ML18093A738

Philadelphia Electric Co Annual Rept,1987.

ML18093A738
Person / Time
Site:	Peach Bottom, Salem, Hope Creek, Limerick, 05000000
Issue date:	12/31/1987
From:	Everett J PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
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ML18093A737	List: ML18093A736 ML18093A738 ML18093A739 ML18093A740 ML18093A741
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NUDOCS 8803210500
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Text

Financial Highlights ., l

• Results of Operations 1987-1985

% Change % Change 1987 1987-1986 1986 1986-1985 1985 Electric Operating Revenues (OOO's) $ 648,173 11.2 $ 582,961 .6 $ 579,733 Operating Expenses (OOO's) $ 533,500 9.4 $ 487,507 .6) $ 490,327 Net Income (OOO's) $ 73,765 34.2 $ 54,946 19.l $ 46,150 Earnings Per Common Share $ 4.03 34.3 $ 3.00 17.6 $ 2.55 Dividends Paid Per Common Share $ 2.65 1.9 $ 2.60 2.8 $ 2.53 Total Assets (OOO's) $1,499,362 7.0 $1,401,064 6.2 $1,319,027 Cash Utility Construction Expenditures (OOO's) $ 102,324 10.9 $ 92,283 (1.8) $ 94,017 Sales of Electricity (KWH) (OOO's) 7,014,400 7.6 6,521,414 5.2 6,199,672.

Price Paid Per KWH-(All Customers) 8.833¢ (2.2) 9.033¢ (4.7) 9.481¢ Total Customer Accounts (Year-end) 421,251 3.3 407,776 3.2 395,205 Number of Shareholders-Common Stock (Year-end) 45,586 (3.3) 47,133 (3.1) 48,635 Number of Atlantic Electric Employees (Year-end) 2,148 ( .9) 2,168 3.3 2,099 Book Value $ 25.71 5.5 $ 24.37 1.7 $ 23.96 Certain prior year amounts have been restated for the effects of SFAS 90, consolidation of subsidiaries and capitalization of leases. (in dollars) 4 3 2 ....... 1i .. . 0 '83 '84 '85 '86 '87 Atlantic Energy Earnings and Dividends Paid Per Share of Common Stock c Earnings

• Dividends Paid (year-end dollars) 40 30 20 10 0 1 I I .... '83 '84 '85 '86 Atlantic Energy Market Price Per Share of Common Stock '87 1 To Our Shareholders This is our first Annual Report to you as Atlantic Energy shareholders, and 1987 has been great for starters!

We've set new records for earnings, dividends and customer growth. Earnings reached a new record of $4.03 per share. This compares very favorably with last year's restated results of $3.00 per share. The 1986 restatement resulted from the implementation in 1987 of SFAS 90, relating to the regulatory treatment of certain types of property abandonments and disallowances. , For thirty-five consecutive years, dividends paid I per share have increased.

Total dividends paid in 1987 amounted to $2.65 per share. Last June, the Board of Directors increased the regular quarterly dividend rate to 67¢ per share, making the annual rate $2.68 per share. And, in December, the Board declared an extra cash dividend of 5¢ per share, payable with the regular dividend on January 15th this year. The extra dividend action was taken in view of the very good results of 1987. The driving force behind this performance has been our utility subsidiary, Atlantic Electric, and the growth in its service territory.

The utility's energy sales grew by 7.6% over the past year, exceeding the 7 billion kilowatt-hour level for the first time. Peak J. D. Feehan E. D. Huggard demand in 1987 increased by 10.3 % over the record 2 set in 1986. Over 12,000 new customers were added to the Atlantic Electric another new record! Our rates have been relatively stable since 1984. Adjusting for inflation, our prices have declined in real terms, and we believe that has contributed to an increase in the average energy use by our customers.

We continue to benefit from our diversified mix of fuel sources and power plants. In 1987, coal and nuclear power provided 76% of our total energy requirements.

The Hope Creek nuclear unit and the two Susquehanna nuclear units performed very well. And for 1987, Susquehanna Unit 2 was the best operating unit of its type in the world. Power generation from our nuclear units would have been stronger were it not for developments at the Peach Bottom Station, which is operated by Philadelphia Electric Company. The Nuclear Regulatory Commission shut Peach Bottom down in March 1987, following incidents of unacceptable conduct by power plant operators.

To date, the NRC and the Institute of Nuclear Power Operations, a nuclear utility peer group, have had problems with PE's proposed plans for restart. It is apparent that there will be more changes that PE will have to make. We have called upon PE management and PE's special board committee to effectively and properly respond to the concerns expressed by the NRC, INPO and others, in an effort to return the plant to service safely and promptly.

The New Jersey Public Advocate has just asked the Board of Public Utilities to determine whether the New Jersey utilities should continue to recover their Peach Bottom costs through base rates. We will keep you posted on these most important developments.

In February 1987, the BPU authorized a net decrease in revenues of $15.9 million: base rate revenues were increased by $31.4 million, reflecting the costs of the new Hope Creek unit and the 1987 reduction in the Federal income tax rate. That increase was more than offset by the $47.3 million decrease in levelized energy clause revenues.

Energy clause revenues were further decreased by $2.4 million in April. As part of its February 1987 Order, the BPU established a nuclear plant mance standard.

This standard provides for penalties and incentives for overall capacity factors below and above a 70% benchmark.

We had expressed concern about the specifics of the standard during the rate proceeding.

Others shared our view: the bond rating agencies cited the performance standard as a major factor which led them to lower our bond ratings to the high, single-A category in 1987.

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With the reduced level of nuclear generation in 1987, the first application of the standard is expected to result in a failure to recover some portion of our ment power costs. The provision for some disallowance has been reflected in our 1987 results, but the actual amount of disallowance may be fixed by the BPU in nection with our pending rate case. Last September, we requested a net increase in revenues of $49 .8 million, reflecting an increase in energy adjustment revenues and the effects in 1988 of the lower Federal income tax rate. The administrative law judge has filed her initial decision, and a final BPU order is expected in early 1988. The vitality of Atlantic Electric' s service territory is expected to provide the tunity for continuing strong financial performance.

Since the 1987 peak load was at a level that we had not expected to top until 1990, we have made short-term power purchase arrangements which will help bridge the gap until additional generating capacity becomes available on a long-term basis. Our long-term plans include the purchase of power from non-utility sources. In 1987, the BPU approved a pricing structure which we're using in negotiating term contracts for buying up to 700 megawatts of capacity.

The availability of power from these non-utility sources will be coordinated with other, more traditional utility resources to assure reliability and meet customers' requirements as efficiently as possible.

Atlantic Electric's progress is the direct result of hard work by a family of dedicated employees.

They've made 1987 the safest year in recent history; streamlined the organizational structure to improve the timeliness and quality of service; and found new ways to handle growth, get the job done, and control costs. The future successes of our utility will be realized with efforts such as these. Our holding company structure became effective last November.

We expect that the activities of our non-utility subsidiaries will develop at a prudent pace. It should be a few years before they can contribute significantly to consolidated earnings.

Atlantic Generation is developing non-utility projects through a partnership role in Cogeneration Partners of America. CPA is marketing cogeneration services and projects to wholesale and retail customers located in various states. CPA's progress in its very early stages has been encouraging.

Atlantic Southern Properties, formerly Atlantic Housing, has a property in Atlantic County which may be developed for use by the utility and other commercial customers.

And ATE Investment is just getting started. The development of Atlantic Energy and the enhancement of our strategic options reflect the varied skills and untiring personal commitment of a very fine group of Directors.

Eleanor Daniel, who has served on the Board for more than 12 years, will be retiring this April. She has provided her vast experience in economics, business and finance to the direction of the Company. With that experience, she has blended gracious wisdom, contributing greatly to our progress, and the joy of our work. This past year has been a prosperous and exciting one. New records were set for operating and financial performance.

We've made our corporate structure more flexible, recognizing that the traditional monopoly of electric utilities is giving way to regulatory change and new forms of competition.

We have come to a turning point: Reflecting on our success as Atlantic Electric, we have adjusted our course to navigate the currents of change in the utility industry.

We are also beginning to explore new, unregulated opportunities, though we'll never lose sight of home. For the Board of Directors, J.D. Feehan E.D. Huggard Chairman of the Board President and Chief Executive Officer February 9, 1988 3 Year in Review 4 Utility Operations A new utility system peak of 1,609 megawatts was recorded in July, representing a 10.3% increase over the prior year's record. Energy sales increased by 7.6%, to a record 7 billion kilowatt-hours.

Coal and nuclear generation provided 76% of total energy needs in 1987. Compared to oil, the coal and nuclear mix saved customers more than $85 million in fuel costs. The new Hope Creek unit performed very well in its first full year's operation, with an overall capacity factor of 78%. During 1987, Susquehanna Unit 2 was the best operating unit of its type in the world. Cash construction expenditures totaled $102.3 million. Approximately 40% of the total was for expansion and improvements to the transmission and distribution systems, reflecting the recent and anticipated growth in the service territory.

Other major expenditures for production plant related to service life extension grams, improved operating efficiency and pollution control. . A 500kv transmission_

line crossing the Delaware River was returned to service in November, after having been knocked down by a tanker in March. A major munications effort advised our customers that the loss of the line could result in lems with meeting system load. The supportive response from customers helped us control loads through the peak season. A test bum of Refuse Derived Fuel was conducted at the B.L. England Station in October. A decision not to use RDF followed test results which indicated that it could adversely affect the reliability of Atlantic Electric's units. Successful bidding for additional short-term transmission capacity enabled Atlantic Electric to import low-cost power from other utilities, saving customers about $1 million. A pilot program, completed in October, tested the feasibility of remote control of home air conditioning and water heating equipment.

This method ofload control can now be coordinated with other supply-and demand-side options for meeting customer growth. Community Relations and Customer Service Atlantic Electric reorganized its customer service section and established new customer service regions. These changes will allow for more comprehensive and timely customer service. Over 5,300 home energy audits were completed and over 1,900 customers took advantage of Atlantic Electric's seal-up programs.

Atlantic Electric received special commendation from the National Career ment Association for its commitment to equal employment opportunity.

About 150 employees were trained as part of the Gatekeeper Program, which was developed to help those with direct customer contact identify the special problems of senior citizens and coordinate assistance for them. Atlantic Electric's Good Neighbor Fund, working through the Salvation Army, assisted over 1,500 needy families with their winter heating_ bills. The Volunteer Initiative Program, established in 1987, has helped to increase the volunteer efforts of employees in community service. The program matches the skills and interests of volunteers with the needs of service organizations in the area. Regulatory and Financial Matters A net base rate increase of $31.4 million was authorized in February.

The increase, primarily for the new Hope Creek generating unit, was partially offset by the effects in 1987 of lower Federal income tax rates. Levelized energy clauses were reduced in 1987, with a $4 7.3 million decrease in February, and an additional

$2.4 million decrease in April. In March, the Nuclear Regulatory Commission shut down Peach Bottom Station, operated by Philadelphia Electric Company, following incidents of improper duct by plant operators.

With favorable market conditions for long term, tax-exempt financing, Atlantic Electric converted

$18.2 million of its adjustable rate pollution control bonds to a fixed rate of 7% % in April. Ratings on Atlantic Electric debt obligations were lowered by the bond rating agencies to the high single-A category.

In July, Atlantic Electric refunded an interim tax-exempt financing with $4.4 million of 8% % pollution control bonds. In August, the BPU approved procedures used by Atlantic Electric in ating the purchase of up to 700 megawatts of capacity and energy from various non-utility projects.

In September, Atlantic Electric requested a net revenue increase of $49.8 million, comprised of an increase in levelized energy clause revenues of $60.9 million, set by a decrease in base rate revenues of about $11 million due to the reduction in Federal income tax rates. 5

Viewpoints The following text presents highlights of a recent Executive Committee*

session at which corporate developments and plans were reviewed Major Strategic Issues Huggard: Several developments over the past year suggest the major issues which we'll face in 1988 and beyond. First of all, the strong growth which we've seen in our utility service area should continue.

That growth will present opportunities for future strong financial performance, but it also brings the challenge to control costs and secure-additional generating capacity.

In addition, we want to press on with development of the holding pany structure.

We've worked hard to get the necessary regulatory approvals.

Now we're shifting our efforts to building the new business units which will support and complement the utility. Service Territory Growth Jacobs: Our recent growth has not been confined to Atlantic City and the surrounding area. We're seeing growth throughout the service ritory, particularly in the residential and commercial sectors. We expect that Atlantic Electric' s growth rate will be higher than most other nearby utilities for another few years. This growth will be aided by the completion of several transportation links. A high speed rail line connecting Philadelphia with Atlantic City is expected to be completed sometime in 1989. It should open up new possibilities for workers and visitors all along the corridor.

Completion of major sections of Route 55 will connect our central region with the major highways to Philadelphia and shore points, also opening up new areas for growth. The Need for Additional Generating Capacity Jacobs: We've been careful to avoid an excess capacity problem in the past, and so our recent records for energy sales and peak load have erated the need for additional capacity.

But we plan to meet the ments in ways that are economical and moderate our investment costs. Parent: That's right. We've looked at the capacity situation and broken it down into several components, based upon different time horizons.

• Executive Committee members are: E.D. Huggard, President and Chief Executive Officer; and Vice Presidents:

M.J. Harlacher, J.L. Jacobs, M.A. Jarrett, B.A. Parent and J.G. Salomone.

A11:1antic Eiectric's service territory was redefined tlhiis year into fo111111' separate c11.11stomer serYice ll'egions, so tlh!at customers' needs co1.11lcll be me1t more effectiYely.

'if'lh!e following pages o1!11ell' a look at tlhie bea1111ty and clrnaracter of each of tlhiese foa.nr d!stinct!Ye regions. 7 The River Region harbors some of South Jersey's oldest and most historic communities.

This region's sandy soil has traditionally attracted some of the country's largest glass manufacturers.

Commercial fishing and agriculture are also strong businesses in this part of the Garden State, which produces the popular "Jersey Tomato." ., -* ';..,.( ' 8 Recently, we've been pursuing arrangements with neighboring utilities for capacity purchases which will help us meet reserve capacity ments established by the P JM power pool. These contract arrangements are scheduled to last just a few years, to bridge the gap until new generating capacity is projected to be available.

• Cogeneration Parent: Cogeneration can produce power more efficiently, at lower costs, than some other types of power plants. In conventional power plants, the steam that passes through the turbine generator is condensed and then recycled through the boiler. Some valuable heat energy is lost in the process. With cogeneration, however, the exhaust steam is applied directly for heating or some other end-use. We've had first-hand ence with cogeneration for more than 40 years at our Deepwater Station. Companies can build cogeneration facilities suited to specific steam requirements, produce electricity for their own purposes, and have plenty of economic generating capacity left over to sell to the utility. There is some cogeneration potential in our service territory.

Since we can use the capacity and could benefit from the cost advantages, we are actively pursuing opportunities to purchase power from cogeneration facilities.

Harlacher:

In 1987, we got BPU approval to negotiate power purchase contractsfor up to 700 megawatts of cogeneration capacity.

Negotiations should be completed by the first half of 1988, and some of the tion power could be on-stream by 1990 or 1991. Both the amount and the timing of cogeneration projects are tant We are doing some contingency planning right now, looking at what might have to be built in case the cogeneration plans change or the various projects are delayed. Jarrett: Several years ago, a law was passed in New Jersey establishing a Certificate of Need process. In essence, no major construction or sion of a generating plant by a public utility can begin without getting a Certificate of Need. The legislature wanted to avoid the possible burdens on ratepayers which could be caused by excess generating capacity.

That's a goal we've always had. We're mindful of our ultimate obliga-tion to serve our customers and we're working to explore all reasonable alternatives in meeting load growth. Some of those alternatives may pan out; others may not. There will come a time when we'll have to say that the pursuit of reasonable and realizable alternatives to utility tion has been exhausted.

At that time, it will be critical to commence some construction; otherwise, the prospects for not meeting our customers' energy demands may tum into reality. We are working vigorously to pursue least cost methods of meeting customer growth. That will serve our customers well. It will also help shareholders, because our investment in new generating capacity will be carefully measured.

• Other Ways of Providing for Growth Harlacher:

Large-scale cogeneration and utility-built capacity are just some of the resources which are expected to help meet our growth. Small cogeneration units on customers' premises, conservation and load management are going to play a role in our customers' energy future. This means getting more involved with the customers' end-uses of trical energy. In some ways, it has opened up new areas of customer vice for us.

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• From the Customers' Perspective Jarrett: We've learned a lot from our energy sales experience, customer attitude surveys and the successes and failures of various conservation programs.

What we've seen in recent history is that increases in the real price of electricity sharpened our customers' focus on conservation efforts. They have improved their home insulation, caulked windows and doors, and opted for more efficient appliances.

Salomone:

The price of electricity has declined in real terms and our customers have responded by increasing their average energy usage. In other words, our price stability has allowed them to opt for higher levels of comfort and convenience.

Harlacher:

Our five-year Demand Side Management Plan has been set up to explore ways to encourage efficiency and reduce peak load. We've placed continuing emphasis on weatherization efforts, offering free home energy audits and seal-up programs.

In 1987, we completed a pilot load control program. By using radio signals to adjust the times when home air conditioning and water heating are used, we reduced the coincident peak load without appreciably affecting our customers' comfort. We can now coordinate direct load control programs into our future plans, and reduce the need for more costly methods of handling growth. Parent: Our main objective is to develop conservation and load ment practices which are cost beneficial for our customers.

The process isn't perfect. It involves market testing and some trial-and-error.

Since starting out on our demand side efforts, we have had to revisit some grams to improve them. Still, we believe that these initiatives will help us in several ways: in reducing load; in more efficient energy usage; and in having a stronger relationship with our customers.

• Competition, Regulation and Utility Industry Changes

• Jarrett: That good relationship with customers is particularly important, with the changes going on in our industry.

For years, there has been the traditional competition from alternative energy sources like oil or natural gas for home heating. Now, however, we're also seeing the development of non-utility power producers who are making electricity for sale to utilities or large electrical customers.

The federal legislation, PURPA, has allowed non-utilities to become power producers without the sive cost-based regulation which the traditional utilities have had. Other regulatory concerns, here on the state level, have also given support to developments which involve power production and transmission by non-utilities.

Salomone:

That's true. What some would call deregulation, others might call changes in regulation to advance open market forces. And, the primary reason to do so relates to cost. But cost is only one of the issues that has to be tested in this changing regulatory environment.

Some other aspects which must stand the test in the public eye include reliability, safety and environmental impact. As a public utility, we have done a good job in providing reasonably-priced power while balancing those other concerns.

The cost issue continues to be the dominant factor, and we have to reserve judgment on how new entrants into power production will deal with those other responsibilities.

Market entry by others is a factor to be dealt with. That's because, like most utilities in the Northeast, our utility's costs reflect fuel mix, recent construction to meet growth and plant additions to protect the environment These costs present competitive opportunities for non-utility developers.

The Central Region is the largest and! most diversified of Atlantic Electrric's customer seNice regions. it includes parts of six SouU11 Jell'Self coMnties and supports a IUlnique mix of agriculture amd teclhnoioglf.

This region's products and services include compact discs, com* puterized weighing equipment, petroleum refining and ceutical production.

Ill is also an impoirtamt area for fruit and uegetab!e farming.

• 11 The Ocean Region's growth, the highest in our service area, has been stimulated by the hotel and casino industry in Atlantic City. Seaside areas play host to millions of tourists each year and to special events like the Miss America Pageant. This region's business activities range from harvesting cranberries to produc* ing world-famous fine china. 12

• Jacobs: The degree of entry by others, such as cogenerators, into the power business is a function of several factors. Cost is one. Another is that cogeneration development is linked to the need for that second form of energy output, such as steam. Cogeneration facilities often involve industrial

'hosts' which do have those large thermal requirements.

In the case of Atlantic Electric, we've had a relatively low mix of industrial customers.

So, from that viewpoint, unlimited cogeneration development might not be a significant competitive concern. Parent: It's one thing for a non-utility to build a power plant; it's another to deliver the power where it's needed. Competition for, and expansion of, transmission capacity will depend on relative cost and availability.

One important factor which will shape future developments in this area is the difference in price to the customer between power bought from the traditional utility source, and power bought from some other producer.

As far as our electric system is concerned, there's tically no excess transmission capacity available right now. Additional transmission capacity would have to be built. The cost of building and using new transmission facilities would have to be factored into the 'delivered cost' of independently produced power. That would reduce the relative attractiveness of such power. We are keeping alert to the early signals of change, and will preserve our ability to import power effectively, while responding to the regulatory developments which may anse. Jarrett: I'd like to talk about customer attitudes for a minute. These attitudes are important because they shape some very important sions: whether customers are getting value for what they pay; whether the service is satisfactory; and whether they want to get service elsewhere.

We've done a lot in terms of establishing good customer relations.

Our surveys indicate that customers are price-sensitive:

they would like our rates to be lower, but they think that we charge fair prices for the value they receive. They also indicate that prompt response to service requests is a high priority.

This goes back to the care and attention toward customers that we emphasize.

Salomone:

Look at what's been happening in the airline and telephone industries.

The options provided by those deregulated industries have often involved trade-offs in cost and availability or convenience of vice. I don't honestly believe that the same customer criteria prevail in the case of electricity.

Our customers want power for light, heat and manufacturing when they flip the switch. They will not want to 'wait in line' for electricity.

That gives some indication of the difficult balance that comes into play for regulated utilities and regulators.

For years, with traditional utility regulation, customers have benefited from a good balance of cost, reliability and quality of service. As the competitive forces are stimulated in our business and the emphasis shifts even more on cost, there will be different types of discussions about reliability and service. It may be several years yet before these issues are assessed and resolved in the broad, public perspective.

• Holding Company Reorganization

• Huggard: These regulatory and competitive changes really formed the basis for our decision to set up a holding company structure.

Providing electrical energy to our customers has been, and will continue to be, our primary business.

The new structure enables us to respond to the changes

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in the utility industry, and gives us an opportunity to participate as other, non-regulated companies might. We'll continue to pursue low cost power for customers in a business environment where the form and substance of regulation are changing.

We're planning conservative diversification to enhance the stability and growth of earnings and dividends.

Parent: Right no\\) our Atlantic Generation subsidiary is getting involved in cogeneration projects through its partnership interest in tion Partners of America. The two other partners in CPA have tant experience in cogeneration development and energy supply. Our business plan for this effort is proceeding along well. Through CPA's efforts, we expect to provide some portion of the new cogeneration which will be developed in our utility's service area. But CPA's activities aren't confined to southern New Jersey. It is marketing its services and the development of a variety of smaller cogeneration projects in several states. The business activities of Atlantic Generation and CPA give us tunities to benefit from providing energy and generating capacity in the non-regulated arena. Salomone:

The ATE Investment subsidiary is expected to participate in financial transactions which will produce attractive returns without assuming a disproportionate amount of risk. We're still in the early phases of starting this business, but I expect that several investments will be made during 1988. We'll also be looking at ways that the investment subsidiary can complement the utility's business and reduce its expenses.

Jarrett: Atlantic Southern Properties currently has a project which it may develop for use by the utility and prospective commercial customers.

As we've mentioned, southern New Jersey has a lot of growth potential, and we expect to put our experience to good use in developing real estate opportunities.

Jacobs: There are two important points we should reinforce as far as holding company developments are concerned.

First, we're not going to stray far from our familiar path. The regulated electric utility business is a good one to be in. Furthermore, the regulatory authorizations we *got from the New Jersey BPU and the Securities and Exchange Com-mission echo our conservative approach to diversification.

The second point is that we're sowing the seeds for future growth. It's fair to say that, over the first several years, the contributions of the utility subsidiaries to corporate earnings will be very modest. But the growth of the non-regulated subsidiaries and their earnings contributions should complement the utility's progress.

By the fifth year as a holding company enterprise, we believe that the non-regulated subsidiaries should be making a noteworthy contribution to total earnings.

And, if that doesn't materialize, rest assured that we'll trim our sails accordingly.

Some Closing Remarks Huggard* All of the indications are that the electric utility industry is changing.

It's in our interest to anticipate some of these changes and prepare to use them for the benefit of customers and shareholders alike. Time will tell which changes are good and which will last. We're very fortunate with the position we have: a very strong, healthy core business with prospects for continuing growth; a new corporate structure which is well-suited to responding to the developments we've been talking about; and management and employees who are equal to, and excited about, the great possibilities which lie ahead.

• Combining Victorian charm with sortie of New Jersey's fh1est beaches, the Cape Region long a favorite for tourism in the state. located . . in the southern tip of New Jersey, this region has quickly become.desirable for residential living. A "nice place to visit" lhas become a grea.t place to live for over 80,000 residents.

15 Atlantic Elecbic's Service Territory 16

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Representing the southern one-third of the state of New Jersey, Atlantic Electri.c's service temtory is situated near such major cities as New York, Philadelphia, Baltimore and Washington, D. C. The majority of its customers are residential and commercial Tourism and its related commercial activities play a major part in the economy of the eastern shore. On the western side, fanning, agricultural and light industrial customers continue as a significant economic base.

• Atlantic Elecbic' s Customers At-A-Glance RESIDENTIAL Total residential kilowatt-hour sales increased 7.1% in 1987 and average use per residential customer rose 3.7%. In 1987, the average number of residential customers increased 3.2% and now comprises over 88% of Atlantic Electric's total customer accounts.

Over 11,400 new residential dwellings were connected in 1987, with the majority located in the coastal area. 1987 Energy (billion kwhrs) 3.040 Peak(Mw) 857 COMMERCIAL 2002 4.230 1140 Est. 1987-2002 Annual Growth Rate 2.23% 1.92% Atlantic Electric's average number of commercial customers increased 3.1% to 46,775. Overall, commercial sales rose 8.0%. With the addition of a twelfth hotel/casino in 1987, sales to that class increased 9.2% over 1986 levels and represented 6.0% of 1987 total energy sales. 1987 2002 Energy (billion kwhrs) 2.592 3.829 Peak(Mw) 586 868 INDUSTRIAL

& OTHER Est. 1987-2002 Annual Growth Rate 2.64% 2.65% Sales to industrial and other customers increased 8.2% in 1987 from 1986 levels. Industries in Atlantic Electric's service area include glass, chemicals and allied products, rubber and plastic products, food products, petroleum refining and machinery.

Atlantic Electric's 1,015 industrial customers, whose average use per customer increased by 9.0% in 1987, are located primarily in the inland and western sections of Atlantic Electric's service territory.

1987 Energy (billion kwhrs) 1.382 Peak(Mw) 166 2002 1.290 153 Est. 1987-2002 Annual Growth Rate (0.46%) (0.54%) (billions of kwh) 4 0 average customer use (000 kwh) %of total sales (billions of kwh) 4 3 2 '83 7.7 43 '84 '85 '86 '87 7.9 7.6 8.0 8.3 44 43 44 43 __ n __ n __ IL 11 11 I! i I I ! --1: i-: 1-j 1-il-! 0 average customer use (000 kwh) % of total sales (billions of kwh) 4 3 2 '83 '84 46.8 49.3 35 35 '85 '86 '87 51.9 52.9 55.4 37 37 37 n rn1-11 11 11-1 0 average customer use (000 kwh) % of total sales '83 1200.4* 22 *Industrial customers only. '84 1179.7* 21 '85 '86 '87 1181.3* 1196.7' 1304.0' 20 19 20 17 I_ ' ' 2002 8.2 45 2002 67.8 41 2002 1211.9* 14 L_ _______ _ Index to Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operation 19 Report of Management 23 Report of the Audit Committee 23 Auditors' Opinion 23 Consolidated Statement of Income 24 Consolidated Statement of Cash Flows 25 Consolidated Balance Sheet 26 Consolidated Statement of Changes in Common Shareholders' Equity 28 Notes to Consolidated Financial Statements 29 18 Management's Discussion and Analysis of Financial Condition and Results of Operation Atlantic Energy, Inc. and Subsidiaries OVERVIEW Atlantic Energy's primary subsidiary is, and will continue to be, Atlantic Electric.

Operations of the nonutility companies have begun modestly following a strategy to make prudent investments where the potential for future returns is promising.

Atlantic Southern Properties has purchased commercial real estate and is continuing to develop this site as well as developing plans to attract future tenants. Atlantic Generation entered into a partnership arrangement to struct, own and operate cogeneration facilities.

ATE Investment has been fonned to manage the capital resources of Atlantic Energy, and to engage in limited, passive investment opportunities.

Earnings for 1987 amounted to $4.03 per share compared to $3.00 in 1986 and $2.55 in 1985, as restated.

Since earnings for each of these years were primarily attributable to the operations of the utility business, the remainder of the analysis will focus on Atlantic Electric.

UTILITY OPERATIONS The nature of Atlantic Electric's operations is capital intensive.

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

At December 31, 1987, gross investment in property and plant was approximately

$1.6 billion. As a utility, Atlantic Electric is generally subject to regulation by the Board of Public Utilities (BPU). Atlantic Electric seeks to maintain a level of rates which will allow it to meet daily working capital requirements, long tenn obligations, and to provide a fair return on investment to its shareholder, while taining service reliability.

Construction Program During 1987, cash construction expenditures aggregated

$102 million, which is an 11 % increase from the $92 million expenditure level experienced in 1986 and a 9% increase from the $94 million level in 1985. A major element of the construction program during the (in millions of dollars) 250 200 150 100 50 '83 '84 '85 '86. '87 Atlantic Energy Cash Requirements and Internal Generation of Funds a Construction and Other a Maturities, Retirements and Sinking Funds a Internal Cash Generation

• Excludes certain optional retirements past several years has been to support the 5% investment in the Hope Creek Generating Station. The construction program and the forecast of related construction expenditures is reviewed regularly and is designed to meet customers' demand for electric energy service for the present and the future. The current forecast of peak load growth for 1988 through 1992 is 1.9% per year. This forecast reflects a continuing commitment to promote energy conservation among customers, and alternatives to conventional energy supply, including cogeneration.

In response to customers' needs, the construction gram includes elements to improve or replace existing production plant, and upgrading the transmission and distribution system. Financing Program Atlantic Electric finances its construction program, as well as nonnal operating needs, through a combination of internally generated funds, short tenn debt used on an interim basis, long tenn debt and shareholder investment Flexibility in financing needs is complemented by maintaining lines of credit with lending institutions, which aggregated

$115 million at December 31, 1987. The aggregate dollar amounts of major financings for the past three years are summarized (in millions of dollars) as follows: 1987 1986 1985 First Mortgage Bonds $4.4 $220.0 $70.0 Common Stock .4 .4 11.2 Capital Contributions

.9 Total $5.7 $220.4 $81.2 The 1987 financings consisted of the sale of $4.4 million of First Mortgage Bonds, 8% % Pollution Control Series A of 1987. Proceeds were used to repay maturing notes payable. Issuance of Common Stock was accomplished through the Employee Stock Ownership Plan (in percent) *100 .... : .. I 1 ... r-1 * .. i ..

• 1 .... I ' I ' I I 80 ' ' ..... *1 I .... ' *** *1 ' . *6 q ... ! : ..... I* .... i : ..... : .... I i* ..... . ' ; ! ', ..

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11 ............. . 20 0 I 11 11 1 I i I ! I : ! I '83 '84 '85 '86 Atlantic Energy Year End Capitalization o Common Equity

• Preferred Stock :i Long Term Debt

• Short Term Debt '87 19 L . _________

J Management's Discussion and Analysis of Financial Condition and Results of Operation (continued) (ESOP) prior to the effective date of the restructuring.

Capital butions represent the proceeds of Atlantic Energy financings, which consisted of Common Stock issued under Atlantic Electric employee benefit programs.

The 1986 financings included the sale of two series of First Mortgage Bonds: $125 million of the 8%% Series and $95 million of the 8% Series. Part of the proceeds of these financings was used to redeem outstanding indebtedness which had been issued at higher interest rates. The 1986 Common Stock issuances related to Atlantic Electric shares issued through the ESOP. The 1985 financings included the sale of $70 million of an 11112% Series of First Mortgage Bonds, $10.8 million of Common Stock issued by Atlantic Electric through its Dividend Reinvestment Plan, and $.4 million of Common Stock issued through the ESOP. The timing and amount of security issuances are guided, in part, by Atlantic Energy's capital structure goals and the capital requirements of its subsidiaries.

Capitalization ratios for Atlantic Energy as of December 31 for the last five years are set forth in the accompanying chart. Approximately 34% of the cash requirements for construction, maturities, sinking funds, optional retirements and redemptions associated with long term debt and preferred stock, and for other capital purposes of Atlantic Energy and its subsidiaries during the period 1985-1987 was generated from operations after deductions for dividends and working capital needs, but exclusive of changes in temporary cash investments.

Excluding the early retirement of all of the 12%% Series First Mortgage Bonds and a portion of the 11%% and ll1/2% Series First Mortgage Bonds of Atlantic Electric in 1986, approximately 45% of cash requirements during the period 1985-1987 was generated internally.

Provisions of Atlantic Electric's charter, mortgage and debenture agreements can limit, in certain cases, the amount and types of additional financing which may be used. At December 31, 1987 Atlantic Electric estimates additional funding capacities at $278.6 million for First Mortgage Bonds, or $408.0 million for Preferred Stock, or $135.9 million for unsecured debt. These amounts are not necessarily additive.

20 (in billions of kilowatt*hours) 7.0 ******************************r**

,, r 1 ..... I 11 5.5 11 o 11 11 11 r1 r1 5.0 '83 '84 '85 '86 '87 Atlantic Electric Total Energy Sales Revenues Operating revenues increased 11.2% in 1987 to $648.2 million compared to $583.0 million in 1986. The 1986 level of revenues represented a .6% increase compared to 1985. These overall increases reflect the net results of changes in base revenues, Levelized Energy Clause revenues and kilowatt-hour sales as shown below: (Thousands of Dollars) 1987 1986 Base and Unbilled Revenues $30,647 $ 7,527 Levelized Energy Clause (9,725) (33,849) Kilowatt-hour Sales 44,290 29,550 Total $65,212 $ 3,228 Future changes in operating revenues will reflect the results of customers' rate changes, general economic conditions in the service area, and the results of load management and conservation programs.

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

Energy sales statistics, stated as percentage changes from prior years, are shown below: Increase (Decrease) from Prior Year Customer Class 1987 1986 Average Average Average Average Sales Use # of Cust. Sales Use # of Cust. Residential Commercial Industrial Other Total (limes coverage) 5 7.1% 8.0 8.2 .1 7.6 3.7% 3.2%

4.7 3.1 9.0 (.7) .1 4.2 3.2 4

• • • • n n 3 2 0 I 1-l ! ...........

I ! '83 '84 '85 Atlantic Electric Pre Tax Interest Coverage Ratio '86 '87 7.6% 4.4% 3.0% 4.5 1.9 2.5 1.5 1.3 .2 .8 .8 5.2 2.2 3.0 The increases in total kilowatt-hour sales in 1987 and 1986 are largely attributable to the number of new customers added to the system. The growth of electricity consumption within the service territory is related to improving economic conditions, enhanced in part by the hotel/casino industry, and the relative stable price of electricity in the last few years. Overall, the combined effects of the changes in sales and rates has resulted in an increase in revenues per kilowatt-hour of 2.9% in 1987 compared to 1986, and a decrease of3.6% in 1986 compared to 1985. Costs and Expenses Total operating expenses increased 9.4% in 1987 compared to 1986. The 1986 operating expenses represented a decrease of .6% compared to 1985. Excluding depreciation and taxes, operating expenses increased to $353.4 million in 1987, an increase of 7.5% from 1986, which had decreased 1.3% from 1985. Net Energy Costs reflect the amount of energy produced, the various fuel and purchased power sources used to produce it, as well as the operation of the levelized energy clauses (LECs). Atlantic Electric's annual fuel, interchange and purchased power costs reflect changes in availability of low-cost generation from both owned and purchased sources, as well as changes in the needs of other utilities participating in energy interchange.

Net Energy Costs for the three years ended December 31, (in thousands of dollars) include the following:

Fuel Interchange Deferred Costs Total (in cents) 10 8 1987 $125,271 23,990 (ll,628) $137,633 1986 $111,384 19,387 $130,771 I .. J .... f\:'; I ['

6 4 2 0 = "=== 1985 $133,437 17,272 5,865 $156,574 '83 '84 '85 '86 '87 Atlantic Electric Average Booked Revenue Per Kilowatt-Hour Atlantic Energy, Inc. and Subsidiaries The cost of energy is recovered through base rates and through the operation of LECs. LECs utilize projected energy costs and include provisions for prior period under or over recovery of these costs. The recovery of energy costs is made through levelized monthly rates over the period of projection.

Any under or over recovery of costs is deferred on the consolidated balance sheet as an asset or liability as appropriate.

These deferrals are recognized in the consolidated income statement during the period in which they are subsequently recovered through the LECs. During 1987, the cost of energy was impacted by higher than projected kilowatt-hour sales. In addition, the shut down of the Peach Bottom Station and the temporary loss of a major transmission line caused Atlantic Electric to incur mental purchased power and interchange expenses.

During 1987, Atlantic Electric went from being in an over recovered position to an under recovered position.

At December 31, 1987 $23.8 million is shown on the consolidated balance sheet as Deferred Energy Costs in contrast to December 31, 1986 where $13.2 million is shown on the consolidated balance sheet as Deferred Energy Revenues.

Information on the sources and costs per kilowatt-hour of energy is shown in the accompanying graph and table. Operation and maintenance costs include the costs of both owned and jointly-owned generating units. At wholly-owned units, Atlantic Electric has instituted programs to upgrade these facilities to improve efficiency and extend the service life of the generating units. In 1987, these expenses increased as the result of the commercial operation of Hope Creek, and planned unit overhauls.

Additionally, operating and maintenance costs are subject to price increases relating to materials, supplies and services, and include wages and employee benefits.

50 40 n '83 '84 '85 '86 '87 Atlantic Energy AFDC as a Percent of Net Income 21 Management's Discussion and Analysis of Financial Condition and Atlantic Energy, Inc. and Subsidiaries Results of Operation (continued)

Changes in depreciation expense generally represent changes in the value and mix of electric utility plant in service and the respective in-service dates, including the Hope Creek Unit in 1987. Interest charges before the Allowance for Borrowed Funds Used During Construction rose to $47.9 million in 1987 compared to $46.l million in 1986 and $41.6 million in 1985. These increases reflect the net effects of principal amounts and interest rates of debt standing in the period. A total of $294.4 million of long term debt was issued during the 1985-1987 period as described under "Financing Program" above at rates ranging from 8% to 11 1/2 % . In the same period, maturities included $10 million of 3% % Series First Mortgage Bonds in 1985, $45 million of floating rate notes in 1986 and $10 million of 4 1/2 % Series of First Mortgage Bonds in 1987. In addition, $63.75 million, $36.675 million and $48.785 million principal amounts, respectively, of the 12%%, 11%% and lll/z% Series of First Mortgage Bonds were retired in 1986. In January 1987, an additional

$.3 million principal amount of the 11%% Series was reacquired.

The increase in short term interest expense in 1987 reflects higher average balances and higher average rates. The decrease in short term interest expense in 1986 from 1985 reflects lower average balances and lower average rates. Increases in other interest expense in 1987 is attributed to interest on over recovery of fuel costs in prior periods. The embedded cost of long term debt at December 31, 1987, was 9.0%, compared to 8.9% in 1986 and 9.6% in 1985. Atlantic Electric expects to use short term debt to finance the construction and working capital needs on an interim basis, replacing it with long term issues as permanent financing.

The Allowance for Funds Used During Construction (AFDC) ing both the Borrowed Funds portion, which is used to reduce interest (in billions of ki/owall*hours) 8 4 lT%f lr(4%}i charges, and the Equity Funds portion, shown under Other Income was $3.2 million in 1987 compared to $17.0 million in 1986 and $11'.2 million in 1985. The 1987 decrease is due to decreases in the average balances of construction work in progress due to placing the Hope Creek Generating Station in service. OUTLOOK Atlantic Electric has positioned itself to remain flexible in responding to the external forces that may affect it. This strategy is evident in the utility operations in the diversity of power supply sources, which include investments in both wholly-owned generating facilities, as well as ownership interests in jointly-owned facilities, purchased power contracts, and a diversity in fuel mix including coal, nuclear, oil and natural gas. There are external forces which Atlantic Electric may be unable to influence.

Long term liquidity and financial flexibility depend in part upon receiving fair treatment from utility regulators in rate ings. The ability to finance operating and capital needs is dependent upon regulatory treatment and the ability to maintain good credit ratings. The continued unavailability of the Peach Bottom Station, and the regulatory treatment ultimately decided by the BPU, could have a material adverse effect on the consolidated financial results of Atlantic Electric and Atlantic Energy. Atlantic Energy is now in a position to take advantage of tunities for investment and growth through its nonregulated sidiaries.

A program of prudent evaluation of such opportunities is now coupled with the opportunity to finance such investments outside the regulated business.

The Board of Directors and management are reviewing strategies for investment opportunities that offer the potential to increase shareholder value. '83 '84 '85 '86 '87

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__ Natural Gas

• 6.56 6.93 5.50 3.80 3.55 Interchange

• 5.21 6.02 3.65 2.48 3.07 Yearly Average Atlantic Electric Total Sources and Costs of Energy 22 Reports of Management and the Audit Committee Report of Management The management of Atlantic Energy, Inc. is responsible for the financial statements presented herein. These financial statements were prepared by management in conformity with generally accepted accounting principles.

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

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

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

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

Company management recognizes its responsibility for fostering a strong ethical climate in which the corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. Auditors' Opinion Deloitte Haskins+Sells Certified Public Accountants One World Trade Center New York, New York 10048 To the Shareholders and the Board of Directors of Atlantic Energy, Inc.: We have examined the consolidated balance sheets of Atlantic Energy, Inc. and subsidiaries as of December 31, 1987 and 1986 and the related consolidated statements of income, changes in common shareholders' equity, and of cash flows for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and, ingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

The Company has established a system of internal accounting and financial controls and procedures designed to insure that the financial records reflect the transactions of the Company and that assets are safeguarded.

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

Report of the Audit Committee The Board of Directors has oversight responsibility for determining that management has fulfilled its obligation in the preparation of financial statements and the ongoing examination of the Company's system of internal accounting controls.

The Audit Committee, which is composed solely of outside directors, meets regularly with ment, Deloitte Haskins & Sells and the internal audit staff, without management present, to discuss accounting, auditing and financial reporting matters. The Audit Committee reviews the program of audit work performed by the internal audit staff. To insure auditor pendence, both Deloitte Haskins & Sells and the internal audit staff have complete and free access to the Audit Committee.

In our opinion, the accompanying consolidated financial statements present fairly the financial position of the companies at December 31, 1987 and 1986 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1987, in conformity with generally accepted accounting principles applied on a consistent basis, after restatement for the changes, with which we concur, in the method of accounting for abandonments and disallowances of plant costs and in the method of accounting for lease obligations as described in Note 1 to the financial statements.

January 29, 1988, except for the last paragraph of Note 10 as to which the date is February 9, 1988 23 Consolidated Statement of Income (Thousands of Dollars) 1987 Operating Revenues-Electric

$648,173 Operating Expenses:

Net Energy Costs 137,633 Operations 163,842 Maintenance 51,899 Depreciation and Amortization 51,080 New Jersey Gross Receipts Taxes 70,323 Federal Income Tax Expense 48,916 Other Taxes 9,807 Total 533,500 Operating Income 114,673 Other Income: Allowance for Equity Funds Used During Construction 1,436 Miscellaneous Income-Net 6,645 Total 8,081 Application of SFAS 90: Plant Abandonments and Disallowances-Net 2,545 Applicable Income Taxes (720) Net Effect of SFAS 90 1,825 Income Before Interest Charges 124,579 Interest Charges: Interest on Long Term Debt 44,547 Interest on Short Term Debt 2,070 Other Interest Expense 1,291 Total Interest Charges 47,908 Allowance for Borrowed Funds Used During Construction (1, 761) Net Interest Charges 46,147 Preferred Stock Dividend Requirements of Subsidiary 4,667 Net Income $ 73,765 Average Number of Shares of Common Stock Outstanding (in thousands) 18,311 Per Common Share: Earnings $ 4.03 Dividends Declared $ 2.715 Dividends Paid $ 2.65 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

24 r -----------f Atlantic Energy, Inc. and Subsidiaries For the Years Ended December 31 1986 $582,961 130,771 153,014 44,820 42,515 69,797 36,754 9,836 487,507 95,454 8,336 3,165 11,501 (15,571) 6,512 (9,059) 97,896 46,146 408 (465) 46,089 (8,684) 37,405 5,545 $ 54,946 18,266 $ 3.00 $ 2.61 $ 2.60 1985 $579,733 156,574 132,823 43,378 41,985 71,100 36,308 8,159 490,327 89,406 5,216 1,502 6,718 (11,061) 2,974 (8,087) 88,037 39,604 2,144 (163) 41,585 (5,980) 35,605 6,282 $ 46,150 18,069 $ 2.55 $ 2.555 $ 2.53 Consolidated Statement of Cash Flows (I'housands of Dollars) 1987 Cash Flows From Operating Activities:

Net Income $ 73,765 Deferred Purchased Power Costs (16,910) Deferred Energy Costs and Revenues (36,984) Preferred Stock Dividend Requirements of Subsidiary 4,667 Noncash items affecting operating activities:

Depreciation and Amortization 51,080 Allowance for Funds Used During Construction (3,197) Investment Tax Credit Adjustments-Net (l,552) Deferred Federal Income Taxes-Net 19,807 Net Effect of Application of SFAS 90 (l,825) Net (Increase)

Decrease in Other Working Capital* 19,865 Other-Net 7,962 Net Cash Provided by Operating Activities 116,678 Cash Flows Used by Investing Activities:

Cash Utility Construction Expenditures (102,324)

Leased Property (10,261) Property Abandonment Costs 1,806 Nonutility Property and Equipment (558) Investment in Partnership (3,001) Other-Net (7,715) Net Cash Used by Investing Activities (122,053)

Cash Flows From Financing Activities:

Sale of Long Tenn Debt 4,400 Retirement

& Maturity of Long Tenn Debt (10,337) Pollution Control Funds Released (Held) by Trustee 5,022 Increase in Short Tenn Debt 50,800 Proceeds from Capital Lease Obligations 10,261 Common Stock Issued 2,320 Redemption and Conversion of Preferred Stock (7,454) Dividends on Preferred Stock (4,667) Dividends on Common Stock (49,741) Debt Costs and Other 6,435 Net Cash Provided (Used) by Financing Activities 7,039 Net Increase (Decrease) in Cash And Temporary Investments 1,664 Cash and Temporary Investments, beginning of year 7,876 Cash and Temporary Investments, end of year $ 9,540 *Excluding cash and temporary investments.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

---1 Atlantic Energy, Inc. and Subsidiaries For the Years Ended December 31 1986 $ 54,946 (15,700) 8,711 5,545 42,515 (17,020) 4,585 32,184 9,059 14,439 (207) 139,057 (92,283) (6,252) (5,922) (6,470) 1,925 (109,002) 220,000 (214,854)

(2,399) 12,900 6,252 548 (9,499) (5,545) (47,682) (6,146) (46,425) (16,370) 24,246 $ 7,876 1985 $ 46,150 (14,680) 22,190 6,282 41,985 (11,196) 7,261 15,729 8,087 (25,107) 2,147 98,848 (94,017) (8,660) (5,215) (489) (108,381) 70,000 (10,000) 7,718 8,660 11,515 (12,203) (6,282) (46,220) 905 24,093 14,560 9,686 $ 24,246 25 (Thousands of Dollars) Assets Electric Utility Plant: In Service: Production Thansmission Distribution General Total Consolidated Balance Sheet Less Accumulated Depreciation Net Construction Work in Progress Land Held for Future Use Leased Property-Net Electric Utility Plant-Net Nonutility Property and Investments:

Pollution Control Construction Funds Nonutility Property and Equipment-Net Other Investments Total Current Assets: Cash and Working Funds Accounts Receivable:

Utility Service Miscellaneous Allowance for Doubtful Accounts Unbilled Revenues Fuel (at average cost) Materials and Supplies (at average cost) Prepayments Deferred Energy Costs Total Current Assets Deferred Debits: Property Abandonment Costs Unrecovered Purchased Power Costs Deferred Energy Costs Unamortized Debt Costs Other Total Deferred Debits Total Assets The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

26 December31 1987 1986 $ 800,206 $ 557,257 217,741 206,198 389,619 367,932 78,756 70,709 1,486,322 1,202,096 388,329 350,873 1,097,993 851,223 73,153 257,688 5,632 5,623 37,694 37,603 1,214,472 1,152,137 109 5,426 8,232 7,889 2,376 282 10,717 13,597 9,540 7,876 43,190 41,825 10,686 13,230 (1,600) (1,600) 24,973 24,588 22,994 22,899 20,749 20,538 9,497 9,474 11,628 151,657 138,830 11,794 13,476 65,270 48,360 12,179 25,686 27,240 7,587 7,424 122,516 96,500 $1,499,362

$1,401,064 (Thousands of Dollars) Liabilities and Capitalization Capitalization:

Common Shareholders' Equity: Common Stock, no par value; 50,000,000 shares authorized Retained Earnings Total Common Shareholders' Equity Preferred Stock of Atlantic Electric:

Not Subject to Mandatory Redemption Subject to Mandatory Redemption Long Term Debt of Atlantic Electric Total Capitalization Current Liabilities:

Preferred Stock Redemption Requirement Long Term Debt due within one year Capital Lease Obligations due within one year Short Term Debt Accounts Payable Taxes Accrued Interest Accrued Dividends Declared Customer Deposits Deferred Taxes Deferred Energy Revenues-Net Other Total Current Liabilities Deferred Credits and Other Liabilities:

Deferred Investment Tax Credits Deferred Income Taxes Obligations under Capital Leases Other Total Deferred Credits and Other Liabilities Commitments and Contingent Liabilities (Note 10) Total Liabilities and Capitalization Atlantic Energy, Inc. and Subsidiaries December31 1987 1986 $ 285,430 $ 283,054 186,294 162,270 471,724 445,324 40,000 41,154 18,500 24,800 489,265 494,972 1,019,489 1,006,250 5,050 5,050 10,000 10,000 679 630 63,700 12,900 37,484 25,431 7,969 8,867 10,118 9,509 14,270 13,195 3,383 3,408 12,714 14,153 13,177 25,967 19,381 191,334 135,701 66,612 68,164 168,010 146,044 37,015 36,973 16,902 7,932 288,539 259,113 $1,499,362

$1,401,064 27 Consolidated Statement of Changes in Common Shareholders' Equity (Thousands of Dollars) Shares Balance, January 1, 1985 as previously reported 17,821,346 Cumulative effect of retroactive application of SFAS 90 Balance, January 1, 1985 as restated 17,821,346 Common stock issued 435,663 Net income, as restated Capital stock expense Common stock dividends Balance, December 31, 1985 18,257,009 Common stock issued 16,646 Net income, as restated Capital stock expense Common stock dividends Balance, December 31, 1986 18,273,655 Common stock issued 72,864 Net income Capital stock expense Common stock dividends Balance, December 31, 1987 18,346,519 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

28 Atlantic Energy, Inc. and Subsidiaries Common Stock $270,882 270,882 11,516 53 282,451 551 52 283,054 2,340 36 $285,430 Retained Earnings $161,629 (6,553) 155,076 46,150 (46,220) 155,006 54,946 (47,682) 162,270 73,765 (49,741) $186,294 Notes to Consolidated Financial Statements Atlantic Energy, Inc. and Subsidiaries NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization Effective November 1, 1987, Atlantic Energy, Inc. became the parent company of Atlantic City Electric Company (Atlantic Electric) pursuant to an Agreement and Plan of Merger (Plan) approved by shareholders on April 22, 1987. Under the Plan each common share of Atlantic Electric was converted on a share-for-share basis into common shares of Atlantic Energy. On the effective date, a corporate restructuring took place under which Atlantic Generation, Inc., Atlantic Housing, Inc. Oater named Atlantic Southern Properties, Inc.) and ATE Investment, Inc., previously subsidiaries of Atlantic Electric, became subsidiaries of Atlantic Energy. Deepwater Operating Company, which operates certain generating facilities, remains a wholly-owned subsidiary of Atlantic Electric.

Principles of Consolidation The consolidated financial statements include the accounts of Atlantic Energy and its subsidiaries, all of which are wholly-owned.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Atlantic Generation is a one-third partner in tion Partners of America (a partnership), and accounts for such ment by recognizing its distributive share of the results of operations of the partnership.

The results of operations of the nonutility panies are not significant and are classified under Other Income in the Consolidated Statement of Income. Certain prior year amounts have been restated to reflect the consolidation of subsidiary companies in conformity with the current year reporting.

Restatement of Previously Reported Financial Information In December 1986, the Financial Accounting Standards Board issued Statement of Financial Accounti,ng Standards No. 90-Regulated Enterprises-Accounting for Abandonments and Disallowances of Plant Costs (SFAS 90), which is an amendment of previously prescribed accounting standards for the types of events enumerated.

SFAS 90 is effective for fiscal years beginning after December 15, 1987, but earlier adoption is permitted.

As discussed in Note 11 to the Financial Statements included in Atlantic Electric's 1986 Annual Report to Shareholders, Atlantic Electric could not predict the impact of SFAS 90, pending the outcome of certain proceedings then in progress before the State of New Jersey, Board of Public Utilities (BPU), especially with respect to the Hope Creek Generating Station. The BPU issued an Oral Decision on February 20, 1987 and a Summary Order on February 27, 1987 on Hope Creek and related issues. In the first quarter of 1987, Atlantic Electric elected to adopt SFAS 90. Consistent with the provisions of SFAS 90, previously issued financial statements of Atlantic Electric were restated to reflect the application of the new standard.

SFAS 90 requires that a loss be recognized if the carrying amounts of abandoned assets exceed the present value of future revenues to be generated by those assets. The standard also requires that any allowance of the cost of a newly completed plant, including an indirect disallowance which provides no return on investment of any portion of the plant, be recognized as a loss. The application of SFAS 90 to Atlantic Electric resulted in the recognition of a loss for the disallowance by the BPU of certain costs relating to Atlantic Electric's investment in Unit No. 1 of the Hope Creek Generating Station; recognition of a loss and subsequent accretion of discount, for an indirect disallowance of certain costs relating to Unit No. 1 of the Hope Creek Generating Station excluded from earning a return (in accordance with the provisions of a Cost Containment Agreement);

and recognition of a loss and subsequent accretion of discount, for each of several plant abandonments referred to under Property Abandonment Costs. The following tables illustrate the effects of the application of SFAS 90 for the years ended December 31, 1986 and 1985 (dollar amounts in thousands, except per share amounts):

1986 1985 Effects of SFAS 90: Direct Disallowance

$(22,433)

$ Indirect Disallowance 3,218 (6,911) Plant Abandonments (5,442) Accretion of Discount 3,644 1,292 Income Taxes 6,512 2,974 Total $ (9,059) $ (8,087) Earnings per share as previously reported $ 3.50 $ 3.00 Effects of SFAS 90 (.50) (.45) Earnings per share as restated $ 3.00 $ 2.55 Retained earnings as of January 1, 1985 has been reduced by mately $6.553 million to reflect the effects of SFAS 90 on years prior to 1985. In addition to the above, Atlantic Electric was also required to record capital leases, effective January 1, 1987. The financial statements presented have been restated to include property under capital leases and related obligations.

Adoption of this standard had no effect on net income for the years presented since the total of the amortization of property under capital leases and the interest component of the periodic payments equals the rental expense recognized for making purposes.

Regulation The accounting policies and rates of Atlantic Electric are subject to the regulations of the State of New Jersey, Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission (FERC). All significant accounting policies and practices used in the determination of rates are also used for financial reporting purposes.

29 L Notes (continued)

Operating Revenues Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the period for energy used subsequent to the last billing cycle. Electric Utility Plant Property is stated at original cost Generally the plant is subject to a first mortgage lien. The cost of property additions, including ment of units of property and betterments, is capitalized.

Included in certain additions is an Allowance for Funds Used During tion (AFDC) which is defined in the applicable regulatory system of accounts as the cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of 8.95% for 1987 and 1986, and 8.5% for 1985. Deferred Energy Costs and Revenues Atlantic Electric has Levelized Energy Clauses which are based on projected energy costs and include provisions for prior period under or over recoveries.

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

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

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

Depreciation applicable to certain nuclear plant includes amounts provided for decommissioning.

The overall composite rate of depreciation was approximately 3.8% for 1987, and 3.7% for 1986 and 1985. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries.

Atlantic Southern Properties provides depreciation, using the straight-line method for real property over a thirty-one and one-half year life, and the double declining balance method for equipment over lives ranging from five to seven years. Nuclear Fuel Fuel costs associated with Atlantic Electric's participation in owned nuclear generating stations, including a provision for estimated spent fuel disposal costs, are charged to fuel expense based on the units of thermal energy produced, and included in Net Energy Costs. Federal Income Taxes Deferred Federal Income Taxes are provided on all significant current transactions for which the timing of reporting differs for book and tax purposes.

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

Property Abandonment Costs These costs are stated at their net present value and consist principally of Atlantic Electric's investment in Hope Creek Unit No. 2, a nuclear generating unit which was cancelled in 1981, offshore nuclear units which were cancelled in 1978, unrecovered nuclear fuel advances associated with uranium supply contracts which were terminated in 1985 and study costs associated with a proposed plant site. Since no return was granted by the BPU on these costs, the excess of the carrying value of the assets over their discounted present value was recognized as a loss at the date of abandonment Such discount is being restored to income by accretion over the amortization period allowed for ratemaking.

The Hope Creek Unit No. 2 investment is being amortized over a 15-year period that began in 1983. The investment in the offshore nuclear units is being amortized over a 20-year period that began in 1979. Unrecovered nuclear fuel advances are being amortized over 15 years, beginning in 1986. The study costs are being amortized over 10 years beginning in 1986. Unrecovered Purchased Power Costs Atlantic Electric has agreements for the purchase of 125 megawatts of capacity and related energy from Pennsylvania Power & Light Company (PP&L) under two Capacity and Energy Sales Agreements (the PP&L Agreements).

The PP&L Agreements provide for the purchase of capacity and energy from PP&L's Susquehanna Unit 1 and Unit 2 through September 30, 1991, and then from certain PP&L coal-fired units through September 30, 2000. Through September 30, 1991, the estimated costs to be incurred for purchases of capacity and associated energy from the Susquehanna Units will exceed the levelized costs to be recovered from customers.

Such unrecovered costs will be accumulated and deferred.

Such costs are included in the consolidated balance sheet as Unrecovered Purchased Power Costs. Related deferred taxes have been provided.

The level of rates approved by the BPU is designed to recover these deferred costs and associated carrying charges during the balance of the 17-year period. Other Debt premium, discount and expenses of Atlantic Electric are amortized over the life of the related debt. Costs associated with debt reacquired by refundings are amortized over the life of the newly issued debt as permitted by the BPU. Gains and losses relating to other reacquired debt are recognized currently.

30 1---------------------------

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NOTE2. FEDERAL INCOME TAXES Federal income tax expense is less than the amount computed by applying the statutory rate on book income subject to tax for the following reasons: (Thousands of Dollars) Net Income Preferred Stock Dividend Requirements of Subsidiary Federal Income Tux Expense (as below) Book Income Subject to Tux Statutory Income Tux Rate Income Tux Computed at the Statutory Rate Items for which deferred taxes are not provided:

Difference between Tux and Book Depreciation Allowance for Funds Used During Construction Capitalized Overheads Investment Tux Credits Other Total Federal Income Tux Expense Effective Income Tux Rate The Components of Federal Income Tux Expense are as follows: Federal Income Tuxes Currently Payable Application of SFAS 90: Deferred Income Tuxes Investment Tax Credits Total Deferred Federal Income Tuxes: Liberalized Depreciation Unbilled Revenues Unrecovered Purchased Power Costs Deferred Energy Costs Costs associated with Reacquired Debt Other Deferred Investment Tux Credits Employee Stock Ownership Plan Credits Total Deferred Federal Income Tux Expense Total Federal Income Tux Expense Less Federal Income Tuxes Included in Other Income Less SFAS 90 Income Tuxes Federal Income Tuxes Included in Operating Expenses Federal income tax returns for 1981 and prior years have been examined by the Internal Revenue Service (IRS) and federal income tax liabilities for all years through 1976 have been determined and settled. The IRS has proposed certain deficiencies in taxes for the years 1977 through 1981. The Company has protested the proposed deficiencies and is of the opinion that the final settlement of its federal income tax liabilities for these years will not have a material adverse effect on its results of operations or financial position.

At December 31, 1987, the cumulative amount of deferred income taxes which have not been provided on timing differences, principally depreciation, amounted to approximately

$75 million. 1987 Atlantic Energy, Inc. and Subsidiaries Years Ended December 31 1986 1985 $ 73,765 $ 54,946 $ 46,150 4,667 5,545 6,282 49,429 31,399 33,343 $127,861 $ 91,890 $ 85,775 $ $ $ $ 39.95% 46% 46% 51,080 $ 42,269 $ 39,457 2,825 2,842 2,801 (1,055) (7,684) (5,029) 485 (1,431) (1,209) (2,409) (3,859) (2,178) (1,497) (738) (499) 49,429 $ 31,399 $ 33,343 39% 34% 39% 30,076 $ 790 $ 12,956 720 (4,679) (2,974) (1,833) 720 (6,512) (2,974) 14,422 17,756 11,899 (2,766) (834) 1,415 6,268 7,222 6,753 4,523 (2,551) (949) 10,078 (1,691) (2,038) (1, 787) (1,552) 4,585 7,261 378 352 371 18,633 37,121 23,361 49,429 31,399 33,343 (207) 1,157 9 720 (6,512) (2,974) 48,916 $ 36,754 $ 36,308 The Financial Accounting Standards Board has issued a Statement of Financial Accounting Standards entitled "Accounting for Income Tuxes" which is effective for years after 1988. The statement changes the recording methodology relating to deferred income taxes to a liability approach.

The principal impact of this change to the Company relates to the recording of changes in tax rates on a current basis, and the recording of deferred tax liabilities not previously recorded by Atlantic Electric.

The Company expects the impacts of this change to be lessened due to rate regulation, and in the opinion of ment, would not have a material effect on results of operations or financial position.

31 -1 L ______ ----Notes (continued)

NOTE 3. RATE MATTERS OF ATLANTIC ELECTRIC Base Rate Case Proceedings In February 1985, the BPU granted Atlantic Electric an increase of approximately

$24.0 million relating to the purchase of capacity and energy from PP&L's Susquehanna Unit 2. In April 1985, Atlantic Electric filed a petition requesting a net increase of $91.85 million to be implemented in two phases. The first phase request, for $63.3 million, related to increased operations and maintenance costs, and capital investment.

In April 1986, the BPU issued an Order relating to the first phase granting an increase in annual revenues of approximately

$13.6 million. The BPU Order reflects an overall rate of return of 11.42%, with a return on common equity of 14.10%. The second phase request related to Atlantic Electric's 5% ownership in the Hope Creek Generating Station. The BPU issued an Oral Decision on February 20, 1987 relating to the second phase request granting a net increase in base rate revenues of approximately

$31.4 million. The net increase consists of approximately

$38. 775 million primarily associated with the costs of owning and operating the Hope Creek Generating Station, and a decrease of approximately

$7.366 million associated with the changes in corporate federal income taxes resulting from the Tax Reform Act of 1986. In its decision, the BPU disallowed

$22.433 million of costs associated with the construction of Hope Creek and fixed a level of investment for ratemaking purposes at $217.4 million compared to a target cost of $200.3 million. Although Atlantic Electric is allowed to recover the $217.4 million cost of this ment, 20% of the excess, or $3.4 million, has been excluded from rate base for purposes of computing a return on the investment.

On September 25, 1987, Atlantic Electric filed a motion with the BPU to reduce base rates by $11.0 million primarily to reflect the lower corporate federal income tax rate to be in effect for 1988 resulting from the Tax Reform Act of 1986. Energy Clause Proceedings Atlantic Electric's energy clauses are reviewed annually by the BPU. In February 1985, the BPU granted an increase of approximately

$4.8 million. As part of that decision, $1.639 million of the costs associated with an extended outage of Salem Unit 1 during 1983 were excluded from recovery.

Atlantic Electric also agreed to defer $7.5 million of Deferred Energy Costs, relating to costs associated with certain nuclear unit outages in 1984. In January 1986, the BPU ordered a reduction in energy revenues of $44.0 million. As part of that decision, Atlantic Electric agreed to expense $3.975 million of replacement power costs associated with maintenance and repair outages at Peach Bottom Unit 2 and Salem NOTE 4. RETIREMENT PLAN Atlantic Electric and its subsidiary have a noncontributory defined benefit retirement plan covering substantially all their employees.

Benefits are based on an employee's years of service and average final pay. The companies' policy is to fund pension costs within the guidelines of the minimum required by the Employee Retirement Income Security Act, and the maximum allowable as a tax tion. In December 1985, the Financial Accounting Standards Board adopted a new accounting standard for employers' accounting for Unit 2. Also, Atlantic Electric agreed to increase the 1985 deferral of $7.5 million of Deferred Energy Costs to $12.179 million. Recovery of this deferral is subject to the litigation discussed in Note 10 and later review by the BPU. In February 1987, the BPU ordered a net decrease in annual energy clause revenues of $47.3 million effective February 27, 1987. The Order includes approximately

$7.0 million of fuel savings associated with Hope Creek and $7.2 million due to the effects of compression, which allows for the distribution of the reduction over the remaining months of 1987. On April 23, 1987, the BPU ruled that energy revenues be decreased by an additional

$2.4 million, to reflect interest on 1986 over recoveries of fuel expenses and the disallowance of certain replacement power costs associated with 1985 Peach Bottom outages. This reduction was compressed into the remainder of 1987. These issues had been deferred in the February 20, 1987 decision.

In that decision, the BPU also established a performance standard for the five nuclear units in which Atlantic Electric has minority ownership interests.

The performance standard sets an annual overall target capacity factor of 70% with incentives for performance in excess of 80% and penalties for performance below 60%. Under the penalty provisions, a portion of Atlantic Electric's replacement power costs would not be recoverable through customer rates. On September 25, 1987, Atlantic Electric filed petitions for a net increase in annual levelized energy clause revenues of $60.9 million. This increase reflects 1987 actual fuel and energy costs and projected costs for 1988 being higher than were projected in 1986 to establish existing rates. It also includes the effects of the removal of the pression of 1987 levelized energy clause reductions, and the tion of the nuclear units performance standard provisions.

In this filing, Atlantic Electric estimated that the aggregate 1987 capacity factor for the nuclear units would approximate 50.2%. This approximation was primarily based on the continued unavailability for the remainder of 1987 of the Peach Bottom Station due to a Nuclear Regulatory Commission imposed shutdown of the station on March 31, 1987. Subsequent unplanned outages at the Salem and Hope Creek units -have reduced the original estimate.

The actual capacity factor in 1987 was approximately 45.5%. Based on the application of the formance standard to the 1987 nuclear units' performance, Atlantic Electric estimated, and has provided for, approximately

$4.8 million of replacement costs that would not be recoverable from customers.

Application of provisions of the nuclear unit performance standard are subject to the findings of the BPU and Atlantic Electric cannot predict the final outcome of the proceedings in this matter. pensions.

The companies adopted the new standard effective January 1, 1987. The new standard did not have a significant effect on the determination of pension costs. Pension costs for 1987, 1986 and 1985 were iJ.pproximately

$4.2 million, $4.3 million and $6.5 million, respectively.

Approximately 80% of these costs were charged to operating expense and the remainder, which was associated with construction labor, was charged to the cost of new utility plant. 32 r-----------------------

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Net pension costs for 1987 included the following components: (Thousands of Dollars) Service cost-benefits earned during the period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral Net periodic pension costs $ 5,579 11,664 (3,399) (9,634) $ 4,210 A reconciliation of the funded status of the plan as of December 31, 1987 is as follows: (Thousands of Dollars) Fair value of plan assets Projected benefit obligation Excess of plan assets over projected benefit obligation Unrecognized net transitional asset Unrecognized net gain Prepaid or accrued pension cost Accumulated benefit obligation:

Vested benefits Non-vested benefits Total $162,081 152,050 $ 10,031 (2,927) (7,104) $108,408 5,671 $114,079 Atlantic Energy, Inc. and Subsidiaries Approximately 57% of plan assets are invested in equities, 28% in fixed income securities and 15% in other investments.

The weighted average discount rate and anticipated rate of increase in future compensation levels used to determine the jected benefit obligation as of December 31, 1987 were 8.25% and 6%, respectively.

The corresponding rates as of January 1, 1987 were 7.5% and 6%. The expected long term rate of return on plan assets used in determining the pension cost for 1987 was 8%. In addition to providing pension benefits, the companies provide certain health care and life insurance benefits for retired employees.

Substantially all employees may become eligible for those benefits if they reach retirement 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. In December 1986, the companies established a trusteed plan to begin funding for these post employment benefits.

The companies made contributions of $3.2 million and $2.9 million to the trust for 1987 and 1986, respectively.

Funding on behalf of active employees is based on the aggregate cost method over their service lives and is equivalent to normal cost For current retirees, funding is based on current actual experience and amortization of expected benefits over the remaining life expectancy of the retiree group. The actuarial present value of accumulated post employment benefits under the plans was $28.l million at January 1, 1987. The cost of these benefits were $3.2 million, $2.9 million and $1.0 million for 1987, 1986 and 1985, respectively.

NOTE 5. JOINTLY-OWNED GENERATING STATIONS Atlantic Electric participates with other utilities in the construction and operation of several electric production facilities.

The amounts shown represent Atlantic Electric' s share of each plant at December 31, and includes an allowance for funds used during construction.

Electric Plant Construction Generation in Service Energy Company's Station Source Share 1987 Keystone Coal 2.47% $ 8,198 Conemaugh Coal 3.83 14,171 Peach Bottom Nuclear 7.51 93,904 Salem Nuclear 7.41 167,523 Hope Creek Nuclear 5.00 223,505 The Hope Creek Station successfully completed its power ascension program and was released to the Pennsylvania-New Jersey-Maryland power pool for dispatch.

Public Service Electric & Gas Company, the operator of the station, declared the unit commercial in February 1987 upon receipt of a BPU Order. The operators of the Salem and Peach Bottom Nuclear Generating Stations entered into contracts with the United States Department of Energy for spent nuclear fuel disposal, requiring the payment of fees $ Work in Progress 1986 1987 1986 1987 1986 (Thousands of Dollars) (mwh) 8,074 $ 614 $ 285 292,801 286,415 12,558 387 1,100 395,456 402,874 91,690 8,369 4,285 225,446 878,791 162,960 3,192 4,006 914,095 919,915 804 236,055 362,886 53,766 related to Atlantic Electric's ownership interests in the stations.

Current recovery of these spent nuclear fuel disposal costs is provided as part of Atlantic Electric's energy clause. Atlantic Electric provides its own financing during the construction period for its share of the jointly-owned plants and includes its share of direct operations and maintenance expenses in the Consolidated Statement oflncome.

33 Notes (continued)

NOTE 6. NONUTILITY COMPANIES Atlantic Southern Properties owns and operates commercial real estate property.

Atlantic Generation is a one-third partner in Cogeneration Partners of America. ATE Investment was formed to manage investments for Atlantic Energy. None of the companies had operating results in 1985 or 1986. For 1987, the companies had combined losses of $549,000, net of income tax credits of $670,000, due to the expected benefits from filing a consolidated federal income tax return. The net assets of the nonutility companies included in the consolidated balance sheet approximate

$9.l million, consisting principally of Atlantic Southern Properties' commercial real estate ($6.8 million) and Atlantic Generation's partnership investment

($2.2 million).

NOTE 7. CUMULATIVE PREFERRED STOCK OF ATLANTIC ELECTRIC Atlantic Electric has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, 2,000,000 shares of No Par Preferred Stock and 3,000,000 shares of Preference Stock, No Par Value. Information Series Par Value Shares Not Subject to Mandatory Redemption:

4% $100 77,000 4.10% 100 72,000 4.35% 100 15,000 4.35% 100 36,000 4.75% 100 50,000 5% 100 50,000 5%% Convertible 100 7.52% 100 100,000 Total Subject to Mandatory Redemption:

9.96% $100 88,000 $8.25 None 77,500 $9.45 None 70,000 Total Less portion due within one year Total Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable soley at the option of Atlantic Electric.

The remaining shares of the 5%% Convertible Series were called for redemption on April 30, 1987 at the scheduled redemption price of $101.50. On August 1 of each year 8,000 shares of the 9.96% Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. As of December 31, 1987, Atlantic Electric had redeemed the maximum 40,000 optional shares as allowed under optional redemption provisions.

On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of Atlantic Electric, not more than an additional 2,500 shares may be 34 relating to outstanding shares at December 31 is shown in the table below (dollars in thousands, except par values and current redemp-tion prices). Current 1987 1986 Redemption Amount Shares Amount Price s 7,700 77,000 $ 7,700 $ 105.50 7,200 72,000 7,200 101.00 1,500 15,000 1,500 101.00 3,600 36,000 3,600 101.00 5,000 50,000 5,000 101.00 5,000 50,000 5,000 101.00 11,535 1,154 10,000 100,000 10,000 103.01 $40,000 $41,154 s 8,800 96,000 $ 9,600 $ 105.34 7,750 82,500 8,250 106.14 7,000 120,000 12,000 23,550 29,850 5,050 5,050 $18,500 $24,800 redeemed on any sinking fund date without premium. Atlantic tric redeemed 5,000 shares at par in 1987 and 1986, respectively.

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

Atlantic Electric redeemed 50,000 and 80,000 shares at par in 1987 and 1986, respectively.

As of December 31, 1987, Atlantic Electric had redeemed the maximum 50,000 optional shares. The annual minimum sinking fund provisions of the above series aggregate

$5.05 million for 1988, $4.05 million for 1989 and $1.05 million for 1990 through 1992. (

NOTE 8. LONG TERM DEBT OF ATLANTIC ELECTRIC Long term debt of Atlantic Electric consists of the following:

Series First Mortgage Bonds: 41/2% 3%% 41/2% 41/2% 41/z% 4%% 11%% 5Ys% 8% 8%% 8% 71/2% 7%% 7%% Pollution Control 6%% Pollution Control 11%% Pollution Control 101/z% Pollution Control Series B 7%% Pollution Control Series A 101/z% Pollution Control Series C 11 l/z% 8%% 8% % Pollution Control Total Debentures:

51.4% 7%% Total Unamortized Premium and Discount-Net Total Less portion due within one year Total Maturity Date January 1, 1987 April 1, 1988 April 1, 1989 March 1, 1991 July 1, 1992 March 1, 1993 November 1, 1993 February 1, 1996 November 1, 1996 September 1, 2000 May 1, 2001 April 1, 2002 June 1, 2003 January 1, 2005 December l, 2006 May 1, 2011 July 15, 2012 April 15, 2014 July 15, 2014 October 1, 2015 May 1, 2016 July 15, 2017 February 1, 1996 May 1, 1998 s Atlantic Energy, Inc. and Subsidiaries December31 1987 (Thousands of Dollars) 10,000 2,775 10,000 10,350 9,540 13,025 9,980 95,000 19,000 27,000 20,000 29,976 6,500 2,500 39,000 850 18,200 23,150 21,215 125,000 4,400 497,461 2,267 2,619 4,886 (3,082) 499,265 10,000 $489,265 35 1986 $ 10,000 10,000 2,775 10,000 10,350 9,540 13,325 9,980 95,000 19,000 27,000 20,000 29,976 6,500 2,500 39,000 850 18,200 23,150 21,215 125,000 503,361 2,267 2,619 4,886 (3,275) 504,972 10,000 $494,972 Notes (continued)

On January 1, 1986, Atlantic Electric redeemed $6.0 million of its 12%% Series bonds through the operation of the sinking fund and optional redemption provisions.

On June 12, 1986, Atlantic Electric redeemed all of the remaining principal amount, $57. 750 million at a redemption price of 109.92%. The aggregate costs of the sition were $3.288 million, net of related income taxes. These costs, including unamortized debt expenses related to the issuance of the debt and other expenses, and the related deferred income taxes, are being amortized over thirty years beginning in June 1986. On November 5, 1986, Atlantic Electric tendered for all of the standing principal of the 11%% Series due 1993 and the lF/2% Series due 2015 at redemption prices of 112.570% and 121.125% of the principal amount, respectively.

At December 31, 1986, principal amounts of $36.675 million and $48. 785 million, respectively, were reacquired.

The aggregate cost of these redemptions was $8. 75 million, net of related income taxes. These costs, including unamortized debt expenses related to the issuance of the debt and other expenses, and the related deferred income taxes, are being amortized over ten years beginning November 1986. In January 1987, Atlantic Electric reacquired an additional

$300,000 principal amount of the 11%% Series relative to the November 5, 1986tender.

Deposits in sinking funds for retirement of debentures are required on February 1 of each year through 1995 for the 5 1.4 % Debentures,

• and on May 1 of each year through 1997 for the 7114 % Debentures in amounts in each case sufficient to redeem $100,000 principal amount plus, at the election of Atlantic Electric, up to an additional

$100,000 principal amount in each year. By December 31, 1987, Atlantic Electric had reacquired and cancelled

$1,033,000 and $881,000 principal amount of the 5 1.4 % and 7114 % Debentures, respectively, towards its requirements for 1988 and subsequent periods. Effective April 15, 1987, Atlantic Electric exercised its option to convert the Pollution Control Series A due 2014 from an adjustable rate into a fixed rate of 7%%. Regular redemption prices are currently in effect for each series of first mortgage bonds, except for certain pollution control series for which redemption is restricted prior to specified dates. Also, certain pollution control series contain future sinking fund requirements.

Redemption of certain series of the first mortgage bonds are restricted prior to specified dates if the redemption is for the purpose of refunding at effective interest costs to Atlantic Electric ofless than specified rates. Current sinking fund requirements of $650,000 in connection with certain first mortgage bonds outstanding may be satisfied by certification of property additions as provided for in the related mortgage indentures.

The aggregate amount of debt maturities, in addition to sinking fund requirements, of all long term debt outstanding at December 31, 1987 are $10.0 million in 1988, $2.775 million in 1989, $10.0 million in 1991, and $10.35 million in 1992. No outstanding long term debt matures in 1990. NOTE 9. SHORT TERM DEBT AND COMPENSATING BALANCES As of December 31, 1987, Atlantic Electric had bank lines of credit of $115 million of which $102 million was available for use. Atlantic Electric is required, with respect to $31 million of these credit lines, to maintain average compensating balances in demand deposits which are not significant nor legally restricted.

Atlantic Electric is in ance with such compensating balance arrangements.

With respect to the remaining available credit lines, Atlantic Electric pays commitment fees (generally Ys%) for which charges amounted to $149,000 in 1987, $248,000 for 1986, and $235,000 for 1985. At December 31, 1987 Atlantic Electric had $63. 7 million of short term debt consisting of 1987 For the year ended-Maximum amount of total short term debt at any month-end:

Commercial Paper $46,700 Notes Payable to Banks $17,000 Average amount of short term debt (based on daily outstanding balances):

Commercial Paper $22,497 Notes Payable to Banks $ 3,327 Weighted daily average interest rates on short term debt: Commercial Paper 6.9% Notes Payable to Banks 7.1% 36 $46. 7 million in commercial paper and $17.0 million in notes payable. Atlantic Electric had $12.9 million of short term debt outstanding at December 31, 1986 consisting of $8.5 million of commercial paper and $4.4 million of pollution control obligations (PCOs). The PCOs represent two separate interim pollution control financings at respective interest rates of 4.7% and 5.5%. These PCOs matured and were refinanced in July 1987. Atlantic Electric had no outstanding short term debt at December 31, 1985. Additional information regarding short term debt (excluding the PCOs) follows: 1986 1985 (Thousands of Dollars) $10,500 $55,700 $ 5,000 $10,000 $ 2,256 $19,905 $ 123 $ 4,239 6.3% 7.9% 6.8% 8.1%

Atlantic Energy, Inc. and Subsidiaries NOTE 10. COMMITMENTS AND CONTINGENCIES Construction Program Atlantic Electric' s cash construction expenditures for 1988 are estimated at approximately

$117 million. Current commitments for the struction of major production and transmission facilities amount to approximately

$52.4 million of which it is estimated approximately

$23.0 million will be expended in 1988. These amounts exclude the allowance for funds used during construction and customer contributions.

Insurance Programs Atlantic Electric is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek Stations are insured against property damage losses up to $1.4 billion per site under these programs.

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

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

As of December 31, 1987, the maximum amount of retrospective premiums Atlantic Electric could be assessed for losses during the current policy year was $9.35 million under these programs.

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

Currently, Congress is considering several proposals which would affect the amount of the assessment under this program. At this time, Atlantic Electric is unable to predict the outcome of these proposals or their effects on the Company. Atlantic Electric is also a member of several utility industry-owned mutual insurance companies providing various other liability ance coverages as part of Atlantic Electric' s overall insurance programs.

As of December 31, 1987, under these policies the maximum amount of retrospective premiums Atlantic Electric could be assessed for losses during the current policy year was $4.5 million. Purchase Power Agreements Atlantic Electric has an arrangement for a limited term purchase of energy and capacity from Allegheny Power System which is subject to annual extensions.

It also has agreements to purchase certain capacity and energy output from Pennsylvania Power & Light Company. The BPU order which approved rates for the PP&L agreements prescribes a revenue reduction formula in the event that the hanna Units fail to meet a combined minimum performance standard established by the stipulation which could subject Atlantic Electric, under the most adverse circumstances, to a revenue reduction not to exceed $15.0 million per unit per year. Nuclear Plant Outages The BPU has deferred consideration of $12.179 million of replacement power costs associated with certain nuclear outages relating to generator failures at Salem Station. The co-owners of the station have instituted litigation against the supplier of the affected equipment Atlantic Electric cannot predict the outcome of this matter or its ultimate effect, but in the opinion of management, it would not materially affect the results of operation or financial position.

The New Jersey Public Advocate filed a motion, dated January 27, 1988 with the Office of Administrative Law in a separate proceeding involving Public Service Electric & Gas Company (PS) requesting, in substance, that hearings be conducted to determine whether PS should continue to collect its costs for Peach Bottom through its rates for service and, in the interim, to make rates connected with Peach Bottom subject to refund. On February 4, 1988, the BPU announced that it would consider the Public Advocate' s motion regarding Peach Bottom. On February 9, 1988, the Public Advocate filed a comparable motion with the BPU with respect to Atlantic Electric and Peach Bottom, and in a separate motion, has requested that the BPU consolidate both the Atlantic Electric and PS Peach Bottom proceedings.

Atlantic Electric currently estimates that, with respect to its ownership interest in Peach Bottom, base rate revenues could amount to approximately

$30 million annually.

With the unavailability of the Peach Bottom units, replacement power costs could amount to approximately

$20 million annually.

The future disallowance of all or a substantial portion of base rate revenues or replacement power revenues could have a material adverse impact on the consolidated financial results of Atlantic Electric and the Company. It is not possible at this time to predict when the Peach Bottom Station will be returned to service or the regulatory treatment that will be ultimately decided by the BPU. 37 Notes (continued)

NOTE 11. LEASES Atlantic Electric leases various types of property and equipment for use in its operations.

Certain of these lease agreements are capital leases consisting of the following at December 31: Production plant General plant Total Less accumulated amortization Net Nuclear Fuel Leased property-net Atlantic Electric has a contractual liability to purchase nuclear fuel for the Salem and Hope Creek Generating Stations from Pearl Fuel Corporation.

The asset and related obligation are reduced as the fuel is burned, and are increased for additional purchases.

Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract.

Atlantic Electric is responsible for payment of its share of fuel consumed and related operating costs and interest expense. 1987 $13,521 1,740 15,261 5,690 9,571 28,123 $37,694 Atlantic Energy, Inc. and Subsidiaries (Fhousands of Dollars) 1986 $13,521 1,740 15,261 5,059 10,202 27,401 $37,603 Operating expenses for 1987, 1986, and 1985 include leased Nuclear Fuel costs of approximately

$10.8 million, $7.8 million and $7.7 million, respectively, and rentals and lease payments for all other capital and operating leases of $5.1 million, $4.0 million and $4.5 million, respectively.

Excluding the nuclear fuel obligation, future minimum rental payments for all noncancellable lease ments are not significant to Atlantic Electric's operations.

NOTE 12. QUARTERLY FINANCIAL RESULTS (unaudited)

Quarterly financial data presented below for 1986 has been restated from the amounts previously reported by Atlantic Electric to give effect to the application of SFAS 90. In addition, the Net Income (Loss) amounts, as reported by Atlantic Energy, differ from those reported by Atlantic Electric due to the classification of Atlantic Electric's Preferred Dividends in the determination of net income Goss). Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows: Net Operating Operating Income Earnings Quarter Revenues Income (Loss) Per Share (Thousands of Dollars Except Per Share Amounts) 1987 1st $142,094 $ 22,715 $14,186 $ .78 2nd 152,962 26,764 15,176 .83 3rd 208,446 46,748 34,938 1.91 4th 144,671 18,446 9,465 .52 $648,173 $114,673 $73,765 $4.0301 1986 1st $136,520 $20,339 $12,545 $ .69 2nd 134,433 20,858 13,710 .75 3rd 179,310 37,826 30,258 1.66 4th 132,698 16,431 (1,567) (.09) $582,961 $95,454 $54,946 $3.0001 (1) The individual quarters do not add due to the increasing average number of common shares outstanding at the end of each quarter. The Earnings Per Share previously reported in 1986 by Atlantic Electric for the first through fourth quarters were $.65, $. 71, $1.62 and $.52, respectively.

38 I I I I The revenues of Atlantic Electric are subject to seasonal tuations due to increased sales and higher residential rates during the summer months. l I Investor Infonnation Where should I send inquiries concerning my investment in Atlantic Energy, Inc.? The Company serves as recordkeeping agent, dividend disbursing agent and also as 'Iransfer Agent for Common Stock. Correspondence concerning such matters as the replacement of dividend checks or stock certificates, address changes, transfer of Common Stock certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general infonnation about the Company should be addressed to: Atlantic Energy, Inc. Investor Records P.O. Box 1334 1199 Black Horse Pike Pleasantville, New Jersey 08232 Telephone (609) 645-4506 or (609) 645-4507 Ms. S.M. Dodd, Secretary, is the corporate officer responsible for all investor services.

Does the Company have a Dividend Reinvestment and Stock Purchase Plan? Yes. The Plan allows shareholders and employees to automatically invest their cash dividend and/or optional cash payments in shares of the Company's Common Stock. Holders of record of Common . Stock interested in enrolling in the Plan should contact Investor Records at the address above. 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 Atl Enrg. The high and low sales prices of the Common Stock as reported in the Wall Street Journal as New York Stock Exchange-Composite

'Iransactions for the periods indicated were as follows: 1987 1986 High Low High Low First Quarter 41% 36% 36% 28 1/.i Second Quarter 37% 32% 38% 32112 Third Quarter 361/2 3l3/.i 46% 33% Fourth Quarter 351/z 28% 41% 37 Atlantic Energy, Inc. and Subsidiaries Is additional information about the Company available?

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

Specific requests should be addressed to Investor Records, at the address shown. When are dividends paid? The proposed record dates and payable dates for dividends on Common Stock are as follows: Record Dates March 17, 1988 June 16, 1988 September 15, 1988 December 15, 1988 Payable Dates Aprill5, 1988 July 15, 1988 October 14, 1988 January 16, 1989 The following table indicates dividends paid in 1987 and 1986 on Common Stock: 1987 1986 First Quarter $ .655 $ .645 Second Quarter .655 .645 Third Quarter .67 .655 Fourth Quarter .67 .655 Annual Total $2.65 $2.60 Dividends paid on Common Stock in 1987 and 1986 were fully taxable. Who is the trustee and interest paying agent for Atlantic Electric's Bonds and Debentures?

First Mortgage Bond recordkeeping and interest disbursing are perfonned by Irving '!rust Company, One Wall Street, New York, New York 10015. Debenture recordkeeping and interest disbursing are perfonned by First Fidelity Bank, N.A., 765 Broad Street, Newark, New Jersey 07101. Who can I contact regarding the Preferred Stock of Atlantic Electric?

Atlantic Electric serves as recordkeeping agent, dividend disbursing agent and 'Iransfer Agent for its Preferred Stock. Inquiries regarding such matters can be directed to the address listed above. 39

',*

1 Atlantic Energy, Inc. Investor Information Operating Revenues Net Income Summary Financial and Statistical Review 1987-1983 Average Number of Shares Outstanding (Thousands)

Earnings per Average Common Share Total Assets (Year End) Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year End) Capital Lease Obligations Dividends Declared on Common Stock Dividend Payout Ratio Book Value Per Share (Year End) Price Earnings Ratio (Year End) Times Fixed Charges Earned (pre-tax,Atlantic Electric)

Shareholders and Employees (Year End) Common Shareholders Employees (Atlantic Electric)

Atlantic City Electric Company (Principal Subsidiary)

Fadlities for Service Total Utility Plant (Thousands)

Additions to Utility Plant (Thousands)

Pole Miles of 'Iransmission and Distribution Lines Generating Capacity (Kilowatts) (a) (b) Maximum Utility System Demand-kw Capacity Reserve at Time of Peak (% of Instal. Gen.) Energy Supply (Thousands of kwh): Net Generation Purchased and Interchanged-Net Total System Load Electric Sales (Thousands of kwh) Residential Commercial Industrial All Others Total Residential Electric Service (Average per Customer)

Amount of Electricity used during the year (kwh) Revenue for a year's service Revenue per Kilowatt-hour Customer Data (Average)

Residential With Electric Heating Residential Without Electric Heating Total Residential Commercial Industrial Other Total Customers Total Service Locations Operating Revenues (Thousands)

Energy Revenues:

Residential Commercial Industrial All Others Total Energy Revenues Unbilled Revenues-Net Other Electric Revenue Total 1987 1986 $ 648,173 $ 582,961 $ 73,765 $ 54,946 18,311 18,266 $ 4.03 $ 3.00 $1,499,362

$1,401,064

$ 522,815 $ 534,822 $ 37,694 $ 37,603 $ 2.715 $ 2.61 66% 87% $ 25.71 $ 24.37 8 12 3.68 2.99 45,586 47,133 2,148 2,168 $1,602,801

$1,503,010

$ 105,521 $ 109,303 7,055 7,015 1,660,700 1,660,700 1,609,000 1,459,000 3.1% 12.1% 6,157,938 5,966,600 1,483,685 1,131,900 7,641,623 7,098,500 3,040,410 2,839,114 2,592,232 2,401,199 1,323,567 1,222,981 58,191 58,120 7,014,400 6,521,414 8,281 7,982 $ 838.08 $ 780.43 10.12¢ 9.78¢ 75,900 72,640 291,253 283,062 367,153 355,702 ' 46,775 45,359 1,015 1,022 554 554 415,497 402,637 444,819 430,565 $ 307,704 $ 277,601 231,498 211,023 89,261 78,404 10,409 10,152 638,872 577,180 385 (1,813) 8,916 7,594 $ 648,173 $ 582,961 Certain prior year amounts have been restated for the effects ofSFAS 90, consolidation of subsidiaries and capitalization of leases. (a) Excludes capacity allocated to a large industrial customer.

Atlantic Energy, Inc. and Subsidiaries 1985 1984 $ 579,733 $ 549,531 $ 46,150 $ 56,433 18,069 17,581 $ 2.55 $ 3.21 $1,319,027

$1,253,083

$ 521,612 $ 473,462 $ 38,857 $ 41,722 $ 2.555 $ 2.45 99% 75% $ 23.96 $ 23.90 11 8 3.06 3.62 48,635 47,446 2,099 2,012 $1,438,643

$1,351,392

$ 105,213 $ 95,388 6,977 6,958 1,605,700 1,594,200 1,432,000 1,298,800 10.8% 18.5% 5,817,254 6,237,724 1,049,393 393,175 6,866,647 6,630,899 2,638,121 2,646,813 2,298,895 2,150,464 1,204,971 1,197,392 57,685 59,122 6,199,672 6,053,791 7,643 7,866 $ 778.77 $ 783.47 10.19¢ 9.96¢ 68,871 65,261 276,305 271,207 345,176 336,468 44,256 43,615 1,020 1,015 554 544 391,006 381,642 417,625 407,277 $ 268,814 $ 263,612* 209,880 190,435 80,392 79,123 10,315 10,405 569,401 543,575 3,076 (1,340) 7,256 7,296 $ 579,733 $ 549,531 (b) Includes unit purchase of capacity under contracts with Pennsylvania Power & Light Company (commencing in 1983) and Delmarva Power & Light Company (1983 and 1984). 40 l 1983 $ 517,142 $ 59,717 16,923 $ 3.53 $1,170,995

$ 459,366 $ 39,228 $ 2.32 65% $ 23.20 7 4.14 48,299 1,995 $1,265,393

$ 83,673 6,925 1,594,200 1,346,700 15.5% 5,913,196 579,488 6,492,684 2,545,351 2,019,468 1,225,637 60,978 5,851,434 7,715 $ 735.66 9.54¢ 62,272 267,642 329,914 43,152 1,021 549 374,636 398,526 $ 242,705 175,520 76,109 10,133 504,467 5,671 7,004 $ 517,142 Officers of Atlantic Energy, Inc. and Subsidiaries Officers of Atlantic Energy, Inc. E. DOUGLAS HUGGARD President and Chief Executive Officer MEREDITH I. HARLACHER, JR. Vice President JERROLD L. JACOBS Vice President MICHAEL A. JARRETT Vice President BRIAN A. PARENT Vice President J.G. SALOMONE Vice President and Treasurer SABRINA M. DODD Secretary J. DAVID McCANN Assistant Secretary and Assistant Treasurer The President and Vice Presidents of Atlantic Energy, Inc. make up the Executive Committee and also the Boards of Directors for each of Atlantic Energy's subsidiaries.

Officers of Atlantic City Electric Company (at January 1, 1988) E. DOUGLAS HUGGARD President and Chief Executive Officer JERROLD L. JACOBS Executive Vice President MEREDITH I. HARLACHER, JR. Senior Vice President-Planning and Regulatory Affairs MICHAEL A. JARRETT Senior Vice President-Corporate Services BRIAN A. PARENT Senior Vice President-Utility Operations J.G. SALOMONE Senior Vice President-Finance and Accounting JOHN M. CARDEN Vice President-Customer Service LANCE E. COOPER Vice President-Control and Assistant Treasurer SABRINA M. DODD Secretary Years of Service 32 26 22 12 20 11 20 5 2 Officers of Atlantic Generation, Inc. THOMAS E. FREEMAN Vice President-Human Resources JOSEPH T. KELLY, JR. Vice President-Interconnection Operations JAMES J. LEES Vice President-Rates BERTRAM LeMUNYON Vice President-Power Delivery HENRY K. LEVARI, JR. Vice President-Corporate Planning and Performance J. DAVID McCANN Vice President, Treasurer and Assistant Secretary MORGAN T. MORRIS, III Vice President-Administrative Services HENRY C. SCHWEMM, JR. Vice President-Production Years of Service 7 37 17 28 16 15 18 18 HARVEY N. MORRIS President FELIXJ. ROSPOND Secretary

& Treasurer Officers of Atlantic Southern Properties, Inc. M.A. JARRETT President Officers of ATE Investment, Inc. J.G. SALOMONE President J.M. CARDEN Vice President L.E.COOPER Vice President J.D.McCANN Secretary

& Treasurer J.D.McCANN Secretary

& Treasurer 41 42 Directors of Atlantic Energy, Inc. ELEANOR S. DANIEL Self-employed, Vice President and director of several real estate corporations JOHN D. FEEHAN Chairman of the Board of the Company JOS. MICHAEL GALVIN, JR. President and Chief Executive Officer of Salem County Memorial Hospital GERALD A. HALE President of HHH, Inc., an investment and management company MATTHEW HOLDEN, JR. Professor of Government and Foreign Affairs, University of Virginia Director Committees EieanorS.

Daniel John D. Feehan Jos. Michael Galvin, Jr. Gerald A. Hale Matthew Holden, Jr. E. Douglas Huggard Irving K. Kessler Richard B. McGlynn Madeline H. McWhinney D Committee Chairman Ci Committee Membership n Ex Officio Membership D D [J [J D r-----. ' ' I I l ___ J D [] [] D D E. DOUGLAS HUGGARD President and Chief Executive Officer of the Company IRVING K. KESSLER Retired, Former Executive Vice President, RCA Corporation RICHARD B. McGLYNN Counselor-at-Law, Attorney with the firm of Stryker, Tams & Dill MADELINE H. McWHINNEY President of Dale, Elliot and Company, a management consulting firm providing services to the banking industry

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Kelly/Mooney, Joseph Mulligan * ... :Design: Mueller & Wister, Inc. Directors of Atlantic Energy, Inc. front row (l tor): J.D. Feehan, R.B. McGlynn middle row (l tor): JVJ.H. McWhinney, G.A. Hale, l.K. Kessler back row (l to r): E.D. Huggard, E.S. Daniel, J.M. Galvin, Jr., M. Holden, Jr.