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 September 30, 1997
( ) 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. 52,504,479 shares (as of November 10, 1997)
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
For the Quarter Ended
September 30, 1997
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Atlantic Energy, Inc.
Consolidated Statement of Income 1
Consolidated Statement of Cash Flows 3
Consolidated Balance Sheet 4
Atlantic City Electric Company
Consolidated Statement of Income 6
Consolidated Statement of Cash Flows 8
Consolidated Balance Sheet 9
Notes to Financial Statements
Atlantic Energy, Inc. and
Atlantic City Electric Company 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Atlantic Energy, Inc. and
Atlantic City Electric Company 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars,except per share data)
Quarter Ended September 30,
1997 1996
(unaudited)
Operating Revenues-Electric $297,367 $281,965
Operating Expenses:
Energy 63,800 66,371
Purchased Capacity 52,812 49,645
Operations 37,864 34,882
Maintenance 7,814 10,555
Depreciation and Amortization 21,034 20,265
State Excise Taxes 30,106 29,392
Federal Income Taxes 25,454 17,227
Other Taxes 1,542 2,284
Total Operating Expenses 240,426 230,621
Operating Income 56,941 51,344
Other Income and (Expense):
Allowance for Equity Funds Used
During Construction 182 205
Other-Net 7,897 (182)
Total Other Income 8,079 23
Interest Charges:
Interest on Long Term Debt 15,040 15,042
Other Interest Expense 1,300 1,494
Total Interest Charges 16,340 16,536
Allowance for Borrowed Funds Used
During Construction (230) (193)
Net Interest Charges 16,110 16,343
Less Preferred Securities Dividend
Requirements of Subsidiary 2,444 2,457
Net Income $ 46,466 $ 32,567
Average Number of Shares of Common 52,504 52,702
Stock Outstanding (000's)
Per Common Share:
Earnings $.89 $.62
Dividends Declared $.385 $.385
Dividends Paid $.385 $.385
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars, except per share data)
Year-to-Date September 30,
1997 1996
(unaudited)
Operating Revenues-Electric $758,322 $752,968
Operating Expenses:
Energy 166,296 171,648
Purchased Capacity 150,133 146,877
Operations 100,200 110,050
Maintenance 21,692 33,004
Depreciation and Amortization 62,333 60,490
State Excise Taxes 79,131 80,391
Federal Income Taxes 47,392 30,842
Other Taxes 6,770 7,656
Total Operating Expenses 633,947 640,958
Operating Income 124,375 112,010
Other Income:
Allowance for Equity Funds Used
During Construction 726 697
Other-Net 13,038 2,603
Total Other Income 13,764 3,300
Interest Charges:
Interest on Long Term Debt 44,690 45,179
Other Interest Expense 4,133 4,124
Total Interest Charges 48,823 49,303
Allowance for Borrowed Funds Used
During Construction (777) (820)
Net Interest Charges 48,046 48,483
Less Preferred Securities Dividend
Requirements of Subsidiary 8,152 8,475
Net Income 81,941 58,352
Retained Earnings at Beginning of Period 227,630 249,741
309,571 308,093
Dividends Declared on Common Stock (60,642) (60,871)
Capital Stock Expense and Other (144) -
Retained Earnings at End of Period $248,785 $247,222
Average Number of Shares of Common
Stock Outstanding (000's) 52,503 52,702
Per Common Share:
Earnings $1.56 $1.11
Dividends Declared $1.155 $1.155
Dividends Paid $1.155 $1.155
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
Year-to-Date September 30,
1997 1996
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 81,941 $ 58,352
Unrecovered Purchased Power Costs 12,848 12,310
Deferred Energy Costs 4,308 (2,134)
Preferred Securities Dividends of ACE 8,152 8,475
Depreciation and Amortization 62,333 60,490
Deferred Income Taxes-Net (3,078) 2,289
Unrecovered State Excise Taxes 7,170 7,170
Changes-Net Working Capital Components:
Accounts Receivable & Unbilled Revenues (22,363) (12,864)
Accounts Payable (16,551) (5,499)
Inventory 5,161 2,092
Prepaid Excise Tax (19,380) (18,407)
Taxes Accrued 42,008 36,709
Other (6,450) 9,488
Other-Net 2,339 (4,999)
Net Cash Provided by Operating Activities 158,438 153,472
Cash Flows Of Investing Activities:
Utility Cash Construction Expenditures (58,774) (69,947)
Nonutility Construction Expenditures (42,935) (9,281)
License Fees (9,500) (18,000)
Partnership Distribution 4,420 10,729
Nuclear Decommissioning Trust Fund
Deposits (4,818) (4,818)
Other-Net (13,806) (6,370)
Net Cash Used in Investing Activities (125,413) (97,687)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt 92,525 20,500
Retirement and Maturity of Long
Term Debt (23,334) (12,266)
(Repayments) Proceeds from Short
Term Debt (19,050) 57,655
Redemption of Preferred Stock (20,000) (47,531)
Dividends Declared-ACE Preferred
Securities (8,152) (8,475)
Dividends Declared on Common Stock (60,642) (60,871)
Other-Net 3,228 4,139
Net Cash Used in Financing Activities (35,425) (46,849)
Net (Decrease) Increase in Cash and
Temporary Investments (2,400) 8,936
Cash and Temporary Investments:
Beginning of period 15,278 5,691
End of period $ 12,878 $ 14,627
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30 December 31,
1997 1996
(unaudited)
Assets:
Electric Utility Plant In Service $2,567,444 $2,508,220
Less Accumulated Depreciation 913,592 871,531
Utility Plant in Service-Net 1,653,852 1,636,689
Construction Work in Progress 91,370 117,188
Land Held for Future Use 5,604 5,604
Leased Property-Net 37,403 39,914
Electric Utility Plant-Net 1,788,229 1,799,395
Investments and Nonutility Property:
Investment in Leveraged Leases 80,251 79,687
Nuclear Decommissioning Trust Fund 79,073 71,120
Nonutility Property and Equipment-Net 90,254 46,147
Other Investments and Funds 56,945 53,550
Total Investments and Nonutility Property 306,523 250,504
Current Assets:
Cash and Temporary Investments 12,878 15,278
Accounts Receivable:
Utility Service 73,463 64,432
Miscellaneous 40,123 32,547
Allowance for Doubtful Accounts (3,500) (3,500)
Unbilled Revenues 39,071 33,315
Fuel (at average cost) 24,327 29,682
Materials and Supplies (at average cost) 24,009 23,815
Working Funds 15,063 15,517
Deferred Energy Costs 29,221 33,529
Prepaid Excise Tax 26,505 7,125
Other 12,616 11,354
Total Current Assets 293,776 263,094
Deferred Debits:
Unrecovered Purchased Power Costs 70,552 83,400
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 47,313 54,714
Unamortized Debt Costs 44,089 44,423
Other Regulatory Assets 62,031 59,575
License Fees 27,722 17,733
Other 13,792 12,066
Total Deferred Debits 351,357 357,769
Total Assets $2,739,885 $2,670,762
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1997 1996
(unaudited)
Liabilities and Capitalization:
Capitalization:
Common Shareholders' Equity:
Common Stock $ 562,684 $ 562,746
Retained Earnings 248,784 227,630
Unearned Compensation (2,526) (2,982)
Total Common Shareholders' Equity 808,942 787,394
Preferred Securities of Atlantic Electric:
Preferred Stock:
Not Subject to Mandatory Redemption 30,000 30,000
Subject to Mandatory Redemption 23,950 43,950
Company-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the
Company 70,000 70,000
Long Term Debt 786,308 829,745
Total Capitalization (excluding current
portion) 1,719,200 1,761,089
Current Liabilities:
Preferred Stock Redemption Requirement 10,000 10,000
Capital Lease Obligation-Current Portion 743 702
Long Term Debt-Current Portion 211,575 98,250
Short Term Debt 45,900 64,950
Accounts Payable 49,957 66,508
Taxes Accrued 49,512 7,504
Interest Accrued 16,913 20,241
Dividends Declared 21,214 21,701
Deferred Income Taxes - 3,190
Provision for Rate Refunds - 13,000
Other 35,444 24,696
Total Current Liabilities 441,258 330,742
Deferred Credits and Other Liabilities:
Deferred Income Taxes 434,363 434,108
Deferred Investment Tax Credits 44,677 46,577
Capital Lease Obligations 36,660 39,212
Other Post-Retirement Benefits 36,829 32,608
Other 26,898 26,426
Total Deferred Credits and Other Liabilities 579,427 578,931
Total Liabilities and Capitalization $2,739,885 $2,670,762
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic City Electric Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
Quarter Ended September 30,
1997 1996
(unaudited)
Operating Revenues-Electric $300,338 $282,577
Operating Expenses:
Energy 63,800 66,371
Purchased Capacity 52,812 49,645
Operations 37,867 34,896
Maintenance 7,815 10,568
Depreciation and Amortization 21,034 20,265
State Excise Taxes 30,106 29,392
Federal Income Taxes 25,454 17,227
Other Taxes 1,542 2,284
Total Operating Expenses 240,430 230,648
Operating Income 59,908 51,929
Other Income:
Allowance for Equity Funds Used During
Construction 182 205
Miscellaneous Income-Net 5,005 (180)
Total Other Income 5,187 25
Interest Charges:
Interest on Long Term Debt 15,040 15,042
Other Interest Expense 1,300 1,494
Total Interest Charges 16,340 16,536
Allowance for Borrowed Funds Used
During Construction (230) (193)
Net Interest Charges 16,110 16,343
Less Company-Obligated Mandatorily
Redeemable Preferred Securities
Dividends of Subsidiary Trust Holding
Solely Junior Subordinated Debentures
of the Company 1,444 -
Net Income 47,541 35,611
Less Preferred Dividend Requirements 1,000 2,457
Balance Available for Common Shareholder $ 46,541 $ 33,154
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic City Electric Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars)
Year-to-Date September 30,
1997 1996
(unaudited)
Operating Revenues-Electric $763,701 $754,084
Operating Expenses:
Energy 166,296 171,648
Purchased Capacity 150,133 146,877
Operations 100,171 110,135
Maintenance 21,702 33,034
Depreciation and Amortization 62,333 60,490
State Excise Taxes 79,131 80,391
Federal Income Taxes 47,392 30,842
Other Taxes 6,770 7,656
Total Operating Expenses 633,928 641,073
Operating Income 129,773 113,011
Other Income:
Allowance for Equity Funds Used During
Construction 726 697
Miscellaneous Income-Net 8,467 3,165
Total Other Income 9,193 3,862
Interest Charges:
Interest on Long Term Debt 44,690 45,179
Other Interest Expense 4,133 4,124
Total Interest Charges 48,823 49,303
Allowance for Borrowed Funds Used
During Construction (777) (820)
Net Interest Charges 48,046 48,483
Less Company-Obligated Mandatorily
Redeemable Preferred Securities
Dividends of Subsidiary Trust Holding
Solely Junior Subordinated Debentures
of the Company 4,332 -
Net Income 86,588 68,390
Retained Earnings at Beginning of Period 234,948 252,484
321,536 320,874
Dividends Declared:
Cumulative Preferred Stock (3,820) (8,475)
Common Stock (60,642) (61,871)
Total Dividends Declared (64,462) (70,346)
Capital Stock Expense and Other (108) (251)
Retained Earnings at End of Period $256,966 $250,277
Earnings for Common Stock:
Net Income $ 86,588 $ 68,390
Less Preferred Dividend Requirements 3,820 8,475
Balance Available for Common Shareholder $ 82,768 $ 59,915
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic City Electric Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
Year-to-Date September 30,
1997 1996
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 86,588 $ 68,390
Unrecovered Purchased Power Costs 12,848 12,310
Deferred Energy Costs 4,308 (2,134)
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated
Debentures of the Company 4,332 -
Depreciation and Amortization 62,333 60,490
Deferred Federal Income Taxes-Net (3,313) 995
Unrecovered State Excise Taxes 7,170 7,170
Changes-Net Working Capital Components:
Accounts Receivable & Unbilled Revenues (18,366) (15,548)
Accounts Payable (13,687) (5,472)
Inventory 5,171 2,105
Prepaid Excise Tax (19,380) (18,407)
Federal Income Taxes Payable-Affiliate 38,489 22,242
Other (9,795) 20,898
Other-Net 6,307 (769)
Net Cash Provided by Operating Activities 163,005 152,270
Cash Flows of Investing Activities:
Cash Construction Expenditures (58,774) (69,947)
Leased Property (4,364) (2,385)
Nuclear Decommissioning Trust Fund
Deposits (4,818) (4,818)
Other-Net (1,448) (1,266)
Net Cash Used in Investing Activities (69,404) (78,416)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt 37,600 -
Retirement and Maturity of Long Term Debt (23,334) (12,266)
(Repayments)Proceeds - Short Term Debt (19,050) 57,155
Redemption of Preferred Stock (20,000) (47,531)
Dividends Declared on Preferred Stock (3,820) (8,475)
Dividends on Company-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company (4,332) -
Dividends Declared on Common Stock (60,642) (61,871)
Other-Net 748 4,095
Net Cash Used in Financing Activities (92,830) (68,893)
Net Increase in Cash and
Temporary Investments 771 4,961
Cash and Temporary Investments
Beginning of period 7,927 3,987
End of period $ 8,698 $ 8,948
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic City Electric Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1997 1996
(unaudited)
Assets:
Electric Utility Plant:
In Service $2,567,444 $2,508,220
Less Accumulated Depreciation 913,592 871,531
Utility Plant in Service-Net 1,653,852 1,636,689
Construction Work in Progress 91,370 117,188
Land Held for Future Use 5,604 5,604
Leased Property-Net 37,403 39,914
Electric Utility Plant-Net 1,788,229 1,799,395
Investments and Nonutility Property:
Nuclear Decommissioning Trust Fund 79,073 71,120
Other 9,713 9,750
Total Investments and Nonutility
Property 88,786 80,870
Current Assets:
Cash and Temporary Investments 8,698 7,927
Accounts Receivable:
Utility Service 73,463 64,432
Miscellaneous 25,230 21,650
Allowance for Doubtful Accounts (3,500) (3,500)
Unbilled Revenues 39,071 33,315
Fuel (at average cost) 24,238 29,603
Materials and Supplies (at average cost) 24,009 23,815
Working Funds 15,062 15,517
Deferred Energy Costs 29,221 33,529
Prepaid Excise Tax 26,505 7,125
Other 11,900 10,089
Total Current Assets 273,897 243,502
Deferred Debits:
Unrecovered Purchased Power Costs 70,552 83,400
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 47,313 54,714
Unamortized Debt Costs 43,008 43,579
Other Regulatory Assets 62,031 59,575
Other 12,571 9,848
Total Deferred Debits 321,333 336,974
Total Assets $2,472,245 $2,460,741
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997
Atlantic City Electric Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
September 30, December 31,
1997 1996
(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 260,103 259,078
Capital Stock Expense (1,537) (1,645)
Retained Earnings 256,966 234,948
Total Common Shareholder's Equity 801,576 778,425
Preferred Securities:
Preferred Stock:
Not Subject to Mandatory Redemption 30,000 30,000
Subject to Mandatory Redemption 23,950 43,950
Company-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the
Company 70,000 70,000
Long Term Debt 758,808 802,245
Total Capitalization (excluding
current portion) 1,684,334 1,724,620
Current Liabilities:
Preferred Stock Redemption Requirement 10,000 10,000
Capital Lease Obligations-Current 743 702
Long Term Debt-Current 58,575 175
Short Term Debt 45,900 64,950
Accounts Payable 49,957 63,644
Federal Income Taxes Payable-Affiliate 45,887 7,398
Other Taxes Accrued 4,595 7,494
Interest Accrued 15,850 19,619
Dividends Declared 21,214 21,701
Deferred Income Taxes - 3,190
Provision for Rate Refunds - 13,000
Other 33,658 22,980
Total Current Liabilities 286,379 234,853
Deferred Credits and Other Liabilities:
Deferred Income Taxes 357,600 357,580
Deferred Investment Tax Credits 44,677 46,577
Capital Lease Obligations 36,660 39,212
Other Post-Retirement Benefits 36,829 32,608
Other 25,766 25,291
Total Deferred Credits and Other
Liabilities 501,532 501,268
Total Liabilities and Capitalization $2,472,245 $2,460,741
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Organizational and Other Matters of AEI and Subsidiaries
Atlantic Energy, Inc. (AEI or the Company) is the parent of Atlantic
City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE)
and Atlantic Energy International, Inc. (AEII) 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.
ATE also has a 94% equity interest in Enertech Capital Partners,
L.P. AEII provided utility consulting services and equipment sales
to international markets and is in the process of winding down its
operations. ACE is the principal subsidiary of AEI. The
consolidated financial information of AEI is principally the
financial information of ACE unless indicated otherwise. In July,
1996 the Company began making nonregulated wholesale electric market
transactions. Effective July 1997, ACE established policies and
procedures for the operating activity for the nonregulated wholesale
electric market transactions. ACE records the revenues and expenses
of these transactions as part of "Other Income" on the Consolidated
Statement of Income. 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 Conectiv, Inc. 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 Conectiv common stock for each share of DP&L common
stock held. AEI shareholders will receive 0.75 shares of the
Conectiv common stock and 0.125 shares of the Conectiv Class A
common stock for each share of AEI common stock held. On January
30, 1997, the merger was approved by the shareholders of both
companies. The Delaware Public Service Commission approved the
merger on September 23, 1997, and the Pennsylvania Public Utilities
Commission approved the merger on October 6, 1997. As previously
reported, the Maryland Public Service Commission, the Federal Energy
Regulatory Commission and the Virginia State Corporation Commission
have approved the merger. In order for the merger to become
effective, approval is required from the New Jersey Board of Public
Utilities(BPU), the Nuclear Regulatory Commission, and the
Securities and Exchange Commission. The Company expects the
regulatory approval process to be complete in late 1997 or early
1998.
New Accounting Standards - The Financial Accounting Standards Board
(FASB) issued two new Statements of Financial Accounting Standards
in 1997 - Statement No. 128 (SFAS 128) "Earnings Per Share" and
Statement No. 129 (SFAS 129) "Disclosure of Information about
Capital Structure", which are effective for financial statements
presented for periods ending after December 15, 1997. SFAS 128
specifies the computation, presentation and disclosure requirements
of earnings per share for entities with publicly held common stock
and potential common stock. The Company does not expect SFAS 128 to
have a significant impact upon the calculation and disclosures
requirements of earnings per share. SFAS 129 relates to disclosures
of the Company's capital structure and is not expected to change
current disclosure practices of the Company with regard to capital
structure.
In June 1997, the FASB issued Statement No. 130 "Reporting
Comprehensive Income" and Statement No. 131 "Disclosure About
Segments of an Enterprise and Related Information". These
statements are effective for fiscal years beginning after December
15, 1997. Since these statements are primarily disclosure related,
the Company currently believes that they will not have a significant
effect on the Consolidated Financial Statements.
NOTE 2. RATE MATTERS OF ACE
As previously reported, on February 28, 1997 ACE filed a petition
with the BPU requesting an increase in annual LEC revenues of $20.0
million to be made effective for service rendered on and after June
1, 1997 which was transferred to the Office of Administrative Law.
Hearings were held on September 18, 1997. Briefing to the ALJ began
in October, 1997. ACE cannot predict the outcome of this matter.
Also previously reported, in ACE's August 1, 1997 filing, ACE
requested a $6.8 million increase in annual base rate revenues for
the recovery of other post-retirement benefits (OPEB) expenses. In
October, 1997 ACE amended its filing to request an increase in
annual base rate revenues of $8.4 million for the recovery of OPEB
expenses. This amendment reflects a correction of the Company's
filing, as well as a modification resulting from the changes to the
1997 Gross Receipts and Franchise Tax legislation. The BPU is
expected to take action with regard to ACE's filing before year end
1997. However, if no order for ratemaking treatment is received, ACE
may be required to recognize through expense its deferred costs
which are estimated to be $37.5 million by year end 1997.
On July 15, 1997 ACE filed its electric industry restructuring plan
with the BPU, as required by Energy Master Plan, proposing how ACE
plans to move to retail access and the possible effect on rates.
(See Note 5)
<PAGE>
NOTE 3. DEBT AND PREFERRED SECURITIES
AEI
At September 30, 1997 and December 31, 1996, AEI had $52.0 million
and $37.6 million, respectively, outstanding under its $75.0 million
revolving credit and term loan facility. Proceeds have been used
for general corporate purposes.
ACE
ACE's Cumulative Preferred Securities and long term debt securities
are not widely held and generally trade infrequently. Their
estimated aggregate fair market values at September 30, 1997 and
December 31, 1996 are approximately $959 million and $975 million,
respectively. With regard to short term debt, ACE had outstanding
$45.9 million at September 30, 1997 and $65.0 million at December
31, 1996.
On July 30, 1997, ACE issued $22.6 million aggregate amount of
variable rate, tax-exempt pollution control bonds. The principal
amount of $22.6 million represents two separate series of bonds:
$18.2 million Pollution Control Revenue Refunding Bonds, 1997 Series
A due April 15, 2014 (Series A) and $4.4 million Pollution Control
Revenue Refunding Bonds, 1997 Series B due July 15, 2017 (Series B).
The Series A and the Series B bonds paid an initial weekly rate of
3.4% and 3.5%, respectively. Each subsequent rate will be
determined by a remarketing agent. The rates of interest of each
series may be changed from time to time to a daily mode, a flexible
mode for periods of any duration up to 270 days or a multi-annual
mode for periods of not less than 365 days. The proceeds from the
sale of the Series A and Series B bonds have been applied to the
September 2, 1997 redemption of $18.2 million aggregate principal
amount of 7 3/8% Pollution Control Revenue Bonds of 1984, Series A
and $4.4 million aggregate principal amount of 8 1/4% Pollution
Control Revenue Bonds of 1987, Series B for a total of $23.9
million.
On August 1, 1997 ACE redeemed 200,000 shares, at par, of its $8.20
Series No Par Preferred Stock. Under a mandatory sinking fund
requirement 100,000 shares were required to be redeemed and ACE
elected to redeem an optional 100,000 additional shares for a total
of $20.0 million using short term debt.
<PAGE>
AEE
At September 30, 1997 and December 31, 1996, ATE had outstanding
$6.0 million and $18.5 million, respectively, under its $25 million
revolving credit and term loan facility. The estimated aggregate
fair market value of ATE's $15 million in 7.44% Senior Notes at
September 30, 1997 and December 31, 1996 was approximately $15
million.
At September 30, 1997 and December 31, 1996, ATS had outstanding
$95.0 million and $42.0 million, respectively, under its $175
million revolving credit and term loan facility. This facility has
been used for funding the construction of the Midtown Energy Center
in Atlantic City, New Jersey which began start-up operation in
October 1997. This facility has also been used to satisfy certain
associated company payables and for other general corporate
purposes.
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. Proceeds from the bond issuance remain
restricted in trust pending resolution of certain release
conditions. The bonds paid an initial rate of 3.7% for the 120 day
period ending on April 30, 1996. The bonds have been remarketed
five times at fixed rates ranging from 3.5% to 3.8%. They may be
remarketed for one or more additional periods not to exceed 120
days, but in no event later than December 1, 1998 at which time the
bonds must be redeemed if the escrow conditions are not satisfied.
In October, 1997 the NJEDA approved a final bond resolution
authorizing the issuance of an additional $18.5 million in limited
obligation bonds. ATS will borrow from the NJEDA the proceeds of
this issuance for certain qualifying costs of the Midtown Energy
Center, subject to BPU approval. The bonds will be supported by a
back-up letter of credit for $31 million. ATS expects to satisfy
all the escrow release conditions and obtain BPU approval in mid-
November 1997, at which point, the $31 million will be applied to
certain qualifying costs incurred during construction of the Midtown
Energy Center.
ATS, in its pursuit of potential business opportunities throughout
the United States, has a potential funding commitment of a $35
million stand-by letter of credit. The funds would be provided from
ATS's existing revolving credit and term loan facility.
NOTE 4. COMMON STOCK OF AEI
As of September 30, 1997, and December 31, 1996, 52,504,479 and
52,502,479 shares of common stock were outstanding, respectively.
NOTE 5. CONTINGENCIES
New Jersey Energy Master Plan
The BPU issued final findings and recommendations on the electric
industry restructuring in New Jersey to the Governor and the State
Legislature for their consideration on April 30, 1997.
The recommendation for the implementation of a phase-in plan for
retail competition would span a twenty-one month period providing
choice to 10% of all customers beginning October 1, 1998 and to 100%
by July 1, 2000. The plan required each electric utility in the
state to file complete restructuring plans, stranded cost filings
and unbundled rate filings by July 15, 1997. The plan would allow
utilities the opportunity to recover stranded costs on a case-by-
case basis, with no guarantee of 100 percent recovery of eligible
stranded costs.
ACE filed its response to the BPU on July 15, 1997. ACE's
restructuring filing met the BPU's recommendations for phase-in of
retail electric access based on a first-come, first-served basis,
proposing choice to 10% of all customers beginning October 1, 1998
and to 100% by July 1, 2000. Customers remaining with ACE will be
charged a market-based electricity price beginning October 1, 1998.
The restructuring filing included a two-phased approach to future
rate reductions of approximately 5%.
In an October 31, 1997 letter to the BPU, ACE added specificity to
the framework set out in the restructuring filing with regard to
steps ACE plans to take to meet the BPU's rate reduction and
restructuring goals. First, specific, definable cost reductions of
approximately 4% after 1998 were outlined. Further, ACE offered
that an appropriate resolution of the merger proceedings will allow
ACE to reduce its rates, due to the merger, of approximately 1.25%
upon consummation of the change in control. In addition, ACE's
current estimate showed that, through the use of securitized debt
for the full amount of stranded costs associated with its own
generation assets, a further rate decrease of up to 2% was possible
based on appropriate legislation and orders of the BPU. Finally,
ACE estimates that the results of good-faith negotiations with the
nonutility generators could provide a reduction of up to an
additional 1.75%. In summary, ACE outlined a total rate reduction
of 9% by the end of the transition.
Under the restructuring filing ACE specified its total stranded cost
estimated to be approximately $1.3 billion, of which $965 million is
attributable to above-market Nonutility Generation (NUG) Contracts.
The remaining amount, approximately $340 million, is related to
wholly and jointly-owned generation investments. The restructuring
filing supports full recovery of stranded costs, which ACE believes
are necessary to move to a competitive environment. The
restructuring filing is currently in the discovery phase. During
this phase, ACE revised the estimated stranded cost amounts to be
approximately $911 million attributable to NUG contracts and
approximately $415 million related to wholly and jointly-owned
generation investments. The Administrative Law Judge is expected to
render a decision in May 1998.
Pending Merger
On June 26, 1997, the Company and DP&L jointly announced an enhanced
retirement offer and separation program that will be utilized to
achieve workforce reductions as a result of the merger. (Refer to
Note 1 for merger discussion.) The total cost to the Company for
these programs, as well as, the cost of executive severance,
employee relocation and facilities integration is estimated to range
from $38 million to $48 million. These costs are contingent upon
the consummation of the merger. ACE will be required to recognize
these costs through expense in accordance with generally accepted
accounting principles (GAAP). The actual cost to the Company and
ACE will depend on a number of factors related to the employee mix
as well as the actual number of employees who will be separated.
Accounting For Deregulation
ACE currently accounts for the economic effects of regulation as
specified by Statement of Financial Accounting Standards No. 71
(SFAS 71) which provides guidance on circumstances when the economic
effect of a regulator's decision warrants different application of
GAAP as a result of the ratemaking process. At this time, ACE
continues to meet the criteria set forth in SFAS 71 and has
presented these financial statements in accordance therewith.
The Financial Accounting Standards Board (FASB), through the
Emerging Issue Task Force (EITF), has recently set forth guidance
intended to clarify the accounting treatment of specific issues
associated with the restructuring of the electric utility industry
through EITF Issue No. 97-4, "Deregulation of the Pricing of
Electricity-Issues Related to the Application of FASB Statements No.
71, Accounting for the Effects of Certain Types of Regulation, and
No. 101, Regulated Enterprises-Accounting for the Discontinuation of
application of FASB Statement No. 71" (EITF No. 97-4)". The
consensus reached in EITF No. 97-4 as to when an enterprise should
stop applying SFAS 71 to a separable portion of its business whose
pricing is being deregulated, is defined as "when deregulatory
legislation or a rate order (whichever is necessary to effect change
in the jurisdiction)is issued that contains sufficient detail for
the enterprise to reasonably determine how the transition plan will
effect the separable portion of its business" (e.g. generation).
Consensus was also reached "that the regulatory assets and
regulatory liabilities that originated in the separable portion of
an enterprise to which Statement 101 is being applied should be
evaluated on the basis of where (that is, the portion of the
business in which) the regulated cash flows to realize and settle
them, respectively, will be derived." Additionally, the "source of
the cash flow approach adopted in the consensus should be used for
recoveries of all costs and settlements of all obligations (not just
for regulatory assets and regulatory liabilities that are recorded
at the date Statement 101 is applied) for which regulated cash flows
are specifically provided in the deregulatory legislation or rate
order".
At this time ACE cannot predict, with certainty when it will stop
applying SFAS 71 for its generation business. ACE also cannot
predict the impacts on its financial condition as a result of
applying SFAS 101. The outcome will be dependent upon when a plan
is approved and the level of recovery of stranded costs allowed by
the BPU. If assets require a write-down as a result of the
application of SFAS 101, ACE may need to record an extraordinary
noncash charge to operations that could have a material impact on
the financial position and results of operations of ACE.
Salem Nuclear Generating Station
ACE is a 7.41% owner of the Salem Nuclear Generating Station
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.
PS advised ACE that the Salem restart plan, which encompassed a
comprehensive review and improvement of personnel, process and
equipment issues has been completed for Salem Unit 2. On August 6,
1997, the NRC authorized the restart of Salem 2 and stated that it
would continue to closely monitor activities at Salem. Salem Unit 2
returned to service on August 30, 1997. The unit reached 100% power
on September 23, 1997.
PS has advised ACE that the installation of Salem Unit 1 steam
generators has been completed and the unit is currently expected
to return to service during the first quarter of 1998. Restart of
Salem Unit 1 is also subject to NRC approval.
The outage of Salem Station causes ACE to incur replacement power
costs of approximately $700 thousand per month per unit. As
previously discussed, ACE's replacement power costs for the current
outage, up to the agreed-upon return-to-service date of June 30,
1997 for Salem Unit 1 and December 31, 1996 for Salem Unit 2, will
be recoverable in rates in ACE's 1997 LEC proceeding. Replacement
power costs incurred after the agreed-upon return-to-service date
for the Salem Station will not be recoverable in rates. ACE has
incurred $8.1 million in non-recoverable replacement power costs to
date related to Salem.
Effective December 31, 1996, ACE entered into an agreement with PS
for the purpose of limiting ACE's exposure to Salem's 1997 operation
and maintenance (O&M) expenses. Pursuant to the terms of the
agreement, ACE will pay to PS $10 million of O&M expense, as a fixed
charge payable in twelve equal installments beginning February 1,
1997. ACE's obligation for any contributions, above the $10
million, to Salem 1997 O&M expenses up to ACE's estimated share of
$21.8 million, is based on performance and directly related to the
timely return and operation of Salem Units 1 and 2. With return of
Unit 2 to full power in September 1997, total O&M expenses related
to the Salem Units are expected to be $12.6 million for 1997.
Nuclear Plant Decommissioning
ACE has a trust to fund the future costs of decommissioning each
of the five jointly-owned nuclear units. 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. In a joint filing with PS, the
site specific studies were submitted to the BPU and reviewed by the
Ratepayer Advocate and Staff of the BPU. As a result of these
studies the Company will not request an increase in the annual
funding of the decommissioning trust.
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
Information pertaining specifically to ACE and its subsidiaries 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 or the Company)
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 1997 proxy statement for the annual
meeting of shareholders and the 1996 AEI Annual Report 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, 1997 and December 31, 1996, AEI had $52.0 million
and $37.6 million, respectively, outstanding under its $75.0 million
revolving credit and term loan facility. Proceeds have been used
for general corporate purposes.
ACE
At September 30, 1997 ACE had $45.9 million outstanding in short
term debt, compared to $65.0 million outstanding at December 31,
1996. Short term debt consisted of notes payable to banks.
Proceeds were used for general corporate purposes and to fund the
annual remittance of the state excise tax payment in the amount of
$91.1 million paid in March 1997.
ACE's Cumulative Preferred Securities and long term debt securities
are not widely held and generally trade infrequently. Their
estimated aggregate fair market values at September 30, 1997 and
December 31, 1996 are approximately $959 million and $975 million,
respectively.
On July 30, 1997, ACE issued $22.6 million aggregate amount of
variable rate, tax-exempt pollution control bonds. The principal
amount of $22.6 million represents two separate series of bonds:
$18.2 million Pollution Control Revenue Refunding Bonds, 1997 Series
A due April 15, 2014 (Series A) and $4.4 million Pollution Control
Revenue Refunding Bonds, 1997 Series B due July 15, 2017 (Series B).
The Series A and the Series B bonds paid an initial weekly rate of
3.4% and 3.5%, respectively. Each subsequent rate will be
determined by a remarketing agent. The rates of interest of each
series may be changed from time to time to a daily mode, a flexible
mode for periods of any duration up to 270 days or a multi-annual
mode for periods of not less than 365 days. The proceeds from the
sale of the Series A and Series B bonds have been applied,together
with other funds, to the September 2, 1997 redemption of $18.2
million aggregate principal amount of 7 3/8% Pollution Control
Revenue Bonds of 1984, Series A and $4.4 million aggregate principal
amount of 8 1/4% Pollution Control Revenue Bonds of 1987, Series B
for a total of $23.9 million.
On August 1, 1997 ACE redeemed 200,000 shares, at par, of its $8.20
Series No Par Preferred Stock. Under a mandatory sinking fund
requirement 100,000 shares were required to be redeemed and ACE
elected to redeem an optional 100,000 additional shares for a total
of $20.0 million using short term debt.
Atlantic Energy Enterprises, Inc. (AEE)
At September 30, 1997 and December 31, 1996, ATE Investments,
Inc.(ATE) had outstanding $6.0 million and $18.5 million,
respectively, under its $25 million revolving credit and term loan
facility. The estimated aggregate fair market value of ATE's $15
million in 7.44% Senior Notes at September 30, 1997 and December 31,
1996 was approximately $15 million.
At September 30, 1997 and December 31, 1996, Atlantic Thermal
Systems, Inc.(ATS) had outstanding $95.0 million and $42.0 million,
respectively, under its revolving credit and term loan facility.
This facility has been used for funding the construction of the
Midtown Energy Center in Atlantic City, New Jersey which began
start-up operation in October 1997. ATS's capital expenditures have
been approximately $68.4 million for this project to date. This
facility has also been used to satisfy certain associated company
payables and for other general corporate purposes, including
operating and servicing License Fees as described in the 1996 AEI
Annual Report on Form 10-K. The increase in Nonutility Property and
Equipment-Net on the Consolidated Balance Sheet is mainly due to the
construction of the Midtown Energy Center.
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. Proceeds from the bond issuance remain
restricted in trust pending resolution of certain release
conditions. The bonds paid an initial rate of 3.7% for the 120 day
period ending on April 30, 1996. The bonds have been remarketed
five times at fixed rates ranging from 3.5% to 3.8%. They may be
remarketed for one or more additional periods not to exceed 120
days, but in no event later than December 1, 1998 at which time the
bonds must be redeemed if the escrow conditions are not satisfied.
In October, 1997 the NJEDA approved a final bond resolution
authorizing the issuance of an additional $18.5 million in limited
obligation bonds. ATS will borrow from the NJEDA the proceeds of
this issuance for qualifying costs of the Midtown Energy Center,
this resolution is subject to New Jersey Board of Public Utilities
(BPU) approval. ATS expects to satisfy all the escrow release
conditions and obtain BPU approval in mid-November 1997, at which
point, the $31 million will be applied to certain qualifying costs
incurred during construction of the Midtown Energy Center.
ATS, in its pursuit of potential business opportunities throughout
the United States, has a potential funding commitment of a $35
million stand-by letter of credit. The funds would be provided from
ATS's existing revolving credit and term loan facility.
Results of Operations
Changes in net income and earnings per share for the periods ended
September 30, 1997 versus the corresponding periods of the previous
year are as follows:
Periods Ended September 30, 1997
Quarter Year-to-Date
Net Income 42.7% 40.4%
Earnings Per Share 43.5% 40.5%
The increases in net income and earnings per share primarily reflect
decreased operations and maintenance expenses related to the 1996
Salem Stipulation and increased nonutility income, primarily ATS,
for the periods.
Utility Revenues of ACE
Changes in Operating Revenues-Electric, exclusive of inter-company
sales, are disclosed in the following table:
Periods Ended September 30, 1997
Quarter Year-to-Date
(Thousands of Dollars)
Base Revenues $10,466 $ 7,035
Levelized Energy Clause 2,314 15,250
Kilowatt-hour Sales 15,855 (6,995)
Unbilled Revenues (2,263) 9,067
Sales for Resale (9,758) (15,881)
Other Revenues 1,147 1,141
Total $17,761 $ 9,617
The increase in Base Revenues is primarily due to the $13 million
adjustment related to the 1996 Salem Stipulation. This increase was
offset in part by Off-Tariff Rate Adjustments (OTRAs). OTRAs are
special reduced rates that are being offered, for periods ranging
from 5 to 7 years, by ACE to at-risk customers which reduced Base
Revenues $3.1 million for the current quarter ended period and $7.5
million for the year-to-date period. Levelized Energy Clause(LEC)
revenues for the periods increased due to an annual rate 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 available energy.
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, 1997
Quarter Year-To-Date
Average Average
Customer Class Sales Use Cust Sales Use Cust
Residential 5.8% 4.7% 1.1% (4.2%) (5.1%) 1.0%
Commercial 5.0 2.9 2.0 0.6 (1.1) 1.7
Industrial 6.7 6.5 0.2 2.9 2.3 0.6
Total 5.5 4.3 1.2 (1.2) (2.2) 1.1
The increases in the current quarter residential sales were due
primarily to more favorable weather in the summer of 1997 compared
to 1996, resulting in higher air conditioner usage. Industrial and
commercial sales increases were due to overall economic growth in
the region. The year-to-date decrease in residential sales were due
primarily to milder winter weather during the first quarter of 1997,
resulting in low heating usage.
<PAGE>
Operating Expenses
Total Operating Expenses increased by 4.3% for the current quarter
and decreased by 1.1% for the year-to-date when compared to the same
periods of the prior year. Excluding depreciation and taxes, Total
Operating Expenses decreased by 5.0% for the year-to-date, when
compared to the same period of the prior year, largely due to
decreases in operations and maintenance costs of 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 lower-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. 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
$29.2 million at September 30, 1997 and by $33.5 million at December
31, 1996.
Energy expense decreased by 3.9% for the current quarter and 3.1%
for the year-to-date, when compared to the same periods of the prior
year. Excluding deferred energy costs, Energy expense decreased by
10.6%, for the current quarter and 6.9% for the year-to-date, when
compared to the same periods of the prior year primarily due to
reduced market purchases of energy.
Sources of ACE's energy for the current period are as follows:
Periods Ended September 30, 1997
Quarter Year-to-Date
Coal 24% 26%
Nuclear 15% 17%
Interchanged and Purchased 30% 31%
Nonutility Purchased 25% 23%
Oil and Natural Gas 6% 3%
Total 100% 100%
Operations expense increased by 8.5% for the quarter ended and
decreased by 9.0% for the year-to-date, when compared to the same
periods of the previous year. The increase for the current quarter
period reflects the adjustments made during the same period of the
prior year as a result of the Salem Station Stipulation. The year-
to-date decrease was the result of reduced expenses resulting from
the operations and maintenance agreement with Public Service
Electric & Gas Company(PS) regarding the Salem Units, as discussed
in Note 5, and other cost saving measures instituted by ACE.
Maintenance expense decreased by 26.0% for the quarter ended and
34.3% for the year-to-date, when compared to the same periods of the
previous year, as a result of reduced expenses associated with the
Salem Station agreement with PS, as discussed in Note 5.
Federal Income Tax expense increased by 47.8% for the current
quarter and 53.7% for the year-to-date, when compared to the same
periods of the previous year, and Taxes Accrued on the Consolidated
Balance Sheet increased significantly due to the decrease in
operations and maintenance expense, as well as, increases in other
income as discussed below, which resulted in an increase of taxable
income for the quarter and year-to-date periods.
Other Income
Other Income increased significantly for the current quarter and
year-to-date periods when compared to the same periods of the
previous year, due primarily to an increase in nonutility earnings
as discussed in Nonutility Activities.
New Jersey Energy Master Plan
The BPU issued final findings and recommendations on the electric
industry restructuring in New Jersey to the Governor and the State
Legislature for their consideration on April 30, 1997.
The recommendation for the implementation of a phase-in plan for
retail competition would span a twenty-one month period providing
choice to 10% of all customers beginning October 1, 1998 and to 100%
by July 1, 2000. The plan required each electric utility in the
state to file complete restructuring plans, stranded cost filings
and unbundled rate filings by July 15, 1997. The plan would allow
utilities the opportunity to recover stranded costs on a case-by-
case basis, with no guarantee of 100 percent recovery of eligible
stranded costs.
ACE filed its response to the BPU on July 15, 1997. ACE's
restructuring filing met the BPU's recommendations for phase-in of
retail electric access based on a first-come, first-served basis,
proposing choice to 10% of all customers beginning October 1, 1998
and to 100% by July 1, 2000. Customers remaining with ACE will be
charged a market-based electricity price beginning October 1, 1998.
The restructuring filing included a two-phased approach to future
rate reductions of approximately 5%.
In an October 31, 1997 letter to the BPU, ACE added specificity to
the framework set out in the restructuring filing with regard to
steps ACE plans to take to meet the BPU's rate reduction and
restructuring goals. First, specific, definable cost reductions of
approximately 4% after 1998 were outlined. Further, ACE offered
that an appropriate resolution of the merger proceedings will allow
ACE to reduce its rates, due to the merger, of approximately 1.25%
upon consummation of the change in control. In addition, ACE's
current estimate showed that, through the use of securitized debt
for the full amount of stranded costs associated with its own
generation assets, a further rate decrease of up to 2% was possible
based on appropriate legislation and orders of the BPU. Finally,
ACE estimates that the results of good-faith negotiations with the
nonutility generators could provide a reduction of up to an
additional of 1.75%. In summary, ACE outlined a total rate
reduction of 9% by the end of the transition.
Under the restructuring filing ACE specified its total stranded cost
estimated to be approximately $1.3 billion, of which $965 million is
attributable to above-market Nonutility Generation (NUG) Contracts.
The remaining amount, approximately $340 million, is related to
wholly and jointly-owned generation investments. The restructuring
filing supports full recovery of stranded costs, which ACE believes
are necessary to move to a competitive environment. The
restructuring filing is currently in the discovery phase. During
this phase, ACE revised the estimated stranded cost amounts to be
approximately $911 million attributable to NUG contracts and
approximately $415 million related to wholly and jointly-owned
generation investments. The Administrative Law Judge is expected to
render a decision in May 1998.
Pending Merger
On June 26, 1997, the Company and Delmarva Power & Light (DP&L)
jointly announced an enhanced retirement offer (ERO) and separation
program that will be utilized to achieve workforce reductions as a
result of the merger. (Refer to Note 1 for merger discussion.) The
total cost to the Company for these programs, as well as, the cost
of executive severance, employee relocation and facilities
integration is estimated to range from $38 million to $48 million.
These costs are contingent upon the consummation of the merger. ACE
will be required to recognize these costs through expense in
accordance with generally accepted accounting principles (GAAP).
The actual cost to the Company and ACE will depend on a number of
factors related to the employee mix as well as the actual number of
employees who will be separated.
Accounting For Deregulation
ACE currently accounts for the economic effects of regulation as
specified by Statements of Financial Accounting Standards No. 71
(SFAS 71) which provides guidance on circumstances when the economic
effect of a regulator's decision warrants different application of
GAAP as a result of the ratemaking process. At this time, ACE
continues to meet the criteria set forth in SFAS 71 and has
presented these financial statements in accordance therewith.
The Financial Accounting Standards Board (FASB), through the
Emerging Issue Task Force (EITF), has recently set forth guidance
intended to clarify the accounting treatment of specific issues
associated with the restructuring of the electric utility industry
through EITF Issue No. 97-4, "Deregulation of the Pricing of
Electricity-Issues Related to the Application of FASB Statements No.
71, Accounting for the Effects of Certain Types of Regulation, and
No. 101, Regulated Enterprises-Accounting for the Discontinuation of
application of FASB Statement No. 71" (EITF No. 97-4). The consensus
reached in EITF No. 97-4 as to when an enterprise should stop
applying SFAS 71 to a separable portion of its business whose
pricing is being deregulated, is defined as "when deregulatory
legislation or a rate order (whichever is necessary to effect change
in the jurisdiction)is issued that contains sufficient detail for
the enterprise to reasonably determine how the transition plan will
effect the separable portion of its business" (e.g. generation).
Consensus was also reached "that the regulatory assets and
regulatory liabilities that originated in the separable portion of
an enterprise to which SFAS 101 is being applied should be evaluated
on the basis of where (that is, the portion of the business in
which) the regulated cash flows to realize and settle them,
respectively, will be derived." Additionally, the "source of the
cash flow approach adopted in the consensus should be used for
recoveries of all costs and settlements of all obligations (not just
for regulatory assets and regulatory liabilities that are recorded
at the date Statement 101 is applied) for which regulated cash flows
are specifically provided in the deregulatory legislation or rate
order".
At this time ACE cannot predict with certainty when it will stop
applying SFAS 71 for its generation business. ACE also cannot
predict the impacts on its financial condition as a result of
applying SFAS 101. The outcome will be dependent upon when a plan
is approved and the level of recovery of stranded costs allowed by
the BPU. If assets require a write-down as a result of the
application of SFAS 101, ACE may need to record an extraordinary
noncash charge to operations that could have a material impact on
the financial position and results of operations of ACE.
Salem Nuclear Generating Station
ACE is a 7.41% owner of the Salem operated by PS. Salem Units 1 and
2 were taken out of service on May 16, 1995 and June 7, 1995,
respectively.
PS advised ACE that the Salem restart plan, which encompassed a
comprehensive review and improvement of personnel, process and
equipment issues has been completed for Salem Unit 2. On August 6,
1997, the Nuclear Regulatory Commission (NRC) authorized the restart
of Salem 2 and stated that it would continue to closely monitor
activities at Salem. Salem Unit 2 returned to service on August 30,
1997. The unit reached 100% power on September 23, 1997.
PS has advised ACE that the installation of Salem Unit 1 steam
generators has been completed and the unit is expected to return to
service during the first quarter of 1998. Restart of Salem Unit 1
is also subject to NRC approval.
The outage of Salem Unit 1 causes ACE to incur replacement power
costs of approximately $700 thousand per month. As previously
discussed, ACE's replacement power costs for the current outage, up
to the agreed-upon return-to-service date of June 30, 1997, will be
recoverable in rates in ACE's 1997 LEC proceeding. Replacement
power costs incurred after the agreed-upon return-to-service date
for Salem Unit 1 will not be recoverable in rates. ACE has incurred
$8.1 million in non-recoverable replacement power costs to date
related to Salem.
Effective December 31, 1996, ACE entered into an agreement with PS
for the purpose of limiting ACE's exposure to Salem's 1997 operation
and maintenance (O&M) expenses. Pursuant to the terms of the
agreement, ACE will pay to PS $10 million of O&M expense, as a fixed
charge payable in twelve equal installments beginning February 1,
1997. ACE's obligation for any contributions, above the $10
million, to Salem 1997 O&M expenses up to ACE's estimated share of
$21.8 million, is based on performance and directly related to the
timely return and operation of Salem Units 1 and 2. With return of
Unit 2 to full power in September 1997, total O&M expenses related
to the Salem Units are expected to be $12.6 million for 1997.
Nuclear Plant Decommissioning
ACE has a trust to fund the future costs of decommissioning each
of the five jointly-owned nuclear units. 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. In a joint filing with PS, the
site specific studies were submitted to the BPU and reviewed by the
Ratepayer Advocate and Staff of the BPU. As a result of these
studies the Company will not request an increase in the annual
funding of the decommissioning trust.
Year 2000
The Company's Information Technology (IT) Department, through the
development of a project team, has developed a strategy to address
and correct the year 2000 problem (Y2K). An inventory of the
Company's computer applications, hardware and system software and
infrastructure has been completed. An initial assessment of these
systems has been made as they relate to the Y2K. The Company
believes that is it taking the necessary steps to minimize the risk
of an interruption of service to it's operations and customers.
Nonutility Activities-AEI
Nonutility activities are reflected in AEI's Other Income and
Expense line item on the Consolidated Statement of Income.
AEI
AEI parent only resulted in net losses of $2.0 million and $2.1
million for the year-to-date periods of the current year and the
prior year, respectively. The 1997 and 1996 losses are 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.
ACE
ACE's new nonutility activities primarily include nonregulated
wholesale electric market transactions, special lighting and
other energy services programs. These current nonutility activities
resulted in $4.3 million net income for the current year-to-date
ended period.
AEE
Operations of AEE and subsidiaries resulted in net income of $1.6
million for the year-to-date compared to net income of $0.5 million
for the same period of the prior year. The current net income is
primarily due to ATS's casino heating and cooling service contracts.
Also contributing to the nonutility net income was a reduction of
ATE's interest expense.
<PAGE>
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.
<PAGE>
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (Litigation
Reform Act) provides a "safe harbor" for forward-looking statements
to encourage such disclosures without the threat of litigation,
provided those statements are identified as forward-looking and are
accompanied by meaningful, cautionary statements identifying
important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking
statements have been made in this report. Such statements are based
on management's beliefs as well as assumptions made by and
information currently available to management. When used herein,
the words "will", "anticipate," "estimate," "expect", "objective",
and similar expressions are intended to identify forward-looking
statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking
statements, factors that could cause actual results to differ
materially from those contemplated in any forward-looking statements
include, among others, the following: deregulation and the
unbundling of energy supplies and services; and increasingly
competitive energy marketplace; sales retention and growth; federal
and state regulatory actions; costs of construction; operating
restrictions; increased costs and construction delays attributable
to environmental regulations; nuclear decommissioning and the
availability of reprocessing and storage facilities for spent
nuclear fuel; and credit market concerns. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. The foregoing review of factors pursuant to the
Litigation Reform Act should not be construed as exhaustive or as
any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Litigation Reform Act.<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information updates certain matters previously
reported under Part I, Item 1 - Business of the Annual Report on
Form 10-K for 1996 and Part II, Item 5-Other Information on Form 10-
Q for the quarter ended June 30, 1997 for Atlantic Energy, Inc.(AEI)
and Atlantic City Electric Company (ACE). In addition, certain new
information is contained herein.
As previously reported in the 1996 Form 10-K, the Salem Nuclear
Generating Station (Salem) co-owners filed a Complaint in February
1996 in the United States District Court for the District of New
Jersey against Westinghouse Electric Corporation, the designer and
manufacturer of the Salem steam generators, seeking damages to
recover the cost of replacing the steam generators at Salem. In
accordance with the court's schedule, Westinghouse filed a motion
for summary judgment on October 1, 1997. Also in accordance with
the court's schedule, ACE and the three co-owners of Salem will file
their opposition to that motion for summary judgement. The
litigation is continuing in accordance with the schedule established
by the court.
Item 5. Other Information
Environmental Matters
As previously reported, the New Jersey Department of Environmental
Protection (NJDEP) announced that it intended to introduce rules to
reduce nitrogen oxide (NOx) emissions by 90% from the 1990 levels by
the year 2003. On September 15, 1997 the NJDEP filed its proposal
with the Office of Administrative Law. In its proposal, entitled
"NOx Budget Program", N.J.A.C. 7:27-31, the NJDEP prescribed
participation of New Jersey's large combustion sources in a regional
cap and trade program designed to significantly reduce emissions of
NOx. In effect, the proposed regulation would require New Jersey to
become the first northeastern state to require NOx reductions of 90%
from the 1990 levels, by the year 2003. On October 24, 1997 ACE
testified in opposition to the proposal. ACE cannot predict the
ultimate outcome of this matter.
Pending Merger
As previously reported, regulatory approvals of the planned merger
between AEI and Delmarva Power and Light (DP&L) have been obtained
from the Federal Energy Regulatory Commission (FERC), the Maryland
Public Service Commission (MPSC) and the Virginia State Corporation
Commission (VSCC).
<PAGE>
On September 23, 1997, the Delaware Public Service Commission
(DPSC) also approved the merger. The settlement agreement with the
DPSC will result in a rate decrease of approximately $7.5 million or
1.5% of Delaware electric revenues beginning with the closing of the
merger. This represents an approximate 50/50 sharing of the merger
savings between customers and shareholders in the first year.
Additional rate decreases for electric and natural gas customers
will be phased-in over the second and third years following the
close of the merger. On October 6, 1997, the Pennsylvania Public
Utilities Commission also approved the merger. The merger still
requires the approval of the New Jersey Board of Public Utilities,
the Nuclear Regulatory Commission, and the Securities and Exchange
Commission (SEC). The Company expects the regulatory approval
process to be completed by year-end or early 1998.
On October 27, 1997 South Jersey Gas Company (SJG) filed a
motion to intervene in the merger application with the SEC, seeking
a formal hearing and additional time for filing further comments.
The SJG motion contends that Conectiv, in acquiring the gas
properties of DP&L and operating as a combination utility, is in
violation of Section 10(c)(1) and Section 11 of the Public Utility
Holding Company Act of 1935 ("Act"). ACE can not predict the
outcome of this matter but strongly believes that the SJG motion is
without merit.
Nuclear Generating Station Developments
Salem Nuclear Generating Station
ACE is a 7.41% owner of Salem operated by Public Service Electric
and Gas (PS). Salem consists of two 1,106 megawatt (MW) pressurized
water nuclear reactors representing 164 MWs of ACE's total installed
capacity of 2,386 MWs. (Refer to Note 5 for additional information)
As previously reported, a predecisional enforcement conference
was held on July 8, 1997, with the NRC to discuss apparent
violations at Salem. These apparent violations were identified in
May and June, 1997, and concern emergency core cooling system
switchover and related residual heat removal system (RHR) flow
issues, and Appendix R (fire protection) issues. PS has advised ACE
that, in a letter dated October 8, 1997, the NRC informed PS that a
Level III violation was cited for the issues surrounding the RHR
system and Level IV violations were cited for the two Appendix R
issues. There was no civil penalty issued by the NRC.
Hope Creek Station
As previously reported on Form 10-K for 1996, in 1990 General
Electric (GE) reported that crack indications were discovered near
the seam welds in the core shroud assembly in a GE boiling water
reactor (BWR) located outside the United States. As a result, GE
issued a letter requesting that the owners of GE BWR plants take
interim corrective actions, including a review of fabrication
records and visual examinations of accessible areas of the core
shroud seam welds. PS, the operator of the Hope Creek Nuclear
Generating Station (Hope Creek), is participating in the GE BWR
Owners Group to evaluate this issue and develop long-term corrective
action. During its 1994 refueling outage, PS inspected the shroud
of Hope Creek in accordance with GE's recommendations and found no
cracks. In June 1994, an industry group was formed and subsequently
established generic inspection guidelines which were approved by the
NRC. Hope Creek was initially placed in the lowest susceptibility
category under these guidelines. ACE has been advised that due to
Hope Creek's operating time, it now falls into the intermediate
susceptibility category. PS also advised ACE that another
inspection has been performed by PS during Hope Creek's current
refueling outage in September 1997, and preliminary results from
that inspection have been deemed to be satisfactory.
ACE has also been advised that a predecisional enforcement
conference was held with the NRC on August 12, 1997, to discuss
apparent violations at Hope Creek relating to the installation of
cross-tie valves in the residual heat removal system at Hope Creek
in 1994. On October 20th, the NRC issued a severity level III
violation for this matter. There was no civil penalty issued by the
NRC.
ACE has also been advised that modifications to Hope Creek's
emergency core cooling systems (ECCS) suction strainers are also
required per NRC Bulletin 96-03. PS has advised ACE that they have
installed a portion of the required large capacity passive strainers
during the current Hope Creek refueling outage which began in
September 1997. PS is currently seeking NRC approval for deferral of
the installation of the remaining strainers until the next refueling
outage scheduled for February 1999. It is unknown what further
actions the NRC may take in this matter.
PS has also advised ACE that a predecisional enforcement
conference has been scheduled for December 9, 1997 to discuss two
allegations concerning security program issues which occurred at
Salem and Hope Creek in 1996. ACE cannot predict what other
actions, if any, the NRC may take in this matter.
<PAGE>
Item 6. Exhibits and Reports on 8-K
Exhibits: See Exhibit Index Attached
Reports on Form 8-K:
Current Report on Form 8-K was filed dated July 15, 1997 describing
the Company's restructuring filing as required by the BPU's Energy
Master Plan.
***************************************************
<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: November 12, 1997 By: /s/ M. J. Barron
M. J. Barron
Vice President and Chief
Financial Officer of Atlantic
Energy, Inc. and Senior Vice
President and Chief Financial
Officer of Atlantic City
Electric Company
Date: November 12, 1997 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 September
30, 1997.
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