h e pany and find out what i t's lik e to work in so me very unu s u a l se ttings. Some explored u nderground cab l e ducts a nd rode in ro u g h terrain ve hi c l es across m a r shes to in s p ect power lin es. Jud g in g from their enthusiasm, these young wome n will make g r eat a dditions to o ur 2 1 st ce ntur y work force. tem is expected to save the company more than $325,000 each year in terest payments a nd labor cos t s, a nd i s just another example of h ow teamwork i s paying off at At l a ntic E l ectr i c. YOUR ATLANTIC ELECTRIC WINS NATIONAL ARBOR DA Y AWARD B -E NGL AN D STA TI ON MAKES TvVO HIT S FOR THE E NVIRON M ENT EMPLOYEES A A tl an tic E l ectric earned th e Nation al Arbor D ay Foundation's 1994 Tree Line USA Award. One of on l y eigh t U.S. utilities receiv in g the award, the compa n y was r ecognized b y th e fo und atio n for ach i ev in g excellence in its tr ee mainten ance, tree planting and ed ucation a l programs. At l a n t i c Elect ri c's fo r estry depa rtment maintain s safe tree c l earance alo n g the compa n y's 11,000 miles of ove rhe a d power lines. During the l ast two years, t h ey h ave planted 2,500 In D ece mber At l antic E l ectr i c comp l eted construction of a flue gas desulfurization system at B.L. E ngl a nd Station's U nit #2 on time a nd under budget. Commo nl y ca ll ed a scruber , the $8 1 million system w ill move more than 90 percent of the unit's s ul fur d i ox id e emissions and i s a key part of A tl antic E l ectr ic's lterm s trategy t o meet the standards of BR the Clea n Air Act. The new sys t em works much li ke a l arge s hower, sc rubbin g the unit's fl u e gas wit h a lim estone and t er mixture. The sc rubbin g process will crea te a n es ti mated 40 ,000 tons of co mmcial-grade gypsum as a by-p roduct , w hi ch wi ll be so l d to a regional wa ll board facturer rather than l a nd-fi ll ed. Speak in g of landfill s, one of New Jer sey's biggest waste pro bl ems i s discarded, worn-o ut tires. La s t fa ll , A tlanti c Electric co nduct ed a test at B.L. England that cou ld h e lp th e tire waste p ro bl em, prove t he e n viro nm e nt and save money. During a two month period , 3,000 tons of tire chips , mixed w ith coa l in va r ying portions , were burned in the plant's unit #1. The results of the test burn , the fir s t of it s kind in New J ersey, are curre ntl y being reviewed. A ll indications point to a s u ccessful project and a p oss ibl e l o n g-t e rm supp lmental fuel so urce at B.L. E n gla nd S t ation. Move To Sou th j ersey. It's Worth It. That's ju st one of the bold me ss ages we sent to Philadelphia

-area businesses through our 1994 economic development communications campaign.

The winning ad s were designed to inform outof-state bu s ine ss leaders -in no tain terms -of the many financial tages of doing business in southern Ne w Jersey. The ads succeeded in getting people to sit up and take notice. Jn fact, they prompt ed a spirited debate between Atlantic Electric and Philadelphia Mayor Ed Rendell. OUR DAUGHTERS SPEND A DA Y AT WORK In Apri l , 1 30 young women s pent the day a t At l antic Electric as part of th e tional Take Our D aughte r s to Work D ay. The participants learned a b out different car eer oppor tuniti es and saw fir s t-hand t h e im-In addition to being a l ess expensive a lt er-portant a nd diver se role s women play in line-compatible t rees in p l ace of fast-growi n g , hazardous varieties.

Atlantic E l ectric's forestry personnel also con du c t ed uc ationa l programs that teach the public about th e value of trees in o ur towns and cities. ATLANTIC CITY WELCOMES NEW CAST OF CHARACTERS Daffy Du ck and Bugs Bunn y came t o At l a ntic City in July w h en Warner ers ope n ed i ts Studio Sto re on th e walk. Our s ub sidiary, Atlantic Thermal Systems , is s uppl y in g h ea ting a nd coo lin g se rvices to the facility, h oused in the Trump Pla za. But Th at's Not All Folks ... The new s tore i s ju s t one examp l e of the broader array of r eta il and e nt erta inm ent c h o i ces coming to the resort. Pl a net H o llywo od i s sc h ed ul ed to expand it s o rbit int o the c ity l ater thi s year.

Growth is happening in the western region of our service area as well. One of the nation's fastest growing industrial parks is located in Gloucester County. During 1994 , 15 new companies leased or purchased a total of 510 , 000 square feet of space at the park , creating approximatel y 500 jobs and new sources of e lectric re ven ue for Atlantic Electric. N ew Bu s ine ss and Gr ow th Opp ort uniti es Our non-utility nesses also incurred one-time charges in 1994. Non-utility results reflect a write down of the commercial real estate owned by At lanti c Southern Properties , our real estate subsidiary , translating into a $.03 per share charge. Exc ludin g one-time c har ges, non-uti I ity subsidiar i es contributed

$.03 per share , a $.04 drop from last year's mark. The decline in net income is primarily attributed to the impact of higher deferred income tax expense in 1994. You don't grow by standing st ill. During 1994 we made stro n g mo ves to expand the business ac ti v it y of our subs idiarie s. We believe that s i gn ifi cant opportunities for our growth li e in the non-regulated sector, a nd we ha ve a s trategy in place to capture that growth. We took on a greater role in the operation of Atlantic Generation Inc. (AG I) when we reorganized Coge n eration Partn ers of Amer ica (CPA), our joint vent ur e with Co lumbi a Gas. AGI is now directly responsible for the operation of the partnership

's generation projects.

AGI's third project, the Vineland Cogeneration Project went into operatio n in June. In May we created At l a ntic Thermal Syste ms (ATS), a s ubsidi a ry that will pro v ide heatin g and coo ling energy se r v ic es to co mm ercial and industrial fac iliti es. A TS is currently constructing an energy center that will serve the new At l antic City Convention Center under a 30-year contract.

To g i ve our non-utility ventures the flexibility they need to move quickly into new areas , in January 19 95 we placed them und er a new subsidiary, Atlantic Energy Enterprises (AEE). AEE is a lr eady on the move. We are creat ing a joint venture between AEE and Cenergy, a subs idiar y of Northern States Power , to develop natural gas and electric energy products and services, including power marketing opportun i t i es. This strategic partnership will give us the ability to offer ex i sting as well as new customers a full menu of energy options , including natural gas and fuel oil. The new competitive era in ou r indu stry wi ll certainly be as exciting as it is challenging. As we pursue our vision of b ecoming a full service energy company, we w ill have the opportunity to venture into new and di ve rse areas of our industry.

Throughout our l ong history , we h ave demonstrated time and again that we are up to any task before us, and this will be no exce ption. We're co nfid ent our new organization and business strategy will make us wi nn ers and we commit to you that we'll continue to work in your best interest s. FOR THE BOARD OF DIRECTORS:

E.D. HUGGARD , Chairman of the Board J. L. JAcoss, President

& Chief Executive Officer l TO O UR SHAREHOLDERS

/ 994 will be regarded by many as a year of transition for the electric utility industry.

For Atlantic Energ y, however , 1994 has been a year of vast tran s formation. lt's the year we set into motion a bold strategy to create a growing, market-driven energy company that will win in the new competitive era. Albert Einstein once said, " Our past thinking has created challenges that can't be solved by that same level of thinking." We adopted that principle last y ear when we set out to transform our company into a competitive market-driven tion. We threw out the status-quo and took on a new attitude that embraces change and the spirit of competition.

We created our own version of a "think-tank" in which 300 of our brightest employees mapped out our future. The result of our efforts is a plan to create a company that's focused on serving the full spectrum of our customers' energy needs. We're excited about the new direction we're taking and are already seeing results. The pages that follow present in detail the many facets of our plan. Last summer , while we were actively engaged in building our own future , the financial markets were calling into question the future prospects of our entire industry.

Rising interest rates and the news of dividend cuts by several utilities prompted a negative response by the investment community.

During 1994 in fact , utility share prices , on average , declined more than 15 percent across the industry.

As these unsettling events unfolded , we moved into action, communicating our strategic vision and our strengths to key financial analysts and most importantly , our shareholders.

Our objective was to clearly demonstrate that we are a company in control of our own destiny , with strong leadership and a plan to successfully move out of the old monopolistic utility era and into the competitive 21st century. Ultimately , the financial markets , along with you , will base opinions on solid results. We're confident that we've assembled the right people and built the right strategy to turn our plans into reality. We also made a commitment last summer to our investors to maintain our 1994 annual dividend rate at $1.54. We're proud to say we kept our word. We know how important stable dividends are to our shareholders.

Just as important , our dividends must reflect current financial results as well as the present business environment.

Our decision to hold dividends steady rather than increase them was made after careful deliberation. We weighed the impact to shareholders against the financial market's heightened concern over high utility dividend pay-out ratios. In the end we held it steady -a decision that best serves all involved.

Our current dividend policy focuses on gradually reducing our pay-out ratio to be more in line with those of companies in competitive industries.

We plan on achieving the shift by plowing more of our earnings back into energy-related nesses that offer ample potential for revenue growth. Those new earnings sources will , in turn , help keep dividends strong. Financial Performance Our growth strategy depends on a strong financial tion , and 1994 was the year we laid the groundwork.

Earnings per share were $1.41, a decline from the $1.80 reported last year. Reflected in 1994 's earnings is an approximate 1 percent 2* increase in revenues, higher costs for purchased power and time charges , primarily for employee severance programs. ings from operations , excluding those one-time charges were $1. 78 in 1994. Lowering Utility Costs It takes good business sense and the will to make tough decisions to achieve cost reductions without cutting corporate muscle. Using a stringent budgeting system , we're looking at virtually every dollar we spend and analyzing how it contributes to the achievement of our competitive strategies.

Expenditures that don't make us more competitive are being eliminated.

Through this process , we've cut layers of management, found new ways to streamline operations and have done away with inefficient activities. Our utility down-sizing program will reduce our labor force by about 350 people by year-end 1995. That reduction represents close to a 35 percent decline from peak utility staffing levels of just a few years ago. We expect to recover the cost of the program, $17.3 million , after taxes , within two years through reduced labor costs. Opportunities to cut costs and improve efficiency are being discovered all over our company. A consolidation of our nine utility operating districts into four will save significant labor , equipment and operations costs. And our new power system expansion policy calls for smaller, incremental additions to our system. This new strategy will save us $7 million for one project alone. Taken together , these and many other cost cutting measures add up to big savings and clearly demonstrate an attitude that says we're in this for the long run. Competitive Electric Rates The savings we achieve are helping us keep the rates we charge our customers competitive.

Today, our residential electric rates are closely in line with those charged by New Jersey's other electric utilities , and we have no plans to increase base electric rates for the next several years. That's quite a success story. Just a few years ago we saw the potential for our rates to be significantly higher than those of our neighboring utilities.

Cost-cutting tells only part of how we've kept rates in-check. We've also taken some direct and innovative measures.

A new "economic initiative" rate cut about $28 million off the fuel costs we pass on to customers.

Our work to renegotiate three power purchase contracts with independent power producers is expected to yield at least an $80 million savings for customers over the life of the contracts.

We will continue to aggressively pursue further reductions in these contracts in order to bring them more in line with the market. Regional Economic Expansion Our local economy is on the upswing. We're seeing strong business activity in several pockets of our region. During 1994 Atlantic City's hotel-casino industry began in earnest to prepare for the growth generated by the city's new c onvention center , uled to open in early 1997. Plans are on the table for the tion of at least 2 , 000 hotel-casino guest rooms in the coming few years. We aren't the only ones excited about Atlantic City's prospects. During 1994 there was a flurry of activity by a number of prominent investors who formally initiated efforts to invest in casinos there.

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FINANCIAL HIGHLIGHTS Earnings per Common Share Dividends Paid per Common share Book Value per Common Share Number of Common Shares Outstanding:

Year-end (000): Average Actual Return on Average Common Equity Electric Operating Revenues (000) Operating Expenses (000) Net Income (000) Utility Cash Construction Expenditures (000) Total Assets (000) Sales of Electricity to Ult im ate Customers (KWH) (000) Price Paid per Kilowatt-Hour (Ultimate Customers)

Total Ultimate E l ectric Customer Accounts (Year-end) Number of Common Stock (Year-end)

Number of At l antic Electric Employees (Year-end) ATLANTIC ENERGY EARNINGS AND DIVIDENDS PAID PER SHARE OF COMMON STOCK 2 1.5 .5 0 1.80 1.67 1.54 90 91 92 93 94 .EARNINGS .DIVIDENDS Earnings per share of Common Stock is net income divided by the average number of common s h ares outstanding.

Dividends paid per share is the sum of the quarterly dividend payments made in January , April , July and October. 1994 $ 1.41* $ 1.54 $ 15.56 54,149 54,155 9.07%* $ 913,039 $ 759,499 $ 76,113* $ 119,961 $2,54 5 ,555 8 , 167,856 10.610 ¢ 468,712 48,850 1,794 *r eflec t s spec ial c har ges , primarily for emp lo yee separatio n costs % Change 1994-1993 (21. 7) .7 (.4) 2.4 1.2 (22.5) 5.5 7.6 (20.1) ( 13. I) 2.3 1.3 2.8 1.2 2.1 (2.2) $ $ $ 1993 1.80 1.53 15.62 52,888 53,507 11.71% % Change 1993-1992 7.8 1.3 3.0 2.5 2.5 5.1 $ $ $ 1992 1.67 1.51 15.17 51 , 592 52 , 199 11.14% f % Change 1992-1991 (4.6) 1.3 2.2 5.3 2.6 (7.9) $ 865,675 $ 706,091 $ 95,297 6.0 3.9 10.5 $ 816,825 $ 679,657 $ 86,210 1.0 2.4 0.7 $ 138,111 $2,487,508 8,066, 412 5.7 12.1 5.4 $ 130 ,7 00 $2,2 1 9,338 7 , 655 , 13 8 (2 4.2) 3.2 (3.5) 10.316 ¢ 0.6 10.257¢ 4.5 463 , 073 1.0 458 , 549 1.2 47 ,832 2.8 46 , 524 6.2 1 , 835 (9.3) 2,023 (0.4) ATLANTIC ENERGY MARKET PRICE PER SHARE OF COM MON STOCK 25 23.13 21.75 20 20.50 17.63 16.94 15 10 5 0 90 91 92 93 94 This is the closing price of Atlantic Energy's Common Stock o n the l ast trading date each year, as reported by the New York Stock Exchange Composite Transactions li sting.

. . . . . . . . . .

• financial Information REPORT OF MANAGEMENT REPORT OF THE AUDIT COMMITTEE INDEPENDENT AUDITORS 1 REPORT CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY MANAGEMENT 1 S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTOR INFORMATION

SUMMARY

FINANCIAL AND STATISTICAL REVIEW 1994-1984 DIRECTORS AND OFFICERS

'JR.eport of management The management of Atlantic Energy, Inc. and its iaries (the Company) is responsible for the preparation of the financial statements presented in this Annual Report. The financial statements have been prepared in mity 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 tion included elsewhere in this Annual Report. Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting.

In any system of financial reporting controls, inherent tions exist. 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, 1994, the system of internal accounting and cial controls over financial reporting is effective.

Management also recognizes its responsibility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. statements.

Their audits are based on procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement.

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 lished procedures.

Both the external auditors and the internal auditors periodically make recommendations concerning the Company's internal control structure to management and the Audit Committee of the Board of Directors.

Management responds to such tions as appropriate in the circumstances.

None of the recommendations made for the year ended December 31, 1994 represented significant deficiencies in the design or operation of the Company's internal control structure. J. L. Jacobs President and Chief Executive Officer F. F. Frankowski The financial statements have been audited by Deloitte Chief Accounting Officer & Touche LLP, Certified Public Accountants.

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

• 1Report of the :Audit C9ommittee The 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., Kathleen MacDonnell and Harold J. Raveche. The Committee held four meetings during 1994. The Committee oversees the Company's financial reporting process on behalf of the Board of Directors.

In fulfilling its responsibility, the Committee mended to the Board of Directors, subject to holder ratification, the selection of the Company's independent auditors, Deloitte & Touche LLP, The Committee discussed with the Company's internal auditors and Deloitte & Touche LLP the overall scope of and specific plans for their respective activities concerning the Company. The Committee also cussed the Company's consolidated financial ments with Deloitte & Touche LLP. The Committee meets regularly with the internal and external auditors, 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 ing. The meetings are designed to facilitate any private communication with the Committee desired by the internal and external auditors.

No significant actions by the Committee were required during the year ended December 31, 1994 as a result of any private cations conducted.

Matthew Holden, Jr. Chairman , Audit Committee February 9, 1995

• ATLANTIC ENERGY INC. AND SUBSIDIARIES Independent

Auditors' Report Deloitte&

ToucheLLP 0 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, 1994 and 1993 and the related consolidated statements of income, changes in mon shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 ciples used and significant estimates made by ment, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic Energy, Inc. and its subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.

LLP February 9, 1995 2 C9onsolidated Statement of Income ATLANTIC ENERGY , INC. AND SUBSIDIARIElil (Th o u s ands o f Dollar s) For the Years Ended December 31, 1994 1993 1992 Operating Revenues-Electric I $913,039 $865,675 $816,825 Operating Expenses:

Energy 210,891 159,438 161,134 Purchased Capacity 130,929 110,781 103,173 Operations 156,409 162,151 148,917 Maintenance 37,568 45,360 49,837 Depreciation and Amortization 73,344 67,950 69,371 State Excise Taxes 97,072 104,280 97,969 Federal Income Taxes 42,529 45,277 37,143 Other Taxes 10,757 10,854 12,113 Total Operating Expenses 759,499 706,091 679,657 Operating Income 153,540 159,584 137,168 Other Income and Expense: Allowance for Equity Funds Used During Construction 3,634 2,368 2,212 Employee Separation Costs, net of tax of $9,265 (17,335) Litigation Settlement, net of tax of: 1993-$(1 , 321 ); 1992-$4 , 982 (2,564) 9,671 Other-Net 8,678 12,884 9,519 Total Other Income and Expense (5,023) 12,688 21,402 Income Before Interest Charges 148,517 172,272 158,570 Interest Charges: Interest on Long Term Debt 57,346 59,385 53,284 Other Interest Expense 1,114 1,633 2,678 Total Interest Charges 58,460 61,018 55,962 Allowance for Borrowed Funds Used During Construction (2,772) (1,448) (1,414) Net Interest Charges 55,688 59,570 54,548 Less Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Net Income $ 76,113 $ 95,297 $ 86,210 Average Number of Shares of Common Stock Outstanding 1 (in thousands) 54,149 52,888 51,592 Per Common Share: Earnings $ 1.41 $ 1.80 $ 1.67 Dividends Declared $ 1.54 $ 1.535 $ 1.515 Dividends Paid I $ 1.54 $ 1.53 $ 1.51 The acco mp a n ying Notes to Consolida t ed Fi na ncia l Sta t e m ents a r e an i nteg ral pa r t of th ese s t a t e m e nt s. 3 r9onsoiidated Statement of C9ash Flows ATLANTIC ENERGY, INC. AND SUBSIDIARIES (Th o u s and s of D o llar s) For the Years Ended Decemb e r 31 , 1994 1993 1992 Cash Flows Of Operating Activities:

Net Income $ 76,113 $ 95,297 $ 86,210 Deferred Purchased Power Costs 14,920 (6,050) 13,410 Deferred Energy Costs (3,819) (15,269) (6,143) Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Depreciation and Amortization 73,344 67,950 69,371 Deferred Income Taxes-Net 17,863 20,901 23,386 Prepaid State Excise Taxes (37,029) (35,982) 540 Employee Separation Costs 26,600 Net (Increase)

Decrease in Other Working Capital (24,571) 32,364 7,685 Other-Net (2,457) 1,534 5,650 Net Cash Provided by Operating Activities 157,680 178,150 217,921 Cash Flows Of Investing Activities:

Utility Cash Construction Expenditures (119,961)

(138,111)

(130,700)

Leased Property (10,713) (9,946) (9,565) Nuclear Decommissioning Trust Fund Deposits (6,424) (6,424) (6,424) Other-Net (11,276) (9,832) (8,524)

Net Cash Used by Investing Activities (148,374)

(164,313)

(155,213) Cash Flows Of Financing Activities:

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

(40,599) Increase (Decrease) in Short Term Debt 8,600 (14,600) (6,000) Proceeds from Common Stock Issued 10,289 16,208 16,110 Repurchases of Common Stock (3,909) Redemption of Preferred Stock (24,500) (5,469) (250) Dividends Declared on Preferred Stock (16,716) (17,405) (17,812) Dividends Declared on Common Stock (75,829) (67,259) (65,644) Other-Net 12,330 8,584 4,412 Net Cash (Used) Provided by Financing Activities (77,827) 14,151 (35,128) Net (Decrease)

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

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

I Commori Stock issued under Stock Plans $ 7,652 $ 14,088 $ 12,692 Th e a cc ompan y in g N o t es t o Consolidat e d Finan c ial Stat e m e nt s ar e an int e gral part o f th ese s tatem e nt s. 4 5 C9onsolidated JBal a nce Sheet (Th o usand s of D o llar s) Assets Electric Utility Plant: In Service: Production Transmi s sion Distribution General Total In Service Less Accumulated Depreciation Net Construction Work in Progress Land Held for Future Use Leased Property-Net Electric Utility Plant-Net I n v e st m e nts a n d N on-u t ili ty P r op erty: Investment in Leveraged Leases Nuclear Decommissioning Trust Fund Non-utility Property and Equipment-Net Other Inve s tments and Funds Tota l Investments and Non-utility Property Cu rr e n t Assets: Cash 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 Deferred Energy Costs Deferred Income Taxes Other Total Current Assets . D efe r re d De b its: Unrecovered Purchased Power Costs Recoverable Future Federal Income Taxes Unrecovered State Excise Taxes Unamortized Debt Costs Other Regulatory Assets Other Total Deferred Debits Total Assets f f ATLANTIC ENERGY , INC. AND S UBSIDIARllOS December 31, 1994 1993 $1 , 151 , 661 357,389 659 , 619 180,204 2,348,873 725 , 999 1 , 622 , 874 110,078 6 , 941 42,030 1 , 781 , 923 78 , 216 52 , 004 18 , 163 28 , 940 177,323 5,114 54 , 554 14 , 067 (3,300) 32 , 070 28,030 27,823 14,475 10,999 12,264 11 , 883 207,979 115 , 538 85,854 73,834 38,184 47 , 055 17,865 378 , 330 $2 , 545,555 $1,054,217 338, 5 84 62 7 , 64 9 173 , 20 6 2 , 1 93, 656 668,832 1, 5 24,82 4 156 ,5 90 6 , 901 45 , 26 8 1,733, 5 83 77 , 26 8 43 , 163 14 , 535 1 8, 10 2 153 , 06 8 73 , 63 5 51 , 50 2 11, 42 0 (3, 000) 39 , 309 1 4, 6 3 5 28,2 30 1 4 , 315 7, 1 8 0 3 ,2 83 15 , 796 256, 305 13 0 , 458 8 5 , 855 33, 706 39 , 306 41 , 705 13 , 5 2 2 3 44 , 552 $2,487,508 Th e acco m panyi n g Notes to Co n so li dated Financial Statements are an integral pa r t of these statements.

I

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

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

1994 -54,155,245; 1993 -53,506,786

$ 593,475 $ 579,443 Retained Earnings 249,181 256,549 Total Common Shareholders' Equity 842,656 835,992 Preferred Stock of Atlantic City Electric Company: Not Subject to Mandatory Redemption 40,000 40,000 Subject to Mandatory Redemption 149,250 173,750 Long Term Debt 778,288 766,101 Total Capitalization (excluding current portion) 1,810,194 1,815,843 Current Liabilities:

Preferred Stock Redemption Requirement 12,250 12,250 Long Term Debt 1,000 -Short Term Debt 8,600 -Accounts Payable 66,080 63,847 Taxes Accrued 10,409 16,020 Interest Accrued 19,168 22,149 Dividends Declared 24,681 24,910 Accrued Employee Separation Costs 26,600 -Other 19.813 25.626 Total Current Liabilities 188,601 164,802 I Deferred Credits and Other Liabilities:

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

$2,545,555

$2,487,508 6

7 C9onsolidated Statement of C9hanges in C9ommon Sha 1feho lde 1fs 1 Gquity Balance , December 31, 1991 Common Stock issued Net Income Common Stock dividends Balance, December 31 , 1992 Common Stock issued Net Income Capital Stock expense of subsidiary Common Stock dividends Balance, December 31, 1993 Common Stock issued Common Stock repurchased Net Income Common Stock dividends Balance, December 31 , 1994 Shares 50 ,8 96 , 074 1 ,3 02 , 550 52 , 198 , 624 1 , 308,162 53 , 506 , 786 870,159 (221,700) 54,155,245 The accompanying Notes to Co n solidated Financial Statements are an integra l part of these statements. ATLANTIC ENERGY, INC. ANO SUBSIDIARIES Common Stock Retained Earnings (T/11111,t111d

.\ Doi/an) $520,345 $234,894 28,802 86,210 (78,336) 549,147 242,768 30,296 95,297 (169) (81,347) 579,443 256 , 549 17,941 (3,909) 76,113 (83,481) $593,475 $249,181 lflotes to @onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIES NOT SIGNIFICANT ACCOUNTING POLICIES Organization

-Atlantic Energy, Inc. (the Company, AEI or parent) is the parent of a consolidated group of wholly-owned subsidiaries consisting of Atlantic City Electric Company (ACE) and the following non-utility companies:

Atlantic Energy Technology , Inc. (AET), Atlantic Generation , Inc. (AGI), Atlantic Southern Properties , Inc. (ASP), ATE Investment, Inc. (ATE) and Atlantic Thermal Systems, Inc. (ATS). 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 Public Utilities (BPU), formerly Board of Regulatory Commissioners.

ACE's service territory encompasses approximately 2 , 700 square miles within the southern one-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 principal subsidiary within the consolidated group. AGI and its owned subsidiaries are engaged in the development and operation of cogeneration power projects , rently located in New Jersey and New York , through several partnership arrangements. ASP owns and manages a commercial office and warehouse facility located in southern New Jersey. ATE provides fund management and financing to affiliates and manages a portfolio of investments in leveraged leases for equipment used in the airline and shipping industries.

ATS and its wholly-owned subsidiary , both formed in May 1994, are engaged in the development of thermal heating and cooling systems. AET is presently concluding the affairs of its subsidiary , which is its sole investment.

On January 1, 1995, a new subsidiary of AEI , Atlantic Energy Enterprises, Inc. (AEE), was formed. AEI will transfer direct ownership of the existing non-utility companies to AEE. AEE will seek to form new nesses and ventures and invest in established businesses. Principles of Consolidation

-The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant company accounts and transactions have been nated in consolidation.

ACE, AET, AGI and ATS consolidate their respective subsidiaries.

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

The results of tions of the non-utility companies are not significant to the results of the Company and are classified under Other Income in the Consolidated Statement of Income. Regulation

-The accounting policies and rates of ACE are subject to the regulations of the BPU and in certain respects to the Federal Energy Regulatory Commission (FERC). ACE follows generally accepted accounting principles (GAAP) and financial reporting ments employed by all industries as specified by the Financial Accounting Standards Board (F ASB) and the Securities and Exchange Commission (SEC). ever, accounting for rate regulated industries may depart from GAAP applied by other industries as permitted by Statement of Financial Accounting Standards No. 71 (SFAS No. 71). SFAS No. 71 provides guidance on circumstances where the nomic effect of a regulator's decision warrants different applications of GAAP as a result of the rate making process. In setting rates, a regulator may provide recovery of an incurred cost in a year or years other than the year the cost is incurred.

As permitted by SFAS No. 71 , costs ordered by a regulator to be deferred or capitalized for future recovery are recorded as a regulatory asset because the regulator's rate action provides reasonable assurance of future economic benefits attributable to these costs. In a non-rate regulated industry, such costs may be charged to expense in the year incurred.

SF AS No. 71 further specifies that a regulatory liability is recorded when a regulator orders a refund to customers of revenues previously collected, or when existing rates provide for recovery of future costs not yet incurred.

Such ment is not afforded to non-rate regulated companies.

When collection of regulatory assets or relief of regulatory liabilities is no longer probable , the assets and liabilities are applied to income in the year that the probability assessment is made. Specific regulatory assets and liabilities that have been recorded are discussed elsewhere in the notes to the consolidated financial statements. 8 9 Vlotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIES Electric Operating Revenues -Revenues are nized 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 jointly-owned nuclear generating stations, including spent nuclear fuel disposal costs, are charged to Energy expense based on the units of thermal energy produced.

Electric Utility Plant -Property is stated at original cost. Generally, the plant is subject to a first mortgage lien. The cost of property additions, including ment of units of property and betterments, is ized. 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 reasonable rate on other funds when so used. AFDC has been calculated using a ally compounded rate of 8.25%, as approved by the BPU, since August 1 1 1993. The AFDC rate w:as 8.95%, as approved by the BPU, prior to this date. Depreciation

-ACE provides for straight-line tion based on the estimated remaining life of sion and distribution property, remaining life of the related nuclear plant operating license for nuclear property and estimated average service life for all other depreciable property.

The overall composite rate of depreciation was approximately 3.3% in 1994 and 1993 and 3.5% in 1992. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries.

Depreciation expense of the non-utility companies is not significant.

Nuclear Decommissioning Trust -ACE has 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 BPU, 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 ing each of the units, dates that decommissioning activities are expected to occur and return to be earned by the assets of the fund. The present value of ACE's nuclear decommissioning obligation, based on 1987 site specific studies used by the BPU for approval in 1991 and restated in 1994 dollars, is $152.2 million. The BPU has further established that decommissioning activities are expected tq begin in 2006 and continue through 2032. Actual costs and timing of sioning activities may vary from the current estimates.

ACE will seek to adjust these estimates and the level of rates collected from customers in future BPU ings to reflect changes in decommissioning cost estimates and the expected levels of inflation and interest to be earned by the assets in the trust. As of December 31, 1994, the present value of such tions based on estimates for future decommissioning costs and the dates such activities are expected to occur is $111.4 million, without earnings on or appreciation of the fund assets. As of December 31, 1994, the cost and market value of the trust were $52 million. Trust contributions of $36.9 million qualify for Federal income tax purposes.

The related reserves for missioning costs are presented as a component of accumulated depreciation and amounted to $51.1 million at December 31, 1994, and $42.2 million at December 31, 1993. The SEC has questioned certain accounting practices employed by the electric utility industry concerning decommissioning costs for nuclear generating ties. The F ASB is currently reviewing this issue wjthin the broad context of removal costs relative to all industries.

At this time, the Company cannot predict what future accounting practices may be required by the F ASB and SEC concerning this issue, nor the impact on the financial statements that any new accounting practices may have. Deferred Energy Costs -As approved by the BPU, ACE has a Levelized Energy Clause (LEC) through which energy arid energy-related costs (energy) are charged to customers.

LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries of energy costs. Energy costs are recovered 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 may be greater or less than the recoverable amount of actual energy costs incurred in that period. Energy expense is adjusted to match the associated LEC revenues.

Any underrecovery (an asset representing energy costs curred that are to be collected from customers) or overrecovery (a liability representing previously collected energy costs to be returned to customers) of costs is I l deferred on the Consolidated Balance Sheet as Deferred Energy Costs. These deferrals are recognized in the Consolidated Statement of Income as Energy expense during the period in which they are subsequently included in the LEC. Income Taxes -Effective January 1, 1993, deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different than book income, and tax carryforwards.

Deferred Federal and state income taxes for 1992 were provided on all significant ciirrent transactions for which the timing of recognition 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 nized 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. Earnings Per Common Share -This is computed based upon the weighted average number of common shares outstanding during the year. Common Stock equivalents attributable to the Equity Incentive Plan do not impact this computation because they are currently anti-dilutive.

Unrecovered Purchased Power Costs -ACE has an arrangement that commenced in 1983 to purchase capacity and related energy through September 30, 2000. Levelized base rates over the term of the arrangement were approved by the BPU to recover costs estimated at commencement to be incurred.

During the first half of the term, estimated costs that exceeded levelized revenues were deferred on the Consolidated Balance Sheet as Unrecovered Purchased Power Costs. Since then, levelized revenues have been greater than the estimated costs, permitting the deferred costs to be charged to Purchased Capacity expense on the Consolidated ment of Income. The BPU granted a return on the unrecovered deferred balance throughout the term of the arrangement.

The unrecovered deferred balances at December 31, 1994 and 1993 were $95.9 million and $110.5 million, respectively.

Also included within Unrecovered Purchased Power Costs are costs incurred in renegotiating a contract with an independent power producer.

These costs are amortized to expense over the ATLANTIC ENERGY, INC. AND SUBSIDIARIES BPU-approved recovery period of 20 years beginning in 1994. The unrecovered balances were $19.6 million and $20 million at December 31, 1994 and 1993, respectively.

Regulatory Assets and Liabilities

-Costs incurred by ACE that have been permitted by the BPU to be deferred for recovery in rates in more than one year, or for which future recovery is probable, have been recorded as regulatory assets. Regulatory assets are amortized to expense over the period of recovery.

Total regulatory assets on the Consolidated Balance Sheet at December 31 , 1994 and 1993 were $365.5 million and $332.1 million, respectively.

Unamortized costs currently being recovered in rates at December 31, 1994 and 1993, respectively, and remaining recovery periods at December 31, 1994 are: Unrecovered State Excise Taxes of$73.8 million and $33.7 million, with a remaining recovery period of eight years; decommissioning and nating Federally-owned nuclear units of $7.2 million and $8.4 million, with a remaining recovery period of 14 years; and asbestos removal of $9.6 million and $9.9 million, for which the.recovery period is over the ing depreciable life of the related generating station of36 years. Property Abandonment costs at their net present value of $5 million and $6.3 million at December 31, 1994 and 1993, respectively, are being recovered through rates with no return on the unamortized balances of $6.5 million and $8.5 million, respectively.

Such costs were written down to their net present values at the date of abandonment with subsequent accretions of the unamortized balances over the recovery period. These costs have recovery periods between two and seven years. Also included in Other Regulatory Assets are amounts for which future recovery is probable of $9.4 million and $9 .1 million at December 31, 1994 and 1993, tively. Costs associated with debt reacquired by refundings , included in Unamortized Debt Costs, are amortized over the life of the newly issued debt as permitted by the BPU in accordance with FERC lines. The unamortized balances of these costs were $32.2 million and $33.2 million at December 31, 1994 and 1993, respectively.

Recovery ofregulatory assets for Unrecovered Purchased Power Costs (Note 1), Deferred Energy Costs (Note 1), Recoverable Future Federal Income Taxes (Note 2) and Postretirement Benefits Other Than Pensions (Note 4) are separately discussed in the Notes to Consolidated Financial Statements where indicated.

No regulatory liabilities existed at December 31, 1994 and 1993. 10 1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY , INC. AND SUBSIDIARIES Financial Instruments

-A number of items within Current Assets and Current Liabilities on the dated 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 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 assets under lease. These leased assets are of general use within their respective industries.

NOT INCOME TAXES (000) Other -Debt premium, discount and expenses of ACE are amortized over the life of the related debt. rary investments considered as cash equivalents for Consolidated Statement of Cash Flows purposes sent purchases of highly liquid debt instruments maturing in three months or less. The weighted daily average interest rate on short term debt was 4.4% for 1994 and 3.2% for 1993. Certain prior year amounts have been reclassified to conform to the current year reporting of these items. For the Years Ended December 31, 1994 1993 1992 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 Included in Operating Expenses A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate follows: Statutory Federal Income Tax Rate 11 Income Tax Computed at the Statutory Rate Plant Basis Differences Amortization of Investment Tax Credits Tax Adjustments Other-Net Total Federal Income Tax Expense Effective Federal Income Tax Rate State income tax expense is not significant.

$ 19,729 17,414 37,143 (5,386) $ 42,529 35% $ 45,490 (27) (2,534) (4,097) (1,689) $ 37,143 29% $ 25,349 20,247 (12) 45,584 307 $ 45,277 35% $ 55,400 (5,171) (2,546) (2,071) (28) $ 45,584 29% $ 22,441 23,154 (233) 45,362 8,219 $ 37,143 34% $ 50,791 2,022 (2,767) (3,757) (927) $ 45,362 30%

Items comprising deferred tax balances are as follows at December 3 1 , 1994 and 1993: (000) Deferred Tax Liabilities:

Plant Basis Differences Leveraged Leases Unrecovered Purchased Power Costs State Excise Taxes Other Total Deferred Tax Liabilities Deferred Tax Assets: Deferred Investment Tax Credits Employee Separation Costs Other Total Deferred Tax Assets Total Deferred Taxes-Net At December 31 , 1994 and 1993, valuation allowances exist against deferred tax assets primarily for tive net operating losses (NOLs) for state income tax purposes.

The effects of the valuation allowances and state NOLs are generally not material to consolidated results of operation and financial position.

The Company is subject to Federal Alternative mum Tax (AMT), which is attributable to non-utility operations.

At December 31, 1994 , there is an mated cumulative AMT credit of $12.5 million. The AMT credit is available for an indefinite carryforward NOT RATE MATTERS OF ACE Energy Clause Proceedings Chang e s in Lev e li z ed En e rgy Clause Rat es 1992-1994 Amount Amount Date Request e d Granted Date Filed (millions) (millions)

Effective 2 1 92 $(6.6) $(8.5) 10/92 3 1 93 14.2 10.9 10/93 2 1 94 63.0 55.0 7/94 ACE's Levelized Energy Clause (LEC) is subject to annual review by the BPU. In February 1992, ACE filed a petition with the BPU ATLANTIC ENERGY , INC. AND SUBSIDIARIES 1994 1993 $304,476 $295 , 445 61,409 53,461 33,557 38 , 792 25,842 11 , 797 24 732 21 057 450,016 420 , 552 27,879 29 , 247 6,932 15,245 11 , 741 50,056 40 , 988 $399,960 $379 , 564 period against future Federal income tax payable , to the extent that the regular Federal income tax payable exceeds future AMT payable. Deferred tax costs associated with additional deferred tax liabilities resulting from a change in accounting standards regarding deferred taxes effective in 1993 are recorded on the Consolidated Balance Sheet as erable Future Federal Income Taxes. Such recognition is given in respect of the probable amount of revenue to be collected from ratepayers for these additional taxes to be paid in future years. for the LEC period June 1, 1992 through May 31 , 1993 requesting no change in LEC rates. In April 1992 , ACE filed a revision to their petition requesting a $6.6 million decrease in LEC rates based on an update for the projected overrecovery of prior LEC costs and an amount allocated to customers from the litigation settlement with PECO Energy (PECO) related to the Peach Bottom Atomic Power Station. In October 1992 , the BPU approved a reduction in annual LEC revenues of $8.5 million which included the recovery of $10.4 million over a three-year period of certain deferred costs relating to the Salem Nuclear Generating Station. The PECO settlement allocation was subject to review by the BPU in ACE's 1993 LEC proceeding. 12

'Vlotes to C9onsolidated Financial Statements ATLANTIC ENERGY , INC. AND SUBSIDIARllES In March 1993 , ACE filed a petition with the BPU requesting a $14.2 million increase in LEC revenues for the June 1 , 1993 through May 31, 1994 LEC period. Effective for service rendered on and after October 1 , 1993 , the BPU approved an increase of $10.9 million which included the following:

(1) an additional

$3.8 million of the PECO settlement gether with accrued interest to be returned to customers during the 1994-1995 LEC period; (2) recovery of $400 thousand for the annual assessment for the Department of Energy (DOE) decommissioning and decontamination fund; (3) full LEC recovery of all future assessments for the DOE decommissioning and decontamination fund and (4) recognition of the $48 thousand penalty for 1992 nuclear operations as required by the Nuclear Performance Standard.

The additional allocation of the PECO settlement was provided for in the 1993 financial results and the reimbursement was made through the 1994 LEC. 13 On February 8 , 1994 , ACE filed a petition with the BPU requesting an increase in LEC revenues of $63 million for the period June 1, 1994 through May 31, 1995. The increase was due primarily to the additional costs incurred from two new independent power producers (IPPs) scheduled to begin commercial operation during the 1994/1995 LEC period. The total projected costs for fuel and capacity for the LEC period were $147 million. ACE reduced the requested amount by $84 million as a result of the utilization of $56 million of current base rate revenues associated with a utility power purchase contract expiring in May 1994 and the Southern New Jersey Economic Initiative (SNJEI), an ACE initiative that forgoes the recovery of $28 million of fuel costs. Included in ACE' s request was the recovery over five years of $20 million paid by ACE in December 1993 in connection with contract renegotiations with an IPP. Effective July 26, 1994, the BPU approved a provisional increase of $55 million based on an adjustment to actual costs for fuel and capacity.

On November 30, 1994, the BPU rendered its decision on ACE's LEC request approving the continuation of provisional LEC rates, the recovery of the $20 million in renegotiation costs and the reduction for the $28 million SNJEI. Base Rate Case Proceedings Effective October 1992 , the BPU authorized a net increase in annual base rate revenues of $12.9 million. In March 1994, in response to an appeal filed by the Ratepayer Advocate in December 1992 , the Superior Court of New Jersey , Appellate Division, affirmed the BPU's decision to allow an increase in base rates relating to changes in the state excise tax. Other Rate Proceedings In November 1993, ACE filed a petition with the BPU requesting that hotel-casino customers be permitted to take service under rate schedules offered to all other commercial and industrial customers.

On June 23, 1994 , the BPU approved the request with a provision that ACE not seek recovery of lost revenues resulting from the hotel-casinos being permitted to shift to other rate schedules prior to ACE's next base rate case. The BPU also allowed for a one-time adjustment to be billed to hotel-casino customers for the associated underrecovery in ACE's fuel clause. Prior to BPU approval, hotel-casino customers were served under the Hotel Casino Service rate schedule , the highest rate for service of all ACE' s service classes. Effective July 1, 1994, all hotel-casino customers began taking service under a general service rate schedule which could reduce annual base rate revenues by approximately

$7 million. Effective July 25, 1994, the Hotel Casino Service rate schedules were no longer offered for electric service. In July 1993, the BPU initiated a generic proceeding to address the recovery of the capacity costs associated with purchases of power from non-utility generation projects.

This issue relates to the Ratepayer Advocate's contention that present BPU policy which permits full recovery of these costs through the LEC provides for a "double recovery" of cogeneration capacity costs. In August 1993, the Ratepayer cate identified ACE as one of the electric utilities for which they considered the double recovery of capacity costs to be at issue. Pursuant to its February 18, 1994 decision supporting the investigation of the double recovery of capacity costs from non-utility generation projects , the BPU issued its written order on September 16, 1994. The order confirmed the establishment of a generic proceeding to review the non-utility purchase power capacity cost recovery methodology and ordered that the matter be reviewed in a two phase proceeding.

The scope of the issues to be resolved during the first phase of the proceeding will include: (1) the nation of the existence , or lack of existence , of the double recovery as a result of the traditional LEC through of non-utility generation capacity costs; (2) the quantification of any such double recovery found to exist for each utility for the relevant periods; and (3) a determination of an appropriate remedy or adjustment if such double recovery is found to occur and the periods of time over which such an adjustment would NOT RETIREMENT BENEFITS Pension ACE has a noncontributory defined benefit pension 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. ACE's policy is to fund pension costs within the guidelines of the minimum required by the ployee Retirement Income Security Act and the maximum allowable as a tax deduction.

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

Net periodic pension costs for 1994, 1993 and 1992 include the following components

(000) Service cost -benefits earned during the period Interest cost on projected benefit obligation Actual return on plan assets Other-net 1994 $ 6,871 15,390 (860) (16,885) Net periodic pension costs $ 4,516 1993 $ 7 , 196 16 , 016 (23 , 200) 5,496 $ 5,508 1992 $ 7 , 310 17,301 (13 , 283) (3 , 795) $ 7,533 Approximately

$3 million , $5.2 million and $4.8 million of these costs were charged to operating expense in 1994 , 1993 and 1992, respectively , and the remaining costs , which are associated with construction labor, were charged to the cost of a new utility plant. ATLANTIC ENERGY, INC. AND SUBSIDIARIES be applicable.

Following the conclusion of the first phase of the proceeding , the BPU , in the second phase , will render a final decision regarding the specific findings of the Office of Administrative Law and address the broader issues relating to the appropriate prospective purchase power capacity cost recovery methods. Evidentiary hearings have been scheduled through December 1995. The BPU's final decision is not anticipated until 1996. At this time , ACE cannot predict the outcome of this proceeding and cannot estimate the impact that the double recovery issue may have on future rates. A reconciliation of the funded status of the plan as of December 31 , 1994 and 1993 is as follows: (000) 1994 1993 Fair value of plan assets $190,200 $213 , 600 Projected benefit obligation 206,742 207 , 246 Plan assets (less than) in exce s s of projected benefit obligation (16,542) 6 , 354 Unrecognized net transition asset (1,722) (1,894) Unrecognized prior s ervice co s t 306 329 Unrecognized net loss (gain) 24,106 (638) Prepaid pension cost $ 6,148 $ 4 , 151 Accumulated benefit obligation:

Vested benefits $166,602 $165 , 872 Nonvested benefits 485 1,216 Total $167,087 $167 , 088 At December 31 , 1994 , approximately 60% of plan assets were invested in equity securities , 18% in fixed income securities and 22% in other investments.

The assumed rates used in determining the actuarial present value of the projected benefit obligation at year-end were as follows: Weighted average discount Anticipated increase in compensation 1994 7.5% 3.5% 1993 7.5% 3.5% The assumed long term rate of return on plan assets was 8.5% for both 1994 and 1993 and 8% for 1992. 14 15 1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARll!S Other Postretirement Benefits ACE and its subsidiary provide certain health care and life insurance benefits for retired employees and their eligible dependents.

Substantially all employees may become eligible for these benefits if they reach ment age while working for the companies.

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 benefits.

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

The cost of other postretirement benefits was $15.6 million, $13.1 million and $6 million in 1994, 1993 and 1992, respectively.

These costs were allocated as follows: (millions) 1994 1993 1992 Operating expense $5.6 $3.3

$3.8 New utility plant-associated with construction labor .2 1.7 2.2 Regulatory asset 9.8 8.1 The regulatory assets represent the amount of cost recognized under accounting standards effective January 1, 1993 in excess of the amount of cost currently recovered in rates. These excess costs are deferred as authorized by an accounting order of the BPU pending future recovery through rates. Net periodic other postretirement benefits cost as calculated in accordance with accounting standards in effect since January 1, 1993 include: (000) 1994 1993 Service cost-benefits attributed to service during the period $ 3,817 $ 3,045 Interest cost on accumulated postretirement benefits obligation 8,450 7,133 Actual return on plan assets 100 (255) Amortization of unrecognized transition obligation 3,893 3,893 Other-net {700} {7112 Net periodic other postretirement cost $15,560 $13,105 A reconciliation of the funded status of the plan and the obligation for other postretirement benefits recognized in the Consolidated Balance Sheet as of December 31 , 1994 and* 1993 is as follows: (000) Accumulated benefits obligation:

Retirees Fully eligible active plan participants Other active plan participants Total accumulated benefits obligation Less fair value of plan assets Accumulated benefits obligation in excess of plan assets lJnrecognized net loss lJnamortized unrecognized transition obligation Accrued other postretirement benefits cost obligation 1994 $ 43,265 18,010 60,588 121,863 14,700 107,163 (19,223) (70,075) $ 17,865 1993 $32,720 21,267 49,125 103,112 14,400 88,712 (6,639) (73,968) $ 8,105 At December 31, 1994, approximately 81 % of plan assets were invested in fixed income securities and 19% in other investments.

The assumed health care costs trend rate for 1994 is 10% and is assumed to evenly decline to an ultimate constant rate of 5% in the year 2000 and thereafter.

If the assumed health care costs trend rate was increased by 1 % in each future year, the aggregate service and interest costs of the 1994 net periodic benefits cost would increase by $1.9 million, and the accumulated postretirement benefits obligation at December 31, 1994 would increase by $16.7 million. The weighted average discount rate assumed in determining the accumulated benefits obligation was 7.5% for 1994 and 1993. The assumed long term return rate on plan assets was 7% for 1994 and 1993.

ATLANTIC ENERGY , INC. AND SUBSIDIARIES NOT JOINTLY-OWNED GENERATING STATIONS ACE owns jointly with other utilities several electric The amounts shown represent ACE' s share of each production facilities.

ACE is responsible for its pro-rata facility at, or for the year ending, December 31, includ-share of the costs of construction, operation and mainte-ing AFDC as appropriate.

nance of each facility.

Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Company's Share (%/MWs) 2.47/42.3 Electric Plant in Service (000): 1994 $11,293 1993 10,746 Accumulated Depreciation (000): 1994 $ 3,180 1993 3,231 Construction Work in Progress (000): 1994 $ 1,216 1993 758 Operation and Maintenance Expenses (including fuel)(OOO):

1994 $ 5,085 1993 5,323 1992 4,976 Working Funds (000): 1994 $ 44 1993 44 Generation (MWH): 1994 257,561 1993 293,876 1992 294,222 ACE provides financing during the construction period for its share of the jointly-owned facilities and includes its share of direct operations and maintenance expenses in the Consolidated Statement of Income. Additionally, ACE provides an amount of working funds to the opera-Coal Nuclear Nuclear Nuclear 3.83/65.4 7.51/157.0 7.41/164.0 5.00/52.0 $26,607 $125,003 $206,804 $238,980 18,055 123 ,428 203,858 237,496 $ 6,237 $ 55,190 $ 79,898 $ 53,746 5,971 5 l,871 78,383 46,933 $ 2,649 $ 11,002 $ 8,727 $ 387 9,956 7,983 10,799 1,022 $ 7,211 $ 29,530 $ 27,731 . $ 10,471 6,855 31,479 27,021 9,764 7,194 29,618 25,461 9,541 $ 69 $ 5,051 $ 5,199 $ 2,013 69 4,772 5,249 2,061 419 ,3 13 1,214,776 836,725 355,390 416,263 1,043,485 840,043 440,118 457,771 958,740 737 ,356 351,672 tors of the facilities to fund operational needs. The increase in Electric Plant in Service and decrease in Construction Work in Progress for Conemaugh is primarily due to the placement in service of flue gas desulfurization equipment (scrubber).

16 1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARllt:S NOT NON-UTILITY COMPANIES The Company (AEI) is the parent holding company of the consolidated group. Its primary activities are the management of investments in the subsidiary nies, issuance of common equity and performance of administrative functions on behalf of the consolidated group. Principal assets of each of the subsidiary companies are: AGI -capital investments of mately $30.3 million in cogeneration development projects and partnerships; ASP -commercial real estate site with a net book value of $10.3 million; ATE -leveraged lease investments of $78.2 million; and ATS -construction costs in thermal heating and cooling projects of $6.3 million. AET is presently concluding the affairs of its subsidiary, which is its sole investment.

The net investment in this subsidiary is nominal. Other financial information regarding the subsidiary companies is as follows: Company Net Assets Net Income (Loss) (000) 1994 1993 1994 1993 1992 AGI $23,610 $18,746 $2,959 $4,459 $1,366 ASP 3,175 5,131 (1,956) (347) (263) ATE 9,449 9,182 266 (777) 667 ATS 2,577 (327) AET 1,324 2,069 (744) 524 (4,793) AGI's results reflect the operation of cogeneration facilities in which AGI has an ownership interest.

AGI's 1994 results were reduced by decreased tion of a cogeneration unit and an increase in deferred income tax expenses.

17 ASP's results in each year reflect the vacancy in its commercial site due to generally poor market tions in commercial real estate. The 1994 results include a net after tax write-down of the carrying value of the commercial site of $1. 7 million. ATE's 1994 results reflect a reduction in deferred income tax expense. A TE' s 1993 results were reduced by increased deferred state income tax expense. ATE's 1992 results benefitted from lower interest rates on amounts outstanding under its revolving credit agreement.

ATS, formed in May 1994, is primarily a

tal stage company that will become operational as heating and cooling system projects are completed.

The 1994 results reflect administrative and general costs. AET's 1994 results reflect expenses incurred ing future investment opportunities and an increase in deferred Federal income tax expense. AET's 1993 results are due to the receipt of life insurance proceeds by its subsidiary company. In 1993, this subsidiary discontinued its operating activities to concentrate on licensing its patented proprietary knowledge.

AET's 1992 results reflect the provision for the restructuring of its subsidiary's activities.

AEI parent-only operations, excluding its equity in the results of subsidiary companies, generally reflect administrative expenses.

Net results were losses of $543 thousand in 1994, $183 thousand in 1993 and $401 thousand in 1992.

NOT CUMULATIVE PREFERRED STOCK OF ACE ACE has authorized 799,979 shares of Cwnulative Preferred Stock , $100 Par Value , two million shares of No Par Preferred Stock and three million shares of 1994 S e ri es Par Valu e Shar es (000) Not Subject to Mandatory Redemption:

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

$8.25 None 55,000 $ 5,500 $8.53 None 360,000 36,000 $8.20 None 500,000 50,000 $7.80 None 700,000 70,000 Total 161,500 Less portion due within one year 12,250 Total $149,250 Cwnulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of ACE. 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 premiwn. ACE redeemed 5 , 000 shares in both 1994 and 1993. Commencing in 1994, on November 1 of each year , 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 premiwn. ACE redeemed 240 , 000 shares in 1994. Beginning August 1 , 1996 and annually thereafter , 100,000 shares of the $8.20 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 100,000 shares may be redeemed on any sinking fund date without premiwn. This series is not refundable prior to August 1, 2000. ATLANTIC ENERGY , INC. AND SUBSIDIARIES Preference Stock, No Par Value. Information relating to outstanding shares at December 31 is shown in the table below. Shar es 77,000 72,000 15,000 36,000 50 , 000 50 , 000 100 , 000 60 , 000 600,000 500,000 700 , 000 1993 (000) $ 7,700 7 , 200 1 , 500 3 , 600 5 , 000 5,000 10,000 $ 40 000 $ 6,000 60 , 000 50,000 70,000 186,000 12,250 $173,750 Cu rr e nt Optional R e d e mption Pri ce $105.50 101.00 101.00 101.00 101.00 100.00 101.88 104.66 102.00 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, the remaining shares outstanding must be redeemed at $100 per share. ACE has the option to redeem up to an additional 115,000 shares without premiwn on each May 1 through 2005. This series is not refundable prior to May 1 , 2006. For the next five years , the annual minimwn sinking fund requirements of the Cwnulative Preferred Stock Subject to Mandatory Redemption is $12.25 million for the year 1995 , and $22.25 million in each of the years 1996 and 1997 and $10.25 million in each of the years 1998 and 1999. Cwnulative Preferred Stock of ACE is not widely held and trades infrequently.

The estimated aggregate fair market value of ACE's outstanding Cwnulative Preferred Stock at December 31, 1994 and 1993 was approximately

$185 million and $231 million, respectively.

The fair market value has been determined using market tion available from actual trades of similar instrwnents of companies with similar credit quality and rate. 18 1fl o t es t o C9on s o lid a t e d Fi nan ci a l St a t em e n ts ATLANTIC ENERGY , INC. AND SUBSIDIARIE';S NOT LONG TERM DEBT D ece mb e r 3 1 , S er i es Maturi ty Dat e 1994 1993 (Medium Term Notes -MTNs-h ave varying maturity dates and are shown with the weighted average inte r est r ate of the rela t ed issues within the year of maturity.)

(000) 5 1/8% First Mortgage Bonds Medium Term Notes Series B (6.28%) Medium Term Notes Series A (7.52%) Medium Term Notes Series B (6.83%) 7 1/2% First Mortgage Bonds Medium Term Notes Series B (7.18%) 7 3/4% Fir s t Mortgage Bonds Medium Term Notes Series A (7.98%) Medium Term Notes Series B (7.125%) 7 5/8% Pollution Control Medium Term Notes Series B (6.45%) 6 3/8% Pollution Control Medium Term Notes Series B (6.76%) 10 1/2% Pollution Control Series B 6 5 1 8% First Mortgage Bonds 7 3/8% Pollution Control Series A 10 1 1 2% Pollution Control Series C 8 1/4% Pollution Control Series A 9 1/4% First Mortgage Bonds 6.80% Pollution Control Series A 7% First Mortgage Bonds 5.60% Pollution Control Series A 7% First Mortgage Bond s 6.15% Pollution Control Series A 7.20% Pollution Control Series A 7% Pollution Control Series B Total Debentures

5 1/4% 7 1/4% Total Unamortized Premium and Discount-Net Total Long Term Debt of ACE Long Tenn Debt of A TE Less Portion Due Within One Year Total Long Term Debt 2/1/1996 1998 1999 2000 4/11 2002 2003 6/1/2003 2004 2004 11112005 2005 12/112006 2008 7115/2012 8/1/2013 4/15/2014 7/15/2014 7 11 5/2017 10 11/2019 3/1/2021 9/1/2023 111112025 8/112028 611 1 2029 111112029 11/112029 2/111996 5/1/1998 In 1994 , ACE redeemed its 10 1/2% Pollution Control Bonds Series C due 7/15/2014 and its 7 5/8% Pollution Control Bonds due 11 11 2005. ACE acquired and retired $11.9 million principal amount of First gage Bonds , 9 1/4% Series due 10/112019. The aggregate co s t of the se redemption s wa s $1.2 million , net of r e l a ted Fe deral i n c om e t axes. 1 9 $ 9,980 56,000 30,000 46,000 20,000 20,000 29,976 30,000 28,000 40,000 2,500 50,000 850 75,000 18,200 4,400 53,857 38,865 75,000 4,000 75,000 23,150 25,000 6,500 762,278 2,267 2 619 4,886 (3,876) 763,288 16,000 1,000 $778,288 $ 9 , 980 56 , 000 30 , 000 46 , 000 20 , 000 20 , 000 29 , 976 30 , 000 28,000 6,500 40,000 2,500 50 , 000 850 75,000 18,200 23,150 4,400 65 , 767 38 , 865 75,000 4 , 000 75 , 000 749 , 188 2 , 267 2 , 619 4,886 (2,973) 751 , 101 15 , 000 $766,101 Sinking fund deposits are required for retirement of the 5 1/4% Debentures annually on February 1 through 1995 and for the 7 1/4% Debentures annually on May 1 through 1997 in amounts in each case sufficient to redeem $100 , 000 principal amount. ACE may , at its option , redeem an additional

$100 , 000 annuall y in e ach c a se. Throu gh D e c e mb e r 31 , 1994 , ACE a cquired a nd cancelled

$333 thousand and $181 thousand principal amount of the 5 1/4% and 7 1/4% Debentures , respectively , which will be used to satisfy its requirements for 1995. Certain series of First Mortgage Bonds contain sions for deposits of cash or certification of bondable property currently amounting to $100 thousand , which ACE may elect to satisfy through property additions. For the next five years , the annual amount of scheduled maturities and sinking fund requirements of ACE's long term debt are $12.266 million in 1996, $175 thousand in 1997 , $58.575 million in 1998 and $30.075 million in 1999. ACE's long term debt securities are not widely held and generally trade infrequently.

The estimated aggregate fair market value of ACE's outstanding long term debt securities at December 31 , 1994 and 1993 was $693 million and $768 million , respectively.

The NOT COMMON 5HAREHOLDERS 1 EQUITY In addition to public offerings, Common Stock may be issued through the Dividend Reinvestment and Stock Purchase Plan (DRP), ACE benefit plans (ACE plans) and the Equity Incentive Plan (EIP). The number of shares of Common Stock issued (forfeited), and the number of shares reserved for issuance at December 31 , 1994, were as follows: DRP ACE Plan s EIP Total 1994 699,493 (5,046) 175,712 870,159 1993 1 , 300 , 129 8, 033 1 , 308 , 162 1992 R ese r ve d 1 , 291 , 653 10 , 897 1 , 302 , 550 723 , 975 141 , 038 624 , 288 In April 1994 , the shareholders of the Company approved the EIP. Eligible participants are officers , general managers and nonemployee directors of the Company and its subsidiaries. Under the EIP, nonemployee director participants are entitled to receive a grant of 1 , 000 shares of restricted stock. Restrictions on the s e grants expire over a five-year period. Employee participants may be awarded shares of restricted Common Stock, stock options and other Common Stock-based awards. Actual awards of restricted shares are based on attainment of various levels of certain Company performance criteria within ATLANTIC ENERGY, INC. AND SUBSIDIARIES fair market value has been determined based on quoted market prices for the same or similar debt issues or on debt instruments of companies with similar credit quality , coupon rates and maturities.

Long term debt of A TE primarily consists of $15 million of7.44% Senior Notes due 1999. The mated fair market value of these Notes at December 31 , 1994 and 1993 was $14 million and $16 million , respectively, based on debt instruments of companies with similar credit quality, coupon rates and maturities.

Also, A TE 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 through June 1995. There were $1 million in borrowings outstanding under this agreement at December 31 , 1994. Commitment fees on the unused credit line were not significant.

a three-year period. Restrictions lapse upon actual award at the end of the three-year performance period. Shares not awarded are forfeited. Dividends earned on restricted stock issued through the EIP are invested in additional restricted stock under the EIP. Such s tock acquired is subject to the same restrictions.

The number of restricted shares issued in 1994 to employee participants was 167 ,300. Stock options granted in 1994 are nonqualified and are exercisable three years after but within 10 years from the date of grant. Stock options are priced at an amount at least equal to 100% of the fair market value of Common Stock on the date of grant. As of December 31, 1994, options on 167 ,300 shares of common stock were granted at a price of $21.125 per share. No options were eligible to be exercised in 1994. In October 1994 , the Board of Directors authorized the reaquisition of up to three million shares of the Company's Common Stock. Management will use its discretion , based on market conditions , as to the timing and price of repurcha s ed. There is no schedule or specific share price target associated with the acquisition and the authorized number of shares will not be affected.

Shares repurchased are cancelled.

During 1994, the Company reacquired 221, 700 shares at prices ranging from $16.50 to $18.125 per share. 20 1flotes to C9onsolidated Financial Statements NOT COMMITMENTS AND CONTINGENCIES Construction Program ACE's cash construction expenditures for 1995, which excludes AFDC and customer contributions, are estimated to be approximately

$116 million. Current commitments for the construction of major production and transmission facilities approximate

$23 million, of which it is estimated that $19 million will be expended in 1995. Insurance Programs ACE is a member of certain insurance programs that provide coverage for decontamination and property damage to members' nuclear generating plants. ties at the Peach Bottom, Salem and Hope Creek stations are insured against property damage losses up to $2.75 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 specific conditions.

The insurer for nuclear extra expense insurance provides stated value coverage for replacement power costs incurred in the event of an outage at a nuclear unit resulting from physical damage to the nuclear unit. The stated value coverage is subject to a deductible period of the first 21 weeks of any outage. Limitations of coverage include, but are not limited to, outages (1) not resulting from physical damage to the unit, (2) resulting from any government mandated shutdown of the unit, (3) resulting from any gradual deterioration, corrosion, wear and tear, etc. of the unit, (4) resulting from any intentional acts committed by an insured and (5) resulting from certain war risk conditions.

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

As of December 31, 1994, the maximum amount of spective premiums ACE could be assessed for losses during the current policy year was $6.6 million under these programs.

21 ATLANTIC EN E RGY, INC. ANO SUBSIDIARIES , The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson Amendments Act of 1988, govern liability and nification for nuclear incidents.

All nuclear facilities could be assessed, after exhaustion of private ance, up to $79.275 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 $27.6 million per incident.

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

Energy and Capacity Arrangements UTILITY SOURCES ACE has an arrangement for the purchase of 125 MWs of capacity and related energy from Pennsylvania Power and Light through September 30, 2000. ity costs, including certain deferred charges, totaled $26.6 million, $24.4 million and $25.1 million, and energy costs totaled $10.8 million, $11.2 million and $13.4 million in 1994, 1993 and 1992, respectively.

Commitments for capacity costs expected to be curred are $11. 7 million, $12.0 million, $12.3 million, $12.6 million, $14.2 million and $12.3 million in each of the years 1995-2000, respectively.

ACE's arrangement for the purchase of 200 MWs of capacity and related energy from PECO expired May 31, 1994. Capacity costs charged to Purchased ity expense totaled $25.6 million through May 1994 and $55.9 million and $52.5 million for 1993 and 1992, respectively.

Energy costs for the same periods amounted to $11.4 million, $21.0 million and $19.2 million, respectively.

ACE also had another ment with PECO for the purchase of energy only which terminated in October 1994. Energy costs under this arrangement amounted to $32.5 million, $19.0 million and $17.5 million in 1994, 1993 and 1992, respectively.

ACE is a member of the Pennsylvania-New Maryland Interconnection (PIM), 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 P JM 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 energy purchased through change agreements totaled $10.4 million , $9.9 million and $9.4 million in 1994, 1993 and 1992 , respectively. NON-UTILITY SOURCES ACE has contracted for a total of 569 MWs of capacity and related energy from four non-utility sources. The last two projects under contract for 388 MWs became operational in 1994. Non-utility capacity costs totaled $77.0 million , $30.2 million and $24.4 million, and energy costs totaled $62.5 million, $36.0 million and $27.6 million , in 1994, 1993 and 1992, respectively.

Capacity and energy costs from non-utility sources are recovered through the LEC. Environmental Matters 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 10 million tons per year, and a limit on S02 emissions nationwide by the year 2000, and reductions in emissions of nitrogen oxides (NOx) by approximately 2 million tons per year. ACE's owned B.L. England Units 1 and 2 and its owned Conemaugh Station Units 1 and 2 are affected during Phase I (1995) and all of ACE's other fue1 steam generating units are affected by Phase II (2000) of the CAAA. ACE has installed a scrubber on B.L. England Unit 2 at a cost of $81 million which went into service in December 1994. By scrubbing B.L. England Unit 2, Phase I S02 emission ments are met for both B.L. England Units 1 and 2. ATLANTIC ENERGY , INC. AND SUBSIDIARIES The Conemaugh owners installed a scrubber on Conemaugh Unit 1 which went into service in ber 1994. ACE's 3.83% share of the cost was $11 million. A scrubber on Conemaugh Unit 2 is to be completed in 1995 , with ACE's share of the cost estimated to be $4 million. The jointly-owned stone Station is impacted by the S0 2 and NOx sions of Title IV of the CAAA during Phase IL rently, the Keystone owners plan to rely on utilizing emission allowances, and modified fuel content to a lesser extent, to meet compliance with the CAAA through the year 2000. In addition, certain purchase power arrangements will be affected by the CAAA, in amounts that are not presently determinable.

Federal and state legislation authorize various mental authorities to issue orders compelling sible parties to take cleanup action at sites determined to present danger from releases of hazardous stances. The various statutes impose joint and several liability without regard to fault for certain investigati v e and cleanup costs for all potentially responsible parties. ACE has received notification with respect to two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. ACE's maximum expense for these claims is not expected to exceed $1 million. ACE believes that insurance coverage is available to satisfy any amounts in excess of the self-insured limits associated with these particular claims should any liability result. The insurer for pollution liability insurance provides comprehensive excess general liability coverage , including pollution liability, for environmental costs incurred in the event of bodily injury or property damage resulting from the discharge or release of pollutants into or upon the land , atmosphere or water. Limitations of coverage include any pollution liability (1) resulting subsequent to the disposal of such ants, (2) resulting from the operation of a storage facility of such pollutants, (3) resulting in the tion of acid rain , ( 4) caused to property owned by an insured and ( 5) resulting from any intentional acts committed by an insured. , 22 1flotes to C9onsolidated Financial Statements ATLANTIC ENERGY, INC. AND SUBSIDIARIEll Other ACE is subject to a performance standard for all of its jointly-owned nuclear units. This standard is used by the BPU in determining recovery of replacement energy costs resulting from poor nuclear performance.

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 be recovered from customers and would be charged against income. For 1994 , the aggregate capacity factor of ACE's nuclear units is within the reasonable performance zone, which results in no penalty or reward. A contract with an industrial company whereby ACE delivered process steam, water and by-product ity was terminated by this company effective June 30, 1994. In 1993, ACE received approximately

$12 million from this company for services and energy sales. In accordance with the termination agreement, ACE received $4.2 million in cash proceeds, 45,165 emission allowances valued at $6.5 million, and made provisions to retire certain equipment.

A net gain of $2.4 million net of tax resulted.

The steam and tricity needs of this company are provided by a nonutility cogeneration facility.

ACE has a contract for the purchase of 188 MWs of capacity and energy from this facility.

In November 1994, ACE announced a program to reduce its workforce by up to 20%, or 350 people. This program was initiated so that ACE can better position itself for the more competitive environment within the electric industry.

Under the program, certain employees will separate from the company and 23 be entitled to a severance package , including salary continuation, lump sum payments , extended medical benefits and outplacement services.

In December 1994, ACE accrued the costs of the workforce tion in the amount of $17.3 million, net of tax of $9.3 million, or $.32 in earnings per share. Included is ACE's share of an early retirement program of a jointly-owned nuclear station. ACE's employee separations are expected to be substantially completed by March 1 , 1995. AGI, through its subsidiaries , has partnership interests in common with affiliates of Columbia Gas System, Inc. (Columbia) in certain cogeneration projects.

Columbia has been operating under Chapter 11 of the Federal Bankruptcy Code since 1991. A tion plan for Columbia and its principal pipeline unit is expected to be filed with the U.S. Bankruptcy Court in the first half of 1995. AGI does not anticipate any significant changes in its partnership arrangements as a result of Columbia's reorganization plan. The 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 decontamination and decommissioning of three Federally operated nuclear enrichment facilities.

Based on its ownership in five nuclear generating units, ACE recorded a liability of $6.6 million and $8 million at December 31, 1994 and 1993, respectively, for its obligation to be paid over the next 13 years. ACE has an associated regulatory asset of $7 .2 million and $8.4 million at December 31, 1994 and 1993, respectively.

Amounts are currently being recovered in rates for this liability and the regulatory asset is concurrently being amortized to expense based on the annual assessment billed by the Federal government.

ATLANTIC ENERGY, INC. AND SUBSIDIARIES NOT LEASES ACE leases various types of property and equipment for use in its operations.

Certain of these lease ments are capital leases consisting of the following at December 31: (000) 1994 1993 Production plant $13,521 $13,521 Less accumulated amortization 9,707 8,846 Net 3,814 4,675 Nuclear fuel 38,216 40,593 Leased property-net

$42,030 $45,268 NOT ACE has a contractual obligation to obtain nuclear fuel for the Salem, Hope Creek and Peach Bottom stations.

The asset and related obligation for the leased fuel are reduced as the fuel is burned and are increased as additional fuel purchases are made. No commitments for future payments beyond satisfaction of the standing obligation exist. Operating expenses for 1994, 1993 and 1992 include leased nuclear fuel costs of $14.1 million, $13.9 million and $13.5 million, tively, and rentals and lease payments for all other capital and operating leases of $5.3 million, $4.8 million and $4.8 million, respectively.

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

Rental charges of other subsidiary companies are not significant.

QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts , are as follows: Operating Operating Net Earnings Dividends Paid Quarter Revenu es (000) Income (000) In co me (000) Per Share Per Share 1994 1st $232,098 $ 39,712 $22,862 $ .43 $ .385 2nd 205,822 30,427 16,798 .31 .385 3rd 272,708 58,431 46,323 .85 .385 4th 202,410 24,969 (9,871) (.18) .385 Annual $913,039 $153,540 $76,113 $1.41 $1.54 1993 1st $203,656 $ 35 , 445 $19,995 $ .38 $ .38 2nd 192,538 27,381 11,093 .21 .38 3rd 268,883 68,580 52 , 329 .99 .385 4th 200 , 596 28 , 177 11,880 .22 .385 Annual $865,675 $159,584 $95,297 $1.80 $1.53 Individual quarters may n o t add to t h e t otal due t o rounding, and t h e effect o n ea rning s per share of c han g in g average number of co mm on s hares o utstandin g. The revenues of ACE are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months. Net Income reflects special charges aggregating

$20.4 million, after tax of $10.9 million, or $.3 7 per share , recorded in Other Income during the fourth quarter of 1994. One of the charges is an accrual of the costs of workforce reductions for severance and benefits packages in the amount of $17.3 million, net of tax of $9 .3 million, or $.32 per share. Another charge is an amount for ACE 's share of deferred costs for studies at a nuclear station in the amount of $1.4 million, net of tax of $735 thousand , or $.02 per share. Also included is the write-down of the carrying value of ASP's commercial site of $1. 7 million, net of tax of $926 thousand, or $.03 per share. 24 management's

<Discussion and flnalysis of Financial C9ondition and Results of Ope r ations ATLANTIC ENERGY, INC. AND SUBSIDIARIES Atlantic Energy , Inc. (the Company, AEI or parent) is the parent of a consolidated group of wholly-owned subsidiaries consisting of Atlantic City Electric pany (ACE) and the following non-utility companies: Atlantic Energy Technology, Inc. (AET), Atlantic Generation , Inc. (AGI), Atlantic Southern Properties , Inc. (ASP), ATE Investment , Inc. (ATE) and Atlantic Thermal Systems , Inc. (ATS). ACE, the primary subsidiary, is an electric utility regulated by the New Jersey Board of Public Utilities (BPU). ACE has a wholly-owned subsidiary that operates certain ing facilities.

AGI is engaged in the development and operation of cogeneration and alternate energy projects through various partnership arrangements.

ASP owns and manages a commercial real estate property.

ATE manages a portfolio of leveraged lease investments and provides financing and fund management to an affiliate.

A TS is engaged with development of district heating and cooling facilities which it intends to own and operate. AET is presently concluding the affairs of its subsidiary , which is its sole investment.

On January 1, 1995, a new subsidiary of AEI, Atlantic Energy Enterprises, Inc. (AEE), was formed. AEI will transfer direct ownership of the existing non-utility companies to AEE. The Company's business plan will concentrate on the core utility operations of ACE and the expansion of non-utility business opportunities related to the core business.

The emergence of competition in the area of electric generation , slower growth in energy sales , Federal deregulation of wholesale energy sales, spective retail wheeling initiatives coupled with a public utility's obligation to serve and the need to mitigate future rate increases has caused ACE to examine its traditional approach to its business.

ACE's current business plan recognizes the increasingly competitive nature of the electric energy business in general and the need to encourage economic growth and stability in the service territory and surrounding region. ACE is re-evaluating its revenue requirements and service pricing , the implementation of additional cost controls and the development of new sources of revenue. Non-utility business strategies are expected to pursue new investment opportunities closely related to the utility business, primarily in the areas of regulated electric generation , energy technology investments and thermal energy systems. Investments in these areas may take place as direct ownership or in partnership with others. 25 Financial Results Consolidated operating revenues for 1994, 1993 and 1992 were $913.0 million , $865.7 million and $816.8 million, respectively. The increase in 1994 revenue reflects an increase in Levelized Energy Clause (LEC) revenues as a result of a $55.0 million rate increase effective July 1994 and an increase in Sales for Resale. The increased revenues for 1993 reflect the effect of a rate increase of $10.9 million effective in that year. The revenue increase in 1993 also reflects the contrast between the 1993 normal and the 1992 below normal summer temperatures.

Consolidated earnings per share for 1994 were $1.41 on net income of $7 6.1 million, compared with $1.80 on net income of $95.3 million in 1993 and $1.67 on net income of $86.2 million in 1992. The 1994 earnings were attributed solely to ACE and include a reduction of $.32 for employee separation programs and $.02 for the write-off of deferred nuclear study costs. In 1993, ACE contributed

$1.73 to consolidated earnings, primarily as a result of increased kilowatthour sales due to the contrast between 1993 and 1992 summer temperatures.

ACE's 1993 earnings were reduced by $.10 as a result of charges for reorganization activities.

In 1992 , ACE contributed

$1. 7 4 to consolidated earnings, which included $.15 for a settlement with PECO Energy. Non-utility operations resulted in a net loss of $345 thousand for 1994, net income of $3. 7 million for 1993 and a net loss for 1992 of $3 .4 million. The net loss for 1994 reflects the write-down of carrying value of ASP's commercial site in the amount of $1.7 million after tax, or $.03 per share. This was offset, in part, by the earnings of AGL Non-utility net income for 1993 was primarily the result of higher earnings of AGI derived from the first full year's commercial operation of two of its cogeneration projects.

The loss in 1992 was primari l y due to provisions made by AET relating to restructuring of certain business activities. T hat loss was offset, in part , by earnings of AGI resulting from the start up of two of AGI's tion projects and by ATE's lower interest expense.

The quarterly dividend paid on Common Stock was $.385 per share, an annual rate of $1.54 per share. Information with respect to Common Stock for the period 1992-1994 is as follows: 1994 Dividends Paid Per Share $ 1.54 Book Value Per Share $15.56 Annualized Dividend Yield 8.7% Return on Average Common Equity Total Return (Dividends paid plus change in share price) Market to Book Value Price/Earnings Ratio Closing Price-New York Stock Exchange 9.1% (11.9)% 113 % 13 $17.63 1993 $ 1.53 $15.62 7.0% 11.7% 0.6% 139% 12 $21.75 LIQUIDITY AND CAPITAL RESOURCES Overview 1992 $ 1.51 $15.17 6.6% 11.1% 20.2% 152% 14 $23.13 The Company's cash flows are dependent on the cash flows of its subsidiaries, primarily ACE. Principal cash inflows of the Company are dividends from ACE and funds provided by the issuance of Common Stock. Principal cash outflows of the Company are ments (capital contributions and advances) in its subsidiaries for their investing activities , dividends to common shareholders and repurchase of outstanding common stock. Cash invested in ACE is utilized primarily for the construction of utility generation, transmission and distribution facilities , redemption and maturity of long and short term debt and redemption of preferred stock. Current investing activities of the utility subsidiaries are primarily for the development of non-utility power generation projects and thermal heating and cooling systems. Agreements between the Company and its subsidiaries provide for allocation of tax liabilities and benefits generated by the respective subsidiaries.

A separate credit support agreement exists between the Company and ATE. In 1994, 1993 and 1992, the Company recorded $83.2 million, $81.3 million and $78.3 million, respectively , in dividends from ACE. Other sources of funds ATLANTIC ENERGY , INC. AND SUBSIDIARIES available to the Company , which include the issuance of common equity through optional cash purchases under the Dividend Reinvestment and Stock Purchase Plan (DRP) through July 1994, and ACE's employee benefit plans, are shown as follows: 1994 1 9 9 3 199 2 DRP Optional Cash Purcha s es Share s issued 336,193 690 , 466 719 , 324 Proceeds (000) $6,737 $15 , 985 $16,034 Employee Benefit Plan s Shares issued 8 , 033 10 , 897 Proceeds (000) $ -$ 258 $ 259 Additional common equity has been provided by reinvested dividends through the DRP. In June 1994 , the Company discontinued the issuance of new mon Stock through the DRP , except for certain ployee benefit plans. Common shares issued from reinvested dividends in 1994 , 1993 and 1992 were 370,654 , 609 , 663 and 572 , 329 , respectively.

Major cash outflows of the Company were as follows: (Million s) 1994 1993 1992 Dividends to Shareholders

$83.2 $81.3 $78.3 Advances and Capital Contributions to Subsidiaries*

$25.6 $29.8 $24.1

• Net of R e pa y m e n ts On October 27 , 1994 , the Company's Board of tors authorized the Company to acquire up to three million shares of Common Stock. The Company will cancel these shares. As of December 31 , 1994, the Company has acquired and cancelled 221 , 700 shares at a cost of $3 .9 million. Atlantic City Electric Company Cash construction expenditures for the 1992-1994 period amounted to $388.8 million and included expenditures for upgrades to existing transmission and distribution facilities and compliance with provisions of the Clean Air Act Amendments (CAAA) of 1990. ACE's current estimate of cash construction tures for the 1995-1997 period is $268 million. These estimated expenditures reflect necessary improvements to transmission and distribution facilities and further compliance with provisions of the CAAA. 26 management's

<Discussion and .Analysis of Financial C9ondition and Results of Opeirations ATLANTIC ENERGY , INC. AND SUBSIDIARIES 27 ACE also utilizes cash for mandatory redemptions of Preferred Stock and maturities and redemption 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) for the period 1992-1994 are shown as follows: Preferred Stock (S e ri es) 9.96% (Shares) $8.53 (Shares) $8.25 (Shares) Aggregate Amount (000) 1994 240,000 5,000 $24,500 1993 1992 48 , 000 8 , 000 5 , 000 2 , 500 $5,300 $1,050 First Mortgage Bonds redeemed or acquired and retired or matured in the period 1992-1994 were as follows: Principal Dat e S e ries Amount Pri ce (%) (000 November 1994 7 5/8% due 2005 $ 6 , 500 100.00 June 1994 10 1/2% due 2014 23 , 150 102.00 Various 1994 Dates 9 1/4% due 2019 11 , 910 105.38 September 1993 9 1/4% due 2019 69,233 110.95 September 1993 8 7/8% due 2016 125 , 000 104.80 March 1993 8% due 1996 95,000 100.91 March 1993 8 7/8% due 2000 19,000 102.41 March 1993 8% due 2001 27 , 000 102.53 March 1993 4 3/8% due 1993 9 , 540 100.00 July 1992 4 1/2% due 1992 10 , 350 100.00 *Average price Scheduled debt maturities and sinking fund requirements aggregate

$69 million for the years 1995-1997. *

• On or before April 1 of each year, ACE and other New Jersey utilities are required to pay gross receipts and franchise taxes (state excise taxes) to the State of New Jersey. In March 1994, ACE paid $137.5 million. Included in that amount was approximately

$50 million representing the second and final installment for the additional one-half year's amount of tax due as required by amended state law. This additional amount of gross receipts and franchise tax payment, plus the additional one-half year's payment in 1993 of $45 million , has been recorded on the Consolidated Balance Sheet as Unrecovered State Excise Taxes and is being recovered through rates by ACE. In December 1993 , ACE paid $20 million in connection with renegotiation of a non-utility purchase power contract which ACE is recovering through its LEC. The estimated savings based on currently forecasted fuel costs, is $15 million to $20 million per year, net of the $20 million payment. 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 borrowings from banks. As of December 31 , 1994, ACE has arranged for lines of credit of $150 million of which $141.4 million was available.

Permanent financing by ACE is undertaken by the issuance of its long term debt and Preferred Stock and from capital contributions by the parent company. ACE's nuclear fuel requirements associated with its jointly-owned units have been financed through arrangements with a third party. In 1994 , ACE issued and sold $54.65 million of its long term debt consisting of Pollution Control Bonds. The proceeds from the financings were used for refunding higher cost Pollution Control Bonds and for construction purposes.

Additionally, $125 million in debt securities were registered and are available for issuance in 1995. In 1993, ACE issued and sold $469 million of long term debt consisting of $240 million of Series B Medium Term Notes , $225 million of First Mortgage Bonds and $4 million of Pollution Control Bonds. The proceeds from the 1993 financings were also used for refunding higher cost debt and tion purposes. In 1992, ACE issued and sold $60 million of Series A Medium Term Notes, the proceeds of which were used for ACE's construction program. During 1995-1997, ACE expects to issue $50 million in new long term debt to be used for funding of construction and repayment of short term debt. Provisions of ACE's charter , mortgage and debenture agreements can limit, in certain cases, the amount and type of additional financing which may be used. At December 31 , 1994, ACE estimates additional funding capacities of $218 million of First Mortgage Bonds , or $530 million of Preferred Stock, or $432 million of unsecured debt. These amounts are not necessarily additive.

NON-UTILITY COMPANIES Management of the non-utility companies is evaluating business opportunities which are expected to enhance non-utility operations over the next five years, with focused efforts on expanding and improving its cial performance in non-utility activities. Matters specific to each of the non-utility companies are discussed below. Atlantic Energy Enterprises, Inc. On January 1, 1995, AEI formed a new subsidiary, Atlantic Energy Enterprises , Inc. (AEE), which will hold ownership of the existing non-utility businesses of AGI, ASP, ATE , ATS and AET. As part of this reorganization, AEE expects to develop an tion structured to allow greater flexibility to pursue non-regulated business opportunities.

Expansion of business is expected to focus in the areas of regulated electric generation, energy technology investments and thermal energy systems. Investments in these areas may take place as direct ownership or in partnership with others. AEE's business plan reflects the potential investment of approximately

$215 million over the next five years. AEE will have its own Board of Directors , including outside directors which will help to guide the non-regulated enterprises.

Atlantic Generation, Inc. AGI's activities are represented by partnership interests in three cogeneration projects. At December 31, 1994, total investments amounted to $24.6 million. Cash outlays for investments (comprised of capital ment , advances and loans) by AGI for the period 1992-1994 totaled $14.6 million. AGI obtained the funds for its investments through capital contributions from the parent company. During the period 1992-1994, AGI received distributions from the partnerships totaling $4.4 million from return of investment and repayment of outstanding advances and loans. In June 1994, the third cogeneration project became operational.

AGI expects to continue investment in additional domestic independent power projects in the years 1995-1999.

Atlantic Southern Properties, Inc. ASP' s real estate investment at December 31, 1994 is a 280,000 square-foot office and warehouse facility in Atlantic County, New Jersey. This investment has a ATLANTIC ENERGY, INC. AND SUBSIDIARIES net book value of $10.3 million after a write-down of the carrying value in 1994 of $2.6 million reflecting diminished value due to excess vacancy. As of cember 31 , 1994, ASP's investment has been funded by capital contributions from the parent company and borrowings under a loan agreement with ATE. ASP's current agreement with ATE provides for the repayment of such borrowings on or before December 31, 1995. Extensions to repay these borrowings have been routinely granted in the past. No real estate activity beyond the existing site is contemplated at this time by ASP. ATE Investment, Inc. ATE has invested $78.2 million in leveraged leases of three commercial aircraft and two containerships.

ATE has loans outstanding to ASP which totaled $8.7 million at December 31, 1994. ATE obtained funds for its business activities and loans to ASP through capital contributions from the parent company and external borrowings which include $15 million principal amount of 7.44% Senior Notes due 1999 and a ing credit and term loan facility for borrowings of up to $35 million. At December 31, 1994, there was $1 million in borrowings outstanding under this facility.

ATE's cash flows are provided from lease rental receipts and tion of existing tax benefits generated by the leveraged leases sufficient to sustain operations.

Atlantic Thermal Systems, Inc. A TS is presently engaged in the development of thermal heating and cooling systems. A TS has tained funds for its project development through advances from the parent company and has established a $10 million revolving credit agreement with A TE. There were no loans outstanding from this agreement as of December 31, 1994. Atlantic Energy Technology, Inc. AET is currently concluding the affairs of its iary, which is its sole investment.

The net investment in this subsidiary is nominal. The amount of this investment was written down in 1993 as a result of planned reorganization activities that were provided for in 1992. At that time the subsidiary discontinued its tions to concentrate on licensing its proprietary edge. In 1993, AET received life insurance proceeds of $500 thousand through its subsidiary.

There are no future plans for investment activity at this time by AET. 28 management's

<Discussion and flnalysis

., of Financial C9ondition and Results of Ope1fations ATLANTIC ENERGY, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS Operating results are dependent upon the performance of the subsidiaries, primarily ACE. Since ACE is the principal subsidiary within the consolidated group , the operating results presented in the Consolidated ment of Income are those of ACE, after elimination of transactions among members of the consolidated group. Results of the non-utility companies are reported in Other Income. Revenues Operating Revenues -Electric increased 5.5% and 6% in 1994 and 1993, respectively.

Components of the overall changes are shown as follows: 29 (millions) 1994 1993 Base Revenues $ (4.2) $ 12.2 Levelized Energy Clauses 30.3 (5.0) Kilowatt-hour Sales 9.6 42.6 Unbilled Revenues (7.3) (1.2) Sales for Resale 17.8 0.7 Other 1.2 (0.4) Total $47.4 $ 48.9 Levelized Energy Clause (LEC) revenues increased in 1994 due to a rate increase of $55 million in July 1994 and $10.9 million in October 1993. The decrease in 1993 LEC revenues was the net result of the increase in October 1993 and an $8.5 million decrease effective October 1992. Changes in kilowatt-hour sales are discussed under "Billed Sales to Ultimate Utility Customers." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 3.1 % and 0.8% in revenues per kilowatt-hour in 1994 and 1993, respectively.

The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by ultimate customers at the end of the respective periods, which are affected by weather and economic conditions, and the corresponding price per kilowatt-hour. The changes in Sales for Resale are a function of ACE's energy mix strategy, which in turn is dependent upon ACE's needs for energy, the energy needs of other utilities participating in the regional power pool of which ACE is a member, and the sources and prices of energy available.

The increase in Sales for Resale for 1994 was the result of meeting the demands of the regional power pool due to the extreme weather conditions during the first six months of 1994. Effective July 1, 1994, the BPU permitted hotel casino customers to take service under existing commercial rate schedules which is expected to reduce annual revenue by approximately

$7 million.

.. Billed Sales to Ultimate Utility Customers 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: 1994 1993 Avg Avg# Avg Avg# Customer Class Sales Use of Cusl Sales Use of Cust. Residential 1.5% .4% 1.1% 6.7% 5.9% 0.8% Commercial 2.6 .5 2.1 5.1 3.2 1.9 Industrial (2.9) (3.8)

.9 2.6 4.6 (1.9) Other 3.2 4.0 (.8) 1.2 1.6 (.4) Total 1.3 1.2 5.4 4.4 0.9 The 1994 increase in total kilowatt-hour sales was due to the extreme weather conditions during the first quarter of 1994 and an increased number of billing days in 1994 compared to 1993. This increase was partially offset by the abnormal weather conditions during the last half of the year when kilowatt-hour usage fell below 1993 levels. In 1993 , total kilowatt-hour sales increased primarily due to the colder winter temperatures during the first quarter, and below normal temperatures during the summer of 1992. Improved economic conditions also contributed to the increase in 1993 sales. Commercial sales in both years ATLANTIC ENERGY, INC. AND SUBSIDIARIES benefitted from night lighting programs.

The decline in 1994 industrial sales is due to the loss of ACE's largest customer to an independent power producer during the year. Costs and Expenses Total Operating Expenses increased 7.6% and 3.9% in 1994 and 1993, respectively.

Included in these penses are the costs of energy, purchased capacity, operations, maintenance, depreciation and faxes. Energy expense reflects cost incurred for energy needed to meet load requirements, various energy supply sources used and operation of the LECs. Changes in costs reflect the varying availability of cost generation from ACE-owned and purchased energy sources, and the corresponding unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the nia-New Jersey-Maryland Interconnection.

The cost of energy is recovered from customers primarily through the operation of the LEC. Until 1994, earnings were generally not affected by energy costs because these costs are adjusted to match the associated LEC enues. In any period, the actual amount of LEC revenue recovered from customers may 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 nized in the Consolidated Statement of Income within Energy expense during the period in which they are subsequently recovered through the LEC. ACE was underrecovered by $11 million and by $7 .2 million at December 31, 1994 and 1993 , respectively.

As a result of implementing the Southern New Jersey Economic Initiative in rates, effective July 19 , 1994, the Company is forgoing recovery of future energy costs in LEC rates of $28 million through May 31, 1995. After tax income has been reduced by $10.1 million due to the effects of the initiative in 1994. In 1994, Energy expense increased 32.7% due to the adoption of the Southern New Jersey Economic Initiative and the increase in the levelized energy clause that reduced underrecovered fuel costs. tion-related energy costs for 1994 increased by 19.9% 30 management's

<Discussion and :Analysis of Financial C9ondition and 1Results of Ope1rations ATLANTIC ENERGY , INC. AND SUBSIDIARIES 31 due to increased overall generation and the high cost of energy from additional non-utility sources. The average unit cost for energy in 1994 increased to 2.04 cents per kilowatt-hour compared to 1.82 cents per kilowatt-hour in 1993. Energy expense for 1993 decreased 1.1 % primarily due to an increase in underrecovered fuel costs in 1993 compared to 1992. Production-related energy costs for 1993 increased by 6. 7% largely due to increased generation.

The average unit cost for energy in 1993 increased to 1.82 cents per kilowatt-hour compared to 1.80 cents per kilowatt-hour in 1992. The 1993 increase in the per unit cost is a result of increa s ed amounts of higher co s t energy from non-utility sources and a decreased supply of lower cost energy from coal sources. Purchased Capacity expense reflects entitlements to generating capacity owned by others. Purchased ity expense increased 18.2% and 7.4% in 1994 and 1993 , respectively. 1be increases in Purchased Capacity reflect additional capacity supplied by non-utility power ers that became operational in each year. Operations expense decreased 3.5% in 1994 and increased 8.9% in 1993. The increase in 1993 was due primarily to corporate reorganization activities by ACE. Maintenance expense decreased 17.2% in 1994 due to cost saving measures in maintenance activities. The 9% decrease in 1993 maintenance expense was due to the scheduling of maintenance projects. Depreciation and Amortization expense increased 7.9% in 1994 as a result of an increase in the depreciable base of ACE's electric plant in service. State Excise Taxes expense decreased 6.9% in 1994 and increased by 6.4% in 1993. The increase in 1993 is due to a higher tax assessment.

Federal Income Taxes decreased 6.1 % in 1994 and increased 21.9% in 1993 as a result of the le v el of taxable income during those periods. The change in the 1993 amount reflects the increase in the Federal income tax rate to 35% from 34%, effective in that year. Employee Separation costs represents programs by ACE to reduce its workforce by about 20%, or 350 people. Other-Net within Other Income (Expense) decreased in 1994 due to the net after tax impacts of the write-off of deferred nuclear study costs of $1.4 million and the write-down of the carrying value of ASP's commercial property of $1. 7 million. Litigation ment in 1992 represents ACE's share of the settlement of litigation concerning the Nuclear Regulatory mission imposed shutdown in earlier years of the Peach Bottom Atomic Power Station. The Litigation ment for 1993 represents an additional allocation to customers of the proceeds from the 1992 settlement as ordered by the BPU. Other -Net increased for 1993 as a result of the first full year operation of AG I's eration projects.

Interest on Long Term Debt decreased in 1994 due to refunding of higher cost debt. Interest on Long Term ATLANTIC ENERGY , INC. AND SUBSIDIARIES Debt increased 11.4% in 1993 reflecting the net effects of issuance of $469 million of First Mortgage Bonds during the year, and the maturity , redemption and reacquisition of various series of First Mortgage Bonds totaling $344.8 million principal amount. At ber 31 , 1994 , 1993 and 1992 , ACE's embedded cost of long term debt was 7.6%, 7.8% and 8.8%, respectively.

Preferred Stock Dividend Requirements decreased as a result of continuing mandatory and optional redemptions in each year. Embedded cost of Preferred Stock as of December 31, 1994, 1993 and 1992 was 7.6%, 7.7% 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.

ACE has lowered its planned capital expenditures for the period 1995-1999 which will reduce its external cash requirements.

Additionally, ACE expects to review its revenue requirements with a view toward overall rate stability in light of expected price competition. ACE believes one of its greatest assets is its high level of customer service and reliability.

The financial performance of ACE will be affected in the future by the level of sales of energy and the impacts of regulation and competition.

To better position itself for a more competitive environment, ACE initiated cost reduction programs in 1994. One such program was a workforce reduction program which ACE expects will result in annual after tax cost savings in excess of $10 million. Other issues which may impact the electric utility business include public health , safety and environmental legislation.

Changes in operating revenues in the future will result from changes in customer rates, energy consumption and general economic conditions in the service area , as well as the impacts of load management and tion programs instituted by ACE. ACE's revenues could also be affected by the increasing competition in the retail and wholesale energy market. The gence of competition among suppliers of electricity may require ACE to create new rate structures and to offer incentives to its Commercial and Industrial customers.

32 management's

<Discussion and .Analysis of Financial

@ondition and JR.esults of OpeFations

.. ATLANTIC ENERGY, INC. AND S UBSI D IARIES Net income of ACE may be affected by the operational performance of nuclear generating facilities.

ACE is subject to a BPU-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 income. 33 The Energy Policy Act, enacted in October 1992, vides, among other things, for increased competition between utility and non-utility electric generators and permits wholesale transmission access, or wheeling, with certain requirements.

Other pressures such as increased customer demands for competitive rates, potential loss of municipal power sales, excess generating capacity, together with the emergence of non-utility energy sources, are expected to increase the amount of business risk for electric utilities in the future. In addition, the extent to which New Jersey public utility regulation is modified to be reflective of these new competitive realities will be a key factor affecting the Company. Development of electric generating facilities by utilities has occurred in ACE's service territory.

Effects of non-utility generation 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.

The CAAA 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 1995 through . 1997 includes approximately

$15.9 million related to the cost of compliance.

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

Federal and state legislation authorize various mental authorities to issue orders compelling sible parties to take cleanup action at sites determined to present danger from releases of hazardous stances. 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 two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. ACE's responsibility is not expected to exceed $1 million in the aggregate.

The Company believes that to continue to be successful it will need to foc u s on improving the core utility operations of ACE to meet expected competition, while identifying opportunities for new businesses and growth in earnings through AEE. With support from the Board of Directors, management has embarked on implementing an aggressive business plan which it believes will position the Company to meet the lenges of a new competitive environment.

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, depends upon the frequency, timing and results of rate case decisions.

I nvest01r Information (AS OF DECEMBER 31, 1994) Where should I send inquiries concerning my investment in Atlantic Energy or Atlantic Electric?

The Company serves as recordkeeping agent, dividend disbursing agent and also as Transfer Agent for Common Stock and Atlantic Electric's Preferred Stock.

dence concerning such matters as the replacement of dividend checks or stock certificates , address changes , transfer of certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general information 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 When are dividends paid? The proposed record dates and payable dates are as follows: Record Dates March 20 , 1995 June 19 , 1995 September 25, 1995 December 26, 1995 Payable Dates April 17 , 1995 July 17, 1995 October 16 , 1995 January 15 , 1996 The following table indicates dividends paid per share in 1994 and 1993 on Common Stock: 1994 1993 First Quarter $ .385 $ .38 Second Quarter .385 .38 Third Quarter .385 .385 Fourth Quarter .385 .385 Annual Total $1.54 $1.53 Dividend checks are mailed to reach shareholders mately on the payment date. If a dividend check is not received within 10 days of the payment date , or if one is lost or stolen, contact Investor Records. Dividends paid on Common Stock in 1994 and 1993 were fully taxable. Some state and local governrnents 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.

ATLANTIC ENERGY INC. AND SUBSIDIARIES Who is the trustee and interest paying agent for Atlantic Electric 's bonds and debentures?

First Mortgage Bond recordkeeping and interest disbursing are performed by The Bank of New 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. Does the Company have a Dividend Reinvestment and Stock Purchase Plan ("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. Other services available to Plan participants include certificate safekeeping and automatic investment.

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, shareholders whose stock is held in a brokerage account may be able to participate in the Plan. These s hareholders 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 listings generally use At!Enrg or AtlanEngy.

The high and low sale prices of the Common Stock reported in the Wall Street Journal as New York Stock Exchange-Compos-ite Transactions for the periods indicated were as follows: 1994 1993 L ow Lo w First Quarter $21.750 $19.875 $25.000 $21.875 Second Quarter 21.500 16.375 23.875 21.625 Third Quarter 19.625 16.125 25.375 22.625 Fourth Quarter 18.250 16.000 23.875 20.375 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 08232-4130 Telephone (609) 645-4483 or (609) 645-4518 FAX (609) 645-4132 34 Summa 1fy Financial and Statistical

'Review 1994-1984

'

• 1994 1993 1992 1991 Atlantic Energy, lnc.-Investor Information Operating Revenues (000) $ 913,039 $ 865,675 $ 816,825 $ 808,374 Net Income (000) $ 76,113 * $ 95,297 $ 86,210 $ 85 , 635 Average Number of Common Shares Outstanding (000) 54,149 52,888 51,592 49 , 008 Earnings per Average Common Share $ 1.41 * $ 1.80 $ 1.67 $ 1.75 Total Assets (Year-end)

(000) $2,545,555

$2,487,508

$2,219,338

$2,151,416 Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year-end)

(000) $ 940,788 $ 952,101 $ 842,236 $ 807,347 Capital Lease Obligations (Year-end)

(000) $ 42,030 $ 45,268 $ 49,303 $ 53,093 Dividends Declared on Common Stock $ 1.54 $ 1.535 $ 1.515 $ 1.495 Dividend Payout Ratio 109% 85% 90% 85% Book Value per Share (Year-end)

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

Facilities for Service Total Utility Plant (000) $2,507,922

$2,402,415

$2,279 , 107 $2,175,601 Additions to Utility Plant (000) $ 126,367 $ 141,927 $ 134,326 $ 177,298 Generating Capacity (Kilowatts) (Year-end) (a) (b) 2,327,700 2,307,700 2,160,700 2,090,700 Maximum Utility System Demand (Kilowatts) 1,834,000 1,962,000 1 , 796,000 1,911,000 Capacity Reserve at Time of Peak (% of Installed Generation) 19.4% 11.2 % 16.9% 5.2% Energy Supply (mwh): Net Generation 6,081,778 6,025,861 5,775 , 098 6 , 300 , 891 Purchased and Interchanged 4,439,228 3,753,433 3 , 553 , 247 3,124 , 024 Total System Load 10,521,006 9,779,294 9,328 , 345 9,424 , 915 Electric Sales to Ultimate Customers (mwh): Residential 3,546,789 3,495,722 3,276,330 3,370,327 Commercial 3,344,675 3,259,541 3,100,133 3,147,318 Industrial 1,224,721 1,261,069 1,229,211 1,368,329 All Others 51,671 50,080 49,464 49,626 Total (c) 8,167,856 8,066,412 7,655,138 7,935,600 Residential Electric Service (Average per Customer)

Amount of Electricity Used During the Year (kwh) 8,638 8,608 8,131 8,440 Revenue for a Year's Service $ 1,003.30 $ 969.86 $ 903.91 $ 906.66 Revenue per Kilowatt-hour 11.62 ¢ 11.27¢ 11.12¢ 10.74¢ Ultimate Customer Data (Average)

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

$ 411,954 $ 393,866 $ 364,232 $ 362,050 Commercial 332,145 315,089 299,866 292,349 Industrial 101,093 100,812 97,475 102,202 All Others 10.905 10 575 10 548 10 136 Total from Electric Service 856,097 820,342 772,121 766,737 Unbilled Revenues-Net (7,239) 28 1,203 3,229 Sales for Resale 54,370 36,576 35,884 30,404 Other Electnc Revenues 9,998 8,853 7,723 8,112 Total Operating Revenues (c) $ 913,226 $ 865,799 $ 816,931 $ 808,482 (*)Reflects special charges, primarily for employee separation costs. (a) Excludes capacity allocated to a large industrial customer. (b) Includes unit purchases sales of capacity under contracts with certain other utilities and nonutilities. (c) Includes sales to an affiliate within the Atlantic Energy consolidated group. 35

' ATLANTIC ENERGY , INC. AND SUBSIDIARIES

.. , , 1990 1989 1988 1987 1986 1985 1984 $ 740 , 894 $ 723 , 216 $ 687,335 $ 635 , 657 $ 604 , 716 $ 612 , 035 $ 582,386 $ 68 , 879 $ 80,964 $ 72 , 171 $ 73 , 765 $ 54 , 946 $ 46 , 150 $ 56 , 433 45,590 43,268 39 , 186 36 , 622 36 , 532 36,138 35,162 $ 1.51 $ 1.87 $ 1.84 $ 2.01 $ 1.50 $ 1.28 $ 1.60 $2 , 006,010 $1 , 864,461 $1,660,286

$1 , 499 , 381 $1 , 401 , 064 $1 , 319 , 027 $1 , 253 , 083 $ 747,877 $ 725 , 329 $ 594 , 461 $ 522 , 815 $ 534 , 822 $ 521 , 612 $ 473 , 462 $ 57 , 971 $* 33 , 146 $ 32 , 880 $ 37 , 694 $ 3 7,603 $ 38 , 857 $ 41,722 $ 1.47 $ 1.425 $ 1.37 $ 1.3575 $ 1.305 $ 1.2775 $ 1.225 97% 75% 75% 66% 87% 99% 76% $ 14.36 $ 14.27 $ 13.58 $ 12.86 $ 12.18 $ 11.98 $ 11.95 11 10 9 8 12 11 8 2.94 3.19 3.06 3.68 2.99 3.06 3.62 42 , 295 43 , 383 44,473 45 , 586 47 , 133 48,635 47 , 446 2,055 2,021 2 , 092 2 , 148 2,168 2,099 2 , 012 $2 , 027 , 138 $1 , 846 , 122 $1 , 712 , 614 $1 , 602 , 801 $1 , 503 , 010 $1 , 438 , 643 $1 , 351 , 392 $ 170 , 772 $ 147 , 886 $ 130 , 281 $ 105 , 521 $ 109 , 303 $ 105,213 $ 95 , 38 8 1 , 959 , 700 1,879 , 700 1 , 807 , 700 1 , 660 , 700 1 , 660 , 700 1 , 605 , 700 1 , 594 , 200 1 , 741 , 000 1,700 , 000 1 , 636 , 000 1 , 609 , 000 1,459 , 000 1 , 432 , 000 1 , 298 , 800 10.9% 9.6% 9.5% 3.1% 12.1% 10.8% 18.5% 6 , 267 , 559 6 , 260 , 942 5 , 863 , 119 6 , 157 , 938 5 , 966 , 600 5 , 817 , 254 6 , 237 , 724 2 , 606 , 067 2 , 597 , 623 2 , 567 , 871 1 , 773 , 837 1 , 454 , 491 1 , 333 , 174 940 , 987 8 , 873 , 626 8 , 858 , 565 8 , 430 , 990 7 , 931 , 775 7 , 421,091 7 , 150 , 428 7 , 178 , 711 3,267 , 606 3 , 265 , 918 3,213 , 010 3 , 040 , 410 2 , 839 , 114 2 , 638 , 121 2 , 646 , 813 3 , 063 , 069 2 , 917 , 162 2 , 741 , 976 2 , 592 , 232 2 , 401 , 199 2 , 298 , 895 2 , 150 , 464 1 , 376 , 423 1 , 380 , 832 1 , 339 , 005 1 , 323 , 567 1 , 222 , 981 1 ,2 04,971 1 , 197 , 392 49,769 53 , 872 56 , 289 58 , 191 58,120 57 , 685 59,122 7 , 756,867 7 , 617 , 784 7,350 , 280 7 , 014 , 400 6 , 521,414 6 , 199 , 672 6 , 053 , 791 8,251 8,382 8 , 460 8 , 281 7 , 982 7 , 643 7 ,8 66 $ 844.37 $ 840.34 $ 838.70 $ 808.14 $ 791.09 $ 799.29 $ 783.47 10.23¢ 10.03¢ 9.91¢ 9.76¢ 9.91¢ 10.46¢ 9.96¢ 81 , 479 80 , 409 78 , 805 75,900 72 , 640 68 , 871 65 , 261 314,529 309 , 245 300 , 974 291 , 253 28 3 , 062 276,305 271 , 207 396 , 008 389 , 654 379 , 779 367 , 153 3 55 , 702 3 45 , 176 336 , 46 8 50 , 274 49 , 509 48 , 398 46 , 775 45 , 359 44 , 256 43 , 615 1 , 002 1 , 008 1,014 1 , 015 1 , 022 1 , 020 1 , 015 537 549 552 554 554 554 544 447 , 821 440 , 720 429 , 743 415,497 402 , 637 391 , 006 381 , 642 $ 334 , 375 $ 327 , 443 $ 318,520 $ 296 , 712 $ 281 , 393 $ 275 , 897 $ 263 , 612 271 , 688 256 , 199 240 , 890 222 , 129 214 ,230 216 , 052 190 , 435 96 , 766 94 , 634 91 , 661 8 4 , 476 8 0 , 037 8 3 , 6 28 79 , 123 9 668 9.901 9 935 10.199 10 230 10.470 10.405 712 , 497 68 8, 177 661 , 006 61 3, 516 5 8 5 , 890 5 8 6 , 047 543 , 575 (4 , 055) 7,215 6 , 716 385 (1 , 813) 3,076 (1 , 340) 24,115 18 , 196 11 , 476 12 , 840 13 , 045 15 , 656 32 , 855 8 , 448 9 , 765 8 , 137 8 ,916 7 , 594 7,256 7 , 296 $ 741,005 $ 723 , 353 $ 687 , 335 $ 635,657 $ 604 , 716 $ 612,035 $ 582 , 386 36 JBomrd of <Di1fecto1fs As OF DECEMBER 31, 1994 Jos. Michael Galvin, Jr ................. . Mr. Galvin, a director since 1978 , is president and chief executive officer of the South Jersey Health The Memorial Hospital of Salem County. He is a director of Woodstown National Bank and the Center for Health Affairs. He is a graduate of the University of Scranton and holds a master's degree in business administration from Xavier University. Age: 49. Professional Experience:

personnel, health care management.

Committee Chairman:

Personnel.

Committee Membership

Audit; Energy , Operations

& Research; Pension & Insurance.

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

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

Committee Chairman: Corporate Development.

Committee Membership:

Audit; Energy, Operations

& Research; Personnel.

Matthew Holden , Jr ................ . Mr. Holden , a director since 1981, is the Henry L. and Grace M. Doherty Professor of Government and Foreign Affairs at the University of Virginia.

He is a former commissioner of the Federal Energy Regulatory sion and the Wisconsin Public Service Commission, and former member of the President's Air Quality Advisory Board. He holds a doctorate in political science from Northwestern University.

Age: 63. Professional ence: regulatory affairs, energy consultation, arbitration.

Committee Chairman:

Audit. Committee Membership:

Corporate Development

Pension & Insurance; Personnel.

Cyrus H. Holle y . . . . . . . . . . . . . . . . . . . . . Mr. Holley, a director since 1990, is president of ment Consulting Services. He was formerly chief operating officer , executive vice president and a director of Engelhard Corporation.

He is a graduate of Texas A & M University. Age: 58. Professional Experience

industrial minerals , chemicals and precious metals .. Committee Chairman: Energy, Operations

& Re s earch. Committee Membership

Corporate Development; Finance & Investor Relations; Personnel.

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

Age: 61. Professional Experience:

utility operations.

Committee Membership:

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

37 " ATLANTIC ENE R GY , INC. AND SUBSIDIARIES 13oard of <Diirectors Jerrold L. Jacobs ................... . Mr. Jacobs i s president and chief executive officer of the Company and of Atlantic City Electric Company. He i s a director of all of the Company's subsidiaries and has been with the Company for 33 years. He is a graduate of the

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

utility operations. Committee Membership:

Ex-officio member of all tees except Audit and Per s onnel. Kathleen MacDonnell . . . . . . . . . . . . . . . . . . . M s. MacDonnell was elected as a dire c tor in 1993. She i s v ice pre s ident of Campbell Soup Company and president of its Frozen Food s Group. She is a member of the board of trustees of the West Jersey Hospital System, a member of the board of directors of the Camden County Girl Scouts and a trustee of the Campbell Soup Company Foundation.

She is a graduate of the University of Massachusetts and holds a master's degree in international management from the American Graduate School of International ment. Age: 46. Professional Experience

consumer product s, marketing and international management.

Committee Membership:

Audit; Energy , Operation s & Research; Finance & Inve s tor Relation s; Pen s ion & In s urance. Richard B. McGlynn . . . . . . . . . . . . . . . . Mr. McGlynn , vice president and general counsel of United Water Resources , Inc., has been a director since 1986. During 1994 , Mr. McGlynn served as a partner in the law firm of LeBoeuf , Lamb , Greene & MacRae. A practicing lawyer for over 30 year s, he i s a former commissioner of the New Jer s ey Board of Publ i c Utilitie s and a former judge in E ss ex County , New Jer s ey. He i s a g raduate of Rutgers Law School and Princeton Univer s it y. Age: 56. s ional Experience:

law , utility re g ulation. Committee Chairman:

Pen s ion & In s urance. Committee Membership

Corporate Development

Energy, Operations

& Research; Finance & Investor Relations. Bernard J. Morgan .................. . Mr. Morgan, a banking industry executive, was elected as a director in 1988. He hold s a ma s ter's degree in business administration from the Wharton School of the Universit y of Pennsylvania.

Age: 58. Profe ss ional Experience

banking , finance. Committee Chairman: Finance & In v e s tor Relation s. mittee Member s hip: Corporate De v elopment; Pen s ion & In s urance; Personnel.

Harold J. Raveche .................... . Dr. Raveche, who became a director in 1990, is president of the Stevens Institute of Technology.

He was formerly the dean of science of the Rennsselaer Polytechnic Institute. He is a director of National Westmin s ter Bancorp , Inc. and National We s tminster Bank NJ , and a member of the U.S. Council on Competitivene ss and Bu s ine ss Executive s for National Security.

He hold s a doctorate in ph ys ical chemi s try from the University of California. Age: 51. Profes s ional Experience:

higher education , s cience and technology policy. Committee Membership

Audit; Corporate Development

Energy , Operations

& Research; Finance & Investor Relations.

ATLANTIC ENERGY, INC. AND SUBSIDIARIES 38 Officers (AGE/YEARS OF SERVICE) AS OF DECEMBER 31, 1994 Jerrold L. Jacobs (55/33) President and Chief Executive Officer of Atlantic Energy; Director of Atlantic Energy and all ies; Chairman, President and Chief Executive Officer of Atlantic Electric Mr. Jacobs was elected president and chief executive officer of Atlantic Energy and Atlantic Electric in 1993. Since 1990, he served as president of Atlantic Energy and president and chief operating officer of Atlantic Electric.

He has also served as executive vice president of Atlantic Electric.

Mr. Jacobs joined Atlantic Electric in 1961 as an engineer.

Michael J. Chesser (46/1) Vice President of Atlantic Energ y; Executive Vice President and Chief Operating Officer of Atlantic Electric; Director of all non-utility subsidiaries Mr. Chesser joined Atlantic Energy in 1994. He was previously an executive with Baltimore Gas & Electric, where he was most recently vice president-marketing

& gas operations.

James E. Franklin II (4811) General Counsel to Atlantic Energy and Atlantic Electric; Director of Atlantic Electric Mr. Franklin joined Atlantic Energy as general counsel in 1994. He was previously a senior partner with the law firm of Megargee, Youngblood , Franklin & Corcoran, P.A. where he represented Atlantic Energy in the capacity of external legal counsel. Meredith I. Harlacher, Jr. (52/29) Vice President of Atlantic Energy; Director of Atlantic Electric, Atlantic Energy ogy; Atlantic Southern Properties; Atlantic Thermal Systems and ATE Investment

Senior Vice President-Energy Supply of Atlantic Electric Mr. Harlacher has served as vice president of Atlantic Energy since 1987 and was named senior vice president-energy supply of Atlantic Electric in 1993. He has also served as senior vice president-utility operations and senior vice president-corporate planning and services of Atlantic Electric.

He joined Atlantic Electric in 1965 as an engineer.

Henry K. Levari, Jr. (46/23) Vice President of Atlantic Energy; Director of all subsidiaries; Senior Vice President-Customer Operations of Atlantic Electric Mr. Levari has served as vice president of Atlantic Energy since 1991 and was named senior vice president-customer operations of Atlantic Electric in 1994. He has also served as senior vice president-marketing

& customer operations , senior vice corporate planning and services and vice president-power delivery of Atlantic Electric.

He joined Atlantic Electric in 1971 as an engineer.

J. G. (Jerry) Salomone (54/18) Vice President, Secretary and Treasurer of Atlantic Energ y; Director of all subsidiaries; Senior Vice President-Finance

& Administration of Atlantic Electric; Certified Public Accountant Mr. Salomone has served as vice president of Atlantic Energy since 1987. He was named senior vice president-finance

& administration of Atlantic Electric in 1993. He was previously senior vice president-finance

& accounting and treasurer.

He has served as chief financial and accounting officer of Atlantic Electric since 1984. He joined Atlantic Electric as assistant controller in 1976. (retired 211195) Scott B. Ungerer (36/14) Vice President of Atlantic Energy; Director of all non-utility subsidiaries; Chief Executive Officer of Atlantic Generation, Atlantic Energy Technology and Atlantic Thermal Systems; President of ATE Investment and Atlantic Southern Properties ATLANTIC ENERGY, INC.

SIDIARIES Mr. Ungerer was elected to his current position in 1994. He previously served in management positions for Atlantic Electric in business planning services, production economics and joint tion projects.

He joined Atlantic Electric in 1980 as an engineer.

Nancy J. Cunningham (4711) President of Atlantic Energy ogy; Treasurer of Atlantic Generation; Secretary of all non-utility subsidiaries; Manager of Diversified Activities for Atlantic Energy Ms. Cunningham joined Atlantic Energy in 1994. She previously served as manager of acquisitions and new business development for Rohm and Haas Company. Frank E. DiCola (47/1) President of Atlantic Thermal Systems Mr. DiCola joined Atlantic Thermal Systems as president in 1994. He was previously with Cogeneration Partners of America where he served as president.

Frank F. Frankowski (44/11) Vice President-Controller, Assistant Treasurer and Assistant Secretary of Atlantic Electric; Certified Public Accountant Mr. Frankowski was elected to his current position in 1993. He was previously controller-corporate services.

He has also held ment positions in the accounting and tax departments.

He joined Atlantic Electric in 1983 as manager of internal auditing services.

Ernest L. Jolly (42/14) Vice President-Atlantic Transformation of Atlantic Electric Mr. Jolly was named to his current position in 1994. He was previously vice president-external affairs. He has also held station management positions at Deepwater Generating Station. He joined Atlantic Electric in 1980 as an engineer.

J. David McCann (43122) Vice President-Strategic Customer Support of Atlantic Electric Mr. McCann was named to his current position in 1994. He previously served as vice president-engineering

& construction services of Atlantic Electric.

He has also served as vice power delivery and vice president, treasurer and assistant secretary of Atlantic He joined Atlantic Electric in 1972 as an engineer.

Marilyn T. Powell (4711) Vice President-Marketing of Atlantic Electric Mrs. Powell joined Atlantic Electric in 1994. She previously served as IBM's director of marketing process for its U.S. unit. Henry C. Schwemm, Jr. (53/25) Vice President-Power Generation

& Fuels Management of Atlantic Electric Mr. Schwemm was named to his current position in 1993. He previously served as vice president-production of Atlantic Electric.

He joined Atlantic Electric in 1969 as an engineer.

Louis M. Walters (42116) Vice President-Treasurer and Secretary of Atlantic Electric; Treasurer of Atlantic Southern Properties, Atlantic Thermal Systems , Atlantic Energy Technology and ATE Investment; Certified Public Accountant Mr. Walters was elected vice president-treasurer of Atlantic Electric in 1993 and elected secretary of Atlantic Electric in 1994. He previously served as general manager-treasury and finance of Atlantic Electric.

He joined Atlantic Electric in 1978 as an accountant.

James C. Weller (4511) President of Atlantic Generation, Inc. Mr. Weller joined Atlantic Generation, Inc. as president in 1994. He previously held the position of vice president-engineering and project development for Cogeneration Partners of America.

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