SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 OR 15 (d)
of The Securities Exchange Act of 1934
For Quarter ended March 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission Registrant; State of Incorporation; IRS Employer
File No. Address; and Telephone No. Identification No.
1-9760 Atlantic Energy, Inc. 22-2871471
(New Jersey)
6801 Black Horse Pike
Egg Harbor Township, NJ 08234
(609) 645-4500
1-3559 Atlantic City Electric Company 21-0398280
(New Jersey)
6801 Black Horse Pike
Egg Harbor Township, NJ 08234
(609) 645-4100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
Atlantic Energy, Inc. 52,702,052 shares (as of May 9, 1996)
All of the outstanding shares of Common Stock of Atlantic City
Electric Company are owned by Atlantic Energy, Inc.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Thousands of Dollars
Quarter/Year-to-Date
Ended March 31,
1996 1995
(unaudited)
Operating Revenues-Electric $245,325 $218,626
Operating Expenses:
Energy 58,782 45,737
Purchased Capacity 49,330 47,633
Operations 35,714 37,638
Maintenance 10,714 6,823
Depreciation and Amortization 20,251 19,457
State Excise Taxes 26,805 24,759
Federal Income Taxes 7,806 6,197
Other Taxes 2,943 2,798
Total Operating Expenses 212,345 191,042
Operating Income 32,980 27,584
Other Income:
Allowance for Equity Funds Used During
Construction 221 484
Other-Net 905 1,611
Total Other Income 1,126 2,095
Interest Charges:
Interest on Long Term Debt 15,095 14,597
Other Interest Expense 798 203
Total Interest Charges 15,893 14,800
Allowance for Borrowed Funds Used
During Construction (331) (377)
Net Interest Charges 15,562 14,423
Less Preferred Stock Dividend
Requirements of Subsidiary 3,009 3,787
Net Income $ 15,535 $ 11,469
Average Number of Shares of Common 52,702 53,475
Stock Outstanding (in thousands)
Per Common Share:
Earnings $ .29 $ .21
Dividends Declared $ .385 $ .385
Dividends Paid $ .385 $ .385
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars
Year-to-Date
Ended March 31,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 15,535 $ 11,469
Deferred Purchased Power Costs 4,104 3,921
Deferred Energy Costs (432) (362)
Preferred Stock Dividend Requirements 3,009 3,787
Depreciation and Amortization 20,251 19,457
Deferred Income Taxes-Net (234) 1,582
Prepaid State Excise Taxes (67,212) (76,348)
Unrecovered State Excise Taxes 2,390 2,390
Employee Separation Costs (2,204) (6,779)
Net Decrease (Increase) in Other
Working Capital 5,824 (12,526)
Other-Net (3,044) (595)
Net Cash Used in Operating Activities (22,013) (54,004)
Cash Flows Of Investing Activities:
Utility Cash Construction Expenditures (20,260) (19,502)
Partnership Distribution 6,504 -
Nonutility Investment in Affiliates (4,800) -
Nuclear Decommissioning Trust Fund
Deposits (1,606) (1,606)
Other-Net (3,707) (732)
Net Cash Used in Investing Activities (23,869) (21,840)
Cash Flows Of Financing Activities:
Retirement and Maturity of Long
Term Debt (15,247) -
Proceeds from Long Term Debt - 14,900
Proceeds from Short Term Debt 97,150 101,550
Repurchases of Common Stock - (18,381)
Redemption of Preferred Stock (12,120) -
Dividends Declared on Preferred Stock (3,009) (3,787)
Dividends Declared on Common Stock (20,290) (20,391)
Other-Net 2,819 1,425
Net Cash Provided by Financing
Activities 49,303 75,316
Net Increase (Decrease) in Cash and
Temporary Investments 3,421 (528)
Cash and Temporary Investments,
beginning of period 5,691 5,114
Cash and Temporary Investments,
end of period $ 9,112 $ 4,586
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
March 31, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,448,587 $2,429,176
Less Accumulated Depreciation 813,960 794,479
Net 1,634,627 1,634,697
Construction Work in Progress 118,261 119,270
Land Held for Future Use 6,941 6,941
Leased Property-Net 39,899 40,878
Electric Utility Plant-Net 1,799,728 1,801,786
Investments and Nonutility Property:
Investment in Leveraged Leases 79,153 78,959
Nuclear Decommissioning Trust Fund 64,223 61,802
Nonutility Property and Equipment-Net 24,583 22,743
Other Investments and Funds 53,131 52,780
Total Investments and Nonutility
Property 221,090 216,284
Current Assets:
Cash and Temporary Investments 9,112 5,691
Accounts Receivable:
Utility Service 72,421 66,099
Miscellaneous 18,470 17,477
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 36,112 41,515
Fuel (at average cost) 22,695 25,459
Materials and Supplies (at average cost) 25,321 25,434
Working Funds 14,905 14,421
Deferred Energy Costs 31,865 31,434
Prepaid Excise Taxes 77,965 10,753
Other 12,632 13,339
Total Current Assets 317,998 248,322
Deferred Debits:
Unrecovered Purchased Power Costs 95,714 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 61,884 64,274
Unamortized Debt Costs 37,992 39,004
Other Regulatory Assets 55,889 54,568
Other 14,930 10,983
Total Deferred Debits 352,267 354,504
Total Assets $2,691,083 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
March 31, December 31,
1996 1995
(unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shareholders' Equity:
Common Stock $ 565,610 $ 563,436
Retained Earnings 244,986 249,741
Total Common Shareholders' Equity 810,596 813,177
Preferred Stock of Atlantic Electric:
Not Subject to Mandatory Redemption 40,000 40,000
Subject to Mandatory Redemption 114,750 114,750
Long Term Debt 829,876 829,856
Total Capitalization
(excluding current portion) 1,795,222 1,797,783
Current Liabilities:
Cumulative Preferred Stock Redemption
Requirement 10,250 22,250
Long Term Debt 50,000 65,247
Short Term Debt 127,695 30,545
Accounts Payable 54,870 60,858
Taxes Accrued 14,721 3,450
Interest Accrued 17,465 20,315
Dividends Declared 23,300 23,490
Accrued Employee Separation Costs 5,284 7,488
Deferred Income Taxes 1,607 2,569
Other 22,799 20,554
Total Current Liabilities 327,991 256,766
Deferred Credits and Other Liabilities:
Deferred Income Taxes 426,616 425,875
Deferred Investment Tax Credits 48,478 49,112
Capital Lease Obligations 39,236 40,227
Other 53,540 51,133
Total Deferred Credits and
Other Liabilities 567,870 566,347
Total Liabilities and Capitalization $2,691,083 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Atlantic Energy, Inc. (the Company, AEI or parent) is the parent
of Atlantic City Electric Company (ACE) and Atlantic Energy
Enterprises, Inc. (AEE) which are wholly-owned subsidiaries. ACE
is a public utility primarily engaged in the generation,
transmission, distribution and sale of electric energy. AEE is a
holding company which is responsible for the management of the
investments in nonutility companies consisting of: Atlantic
Generation, Inc. (AGI), ATE Investment, Inc. (ATE), Atlantic
Southern Properties, Inc. (ASP), Atlantic Thermal Systems, Inc.
(ATS), Coastal Comm, Inc. (CCI) and Atlantic Energy Technology,
Inc. (AET). AEE also has a 50% equity interest in Enerval, LLC,
(formerly known as Atlantic CNRG Services, LLC) The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results
of operations of the nonutility companies are not significant and
are classified under Other Income in the Consolidated Statement
of Income.
These consolidated financial statements reflect all normal,
recurring adjustments and accruals which, in the opinion of
management, are necessary for a fair presentation of the
consolidated financial statements presented. The notes to the
consolidated financial statements accompanying the Company's 1996
proxy statement for the annual meeting of shareholders and the
Company's 1995 Annual Report on Form 10-K, which are both filed
with the Securities and Exchange Commission, should be read in
conjunction with this report. Note 1 of these annual reports
specifically identifies the significant accounting policies of
the Company. The consolidated balance sheet contained in the
financial statements presented herein that is labeled December
31, 1995 was derived from the audited consolidated balance sheet
presented in the 1995 Annual Report on Form 10-K.
The Financial Accounting Standards Board issued Statement No. 123
"Accounting for Stock-Based Compensation", effective January 1,
1996. This statement encourages a fair value method to account
for stock-based compensation, as an alternative to the intrinsic
value method permitted by other accounting standards still in
effect. The Company is continuing to use the intrinsic value
method. As required by Statement No. 123, the Company will
provide in its annual financial statements the pro forma effects
of the fair value method on net income and earnings per share.
Certain prior year amounts have been reclassified to conform
to the current year reporting.
NOTE 2. INCOME TAXES
The components of Federal Income Tax expense are as follows
(in thousands of dollars):
Quarter/Year-to-Date,
Ended March 31, 1996
1996 1995
(unaudited)
Current $ 9,163 $ 5,151
Deferred (1,015) 1,534
Total Federal Income Tax Expense 8,148 6,685
Less Amounts Included in Other Income 342 488
Federal Income Taxes Included
in Operating Expenses $ 7,806 $ 6,197
A reconciliation of the expected Federal income taxes compared to
the reported Federal Income Tax expense computed by applying the
statutory rate follows:
Tax Computed at the Statutory Rate
of 35% $ 9,342 $ 7,680
Utility Plant Basis Differences 687 362
Investment Tax Credits (649) (637)
Other-Net (1,232) (720)
Total Federal Income Tax Expense $ 8,148 $ 6,685
Effective Federal Income Tax Rate 31% 30%
The Company is awaiting settlement by the Internal Revenue
Service concerning tax years 1984 through 1986. The impending
settlement is not expected to have a material impact to the
Company.
NOTE 3. RATE MATTERS OF ACE
ACE filed a petition with the New Jersey Board of Public
Utilities (BPU) on April 17, 1995, requesting a $37 million
increase in annual LEC revenues effective June 1, 1995. This
LEC filing represented the first that included a full year of
costs for capacity and energy with all four of the Independent
Power Producers (IPPs) with which ACE has BPU-approved contracts.
The requested amount had been reduced by ACE from $67.6 million
by forgoing $10 million in LEC revenues under the Southern New
Jersey Economic Initiative and deferring $20.6 million of LEC
costs that ACE will incur during the 1995/1996 LEC period for
recovery in the next LEC period, without carrying costs.
Effective July 7, 1995, the BPU approved a provisional increase
of $37 million effective for service rendered on and after
July 7, 1995. On March 13, 1996, the BPU rendered its final
decision approving the continuance of the provisional increase
effective since July 1995.
On March 29, 1996, ACE submitted to the BPU a request for a $49.7
million increase in annual LEC revenues effective June 1, 1996.
The requested LEC rates continue to include the cost of four BPU-
approved contracts with IPPs. This request also includes the
recovery of $20.6 million of LEC costs previously deferred from
the 1995 LEC request. In order to reduce the impact of this LEC
request to customers, ACE has reduced the level of its request by
including a proposed deferral of $14.7 million of 1996/1997 LEC
costs, to be recovered without carrying costs in the next LEC
period.
In September 1994, the BPU issued an order establishing
a generic proceeding to review the methodology by which utilities
are permitted to recover through rates capacity costs from
nonutility generation projects. This issue relates to the
Ratepayer Advocate's allegation that present BPU policy, which
permits the utilities to recover all costs related to nonutility
projects through the LEC, provides the utilities with a double
recovery of the nonutility project's capacity costs concurrently
through base rates and LEC rates. The order established that
this matter be reviewed in a two phase proceeding: 1) to
determine and quantify the existence or non-existence of a double
recovery; and 2) if a double recovery is found to exist to
address the appropriate prospective methodology for the recovery
of these capacity costs. In September 1995, the Ratepayer
Advocate filed testimony that claims ACE's overrecovery of
capacity costs for the four-year period June 1991 through May
1995 is $46 million. The Ratepayer Advocate also filed testimony
supporting similar claims for other New Jersey electric
utilities. In December 1995, ACE and the other electric
utilities filed testimony rebutting the Ratepayer Advocate's
claims. Evidentiary hearings were held in December 1995 and
April 1996. Litigation will continue in 1996; the BPU's final
decision is not expected until the latter part of 1996. At this
time, ACE cannot predict the outcome of this proceeding and
cannot estimate the impact that the double recovery issue may
have on future rates.
By Order dated March 14, 1996 the BPU initiated an investigation
of the ongoing outage at Salem Nuclear Generating Station. ACE
has a 7.41% ownership in the Salem Nuclear Generating Station,
operated by Public Service Electric and Gas Company (PS). By its
Order the BPU declared the rates associated with ACE's and PS's
ownership in Salem Unit 1 interim and subject to refund pending a
hearing as to whether Salem Unit 1 is currently used and useful.
The BPU also ordered ACE and PS to file briefs with regard to why
the BPU should not, after conducting hearings, immediately
declare each utility's rates related to Salem Unit 2 interim, and
subject to refund. On April 4, 1996 both ACE and PS submitted
briefs to the BPU supporting the facts that in contrast to the
uncertain nature of the outage in Salem Unit 1, there is no such
uncertainty with Salem Unit 2. The restart date of Salem Unit 2
has been advanced to August 1996, and no evidence has been
presented to the BPU to indicate that this restart date will not
be achieved. As such, there are no facts currently before the
BPU to support a declaration of Salem Unit 2's rates interim and
subject to refund. On April 11, 1996 the BPU issued a letter
order setting evidentiary hearings, before the BPU, to address
solely the issue of interim rates as related to Salem Unit 2.
Such hearings are scheduled to continue through May 1996. At
this time, ACE cannot predict the BPU's decision concerning the
issue of interim rates related to Salem Unit 2. At this time,
the BPU has not scheduled hearings to investigate the issue of
whether Salem Unit 1 is currently used and useful.
NOTE 4. DEBT
On February 1, 1996, ACE redeemed the remaining 120,000 shares of
its $8.53 No Par Preferred Stock at a price of $101.00 per share.
Also on February 1, 1996, $9.98 million of 5-1/8% First Mortgage
Bonds and $2.267 million of 5-1/4% Debentures of ACE matured.
ACE's Cumulative Preferred Stock and long term debt securities
are not widely held and generally trade infrequently. Their
estimated aggregate fair market values at March 31, 1996 are
approximately $157 million and $796 million, respectively. Their
estimated aggregate fair market values at December 31, 1995 were
approximately $172 million and $851 million, respectively. With
regard to short term debt, ACE had $127.7 million and $30.5
million outstanding at March 31 1996 and December 31, 1995,
respectively.
At March 31, 1996 and December 31, 1995, AEI had $35 million and
$34.5 million, respectively, outstanding under its revolving
credit and term loan facility.
At March 31, 1996 and December 31, 1995, ATE had outstanding
$15.0 million and $18.5 million, respectively, under its
revolving credit and term loan facility. The estimated aggregate
fair market value of ATE's senior notes at March 31, 1996 and
December 31, 1995 was approximately $16 million.
NOTE 5. COMMON STOCK
As of March 31, 1996 and December 31, 1995, 52,702,052 and
52,531,878 shares of common stock were outstanding, respectively.
The increase in shares outstanding for the current period
reflects the issuance of 170,174 shares, net of forfeited shares,
under the Company's Equity Incentive Plan and ACE's benefit
plans.
NOTE 6. CONTINGENCIES
ACE is a 7.41% owner of the Salem Nuclear Generating Station
(Salem) operated by PS. Salem Units 1 and 2 were taken out of
service on May 16, 1995 and June 7, 1995, respectively. A
thorough assessment of the equipment and management issues that
have affected the operation of Unit 2 and the station are being
resolved and necessary corrections are being made to assure safe
and reliable operation over the long term. Unit 2 is expected to
return to service in August 1996. Unit 1 is undergoing extended
testing of its steam generation equipment and its return has been
delayed for an indefinite period. The owners of Salem are
currently considering repair or replacement options for the steam
generators in Unit 1. If the generators are replaced, ACE's
estimated share of capital expenditures would range from
$11 million to $12.6 million. ACE's share of the estimated costs
of repairing the generators would range from $1.4 million to $2.8
million. If the option combines repair and replacement, ACE's
estimated share of capital and maintenance costs would range from
$12.5 million to $15.4 million. The incremental cost of
replacement power during the outages is approximately $1.4
million per month.
ACE is a 5% owner in the Hope Creek Nuclear Generating Station
(Hope Creek), also operated by PS. Hope Creek went into a
scheduled refueling and maintenance outage on November 11, 1995
which was extended to correct maintenance and performance
problems. The unit returned to service on March 25, 1996. The
incremental replacement power costs associated with the Hope
Creek outage was approximately $400 thousand per month.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of ACE's nuclear units is
expected to be below the reasonable performance, ACE anticipates
that it will incur a nuclear performance penalty in 1996 of $2.1
million, net of tax. This penalty is being recognized ratably
throughout 1996 as it relates to performance and replacement
power costs incurred within interim periods during the year. As
of March 31, 1996, ACE has accrued $528 thousand, net of tax, for
the 1996 penalty.
ACE has a trust to fund the future costs of decommissioning each
of the five nuclear units in which it has an ownership interest.
The current annual funding amount of this trust is based on
estimates of the future costs of decommissioning each unit
derived from studies performed in 1987. In accordance with BPU
requirements, updated site specific studies are underway.
Amounts to be recognized and recovered in rates based on the
updated studies are not presently determinable. Results of the
studies are expected by the third quarter of 1996.
CONSOLIDATED STATEMENT OF INCOME
Thousands of Dollars
Quarter/Year-to-Date
Ended March 31,
1996 1995
(unaudited)
Operating Revenues-Electric $245,472 $218,666
Operating Expenses:
Energy 58,782 45,737
Purchased Capacity 49,330 47,633
Operations 35,760 37,690
Maintenance 10,720 6,830
Depreciation and Amortization 20,251 19,457
State Excise Taxes 26,805 24,759
Federal Income Taxes 7,806 6,197
Other Taxes 2,943 2,798
Total Operating Expenses 212,397 191,101
Operating Income 33,075 27,565
Other Income:
Allowance for Equity Funds Used During
Construction 221 484
Miscellaneous Income-Net 1,582 2,153
Total Other Income 1,803 2,637
Interest Charges:
Interest on Long Term Debt 15,095 14,597
Other Interest Expense 798 203
Total Interest Charges 15,893 14,800
Allowance for Borrowed Funds Used
During Construction (331) (377)
Net Interest Charges 15,562 14,423
Net Income 19,316 15,779
Less Preferred Dividend Requirements 3,009 3,787
Balance Available for Common Shareholder $ 16,307 $ 11,992
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars
Year-to-Date
Ended March 31,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 19,316 $ 15,779
Deferred Purchased Power Costs 4,104 3,921
Deferred Energy Costs (432) (362)
Depreciation and Amortization 20,251 19,457
Deferred Federal Income Taxes-Net (604) 833
Prepaid State Excise Taxes (67,212) (76,348)
Employee Separation Costs (2,204) (6,779)
Unrecovered State Excise Taxes 2,390 2,390
Net Increase in Other Working Capital (7,906) (12,533)
Other-Net 2,729 666
Net Cash Used in Operating Activities (29,568) (52,976)
Cash Flows Of Investing Activities:
Cash Construction Expenditures (20,260) (19,502)
Leased Property (778) (1,624)
Nuclear Decommissioning Trust Fund
Deposits (1,606) (1,606)
Notes Receivable-Affiliates - (6,685)
Other-Net (65) 2,452
Net Cash Used in Investing Activities (22,709) (26,965)
Cash Flows Of Financing Activities:
Retirement and Maturity of Long Term Debt (12,247) -
Proceeds from Short Term Debt 97,150 101,550
Redemption of Preferred Stock (12,120) -
Capital Contributions 2,131 328
Dividends Declared on Preferred Stock (3,009) (3,787)
Dividends Declared on Common Stock (20,290) (20,458)
Other-Net 632 1,478
Net Cash Provided by Financing Activities 52,247 79,111
Net Decrease in Cash and
Temporary Investments (30) (830)
Cash and Temporary Investments,
beginning of period 3,987 3,459
Cash and Temporary Investments,
end of period $ 3,957 $ 2,629
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
March 31, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,448,587 $2,429,176
Less Accumulated Depreciation 813,960 794,479
Net 1,634,627 1,634,697
Construction Work in Progress 118,261 119,270
Land Held for Future Use 6,941 6,941
Leased Property-Net 39,899 40,878
Electric Utility Plant-Net 1,799,728 1,801,786
Investments and Nonutility Property:
Nuclear Decommissioning Trust Fund 64,223 61,802
Other Property, Investments and Funds 2,117 2,077
Total Investments and Nonutility
Property 66,340 63,879
Current Assets:
Cash and Temporary Investments 3,957 3,987
Accounts Receivable:
Utility Service 72,421 66,099
Miscellaneous 15,757 17,379
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 36,112 41,515
Fuel (at average cost) 22,683 25,459
Materials and Supplies (at average cost) 25,321 25,434
Working Funds 14,903 14,420
Deferred Energy Costs 31,865 31,434
Prepaid Excise Taxes 77,965 10,753
Other 10,482 10,249
Total Current Assets 307,966 243,429
Deferred Debits:
Unrecovered Purchased Power Costs 95,714 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 61,884 64,274
Unamortized Debt Costs 37,917 38,924
Other Regulatory Assets 55,889 54,568
Other 13,244 9,372
Total Deferred Debits 350,506 352,813
Total Assets $2,524,540 $2,461,907
SEE NOTES TO CONSOLIDATED STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
March 31, December 31,
1996 1995
(unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shareholder's Equity:
Common Stock $ 54,963 $ 54,963
Premium on Capital Stock 231,081 231,081
Contributed Capital 264,894 262,762
Capital Stock Expense (2,049) (2,131)
Retained Earnings 248,418 252,484
Total Common Shareholder's Equity 797,307 799,159
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption 40,000 40,000
Subject to Mandatory Redemption 114,750 114,750
Long Term Debt 802,376 802,356
Total Capitalization
(excluding current portion) 1,754,433 1,756,265
Current Liabilities:
Preferred Stock Redemption
Requirement 10,250 22,250
Capital Lease Obligations 663 650
Long Term Debt-Current Portion - 12,247
Short Term Debt 127,695 30,545
Accounts Payable 54,867 60,831
Federal Income Taxes Payable-Affiliate 8,115 11,574
Other Taxes Accrued 6,748 3,382
Interest Accrued 16,584 19,961
Dividends Declared 23,300 23,490
Employee Separation Costs 5,284 7,488
Deferred Income Taxes 1,607 2,569
Other 20,345 17,156
Total Current Liabilities 275,458 212,143
Deferred Credits and Other Liabilities:
Deferred Income Taxes 354,577 354,218
Deferred Investment Tax Credits 48,478 49,112
Capital Lease Obligations 39,236 40,227
Other 52,358 49,942
Total Deferred Credits and
Other Liabilities 494,649 493,499
Total Liabilities and Capitalization $2,524,540 $2,461,907
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Atlantic City Electric Company (the Company) is a wholly-owned
subsidiary of Atlantic Energy, Inc. The consolidated financial
statements include the accounts of the Company and its
subsidiary, which is wholly-owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
These consolidated financial statements reflect all normal,
recurring adjustments and accruals which, in the opinion of
management, are necessary for a fair presentation of the
consolidated financial statements presented. The notes to the
consolidated financial statements accompanying the Company's 1995
Annual Report on Form 10-K filed with the Securities and Exchange
Commission should be read in conjunction with this report.
Note 1 of this annual report specifically identifies the
significant accounting policies of the Company. The consolidated
balance sheet contained in the financial statements presented
herein that is labeled December 31, 1995 was derived from the
audited consolidated balance sheet presented in the 1995
Form 10-K.
The Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation", effective
January 1, 1996. This statement encourages a fair value method
to account for stock-based compensation, as an alternative to the
intrinsic value method permitted by other accounting standards
still in effect. The Company is continuing to use the intrinsic
value method. As required by Statement No. 123, the Company will
provide in its annual financial statements the pro forma effects
of the fair value method on net income.
Certain prior year amounts have been reclassified to conform
to the current year reporting.
<PAGE>
NOTE 2. INCOME TAXES
The components of Federal Income Tax expense are as follows (in
thousands of dollars):
Quarter/Year-To Date
Ended March 31,
1996 1995
(unaudited)
Current $ 9,742 $ 6,071
Deferred (1,238) 833
Total Federal Income Tax Expense 8,504 6,904
Less Amounts Included in Other Income 698 707
Federal Income Taxes Included
in Operating Expenses $ 7,806 $ 6,197
A reconciliation of the expected Federal income taxes compared to
the reported Federal Income Tax expense computed by applying the
statutory rate follows:
Tax Computed at the Statutory Rate
of 35% $ 9,737 $ 7,939
Utility Plant Basis Differences 687 362
Investment Tax Credits (634) (634)
Other-Net (1,286) (763)
Total Federal Income Tax Expense $ 8,504 $ 6,904
Effective Federal Income Tax Rate 31% 30%
The Company is awaiting settlement by the Internal Revenue
Service concerning tax years 1984 through 1986. The impending
settlement is not expected to have a material impact to the
Company.
NOTE 3. RATE MATTERS
The Company filed a petition with the New Jersey Board of Public
Utilities (BPU) on April 17, 1995, requesting a $37 million
increase in annual LEC revenues effective June 1, 1995. This
LEC filing represented the first that included a full year of
costs for capacity and energy with all four of the Independent
Power Producers (IPPs) with which the Company has BPU-approved
contracts. The requested amount had been reduced by the Company
from $67.6 million by forgoing $10 million in LEC revenues under
the Southern New Jersey Economic Initiative and deferring $20.6
million of LEC costs that the Company will incur during the
1995/1996 LEC period for recovery in the next LEC period, without
carrying costs. Effective July 7, 1995, the BPU approved a
provisional increase of $37 million effective for service
rendered on and after July 7, 1995. On March 13, 1996, the BPU
rendered its final decision approving the continuance of the
provisional increase effective since July 1995.
On March 29, 1996, the Company submitted to the BPU a request for
a $49.7 million increase in annual LEC revenues effective June 1,
1996. The requested LEC rates continue to include the cost of
four BPU-approved contracts with IPPs. This request also
includes the recovery of $20.6 million of LEC costs previously
deferred from the 1995 LEC request. In order to reduce the
impact of this LEC request to customers, the Company has reduced
the level of its request by including a proposed deferral of
$14.7 million of 1996/1997 LEC costs, to be recovered without
carrying costs in the next LEC period.
In September 1994, the BPU issued an order establishing
a generic proceeding to review the methodology by which utilities
are permitted to recover through rates capacity costs from
nonutility generation projects. This issue relates to the
Ratepayer Advocate's allegation that present BPU policy, which
permits the utilities to recover all costs related to nonutility
projects through the LEC, provides the utilities with a double
recovery of the nonutility project's capacity costs concurrently
through base rates and LEC rates. The order established that
this matter be reviewed in a two phase proceeding: 1) to
determine and quantify the existence or non-existence of a double
recovery; and 2) if a double recovery is found to exist to
address the appropriate prospective methodology for the recovery
of these capacity costs. In September 1995, the Ratepayer
Advocate filed testimony that claims the Company's overrecovery
of capacity costs for the four-year period June 1991 through May
1995 is $46 million. The Ratepayer Advocate also filed testimony
supporting similar claims for other New Jersey electric
utilities. In December 1995, the Company and the other electric
utilities filed testimony rebutting the Ratepayer Advocate's
claims. Evidentiary hearings were held in December 1995 and
April 1996. Litigation will continue in 1996; the BPU's final
decision is not expected until the latter part of 1996. At this
time, the Company cannot predict the outcome of this proceeding
and cannot estimate the impact that the double recovery issue may
have on future rates.
By Order dated March 14, 1996 the BPU initiated an investigation
of the ongoing outage at Salem Nuclear Generating Station
operated by Public Service Electric and Gas Company (PS). The
Company has a 7.41% ownership in the Salem Nuclear Generating
Station. By its Order the BPU declared the rates associated with
the Company's and PS's ownership in Salem Unit 1 interim and
subject to refund, pending a hearing as to whether Salem Unit 1
is currently used and useful. The BPU also ordered the Company
and PS to file briefs with regard to why the BPU should not,
after conducting hearings, immediately declare each utility's
rates related to Salem Unit 2 interim and subject to refund. On
April 4, 1996 both the Company and PS submitted briefs to the BPU
supporting the facts that in contrast to the uncertain nature of
the outage in Salem Unit 1, there is no such uncertainty with
Salem Unit 2. The restart date of Salem Unit 2 has been advanced
to August 1996, and no evidence has been presented to the BPU to
indicate that this restart date will not be achieved. As such,
there are no facts currently before the BPU to support a
declaration of Salem Unit 2's rates interim and subject to
refund. On April 11, 1996 the BPU issued a letter order setting
evidentiary hearings, before the BPU, to address solely the issue
of interim rates as related to Salem Unit 2. Such hearings are
scheduled to continue through May 1996. At this time, the
Company cannot predict the BPU's decision concerning the issue of
interim rates related to Salem Unit 2. At this time, the BPU has
not scheduled hearings to investigate the issue of whether Salem
Unit 1 is currently used and useful.
NOTE 4. DEBT
On February 1, 1996, the Company redeemed the remaining 120,000
shares of its $8.53 No Par Preferred Stock at a price of $101.00
per share. Also on February 1, 1996, $9.98 million of 5-1/8%
First Mortgage Bonds and $2.267 million of 5-1/4% Debentures of
the Company matured. The Company's Cumulative Preferred Stock
and long term debt securities are not widely held and generally
trade infrequently. Their estimated aggregate fair market values
at March 31, 1996 are approximately $157 million and
$796 million, respectively. Their estimated aggregate fair market
values at December 31, 1995 were approximately $172 million and
$851 million, respectively. With regard to short term debt, the
Company had $127.7 million and $30.5 million outstanding at March
31, 1996 and December 31, 1995, respectively.
NOTE 5. CONTINGENCIES
The Company is a 7.41% owner of the Salem Nuclear Generating
Station (Salem) operated by PS. Salem Units 1 and 2 were taken
out of service on May 16, 1995 and June 7, 1995, respectively. A
thorough assessment of the equipment and management issues that
have affected the operation of Unit 2 and the station are being
resolved and necessary corrections are being made to assure safe
and reliable operation over the long term. Unit 2 is expected to
return to service in August 1996. Unit 1 is undergoing extended
testing of its steam generation equipment and its return has been
delayed for an indefinite period. The owners of Salem are
currently considering repair or replacement options for the steam
generators in Unit 1. If the generators are replaced, the
Company's estimated share of capital expenditures would range
from $11 million to $12.6 million. The Company's share of the
estimated costs of repairing the generators would range from $1.4
million to $2.8 million. If the option combines repair and
replacement, the Company's estimated share of capital and
maintenance costs would range from $12.5 million to
$15.4 million. The incremental cost of replacement power during
the outages is approximately $1.4 million per month.
The Company is a 5% owner in the Hope Creek Nuclear Generating
Station (Hope Creek), also operated by PS. Hope Creek went into
a scheduled refueling and maintenance outage on November 11, 1995
which was extended to correct maintenance and performance
problems. The unit returned to service on March 25, 1996. The
incremental replacement power costs associated with the Hope
Creek outage was approximately $400 thousand per month.
The Company is subject to a performance standard for its five
jointly-owed nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of the Company's nuclear
units is expected to be below the reasonable performance, the
Company anticipates that it will incur a nuclear performance
penalty in 1996 of $2.1 million, net of tax. This penalty is
being recognized ratably throughout 1996 as it relates to
performance and replacement power costs incurred within interim
periods during the year. As of March 31, 1996, the Company has
accrued $528 thousand, net of tax, for the 1996 penalty.
The Company has a trust to fund the future costs of
decommissioning each of the five nuclear units in which it has an
ownership interest. The current annual funding amount of this
trust is based on estimates of the future cost of decommissioning
each unit derived from studies performed in 1987. In accordance
with BPU requirements, updated site specific studies are
underway. Amounts to be recognized and recovered in rates based
on the updated studies are not presently determinable. Results
of the studies are expected by the third quarter of 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following is management's discussion and analysis of
significant factors which affected the Atlantic Energy, Inc. (the
Company, AEI or parent) interim financial condition and results
of operations. To properly assess and evaluate the Company's
performance one should read, in conjunction with this report, the
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's 1995 Annual
Report on Form 10-K and the 1996 proxy statement for the annual
meeting of shareholders. Atlantic City Electric Company (ACE) is
the principal subsidiary of the Company and the following
discussion focuses primarily on ACE.
LIQUIDITY AND CAPITAL RESOURCES
Atlantic Energy, Inc.
The operating needs of the Company, representing those of the
consolidated group, are dependent upon the results of its
subsidiaries, principally those of ACE.
At March 31, 1996 and December 31, 1995, AEI had $35 million and
$34.5 million outstanding, respectively, under its revolving
credit and term loan facility.
Atlantic City Electric Company
On February 1, 1996 ACE redeemed the remaining 120,000 shares of
its $8.53 No Par Preferred Stock at a price of $101.00 per share.
Also on February 1, 1996 $9.98 million of 5-1/8% First Mortgage
Bonds and $2.267 million of 5-1/4% Debentures matured.
At March 31, 1996, ACE had $127.7 million outstanding in short
term debt, compared to $30.5 million outstanding at December 31,
1995. Short term debt consisted of notes payable to banks.
Proceeds were used for the redemption of preferred stock
mentioned above and the remittance of the annual state excise tax
payment as discussed below.
In March 1996, ACE made its annual payment to the State of New
Jersey in the amount of $91.6 million for state excise taxes.
This payment caused a net cash usage in operating activities for
the current and prior year quarter end period as presented on the
Consolidated Statement of Cash Flows.
Atlantic Energy Enterprises, Inc. and Subsidiaries
In February 1996, AEE invested $4.8 million in Enerval,LLC, of
which it has a 50% equity interest. This company provides energy
management services, including natural gas supply, transportation
and marketing. AEE obtained funding for this investment from ATE
Investments, Inc. (ATE) in the form of notes payable.
In March 1996, AEE received a dividend distribution from AGI due
to a $6.5 million distribution from a partnership in which AGI's
subsidiaries have an interest. AEE used the proceeds to reduce
the outstanding note payable to ATE.
At March 31, 1996 and December 31, 1995, ATE had outstanding
$15.0 million and $18.5 million, respectively, under its
revolving credit and term loan facility.
In December 1995, ATS, through a partnership arrangement,
borrowed from the New Jersey Economic Development Authority (EDA)
$12.5 million. The availability of the borrowed funds for their
intended use and the ultimate term of the borrowings are subject
to certain conditions. Satisfaction of these conditions and use
of the funds are expected in the second quarter of 1996.
Proceeds from the bond issuance remain restricted in trust
pending resolution of these conditions. Effective April 30,
1996, the bonds were remarketed at a rate of 3.60% for a period
of 114 days.
RESULTS OF OPERATIONS
Changes in net income and earnings per share for the periods
ended March 31, 1996 versus the corresponding periods of the
previous year are as follows:
Quarter/Year-To-Date
Ended March 31, 1996
Net Income 35.5%
Earnings Per Share 38.1%
The change in net income for the current quarter reflects an
increase in electric revenues due to the increase in both
electric sales and annual Levelized Energy Clause (LEC) revenues.
The increase in operating expenses in the current period compared
to the prior year period, reflects the costs supporting the
increase in the sales of energy in the current period, as well as
additional maintenance expense associated with the outages of
ACE's jointly owned nuclear generating facilities. Significant
factors contributing to these changes are explained below.
Unless otherwise specified, changes are in terms of the current
year period compared to the corresponding prior year period.
Utility Revenues
Changes in Operating Revenues-Electric are disclosed in the
following table:
Quarter/Year-To-Date
Ended March 31, 1996
(Thousands of Dollars)
Levelized Energy Clause $ 9,602
Kilowatt-hour Sales 18,113
Unbilled Revenues (2,846)
Sales for Resale 2,897
Other Revenues (1,067)
Total $26,699
Levelized Energy Clause (LEC) revenues for the period increased
due to a provisional rate increase in July 1995 of $37.0 million
on an annual basis. Changes in Kilowatt-hour Sales are explained
in the following section 'Billed Sales to Ultimate Utility
Customers'. The changes in Unbilled Revenues are a result of the
amount of kilowatt-hours consumed by, but not yet billed to,
ultimate customers at the end of the respective periods, which
are affected by weather and economic conditions and the
corresponding price per kilowatt-hour. The changes in Sales for
Resale to wholesale customers are a function of ACE's energy mix
strategy, which in turn is dependent upon ACE's needs for energy,
the energy needs of other utilities participating in the regional
power pool of which ACE is a member, and the sources and prices
of energy available. The increase in Sales for Resale for the
quarter was the result of new contract demands for bulk power
sales to wholesale customers outside the regional power pool.
Billed Sales to Ultimate Utility Customers
Changes in billed kilowatt-hour sales are generally due to
changes in the average number of customers and average customer
use, which is affected by economic and weather conditions.
Energy sales statistics, stated as percentage changes from the
corresponding periods of the prior year, are shown below.
Quarter/Year-To Date
Ended March 31, 1996
Average
Customer Class Sales Use Cust
Residential 11.7% 10.6% 1.0%
Commercial 6.4 5.3 1.0
Industrial 5.0 3.0 2.0
Total 8.6 1.0 7.6
The large increase in Residential sales and average per customer
use for the current quarter/year-to-date period was due to colder
than normal temperatures this year compared to above normal
temperatures in the same period last year. Sales to the
Commercial sector increased due to ongoing economic growth and
colder temperatures. Casino expansions and construction around
Atlantic City, New Jersey were significant contributors to
economic growth. Approximately one quarter of the increase in
the number of Commercial customers was due to the continuing
popularity of ACE's night lighting programs. The increase in
Industrial sales was primarily due to the return of sales to a
customer that had previously been supplied by an independent
power producer.
Expenses
Total Operating Expenses for quarter/year-to-date period ended
March 31, 1996 increased by 11.2%. Excluding depreciation and
taxes, Total Operating Expenses increased by 12.1% due largely
due to an increase in energy costs that accompanied increased
sales and an increase in maintenance costs associated with the
jointly owned nuclear stations.
Energy expense reflects the amount of energy needed to meet load
requirements, as well as the various fuel and purchased energy
sources used and the operation of the LEC. Changes in costs
reflect the availability of low-cost generation from ACE-owned
and purchased energy sources, the unit prices of the energy
sources used and changes in the needs of other utilities
participating in the regional power pool. The cost of energy is
recovered from customers primarily through the operation of the
LEC. Generally, earnings are not affected by energy costs
because these costs are adjusted to match the associated LEC
revenues. However, ACE is voluntarily foregoing recovery of
certain amounts of otherwise recoverable fuel costs through its
Southern New Jersey Economic Initiative (SNJEI), thereby reducing
earnings, as indicated below. Such reduced recoveries are
discretionary by ACE, and are influenced by competitive and
economic factors. Otherwise, in any period the actual amount of
LEC revenue recovered from customers will be greater or less than
the actual amount of energy cost incurred and eligible for
recovery in that period. Such respective overrecovery or
underrecovery of energy costs is recorded on the Consolidated
Balance Sheet as a liability or asset as appropriate. Amounts on
the balance sheet are recognized in the Consolidated Statement of
Income within Energy expense during the period in which they are
subsequently recovered through the LEC. ACE was underrecovered
by $31.9 million at March 31, 1996, as compared to $31.4 million
at December 31, 1995.
Energy expense for the quarter/year-to-date period increased by
28.5%. Excluding deferred energy costs, Energy expense for the
quarter/year-to-date period increased by 25.7%. The increase for
the period was attributable to increased kilowatt-hour sales in
the quarter when compared to the same period in the previous
year, as well as ACE's use of alternative energy sources to
replace energy lost due to the continued shutdown of the Salem
units since May and June of 1995. The SNJEI reduced after tax
income for the quarter/year-to-date period by $1.7 million.
Sources of energy by fuel source for the current period are as
follows:
Quarter/Year-to-Date
Ended March 31, 1996
Coal 27%
Nuclear 13
Interchanged and Purchased 35
Nonutility Purchased 22
Oil and Natural Gas 3
Total 100%
Operations expense for the quarter/year-to-date period decreased
5.1%, due to cost reduction initiatives employed by ACE in 1995.
Maintenance expense for the quarter/year-to-date period increased
5.7% due to costs associated with Salem and Hope Creek nuclear
stations.
Depreciation expense for the quarter/year-to-date period
increased 4.1% due to ACE's ongoing additions to electric plant
in service.
State Excise Tax expense for the quarter/year-to-date period
increased 8.3% reflecting an increased energy sales tax base for
the quarter.
Federal Income Tax expense for the quarter/year-to-date period
increased 26% due to higher taxable income compared to the same
period last year.
Total Interest charges for the quarter/year-to-date period
increased by 7.4% reflecting increased interest related to an
increase in long and short term debt outstanding during the
period.
Preferred Stock Dividend Requirements decreased 20.5% for the
quarter/year-to-date period as a result of mandatory and optional
sinking fund redemptions of preferred stock during the second
half of 1995 and first quarter of 1996.
In December 1994, ACE recorded the expected costs of an employee
separation program. The balance of the accrued separation costs
on the Consolidated Balance Sheet at March 31, 1996 is $5.3
million compared to $7.5 million at December 31, 1995. ACE
expects settlement of this obligation to be substantially
completed by the end of 1996.
ACE is a 7.41% owner of the Salem Nuclear Generating Station
(Salem) operated by PS. Salem Units 1 and 2 were taken out of
service on May 16, 1995 and June 7, 1995, respectively. A
thorough assessment of the equipment and management issues that
have affected the operation of Unit 2 and the station are being
resolved and necessary corrections are being made to assure safe
and reliable operation over the long term. Unit 2 is expected to
return to service in August 1996. Unit 1 is undergoing extended
testing of its steam generation equipment and its return has been
delayed for an indefinite period. The owners of Salem are
currently considering repair or replacement options for the steam
generators in Unit 1. If the generators are replaced, ACE's
estimated share of capital expenditures would range from
$11 million to $12.6 million. ACE's share of the estimated costs
of repairing the generators would range from $1.4 million to $2.8
million. If the option combines repair and replacement, ACE's
estimated share of capital and maintenance costs would range from
$12.5 million to $15.4 million. The incremental cost of
replacement power during the outages is approximately $1.4
million per month.
ACE is a 5% owner in the Hope Creek Nuclear Generating Station
(Hope Creek), also operated by PS. Hope Creek went into a
scheduled refueling and maintenance outage on November 11, 1995
which was extended to correct maintenance and performance
problems. The unit returned to service on March 25, 1996. The
incremental replacement power costs associated with the Hope
Creek outage was approximately $400 thousand per month.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of ACE's nuclear units is
expected to be below the reasonable performance, ACE anticipates
that it will incur a nuclear performance penalty in 1996 of $2.1
million, net of tax. This penalty is being recognized ratably
throughout 1996 as it relates to performance and replacement
power costs incurred within interim periods during the year. As
of March 31, 1996, the Company had accrued $528 thousand, net of
tax, for the 1996 penalty.
ACE has a trust to fund the future costs of decommissioning each
of the five nuclear units in which it has an ownership interest.
The current annual funding amount of this trust is based on
estimates of the future costs of decommissioning each unit
derived from studies performed in 1987. In accordance with BPU
requirements, updated site specific studies are underway.
Amounts to be recognized and recovered in rates based on the
updated studies are not presently determinable. Results of the
studies are expected by the third quarter of 1996.
NONUTILITY ACTIVITIES
Nonutility operations, which include AEI parent, for the quarter/
year-to-date period ended March 31, 1996 resulted in a net loss
of $771 thousand compared to the same period of the prior year
which resulted in a net loss of $523 thousand. Of these amounts,
operations of AEE and subsidiaries for the quarter/year-to-date
ended March 31, 1996 and 1995 resulted in a net loss of $293
thousand and $196 thousand, respectively. The 1996 loss is
largely due to administrative and general costs incurred in the
continuing development of various new businesses, offset in part
by earnings from a partnership interest in cogeneration
facilities.
AEI parent for the quarter/year-to-date period ended March 31,
1996 and 1995 resulted in a net loss of $478 thousand and $327
thousand, respectively. The 1996 loss is largely due to interest
expense associated with borrowings from the Company's revolving
credit and term loan facility.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following is management's discussion and analysis of
significant factors which affected the Company's interim
financial condition and results of operations. To properly
assess and evaluate the Company's performance one should read, in
conjunction with this report, the Management's Discussion and
Analysis of Financial Condition and Results of Operations
included in the Company's 1995 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
On February 1, 1996 the Company redeemed the remaining 120,000
shares of its $8.53 No Par Preferred Stock at a price of $101.00
per share. Also on February 1, 1996, $9.980 million of 5-1/8%
First Mortgage Bonds and $2.267 million of 5-1/4% Debentures of
the Company matured.
At March 31,1996, the Company had $127.7 million outstanding in
short term debt, compared to $30.5 million outstanding at
December 31, 1995. The Company's short term debt consisted of
notes payable to banks. Proceeds were used for the redemption of
preferred stock mentioned above and the remittance of the annual
state excise tax payment as discussed below.
In March 1996, the Company made its annual payment to the State
of New Jersey in the amount of $91.6 million for state excise
taxes. This payment caused a net cash usage in operating
activities for the current and prior year quarter end period as
presented on the Consolidated Statement of Cash Flows.
RESULTS OF OPERATIONS
Net income increased for the quarter/year-to-date period ended
March 31, 1996 by 22.4% from the corresponding prior year period.
The change in net income for the current quarter reflects an
increase in electric revenues due to the increase in both
electric sales and annual Levelized Energy Clause (LEC) revenues.
The increase in operating expenses in the current period compared
to the prior year period, reflects the costs supporting the
increase in the sales of energy in the current period, as well as
additional maintenance expense associated with the outages of the
Company's jointly-owned nuclear generating facilities.
<PAGE>
Significant factors contributing to these changes are explained
below. Unless otherwise specified, changes are in terms of the
current year period compared to the corresponding prior year
period.
Utility Revenues
Changes in Operating Revenues-Electric are disclosed in the
following table:
Quarter/Year-To-Date
Ended March 31, 1996
(Thousands of Dollars)
Levelized Energy Clause $ 9,602
Kilowatt-hour Sales 18,113
Unbilled Revenues (2,846)
Sales for Resale 2,897
Other Revenues (960)
Total $26,806
Levelized Energy Clause (LEC) revenues for the period increased
due to a provisional rate increase in July 1995 of $37.0 million
on an annual basis. Changes in Kilowatt-hour Sales are explained
in the following section 'Billed Sales to Ultimate Utility
Customers'. The changes in Unbilled Revenues are a result of the
amount of kilowatt-hours consumed by, but not yet billed to,
ultimate customers at the end of the respective periods, which
are affected by weather and economic conditions and the
corresponding price per kilowatt-hour. The changes in Sales for
Resale to wholesale customers are a function of the Company's
energy mix strategy, which in turn is dependent upon the
Company's needs for energy, the energy needs of other utilities
participating in the regional power pool of which the Company is
a member, and the sources and prices of energy available. The
increase in Sales for Resale for the quarter was the result of
new contract demands for bulk power sales to wholesale customers
outside the regional power pool.<PAGE>
Billed Sales to Ultimate Utility Customers
Changes in billed kilowatt-hour sales are generally due to
changes in the average number of customers and average customer
use, which is affected by economic and weather conditions.
Energy sales statistics, stated as percentage changes from the
corresponding periods of the prior year, are shown below.
Quarter/Year-To Date
Ended March 31, 1996
Average
Customer Class Sales Use Cust
Residential 11.7% 10.6% 1.0%
Commercial 6.4 5.3 1.0
Industrial 5.0 3.0 2.0
Total 8.6 1.0 7.6
The large increase in Residential sales and average per customer
use for the current quarter/year-to-date period was due to colder
than normal temperatures this year compared to above normal
temperatures in the same period last year. Sales to the
Commercial sector increased due to ongoing economic growth and
colder temperatures. Casino expansions and construction around
Atlantic City, New Jersey were significant contributors to
economic growth. Approximately one quarter of the increase in
the number of Commercial customers was due to the continuing
popularity of the Company's night lighting programs. The
increase in Industrial sales was primarily due to the return of
sales to a customer that had previously been supplied by an
independent power producer.
Expenses
Total Operating Expenses for the quarter/year-to-date period
ended March 31, 1996 increased by 11.1%. Excluding depreciation
and taxes, Total Operating Expenses increased 12.1% due to an
increase in energy expense that accompanied increased sales and
an increase in maintenance costs associated with the jointly-
owned nuclear stations.
Energy expense reflects the amount of energy needed to meet load
requirements, as well as the various fuel and purchased energy
sources used and the operation of the LEC. Changes in costs
reflect the availability of low-cost generation from Company-
owned and purchased energy sources, the unit prices of the energy
sources used and changes in the needs of other utilities
participating in the regional power pool. The cost of energy is
recovered from customers primarily through the operation of the
LEC. Generally earnings are not affected by energy costs because
these costs are adjusted to match the associated LEC revenues.
However, the Company is voluntarily foregone recovery of certain
amounts of otherwise recoverable fuel costs through its Southern
New Jersey Economic Initiative (SNJEI), thereby reducing
earnings, as indicated below. Such reduced recoveries are
discretionary by the Company, and are influenced by competitive
and economic factors. Otherwise, in any period the actual amount
of LEC revenue recovered from customers will be greater or less
than the actual amount of energy cost incurred and eligible for
recovery in that period. Such respective overrecovery or
underrecovery of energy costs is recorded on the Consolidated
Balance Sheet as a liability or asset as appropriate. Amounts on
the balance sheet are recognized in the Consolidated Statement of
Income within Energy expense during the period in which they are
subsequently recovered through the LEC. The Company was
underrecovered by $31.9 million at March 31, 1996, as compared to
$31.4 million at December 31, 1995.
Energy expense for the quarter/year-to-date period increased by
28.5%. Excluding deferred energy costs, Energy expense for the
quarter/year-to-date period increased by 25.7%. The increase for
the current period was attributable to increased kilowatt-hour
sales in the quarter when compared to the same period in the
previous year, as well as the Company's use of alternative energy
sources to replace energy lost due to the continued shutdown of
the Salem units since May and June of 1995. The SNJEI reduced
after tax income for the quarter/year-to-date period by $1.7
million.
Sources of energy by fuel source for the current period are as
follows:
Quarter/Year-to-Date
Ended March 31, 1996
Coal 27%
Nuclear 13
Interchanged and Purchased 35
Nonutility Purchased 22
Oil and Natural Gas 3
Total 100%
Operations expense for the quarter/year-to-date period decreased
by 5.1% due to cost reduction initiatives employed by the Company
in 1995. Maintenance expense for the quarter/year-to-date period
increased 5.7% due to costs associated with the Salem and Hope
Creek nuclear stations.
<PAGE>
Depreciation expense for the quarter/year-to-date period
increased 4.1% due to the Company's ongoing additions to electric
plant in service.
State Excise Tax expense for the quarter/year-to-date period
increased 8.3% reflecting increased energy sales tax base for the
quarter.
Federal Income Tax expense for the quarter/year-to-date period
increased 26% due to higher taxable income compared to the same
period last year.
Total Interest charges for the quarter/year-to-date period
increased by 7.4% reflecting the increased interest related to an
increase in long and short term debt outstanding during the
period.
Preferred Stock Dividend Requirements decreased 20.5% for the
quarter/year-to-date period as a result of mandatory and optional
sinking fund redemptions of preferred stock during the second
half of 1995 and first quarter of 1996.
In December 1994, the Company recorded the expected costs of an
employee separation program. The balance of the accrued
separation costs on the Consolidated Balance Sheet at March 31,
1996 is $5.3 million compared to $7.5 million at December 31,
1995. The Company expects settlement of this obligation to be
substantially completed by the end of 1996.
The Company is a 7.41% owner of the Salem Nuclear Generating
Station (Salem) operated by PS. Salem Units 1 and 2 were taken
out of service on May 16, 1995 and June 7, 1995, respectively. A
thorough assessment of the equipment and management issues that
have affected the operation of Unit 2 and the station are being
resolved and necessary corrections are being made to assure safe
and reliable operation over the long term. Unit 2 is expected to
return to service in August 1996. Unit 1 is undergoing extended
testing of its steam generation equipment and its return has been
delayed for an indefinite period. The owners of Salem are
currently considering repair or replacement options for the steam
generators in Unit 1. If the generators are replaced, the
Company's estimated share of capital expenditures would range
from $11 million to $12.6 million. The Company's share of the
estimated costs of repairing the generators would range from $1.4
million to $2.8 million. If the option combines repair and
replacement, the Company's estimated share of capital and
maintenance costs would range from $12.5 million to $15.4
million. The incremental cost of replacement power during the
outages is approximately $1.4 million per month.
The Company is a 5% owner in the Hope Creek Nuclear Generating
Station (Hope Creek), also operated by PS. Hope Creek went into
a scheduled refueling and maintenance outage on November 11, 1995
which was extended to correct maintenance and performance
problems. The unit returned to service on March 25, 1996. The
incremental replacement power costs associated with the Hope
Creek outage was approximately $400 thousand per month.
The Company is subject to a performance standard for its five
jointly-owed nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of the Company's nuclear
units is expected to be below the reasonable performance, the
Company anticipates that it will incur a nuclear performance
penalty in 1996 of $2.1 million, net of tax. This penalty is
being recognized ratably throughout 1996 as it relates to
performance and replacement power costs incurred within interim
periods during the year. As of March 31, 1996, the Company has
accrued $528 thousand, net of tax, for the 1996 penalty.
The Company has a trust to fund the future costs of
decommissioning each of the five nuclear units in which it has an
ownership interest. The current annual funding amount of this
trust is based on estimates of the future cost of decommissioning
each unit derived from studies performed in 1987. In accordance
with BPU requirements, updated site specific studies are
underway. Amounts to be recognized and recovered in rates based
on the updated studies are not presently determinable. Results
of the studies are expected by the third quarter of 1996.
Part II. Other Information
Item 1. Legal Proceedings
Certain developments have occurred in connection with matters
previously reported under Part I, Item 1-Business in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
for Atlantic Energy, Inc. (AEI) and Atlantic City Electric
Company (ACE). In addition, certain new information is contained
herein.
Rate Matters
ACE's rates for electric service at retail are subject to the
approval of the New Jersey Board of Public Utilities (BPU).
Reference is made to Note 3 of the Notes to Financial Statements
for AEI and ACE filed herewith for information pertaining to the
petitions filed with the BPU concerning certain rate matters.
Such matters include changes in the Levelized Energy Clause (LEC)
revenues for the LEC periods June 1, 1995 through May 31, 1996
and June 1, 1996 through May 31, 1997; the BPU's investigation
into the Ratepayer Advocate's allegation of the double recovery
of capacity costs; and additional information concerning the BPU
investigation of the ongoing Salem Nuclear Generating Station
outage.
In accordance with the BPU's March 14, 1996 order, ACE filed
plant investment and cost information relating to Salem Nuclear
Station with the BPU on April 4, 1996. Such information was
based on the test year ending May 31, 1991 of ACE's last base
rate proceeding and relied on information provided by station
operator, Public Service Electric & Gas Company (PS), for
determining the allocation of plant investment among Salem 1,
Salem 2 and common facilities. The total revenue requirement
estimates are $12.460 million for Salem 1, and $22.129 million
for Salem 2 and common facilities. For further information
regarding Salem and the status of the BPU's investigation into
the Salem outage, refer to Note 3 of the accompanying Notes to
Financial Statements and Item 5-Other Information, below.
Litigation
On February 27, 1996, the Salem co-owners filed a Complaint in
United States District Court for the District of New Jersey
against Westinghouse Electric Corporation, the designer and
manufacturer of the Salem steam generators, under state and
Federal RICO statutes alleging fraud, negligent misrepresentation
and breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. On April 30, 1996,
Westinghouse filed an answer and a counterclaim for unpaid work.
PS has advised ACE that the amount being claimed by Westinghouse
in the counterclaim approximates $2.5 million. An answer to the
counterclaim will be filed on behalf of the co-owners.
On March 5, 1996, ACE filed a Complaint in Superior Court of
New Jersey against PS in connection with Salem, seeking
compensatory damages based on allegations of breach of contract
and negligence. ACE has been advised that the other nonoperating
co-owners of Salem have filed a similar complaint against PS in
the United States District Court for the Eastern District of
Pennsylvania. The final outcome of this litigation cannot be
determined at this time.
Item 5. Other Information
Construction Program
AEI's capital requirements for 1996 are estimated at $192
million. Cash construction expenditures for ACE are estimated at
$92 million and capital requirements for the subsidiaries of
Atlantic Energy Enterprises, an AEI subsidiary, are estimated at
$100 million.
Competition
On April 24, 1996, the Federal Energy Regulatory Commission
(FERC) issued a final rule, Order No. 888 (Final Rule), requiring
transmitting utilities to file open access transmission service
tariffs that contain minimum terms and conditions for non-
discriminatory transmission and certain ancillary services.
Under the Final Rule, all public utilities that own, control, or
operate interstate transmission facilities are required to offer
service to others under a pro forma tariff and must use the pro
forma tariff for their own wholesale energy sales and purchases.
The Final Rule also permits transmitting utilities to seek
recovery of legitimate, prudently incurred, and verifiable costs
that are "stranded" as a result of providing open access
transmission services pursuant to the Final Rule. FERC also
issued another final rule, Order No. 889, that requires utilities
to create an electronic system to share information about
available transmission capacity. On March 21, 1996, ACE filed an
open access transmission tariff in compliance with FERC
requirements. The tariff will become effective upon FERC's
approval.
The BPU has initiated a Phase II process in its Energy Master
Plan proceedings. Phase II is examining possible structural
changes to the state's electric utility industry and is
evaluating the issues surrounding potential stranded investment,
direct access, retail wheeling, tax policies and generation
divestiture. The working groups established to review these
issues have submitted their findings to the BPU staff. The BPU's
report is expected in late May 1996. Public hearings are
scheduled through June and July of 1996 with implementation
planned for January 1997.
On March 18, 1996, the State of New Jersey Department of
Treasury and the BPU released recommendations from a Joint Task
Force on Energy Tax Policy. The proposed changes to the energy
tax include eliminating the Gross Receipts and Franchise Tax
(GR&FT) which is currently collected by all utilities. Instead
of the traditional GR&FT, the proposal recommends imposing the
Corporate Business Tax on all utilities in the same manner as all
other corporations; the 6% State Sales and Use Tax is to be
applied to retail electric and natural gas sales; and, a
transitional energy facilities assessment tax is to be imposed on
electric and natural gas facilities. The energy facilities
assessment tax will be phased out over a five to six year period.
It is anticipated that a bill will be introduced into the State
Legislature in May for an effective date of January 1, 1997.
Nonutility Subsidiaries
In April 1995, Atlantic Jersey Thermal Systems, Inc. (AJTS), a
wholly-owned subsidiary of Atlantic Thermal System, Inc., filed a
petition with the BPU for an order declaring that AJTS not be
deemed a "public utility" under New Jersey law subject to the
BPU's jurisdiction by reasons of either its ownership and
operation of a proposed thermal energy production facility
(Project) serving certain customers in Atlantic City or the sale
of thermal energy therefrom. AJTS has proposed that its thermal
energy services would not constitute the operation of facilities
for public use, but will service a limited number of large,
sophisticated energy consumers through individually-negotiated
service agreements. Bond proceeds of $12.5 million from the
issuance of Thermal Energy Facilities Revenue Bonds by the New
Jersey Economic Development Authority are currently being held in
escrow pursuant to a Trust Indenture. Disbursement of the bond
proceeds is subject to certain conditions, including the issuance
of a final non-appealable order of the BPU approving the
financing of the Project or exempting AJTS and/or the Project
from, or otherwise declaring them not subject to, the
jurisdiction of the BPU. The BPU is expected to take action in
late May 1996, but the final outcome cannot be determined at this
time. For further information regarding these tax-exempt funds,
refer to AEI's Management Discussion and Analysis-Liquidity and
Capital Resources, herein.
<PAGE>
Nuclear Generating Station Developments
PS has advised ACE that as a result of several Boiling Water
Reactors (BWR) experiencing clogging of some emergency core
cooling system suction strainers, which supply water from the
suppression pool for emergency cooling of the core and related
structures, the NRC has issued a Bulletin dated May 6, 1996 to
operators of BWRs requesting measures be taken to minimize the
potential for clogging. The NRC has proposed three resolution
options, with a request that actions be completed by the end of
the unit's first refueling outage after January 1997.
Alternative resolution options will be subject to NRC approval.
ACE has been advised by PS that PS expects to submit its planned
actions and schedules within 180 days. ACE cannot predict what
other actions, if any, the NRC may take on this matter.
Salem Station
ACE is a 7.41% owner of Salem Nuclear Generating Station
(Salem) operated by PS. Salem Station consists of two 1,100
megawatt pressurized water nuclear reactors (PWR) representing
164,000 kilowatts (KW) of ACE's total installed capacity of
2,348,700 KW.
Salem Units 1 and 2 have been out of service since May 16,
1995 and June 7, 1995, respectively. ACE has been advised that
since that time, PS has been engaged in a thorough assessment of
each unit to identify and complete the work necessary to achieve
safe, sustained, reliable and economic operation.
PS has advised ACE that with respect to Salem Unit 1, the most
recent inspection of the steam generators is not complete, but
partial results from eddy current inspections in February 1996
show indications of degradation in a significant number of tubes.
PS has removed several tubes for laboratory examination to
confirm the results of the inspections. PS has been evaluating
several options which include repair of degraded tubes by
sleeving at locations found to contain crack-like indications,
replacement of the steam generators with existing unused steam
generators from a utility that had previously cancelled a new
plant, or repair for an interim period and then replacement of
the steam generators with newly constructed steam generators.
These evaluations are expected to be completed mid-May 1996.
Implementation of one or more of these options may enable the
return to service of Salem Unit 1 by mid-1997.
<PAGE>
PS has further advised ACE that the preliminary results of the
Salem Unit 2 inspections confirm that the condition of the Salem
Unit 2 steam generators is well within current repair limits. PS
had also removed several tubes from Salem Unit 2 steam generators
for laboratory analysis to confirm the results of testing.
Repairs to Salem Unit 2 steam generators will be completed in the
second quarter of 1996 to support the scheduled return to service
by the end of August 1996.
ACE had been advised by PS that PS had planned to return Salem
Unit 1 to service in the second quarter of 1996 and Salem Unit 2
in the third quarter of 1996. As a result of the extent of the
previously discovered degradation in the Salem Unit 1 steam
generators, PS is focusing its efforts on the return of Salem
Unit 2 to service by the end of August 1996. The conduct of the
additional steam generator inspections and testing on Salem Unit
2 is not expected to affect the timing of its restart. The
timing of the restart is subject to completion of the
requirements of the restart plan to the satisfaction of PS and
the NRC, which encompasses a review and improvement of personnel,
process and equipment issues.
PS has advised ACE that the restart plan status is as follows:
(i) Two of the five NRC Confirmatory Action Letter
requirements were recognized as complete by the
NRC on February 13, 1996. A third item has been
addressed by PS and approval by the NRC is
pending;
(ii) Comprehensive action plans concerning people and
process issues are approximately 85% task
complete;
(iii) A detailed Salem Unit 2 schedule integrating
equipment maintenance, upgrades and testing has
been developed and work is on schedule.
PS has advised ACE that based on the above, PS is not aware of
any constraints which will prevent Salem Unit 2 from returning to
service by the end of August 1996.
ACE has been advised that PS is currently considering three
repair and replacement options for the steam generators in Salem
Unit 1. PS has advised ACE that the first option, repairing the
degraded tubes by sleeving, has an estimated cost of $19 million
to $38 million, of which ACE's share would be $1.4 million to
$2.8 million, and would permit Salem Unit 1 to operate for up to
one cycle. This option would, however, require further repair,
expenditures to permit the unit to continue to operate after this
18-month period. The second option, replacing the steam
generators with unused steam generators from a utility that had
previously cancelled a new plant, has an estimated cost of $150
million to $170 million, of which ACE's share would be $11.1
million to $12.6 million, and would permit the plant to operate
for the remainder of its license term. The third option would
combine the first option's repair with replacement by a newly
constructed steam generator at the end of three years and would
cost approximately $169 million to $208 million, of which ACE's
share would be $12.5 million to $15.4 million. This option could
involve additional inspections, repairs and/or mid-cycle outage
costs. Implementation of one or more these options may enable
Salem Unit 1 to return to service by mid-1997. Evaluations of
the repair/replacement options and decisions by the Salem co-
owners on the preferred course of action are expected to be
completed by the end of the second quarter of 1996.
ACE continues to evaluate the legal, regulatory and
administrative implications of these events. At this time, it is
impossible to predict the outcome of participation in any
regulatory, administrative or civil proceedings and the ultimate
responsibility for such costs and penalties.
Hope Creek
ACE is a 5.0% owner of the Hope Creek Nuclear Generating
Station which is operated by PS. ACE has been advised that Hope
Creek completed its sixth refueling and maintenance outage on
March 25, 1996.
PS has advised ACE that by letter dated January 29, 1996, the
NRC requested a meeting with PS senior management to discuss its
concerns regarding declining trends in performance at Hope Creek.
Meetings were held with senior NRC officials on May 6th and 7th
to discuss performance at both Hope Creek and Salem. The NRC
acknowledged fundamental changes in PS's nuclear business unit
and that those changes provided an overall positive impression.
The NRC said that PS must demonstrate the integrity of station
design and licensing basis of both units, a generic issue
presently being pursued by the NRC. The NRC staff indicated that
it will continue to closely monitory performance at Salem and
Hope Creek, including emergency preparedness performance and the
effectiveness of PS's corrective action program.
Item 6. Exhibits and Reports on 8-K
Exhibits: See Exhibit Index Attached
Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Atlantic Energy, Inc.
Atlantic City Electric Company
(Registrant)
Date: May 15, 1996 By: /s/L. M. Walters
L. M. Walters
Treasurer of Atlantic Energy, Inc.
and Vice President, Treasurer and
Assistant Secretary of Atlantic
City Electric Company
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedules for Atlantic Energy, Inc. and
Atlantic City Electric Company for periods ended
March 31, 1996.
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