SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A
(x) Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter ended September 30, 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. 52,704,052 shares (as of November 8, 1996)
All of the outstanding shares of Common Stock of Atlantic City
Electric Company are owned by Atlantic Energy, Inc.
<PAGE>
Atlantic Energy, Inc.
and
Atlantic City Electric Company
Form 10-Q/A
For the Quarter Ended
September 30, 1996
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Atlantic Energy, Inc.
Consolidated Statement of Income 2
Consolidated Statement of Income
and Retained Earnings 3
Consolidated Statement of Cash Flows 4
Consolidated Balance Sheet 5
Atlantic City Electric Company
Consolidated Statement of Income 7
Consolidated Statement of Income
and Retained Earnings 8
Consolidated Statement of Cash Flows 9
Consolidated Balance Sheet 10
Notes to Financial Statements
Atlantic Energy, Inc. and
Atlantic City Electric Company 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Atlantic Energy, Inc. and
Atlantic City Electric Company 20
Signatures 29
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
PART I. Financial Information
ITEM I. Financial Statements
Atlantic Energy, Inc. (AEI) is the parent of Atlantic City
Electric Company (ACE) and Atlantic Energy Enterprises, Inc.
(AEE) which are wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements of AEI
include the accounts of AEI and subsidiaries and 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 AEI's 1996 proxy
statement for the annual meeting of shareholders and the 1995 AEI
Annual Report on Form 10-K, which are filed with the Securities
and Exchange Commission, should be read in conjunction with this
report. Note 1 of such annual reports specifically identifies
the significant accounting policies of AEI. The consolidated
balance sheet for AEI contained in the financial statements
presented herein that is labeled December 31, 1995 was derived
from the audited consolidated balance sheet presented in AEI's
1996 proxy statement for the annual meeting of shareholders and
the 1995 AEI Annual Report on Form 10-K. ACE is the principal
subsidiary of AEI, and as such, the consolidated financial
information of AEI is principally of ACE, unless the financial
information indicates otherwise.
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars,except per share data)
Quarter Ended September 30,
1996 1995
(unaudited)
Operating Revenues-Electric $281,965 $302,685
Operating Expenses:
Energy 66,371 62,513
Purchased Capacity 49,645 49,955
Operations 34,882 37,645
Maintenance 10,555 7,473
Depreciation and Amortization 20,265 19,620
State Excise Taxes 29,392 31,100
Federal Income Taxes 17,227 25,891
Other Taxes 2,284 2,006
Total Operating Expenses 230,621 236,203
Operating Income 51,344 66,482
Other Income and (Expense):
Allowance for Equity Funds Used
During Construction 205 169
Other-Net (182) 1,710
Total Other Income and (Expense) 23 1,879
Interest Charges:
Interest on Long Term Debt 15,042 15,658
Other Interest Expense 1,494 605
Total Interest Charges 16,536 16,263
Allowance for Borrowed Funds Used
During Construction (193) (434)
Net Interest Charges 16,343 15,829
Less Preferred Stock Dividend
Requirements of Subsidiary 2,457 3,787
Net Income $ 32,567 $ 48,745
Average Number of Shares of Common 52,702 52,543
Stock Outstanding (000's)
Per Common Share:
Earnings $.62 $.93
Dividends Declared $.385 $.385
Dividends Paid $.385 $.385
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Thousands of Dollars, except per share data)
Year-to-Date September 30,
1996 1995
(unaudited)
Operating Revenues-Electric $752,968 $727,543
Operating Expenses:
Energy 171,648 146,905
Purchased Capacity 146,877 142,939
Operations 110,050 111,169
Maintenance 33,004 22,204
Depreciation and Amortization 60,490 58,539
State Excise Taxes 80,391 78,460
Federal Income Taxes 30,842 38,230
Other Taxes 7,656 7,181
Total Operating Expenses 640,958 605,627
Operating Income 112,010 121,916
Other Income:
Allowance for Equity Funds Used
During Construction 697 829
Other-Net 2,603 5,558
Total Other Income 3,300 6,387
Interest Charges:
Interest on Long Term Debt 45,179 44,804
Other Interest Expense 4,124 2,513
Total Interest Charges 49,303 47,317
Allowance for Borrowed Funds Used
During Construction (820) (1,158)
Net Interest Charges 48,483 46,159
Less Preferred Stock Dividend
Requirements of Subsidiary 8,475 11,362
Net Income 58,352 70,782
Retained Earnings at Beginning of Period 249,741 249,181
308,093 319,963
Dividends Declared on Common Stock (60,871) (61,000)
Retained Earnings at End of Period $247,222 $258,963
Average Number of Shares of Common
Stock Outstanding (000's) 52,702 52,908
Per Common Share:
Earnings $1.11 $1.34
Dividends Declared $1.155 $1.155
Dividends Paid $1.155 $1.155
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars) Year-to-Date September 30,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 58,352 $ 70,782
Deferred Purchased Power Costs 12,310 11,785
Deferred Energy Costs (2,134) (15,901)
Depreciation and Amortization 60,490 58,539
Deferred Income Taxes-Net 2,289 11,201
Prepaid State Excise Taxes 7,170 7,170
Employee Separation Costs (4,805) (15,619)
Net Changes in Working Capital Components:
Accounts Receivable and Unbilled Revenues(12,864) (28,298)
Accounts Payable and Other
Current Liabilities 8,448 (14,453)
Inventory 2,092 8,462
Other 13,843 (4,434)
Preferred Stock Dividend Requirements
of Subsidiary 8,475 11,362
Other-Net (18,194) 4,676
Net Cash Provided by Operating Activities 135,472 105,272
Cash Flows Of Investing Activities:
Utility Cash Construction Expenditures (69,947) (68,574)
Leased Nuclear Fuel Material (2,385) (6,262)
Nuclear Decommissioning Trust Fund
Deposits (4,818) (4,818)
Utility Plant Removal Costs (8,322) (3,924)
Other-Net 5,785 806
Net Cash Used by Investing Activities (79,687) (82,772)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt 20,500 126,704
Retirement and Maturity of Long Term Debt (12,266) -
Redemption of Preferred Stock (47,531) -
Increase in Short Term Debt 57,655 11,400
Proceeds-Nuclear Fuel Lease Obligations 2,385 6,262
Proceeds from Common Stock Issued 3,985 -
Purchases of Common Stock (1,823) (29,626)
Dividends Declared on Preferred Stock (8,475) (11,362)
Dividends Declared on Common Stock (60,871) (61,000)
Other-Net (408) (789)
Net Cash (Used) Provided by Financing
Activities (46,849) 41,589
Net Increase in Cash and
Temporary Investments 8,936 64,089
Cash and Temporary Investments,
beginning of period 5,691 5,114
Cash and Temporary Investments,
end of period $ 14,627 $ 69,203
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,492,081 $2,429,176
Less Accumulated Depreciation 853,134 794,479
Net 1,638,947 1,634,697
Construction Work in Progress 120,075 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 37,695 40,878
Electric Utility Plant-Net 1,802,321 1,801,786
Investments and Nonutility Property:
Investment in Leveraged Leases 79,500 78,959
Nuclear Decommissioning Trust Fund 68,946 61,802
Nonutility Property and Equipment-Net 32,024 22,743
Other Investments and Funds 49,530 52,780
Total Investments and Nonutility
Property 230,000 216,284
Current Assets:
Cash and Temporary Investments 14,627 5,691
Accounts Receivable:
Utility Service 73,762 66,099
Miscellaneous 26,189 17,477
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 38,204 41,515
Fuel (at average cost) 24,000 25,459
Materials and Supplies (at average cost) 24,801 25,434
Working Funds 15,729 14,421
Deferred Energy Costs 33,568 31,434
Prepaid Excise Taxes 29,160 10,753
Other 11,719 13,339
Total Current Assets 288,259 248,322
Deferred Debits:
Unrecovered Purchased Power Costs 87,507 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 57,104 64,274
Unamortized Debt Costs 36,445 39,004
Other Regulatory Assets 59,237 54,568
Other 32,950 10,983
Total Deferred Debits 359,101 354,504
Total Assets $2,679,681 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1996
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1996 1995
(unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shareholders' Equity:
Common Stock $ 565,598 $ 563,436
Retained Earnings 247,222 249,741
Total Common Shareholders' Equity 812,820 813,177
Preferred Stock of Atlantic Electric:
Not Subject to Mandatory Redemption 30,000 40,000
Subject to Mandatory Redemption 90,000 114,750
Long Term Debt 829,799 829,856
Total Capitalization
(excluding current portion) 1,762,619 1,797,783
Current Liabilities:
Cumulative Preferred Stock Redemption
Requirement 10,000 22,250
Long Term Debt 74,100 65,247
Short Term Debt 87,700 30,545
Accounts Payable 55,359 60,858
Taxes Accrued 40,159 3,450
Interest Accrued 17,186 20,315
Dividends Declared 22,598 23,490
Accrued Employee Separation Costs 2,683 7,488
Deferred Income Taxes 2,438 2,569
Other 34,501 20,554
Total Current Liabilities 346,724 256,766
Deferred Credits and Other Liabilities:
Deferred Income Taxes 428,309 425,875
Deferred Investment Tax Credits 47,211 49,112
Capital Lease Obligations 37,006 40,227
Other 57,812 51,133
Total Deferred Credits and
Other Liabilities 570,338 566,347
Total Liabilities and Capitalization $2,679,681 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY 3rd Quarter, 1996
The Consolidated Financial Statements of ACE include the accounts
of ACE and its subsidiary, which is wholly-owned, and 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. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The notes to the consolidated financial
statements accompanying the 1995 ACE 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
ACE. The consolidated balance sheet for ACE 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 ACE Annual Report on
Form 10-K.
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
Quarter Ended September 30,
1996 1995
(unaudited)
Operating Revenues-Electric $282,577 $303,031
Operating Expenses:
Energy 66,371 62,513
Purchased Capacity 49,645 49,955
Operations 34,896 37,437
Maintenance 10,568 7,483
Depreciation and Amortization 20,265 19,620
State Excise Taxes 29,392 31,100
Federal Income Taxes 17,227 25,891
Other Taxes 2,284 2,006
Total Operating Expenses 230,648 236,005
Operating Income 51,929 67,026
Other Income:
Allowance for Equity Funds Used During
Construction 205 169
Miscellaneous Income-Net (180) 1,300
Total Other Income 25 1,469
Interest Charges:
Interest on Long Term Debt 15,042 15,658
Other Interest Expense 1,494 605
Total Interest Charges 16,536 16,263
Allowance for Borrowed Funds Used
During Construction (193) (434)
Net Interest Charges 16,343 15,829
Net Income 35,611 52,666
Less Preferred Dividend Requirements 2,457 3,787
Balance Available for Common Shareholder $ 33,154 $ 48,879
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY 3rd Quarter, 1996
CONSOLIDATED STATEMENT OF
INCOME AND RETAINED EARNINGS
(Thousands of Dollars)
Year-to-Date September 30,
1996 1995
(unaudited)
Operating Revenues-Electric $754,084 $727,943
Operating Expenses:
Energy 171,648 146,905
Purchased Capacity 146,877 142,939
Operations 110,135 111,113
Maintenance 33,034 22,230
Depreciation and Amortization 60,490 58,539
State Excise Taxes 80,391 78,460
Federal Income Taxes 30,842 38,230
Other Taxes 7,656 7,181
Total Operating Expenses 641,073 605,597
Operating Income 113,011 122,346
Other Income:
Allowance for Equity Funds Used During
Construction 697 829
Miscellaneous Income-Net 3,165 6,540
Total Other Income 3,862 7,369
Interest Charges:
Interest on Long Term Debt 45,179 44,804
Other Interest Expense 4,124 2,513
Total Interest Charges 49,303 47,317
Allowance for Borrowed Funds Used
During Construction (820) (1,158)
Net Interest Charges 48,483 46,159
Net Income 68,390 83,556
Retained Earnings at Beginning of Period 252,484 249,767
320,874 333,323
Dividends Declared:
Cumulative Preferred Stock (8,475) (11,362)
Common Stock (61,871) (61,014)
Total Dividends Declared (70,346) (72,376)
Capital Stock Expense and Other (251) -
Retained Earnings at End of Period $250,277 $260,947
Earnings for Common Stock:
Net Income $ 68,390 $ 83,556
Less Preferred Dividend Requirements 8,475 11,362
Balance Available for Common Shareholder $ 59,915 $ 72,194
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY 3rd Quarter, 1996
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
Year-to-Date September 30,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 68,390 $ 83,556
Deferred Purchased Power Costs 12,310 11,785
Deferred Energy Costs (2,134) (15,901)
Depreciation and Amortization 60,490 58,539
Deferred Federal Income Taxes-Net 995 8,685
Prepaid State Excise Taxes 7,170 7,170
Employee Separation Costs (4,805) (15,619)
Net Changes in Working Capital Components:
Accounts Receivable and Unbilled Revenue(15,548) (28,370)
Accounts Payable and Other Current 9,052 (14,317)
Liabilities
Inventory 2,105 8,462
Other 10,209 (1,799)
Other-Net 4,036 9,020
Net Cash Provided by Operating
Activities 152,270 111,211
Cash Flows Of Investing Activities:
Cash Construction Expenditures (69,947) (68,574)
Leased Nuclear Fuel Materials (2,385) (6,262)
Nuclear Decommissioning Trust Fund
Deposits (4,818) (4,818)
Plant Removal Costs (1,324) (3,924)
Other-Net 58 6,305
Net Cash Used by Investing Activities (78,416) (77,273)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt - 104,404
Retirement and Maturity of
Long Term Debt (12,266) -
Redemption of Preferred Stock (47,531) -
Increase(Decrease)in Short Term Debt 57,155 (8,600)
Proceeds from Nuclear Fuel Lease
Obligations 2,385 6,262
Capital Contributions 2,131 313
Dividends Declared on Preferred Stock (8,475) (11,362)
Dividends Declared on Common Stock (61,871) (61,014)
Other-Net (421) (833)
Net Cash (Used) Provided by Financing
Activities (68,893) 29,170
Net Increase in Cash and
Temporary Investments 4,961 63,108
Cash and Temporary Investments,
beginning of period 3,987 3,459
Cash and Temporary Investments,
end of period $ 8,948 $ 66,567
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY 3rd Quarter, 1996
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,492,081 $2,429,176
Less Accumulated Depreciation 853,134 794,479
Net 1,638,947 1,634,697
Construction Work in Progress 120,075 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 37,695 40,878
Electric Utility Plant-Net 1,802,321 1,801,786
Investments and Nonutility Property:
Nuclear Decommissioning Trust Fund 68,946 61,802
Other Property, Investments and Funds 3,512 2,077
Total Investments and Nonutility
Property 72,458 63,879
Current Assets:
Cash and Temporary Investments 8,948 3,987
Accounts Receivable:
Utility Service 73,762 66,099
Miscellaneous 18,775 17,379
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 38,204 41,515
Fuel (at average cost) 23,987 25,459
Materials and Supplies (at average cost) 24,801 25,434
Working Funds 15,729 14,420
Deferred Energy Costs 33,568 31,434
Prepaid Excise Taxes 29,160 10,753
Prepayments & Other 10,545 10,249
Total Current Assets 273,979 243,429
Deferred Debits:
Unrecovered Purchased Power Costs 87,507 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 57,104 64,274
Unamortized Debt Costs 35,904 38,924
Other Regulatory Assets 59,237 54,568
Other 13,490 9,372
Total Deferred Debits 339,100 352,813
Total Assets $2,487,858 $2,461,907
SEE NOTES TO CONSOLIDATED STATEMENTS
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY 3rd Quarter, 1996
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, 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 (1,881) (2,131)
Retained Earnings 250,277 252,484
Total Common Shareholder's Equity 799,334 799,159
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption 30,000 40,000
Subject to Mandatory Redemption 90,000 114,750
Long Term Debt 802,299 802,356
Total Capitalization
(excluding current portion) 1,721,633 1,756,265
Current Liabilities:
Preferred Stock Redemption
Requirement 10,000 22,250
Capital Lease Obligations 688 650
Long Term Debt-Current Portion 100 12,247
Short Term Debt 87,700 30,545
Accounts Payable 55,359 60,831
Federal Income Taxes Payable-Affiliate 33,816 11,574
Other Taxes Accrued 6,339 3,382
Interest Accrued 16,596 19,961
Dividends Declared 22,598 23,490
Employee Separation Costs 2,683 7,488
Deferred Income Taxes 2,438 2,569
Other 31,680 17,156
Total Current Liabilities 269,997 212,143
Deferred Credits and Other Liabilities:
Deferred Income Taxes 355,344 354,218
Deferred Investment Tax Credits 47,211 49,112
Capital Lease Obligations 37,006 40,227
Other 56,667 49,942
Total Deferred Credits and
Other Liabilities 496,228 493,499
Total Liabilities and Capitalization $2,487,858 $2,461,907
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (audited)
NOTE 1. Organizational and Other Matters of AEI and Subsidiaries
Atlantic Energy, Inc. (AEI) 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), CoastalComm, Inc. (CCI) and Atlantic Energy Technology,
Inc. (AET). AEE also has a 50% equity interest in Enerval, LLC.
On July 2, 1996, AEI formed a new subsidiary, Atlantic Energy
International, Inc. (AEII), to provide utility consulting
services and equipment sales to international markets. On
August 9, 1996, AEE through its subsidiary ATE, joined with an
unaffiliated company to create EnerTech Capital Partners, L.P.,
an equity limited partnership that will invest in and support a
variety of energy related technology growth companies. ACE is
the principal subsidiary of AEI. The consolidated financial
information of AEI is principally the financial information of
ACE unless indicated otherwise. Certain prior year amounts have
been reclassified to conform to the current year reporting.
On August 12, 1996, the Boards of Directors of AEI and Delmarva
Power & Light Company (DP&L) jointly announced an agreement to
merge the companies into a yet-to-be-named new company. The
merger is expected to be a tax free, stock-for-stock transaction
accounted for as a purchase. Under the terms of the agreement,
DP&L shareholders will receive one share of the new company's
common stock for each share of DP&L common stock held. AEI
shareholders will receive 0.75 shares of the new company's common
stock and 0.125 shares of the new company's Class A common stock
for each share of AEI common stock held. In order for the merger
to be effective, approvals are needed by the shareholders of both
companies and a number of Federal and state regulatory agencies.
The process of securing the necessary approvals has begun and may
take from 12 to 18 months to complete. Selected information on
each company at December 31, 1995 and the year then ended follows
(in thousands, except for number of customers):
AEI DP&L
Operating Revenues $953,137 $995,103
Net Income $81,768 $107,546
Assets $2,620,896 $2,866,685
Electric Customers 473,588 436,650
Gas Customers - 98,417
Combination of the above respective amounts would not necessarily
be reflective of the amounts that would result from a
consolidation of the companies.
NOTE 2. RATE MATTERS OF ACE
By an Order dated March 14, 1996 the New Jersey Board of Public
Utilities (BPU) initiated an investigation of the ongoing outage
at the Salem Nuclear Generating Station (Salem). ACE has a 7.41%
ownership in Salem which is operated by Public Service Electric
and Gas Company (PS). By its Order the BPU declared the base
rates associated with ACE'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, in an Order dated
June 26, 1996, declared the base rates associated with ACE's
ownership in Salem Unit 2 interim and subject to refund. The BPU
voted on July 31, 1996 to include Unit 2 in the hearings
scheduled for October to determine if both units were still
considered used and useful. (See Note 5 for further information
regarding the ongoing outage at Salem). On October 22, 1996,
ACE, the New Jersey Ratepayer Advocate and the Staff of the BPU
signed a stipulation settling the ongoing outage of the Salem
Station. Under the terms of the stipulation, ACE will provide
credits to customers totaling $12 million. The credits will be
made during January and February 1997 and will be based on
customer usage between January 1, 1996 and October 31, 1996. The
stipulation also provides that replacement power costs incurred,
up to the agreed upon return-to-service dates (June 30, 1997 for
Unit I and December 31, 1996 for Unit 2) will be recoverable in
the next annual Levelized Energy Clause (LEC) revenue proceeding.
Should either unit not return to service by its agreed upon
return-to-service date, replacement power costs incurred after
such dates will not be recoverable by ACE. The performance of
the Salem Units will not be included in the calculation of the
Nuclear Performance Standard for the period each unit was taken
out of service to each unit's respective return-to-service date.
As such, ACE will not be subject to a penalty or reward under the
Nuclear Performance Standard for 1995 or 1996. In regard to the
litigation pending between ACE and PS, discussed in Note 5, the
stipulation provides that the first $8 million of any net
recovery, if any, by ACE as the result of the litigation (the
gross amount of recovery less litigation expenses) will not be
subject to any claim on behalf of the customers. Also, any
settlement amounts received for damages incurred after the agreed
upon return-to-service dates will not be subject to refund to
customers, since ACE will bear the costs of all replacement power
costs incurred.
On March 29, 1996, ACE filed with the BPU a petition requesting a
$49.7 million increase in annual LEC revenues to be effective
June 1, 1996. A stipulation was reached by the parties, and
approved by the BPU on July 17, 1996, allowing ACE to implement
provisional rates resulting in an increase of annual LEC revenues
of $27.6 million. The stipulation provided for the continuation
of BPU hearings to decide on the following LEC rate issues: $27.8
million for the estimated replacement power costs related to the
Salem Units 1 and 2 ongoing outages; $1.7 million in deferred
replacement power costs associated with a 1994 Salem Unit 1
outage and $1.7 million in New Jersey emission fees. The
provisional LEC rates also include the deferral of $6.4 million
in 1996/97 LEC costs to be recovered without carrying costs in
the next LEC period. On October 22, 1996, ACE, the Ratepayer
Advocate and the Staff of the BPU entered into a stipulation
regarding certain of the issues concerning the LEC petition.
This stipulation incorporates the resolution contained in the
previously discussed Salem outage stipulation relating to the
$27.8 million of estimated replacement power costs associated
with the current Salem outage. Also under the stipulation, the
$1.7 million of replacement power costs for the 1994 Salem Unit 1
outage will be eligible for recovery in the next LEC period. At
this time, the issue of the $1.7 million in emission fees remains
unresolved. Pending resolution of the emission fees issue, the
$27.6 million annual LEC increase remains provisional. The
provisional LEC rates continue to include a voluntary deferral by
ACE of $6.4 million in 1996/97 LEC costs, which are 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 incurred
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
generation projects through the LEC, provides the utilities with
a double recovery of nonutility projects' capacity costs
concurrently through base rates and LEC rates. On October 22,
1996, ACE, the Ratepayer Advocate and the Staff of the BPU signed
a stipulation which settles the alleged over recovery of capacity
costs. By the terms of the stipulation ACE will provide credits
to customers totaling $1.0 million during the months of January
and February 1997 based on customers usage between January 1,
1996 and October 31, 1996. As a result of this stipulation, the
parties agree that all issues with regard to any alleged
overrecovery of nonutility capacity costs are resolved.
Each of the three above described stipulations has been submitted
to the BPU for acceptance and approval. A public hearing is
scheduled to review these stipulations on November 25, 1996.
Net income reflects a net charge of $5.7 million, net of tax, or
$.11 per share, that ACE recorded in the third quarter of 1996 as
a result of the stipulations regarding the Salem outage and
double recovery of capacity costs. The net charge consists of a
$13 million reduction in revenues, a reduction of $4.2 million in
operations expense for amounts previously recorded for the
performance penalty and a Federal income tax benefit of $3.1
million.
<PAGE>
NOTE 3. DEBT AND PREFERRED SECURITIES
AEI
At September 30, 1996 and December 31, 1995, AEI had $41.5
million and $34.5 million, respectively, outstanding under its
revolving credit and term loan facility. Proceeds have been used
for general corporate purposes.
ACE
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 September 30, 1996 are
approximately $126 million and $816 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 outstanding $87.7 million at
September 30, 1996 and $30.5 million at December 31, 1995.
On October 1, 1996, Atlantic Capital I, a newly formed business
trust, issued $70 million of 8.25% Cumulative Quarterly Income
Preferred Securities (QUIPS) with a stated liquidation preference
of $25 each. Atlantic Capital I, established for the sole
purpose of issuing the QUIPS, invested the proceeds in 8.25%
Junior Subordinated Deferrable Interest Debentures (QUIDS) of
ACE. ACE reserves the right to defer payment of interest on the
debentures for up to 20 consecutive quarters. During such a
deferral period, certain dividend restrictions would apply to
ACE's capital stock. The QUIPS and QUIDS are scheduled to mature
on October 1, 2026, but such maturity may be extended to a date
not later than October 1, 2045, if certain conditions are met.
Proceeds from the sale of the QUIDS will be used to fund the
redemption and/or purchase of shares of ACE's preferred stock.
Since Atlantic Capital I is a grantor trust of ACE, the
transactions of the trust are consolidated into the financial
statements of ACE.
On August 1, 1996, ACE redeemed 200,000 shares of its $8.20 No
Par Preferred Stock at a price of $100 per share in accordance
with the annual sinking fund requirement. ACE, on September 16,
1996, also redeemed 100,000 shares of its 7.52% Preferred Stock
$100 Par Value at a price of $101.88 per share and the remaining
50,000 shares of its $8.25 No Par Preferred stock at a price of
$104.45 per share. On August 29, 1996, a tender offer was made
for the 700,000 shares of ACE's $7.80 No Par Preferred Stock.
As a result of the offer, 370,500 shares were tendered at a price
of $111.00 per share during October 1996. Under a separate
agreement for this preferred stock series, which expired November
8, 1996, ACE redeemed an additional 50,000 shares at $111.00 per
share. In accordance with BPU approval, premiums associated with
these redemptions are being deferred and amortized over the life
of the QUIDS. The redemptions were funded by short-term debt,
which was paid off in October by the proceeds of the QUIDS.
AEE
At September 30, 1996 and December 31, 1995, ATE had outstanding
$24.5 million and $18.5 million, respectively, under its
revolving credit and term loan facility. The estimated aggregate
fair market value of ATE's 7.44% Senior Notes at September 30,
1996 and December 31, 1995 was approximately $15 million and $16
million, respectively.
In August 1996, ATS established a $100 million revolving credit
and term loan facility, of which up to $20 million can be used to
establish letters of credit. Any loan amounts outstanding on
February 2, 1998 will convert into a five year term loan.
Interest rates on the borrowings will be based on senior debt
ratings and on the borrowing options selected by ATS. As of
September 30, 1996, $8 million was outstanding under this
facility. Commitment fees on the unused credit line were not
significant. This facility will be used to satisfy certain
associated company payables and for other general corporate
purposes, including construction of the Midtown Energy Center in
Atlantic City, New Jersey which began in November 1996.
NOTE 4. COMMON STOCK OF AEI
As of September 30, 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 AEI's Equity Incentive Plan and ACE's benefit plans.
NOTE 5. CONTINGENCIES OF ACE
ACE is a 7.41% owner of the Salem Units operated by PS. Salem
Units 1 and 2 were taken out of service on May 16, 1995 and
June 7, 1995, respectively. Their return-to-service dates are
subject to completion of testing, analysis, repair activity and
Nuclear Regulatory Commission concurrence that they are prepared
to restart. Salem Unit 1 is scheduled to return to service by
mid-year 1997, after completion of refurbishment, including
replacement of its steam generators. Unused steam generators
have been acquired with an estimated cost, including
installation, between $150 million and $170 million, of which
ACE's share is between $11.1 million and $12.6 million. In
addition, PS estimates the cost of disposal of the old steam
generators could be as much as $20 million. ACE's estimated
share would be $1.5 million. Repair and testing of Unit 2 is
expected to continue well into the fourth quarter of 1996. ACE
has been advised by PS that Salem Unit 2 is currently expected to
return to service early in the first quarter of 1997 and is not
expected to impact the restart of Salem Unit 1. A meeting with
the NRC to discuss restart of Salem Unit 2 is scheduled for
November 18, 1996. ACE's share of expenses associated with the
restart of Salem Units 1 and 2 are $7.8 million for the year-to-
date period ended September 30, 1996.
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 Federal and
state 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.
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. Underperformance
results in penalties which are not permitted to be recovered from
customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear
performance penalty for 1995 and 1996 and had recorded a
provision for such. According to the Salem outage stipulation
agreement on October 22, 1996, as previously discussed, the
performance of Salem Units 1 and 2 shall not be included in the
calculation of a nuclear performance penalty for the period each
unit was taken out of service up to each unit's respective
return-to-service date. The parties have also agreed, that for
the years 1995 and 1996, there will be no penalty or reward under
the nuclear performance standard. ACE had recorded a 1995
performance penalty of $875 thousand, net of tax, and
$1.9 million, net of tax, year-to-date September 30, 1996. These
amounts have been incorporated into the net amount recorded for
the Salem stipulation as discussed in Note 2.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $700 thousand per unit per month.
ACE's replacement power costs for the current outage for each
unit, up to the agreed upon return-to-service dates, will be
recoverable in rates in ACE's next LEC proceeding. Replacement
power costs incurred after the respective agreed upon return-to-
service dates for the Salem Units will not be recoverable in
rates.
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 were completed as of
September 1996. ACE is currently evaluating the results of the
studies and has not fully assessed the impacts upon amounts to be
recognized and recovered in rates based on these updated studies.
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
Information pertaining specifically to ACE and its subsidiary is
included in Note 1, Note 2, Note 3 and Note 5 of the Consolidated
Financial Statements of AEI and is incorporated by reference.
<PAGE>
ITEM 2: 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 Atlantic Energy, Inc. (AEI)
interim financial condition and results of operations. Atlantic
City Electric Company (ACE) is the principal subsidiary of AEI
and the following discussion focuses on ACE unless indicated
otherwise. 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 AEI's 1996 proxy statement for
the annual meeting of shareholders and the 1995 AEI and ACE
Annual Reports on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
AEI
The operating needs of AEI, representing those of the
consolidated group, are dependent upon the results of its
subsidiaries, principally ACE.
At September 30, 1996 and December 31, 1995, AEI had $41.5
million and $34.5 million outstanding, respectively, under its
revolving credit and term loan facility.
ACE
At September 30, 1996 ACE had $87.7 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 general corporate purposes and to fund
redemptions of ACE's preferred stock as discussed below.
On October 1, 1996, Atlantic Capital I, a newly formed business
trust, issued $70 million of 8.25% Cumulative Quarterly Income
Preferred Securities (QUIPS) with a stated liquidation preference
of $25 per share. Atlantic Capital I, established for the sole
purpose of issuing the QUIPS, invested the proceeds into the
8.25% Junior Subordinated Deferrable Interest Debentures (QUIDS)
of ACE. ACE reserves the right to defer payment of interest on
the debentures for up to 20 consecutive quarters. During such a
deferral period, certain dividend restrictions would apply to
ACE's capital stock. The QUIPS and QUIDS are scheduled to mature
on October 1, 2026, but such maturity may be extended to a date
not later than October 1, 2045, if certain conditions are met.
Proceeds from the sale of the QUIDS will be used to fund the
redemption and/or purchase of shares of ACE's preferred stock.
Since Atlantic Capital I is a grantor trust of ACE, the
transactions of the trust are consolidated into the financial
statements of ACE.
<PAGE>
On August 1, 1996, ACE redeemed 200,000 shares of its $8.20 No
Par Preferred Stock at a price of $100 per share in accordance
with the annual sinking fund requirement. ACE, on
September 16, 1996, also redeemed 100,000 shares of its 7.52%
Preferred Stock $100 Par Value at a price of $101.88 per share
and the remaining 50,000 shares of its $8.25 No Par Preferred
stock at a price of $104.45 per share. On August 29, 1996, a
tender offer was made for 700,000 shares of ACE's $7.80 No Par
Preferred stock. As a result of the offer, 370,500 shares were
tendered at a price of $111.00 per share during October 1996.
Under a separate agreement for this preferred stock series, which
expired November 8, 1996, ACE redeemed an additional 50,000
shares at $111.00 per share. In accordance with BPU approval,
premiums associated with these redemptions are being deferred and
amortized over the life of the QUIDS. The redemptions were
funded by short term debt, which was paid off in October by the
proceeds of the QUIDS.
The increase in the Utility Service Accounts Receivable Balance
on the Consolidated Balance Sheet at September 30, 1996 when
compared to December 31, 1995 reflects the effects of ACE's July
1995 $37.0 million increase and the provisional July 1996 $27.6
million increase in the annual Levelized Energy Clause (LEC)
Revenues. A decrease in revenues for the current periods ended
September 30, 1996, reflects the $13 million customer credit
recorded by ACE due to the October 22, 1996 Stipulation settling
the various issues surrounding the Salem outage and the double
recovery issue. See Note 2-Rate Matters of ACE. This customer
credit was recorded on the Consolidated Statement of Income for
September 1996 as a reduction of Revenues with the offset to
Other-Current Liabilities on the Consolidated Balance Sheet at
September 30, 1996.
Atlantic Energy Enterprises, Inc. (AEE)
At September 30, 1996 and December 31, 1995, ATE Investment, Inc.
(ATE) had outstanding $24.5 million and $18.5 million,
respectively, under its revolving credit and term loan facility.
In August 1996, Atlantic Thermal Systems, Inc.(ATS) established a
$100 million revolving credit and term loan facility of which up
to $20 million can be used to establish letters of credit. Loan
amounts outstanding under the revolver on February 2, 1998 will
convert into a five year term loan. Interest rates on the
borrowings will be based on senior debt ratings and on the
borrowing options selected by ATS. As of September 30, 1996, $8
million was outstanding under this agreement. Commitment fees on
the unused credit line were not significant. This facility will
be used to satisfy certain associated company payables and for
other general corporate purposes including construction of the
Midtown Energy Center in Atlantic City, New Jersey which began in
November 1996. ATS has committed approximately $36 million for
construction of this project to date.
In December 1995, ATS, through a partnership arrangement,
borrowed from the New Jersey Economic Development Authority
(NJEDA) $12.5 million from the proceeds of the sale of special,
limited obligation bonds issued by the NJEDA. 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 fourth quarter of 1996. Proceeds from the bond
issuance remain restricted in trust pending resolution of these
conditions. Effective August 22, 1996, the bonds were remarketed
at a rate of 3.60% for a period of 112 days.
RESULTS OF OPERATIONS
AEI Consolidated
Changes in net income and earnings per share for the periods
ended September 30, 1996 versus the corresponding periods of the
previous year are as follows:
Periods Ended September 30, 1996
Quarter Year-to-Date
Net Income (33.2%) (17.6%)
Earnings Per Share (33.3%) (17.2%)
The change in net income for the current quarter primarily
reflects a settlement of regulatory issues related to ACE and its
ownership interest in the Salem Nuclear Generating Station
(Salem) and a decrease in energy sales during the period. The
change in net income for the current year-to-date period reflects
the settlement of regulatory issues related to the Salem outage,
which was partially offset by an increase in electric revenues
due to the increase in both electric sales and annual LEC
revenues. Increased operating expenses for the year-to-date
period reflects the costs supporting the increase in the sales of
energy as well as additional maintenance expense associated with
the outages at Salem.
Net income reflects a net charge of $5.7 million, net of tax, or
$.11 per share, that ACE recorded in the third quarter of 1996 as
a result of the stipulations reached by ACE with the Ratepayer
Advocate and the Staff of the BPU with regard to the outages of
the Salem units and the investigation of the alleged double
recovery of capacity costs of the nonutility generators. The net
charge consists of a $13 million reduction in revenues, a
reduction of $4.2 million in operations expense for amounts
previously recorded for the performance penalty and a Federal
income tax benefit of $3.1 million. Customers will receive
revenue credits totaling the $13.0 million during the months of
January and February 1997 based on January to October 1996 usage.
The stipulations are subject to BPU acceptance and approval.
Unless otherwise specified, changes in results of operations are
in terms of the current year period compared to the corresponding
prior year period as they relate to ACE. ACE is the principal
subsidiary of AEI and the financial presentation and content of
the income statement principally are those of ACE. Results of
nonutility companies are contained in other income and (expense).
Utility Revenues of ACE
Changes in Operating Revenues-Electric, exclusive of inter-
company sales, are disclosed in the following table:
Periods Ended September 30, 1996
(Thousands of Dollars)
Quarter Year-to-Date
Base Revenues $ (3,105) $ (4,751)
Stipulation Credits (13,000) (13,000)
Levelized Energy Clause 7,452 23,145
Kilowatt-hour Sales (11,346) 23,608
Unbilled Revenues (2,170) (8,892)
Sales for Resale 1,688 6,131
Other Revenues (239) (816)
Total $(20,720) $ 25,425
The decrease in Base Revenues for the current year periods
reflect a reduced average realization per kilowatt-hour sold
resulting from less favorable weather conditions relative to last
year and the effects of ACE's BPU approved Off Tariff Rate
Agreements (OTRA's). OTRA's are special reduced rates offered to
ACE at-risk customers. At-risk customers are customers who may
choose to leave ACE's energy system because they have alternative
energy sources available. The Stipulation Credits for the quarter
and year-to-date periods are the result of the October 22, 1996
stipulations for the $13.0 million settlement concerning the
outages of the Salem Units and the alleged over recovery of
capacity costs from nonutility generation facilities. (See Note
2-Rate Matters of ACE for further details regarding the
stipulations.) LEC revenues for the periods increased due to an
annual rate increase in July 1995 of $37.0 million and a
provisional increase in July 1996 of $27.6 million. Changes in
Kilowatt-hour Sales are explained in the 'Billed Sales to
Ultimate Utility Customers' section. 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, 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. In
addition, changes in Sales for Resale are dependent on adjacent
power pool resources and prices of energy available. The increase
in Sales for Resale for the quarter and year-to-date periods were
the result of new contract demands for bulk power sales to
wholesale customers outside the regional power pool.
Billed Sales to Ultimate Utility Customers of ACE
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.
Periods Ended September 30, 1996
Quarter Year-to-Date
Average Average
Customer Class Sales Use Cust Sales Use Cust
Residential (8.5) (9.2) 0.7% 3.3% 2.5% 0.8%
Commercial (1.6) (2.6) 1.0 2.8 1.8 1.0
Industrial 6.0 4.4 1.5 6.5 4.7 1.7
Total (3.8) (4.5) 0.7 3.5 2.7 0.8
The decrease in Residential sales and average use for the quarter
is due to cooler weather during the 1996 summer compared to
the 1995 summer. The increase in year-to-date Residential sales
is due to colder than normal temperatures during the first
quarter of 1996 compared to warmer than normal temperatures last
year. The decrease in current quarter Commercial sales from that
of the same period in 1995 was weather related. Continuing
economic growth in the Commercial sector partially offset the
weather related decrease, with casino expansions and construction
around the Atlantic City, New Jersey area being significant
contributors. The year-to-date growth in the Commercial Sector
is due to winter weather that resulted in higher space heating
usage. The increase in quarterly and year-to-date Industrial
sales was due to the return of sales to a customer that had
previously been supplied by an independent power producer.
Operating Expenses
AEI Consolidated
Total Operating Expenses for quarter and year-to-date periods
ended September 30, 1996 decreased by 2.4% and increased by 5.8%,
respectively. Excluding depreciation and taxes, Total Operating
Expenses increased by 2.5% and 9.1%, respectively, largely due to
increases in energy and maintenance costs of ACE primarily
related to the Salem outage.
ACE
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 has voluntarily foregone recovery of
certain amounts of otherwise recoverable fuel costs through its
Southern New Jersey Economic Initiative (SNJEI), thereby reducing
earnings through May 1996, as indicated below. Such reduced
recoveries are discretionary by ACE, and are influenced by
competitive and economic factors. ACE has elected not to
continue the SNJEI beyond May 1996. 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 deferred 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 $33.6 million at September 30, 1996 as
compared to $31.4 million at December 31, 1995.
Energy expense for the quarter and year-to-date periods ended
September 30, 1996 increased by 6.2% and 16.8%, respectively.
Excluding deferred energy costs, Energy expense for the quarter
and year-to-date periods decreased by 11.6% and increased by
5.6%, respectively. The decrease for the quarter was due to a
decrease in kilowatt-hour sales as a result of cooler weather in
the third quarter of the current year when compared to the same
quarter of the previous year. The increase for the year-to-date
period was attributable to increased kilowatt-hour sales when
compared to the same period in the previous year, as well as
ACE's use of more expensive alternative energy sources in
replacement of energy lost due to the continued outage of the
Salem units. The SNJEI reduced after tax income for the year-to-
date period by $2.7 million.
Sources of ACE's energy for the periods ended September 30, 1996
are as follows:
Quarter Year-to-Date
Coal 26% 27%
Nuclear 13 14
Interchanged and Purchased 38 36
Nonutility Purchased 20 20
Oil and Natural Gas 3 3
Total 100% 100%
Operations expense for the quarter decreased by 6.8% which was
the result of the current reversal of estimates previously
recorded for 1995 and 1996 Nuclear Performance Standard
penalties, in accordance with the stipulation of settlement
regarding the Salem Units.
Maintenance expense for the quarter and year-to-date periods
increased by 41.2% and 48.6%, respectively. The increase is the
result of costs associated with the Salem Station during its
outage.
State Excise Tax expense for the quarter decreased 5.5%,
reflecting a decreased energy sales tax base for the quarter
compared to the same period last year.
Federal Income Tax expense for the quarter and year-to-date
periods decreased by 33.5% and 19.3%, respectively, due to the
decrease of taxable income for the current periods, respectively,
when compared to the same periods last year.
Preferred Stock Dividend Requirements of ACE decreased 35.1% and
25.4% for the quarter and year-to-date periods, respectively, as
a result of mandatory and optional sinking funds requirements and
other optional redemptions of preferred stock during the current
year periods.
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 September 30, 1996, was $2.7
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 Units operated by Public
Service Electric and Gas Company(PS). Salem Units 1 and 2 were
taken out of service on May 16, 1995 and June 7, 1995,
respectively. Their return-to-service dates are subject to
completion of testing, analysis, repair activity and Nuclear
Regulatory Commission concurrence that they are prepared to
restart. Salem Unit 1 is scheduled to return to service by mid-
year 1997, after completion of refurbishment, including
replacement of its steam generators. Unused steam generators
have been acquired with an estimated cost, including
installation, between $150 million and $170 million, of which
ACE's share is between $11.1 million and $12.6 million. In
addition, PS estimates the cost of disposal of the old steam
generators could be as much as $20 million. ACE's estimated
share would be $1.5 million. Repair and testing of Unit 2 is
expected to continue well into the fourth quarter of 1996. ACE
has been advised by PS that Salem Unit 2 is currently expected to
return to service early in the first quarter of 1997 and is not
expected to impact the restart of Salem Unit 1. A meeting with
the NRC to discuss restart of Salem Unit 2 is scheduled for
November 18, 1996. ACE's share of expenses associated with the
restart of Salem Units 1 and 2 are $7.8 million for the year-to-
date period ended September 30, 1996.
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 Federal and
state 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.
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. Underperformance
results in penalties which are not permitted to be recovered from
customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear
performance penalty for 1995 and 1996 and had recorded a
provision for such. According to the Salem outage stipulation
on October 22, 1996, as previously discussed, the performance of
Salem Units 1 and 2 shall not be included in the calculation of a
nuclear performance penalty for the period each Unit was taken
out of service to each Unit's respective return-to-service date.
The parties have also agreed, that for the years 1995 and 1996,
there will be no penalty or reward under the nuclear performance
standard. ACE had recorded a 1995 performance penalty of $875
thousand, net of tax, and $1.9 million, net of tax, year-to-date
September 1996. These amounts have been incorporated into the
net amount recorded for the Salem stipulation as discussed in
Note 2.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $700 thousand per unit per month .
ACE's replacement power costs for the current outage for each
unit, up to the agreed upon return-to-service dates, will be
recoverable in rates in ACE's next LEC proceeding. Replacement
power costs incurred after the respective agreed upon return-to-
service dates for the Salem Units will not be recoverable in
rates.
Nonutility Activities-AEI and AEE
Nonutility operations, which include AEI parent, for the quarter
and year-to-date periods ended September 30, 1996, resulted in
net losses of $587 thousand and $1.6 million, respectively,
compared to losses of $134 thousand and $1.4 million,
respectively, for the prior periods. Of these amounts,
operations of AEE and subsidiaries for the quarter and year-to-
date periods resulted in net income of $263 thousand and $540
thousand, respectively, compared to net income of $304 thousand
and a net loss of $190 thousand, respectively, for the same
periods of the prior year. The current quarter and year-to-date
net income is largely due to the reduction in ATE's interest
expense which was partially offset by the decrease in earnings
from the Atlantic Generation, Inc. independent power projects.
AEI parent for the quarter and year-to-date periods ended
September 30, 1996 resulted in net losses of $850 thousand and
$2.1 million, respectively, compared to net losses of $437
thousand and $1.2 million, respectively, for the corresponding
periods of the prior year. The 1996 loss is largely due to
interest expense associated with the borrowings from AEI's
revolving credit and term loan facility. AEI's credit facility
is used to support general corporate purposes.
OTHER MATTERS OF ACE
On April 24, 1996, the Federal Energy Regulatory Commission
issued Order No. 888 "Promoting Wholesale Competition Through
Open Access Non-Discriminatory Transmission Service by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities". The essence of the Order is to remove
impediments to competition in the wholesale bulk power
marketplace, to bring more efficient, lower cost power to
electricity consumers, and provide an equitable means to
transition the industry to the new environment. Under this
Order, affected utilities that own, control or operate interstate
transmission facilities are required to offer transmission
services for wholesale energy transactions to others on a
nondiscriminatory basis. Tariffs are to be established by the
utilities for these services, under which a utility must also
apply these tariffs to its own wholesale energy transactions.
The Order also permits utilities to seek recovery of legitimate,
prudent and verifiable unrecovered costs that become stranded as
a result of providing open access transmission services pursuant
to the Order. A utility may have been obligated to incur a cost
on behalf of a customer(s) in the reasonable expectation of
providing service and recovery of that cost. When the
customer(s) no longer uses the utility for the service related to
the cost, or there is a change in a regulator's recovery policy
due to market forces concerning the cost, the cost may become
stranded if the utility is precluded from recovery. In relation
to this Federal effort, the BPU is examining possible structured
changes to New Jersey's electric utility industry and is
evaluating, among other items, the issues surrounding potential
stranded costs. The stranded costs issues on both Federal and
state levels continue to develop. At this time, AEI is uncertain
as to the level of stranded costs that may arise, and what, if
any, recovery thereof may be available.
In March 1996, the New Jersey Department of Treasury and the BPU
jointly proposed to eliminate the energy excise tax currently
collected by all utilities and instead making utilities subject
to the Corporate Business Tax (corporate state income tax).
Additionally, the state sales and use tax would be applied to
retail electric and gas sales, and a transitional energy
facilities assessment tax would be imposed on electric and
natural gas facilities. At this time, AEI cannot predict the
final outcome of the proposal, nor what impacts there may be on
the Company.
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
The information required by this item is incorporated herein by
reference from the following portions of AEI's Management's
Discussion and Analysis of Financial Condition and Results of
Operations, insofar as they relate to ACE and its subsidiary:
Liquidity and Capital Resources-ACE; Results of Operations and
Other Matters of ACE.
***************************************************
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: December 23, 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
