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 June 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. 52,702,052 shares (as of August 7, 1996)
All of the outstanding shares of Common Stock of Atlantic City
Electric Company are owned by Atlantic Energy, Inc.
CONSOLIDATED STATEMENT OF INCOME
Thousands of Dollars
Quarter Ended June 30,
1996 1995
(unaudited)
Operating Revenues-Electric $225,678 $206,232
Operating Expenses:
Energy 46,495 37,167
Purchased Capacity 47,903 46,839
Operations 39,455 35,959
Maintenance 11,735 7,914
Depreciation and Amortization 19,973 19,462
State Excise Taxes 24,193 22,600
Federal Income Taxes 5,810 6,142
Other Taxes 2,429 2,378
Total Operating Expenses 197,993 178,461
Operating Income 27,685 27,771
Other Income:
Allowance for Equity Funds Used During
Construction 272 175
Other-Net 1,879 2,315
Total Other Income 2,151 2,490
Interest Charges:
Interest on Long Term Debt 15,041 14,549
Other Interest Expense 1,831 1,705
Total Interest Charges 16,872 16,254
Allowance for Borrowed Funds Used
During Construction (295) (348)
Net Interest Charges 16,577 15,906
Less Preferred Stock Dividend
Requirements of Subsidiary 3,009 3,787
Net Income $ 10,250 $ 10,568
Average Number of Shares of Common 52,702 52,717
Stock Outstanding (in thousands)
Per Common Share:
Earnings $ .20 $ .20
Dividends Declared $ .385 $ .385
Dividends Paid $ .385 $ .385
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Thousands of Dollars
Year-to-Date June 30,
1996 1995
(unaudited)
Operating Revenues-Electric $471,003 $424,834
Operating Expenses:
Energy 105,278 84,392
Purchased Capacity 97,232 92,984
Operations 75,168 73,554
Maintenance 22,450 14,731
Depreciation and Amortization 40,224 38,919
State Excise Taxes 50,998 47,360
Federal Income Taxes 13,615 12,339
Other Taxes 5,372 5,175
Total Operating Expenses 410,337 369,454
Operating Income 60,666 55,380
Other Income:
Allowance for Equity Funds Used During
Construction 492 659
Other-Net 2,785 3,902
Total Other Income 3,277 4,561
Interest Charges:
Interest on Long Term Debt 30,136 29,146
Other Interest Expense 2,630 1,908
Total Interest Charges 32,766 31,054
Allowance for Borrowed Funds Used
During Construction (626) (725)
Net Interest Charges 32,140 30,329
Less Preferred Stock Dividend
Requirements of Subsidiary 6,019 7,575
Net Income 25,784 22,037
Retained Earnings at Beginning of
Period 249,741 249,181
275,525 271,218
Dividends Declared on Common Stock (40,580) (40,773)
Retained Earnings at End of Period $234,945 $230,445
Average Number of Shares of Common 52,702 53,094
Stock Outstanding (in thousands)
Per Common Share:
Earnings $ .49 $ .42
Dividends Declared $ .77 $ .77
Dividends Paid $ .77 $ .77
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars
Year-to-Date June 30,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 25,784 $ 22,037
Deferred Purchased Power Costs 8,206 7,852
Deferred Energy Costs (4,244) (5,901)
Depreciation and Amortization 40,224 38,919
Deferred Income Taxes-Net (514) 4,101
Unrecovered State Excise Taxes 4,780 4,780
Employee Separation Costs (3,547) (11,176)
Net Increase in Other Working Capital (35,763) (63,179)
Preferred Stock Dividend Requirements
of Subsidiary 6,019 7,575
Other-Net (118) 2,602
Net Cash Provided by Operating
Activities 40,827 7,610
Cash Flows Of Investing Activities:
Utility Cash Construction Expenditures (40,220) (43,575)
Leased Property (1,832) (3,986)
Nuclear Decommissioning Trust Fund
Deposits (3,212) (3,212)
Utility Plant Removal Costs (1,033) (2,360)
Other-Net 6,336 1,474
Net Cash Used by Investing Activities (39,961) (51,659)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt 1,000 43,367
Retirement and Maturity of Long Term Debt(19,266) -
Redemption of Preferred Stock (12,120) -
Increase in Short Term Debt 76,720 75,400
Proceeds from Common Stock Issued 3,993 -
Purchases of Common Stock (1,823) (28,421)
Dividends Declared on Preferred Stock (6,019) (7,575)
Dividends Declared on Common Stock (40,580) (40,635)
Other-Net 1,620 3,324
Net Cash Provided by Financing
Activities 3,525 45,460
Net Increase in Cash and Temporary
Investments 4,391 1,411
Cash and Temporary Investments,
beginning of period 5,691 5,114
Cash and Temporary Investments,
end of period $ 10,082 $ 6,525
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
June 30, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,469,033 $2,429,176
Less Accumulated Depreciation 833,924 794,479
Net 1,635,109 1,634,697
Construction Work in Progress 116,228 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 38,835 40,878
Electric Utility Plant-Net 1,795,776 1,801,786
Investments and Nonutility Property:
Investment in Leveraged Leases 79,338 78,959
Nuclear Decommissioning Trust Fund 66,527 61,802
Nonutility Property and Equipment-Net 27,051 22,743
Other Investments and Funds 48,390 52,780
Total Investments and Nonutility
Property 221,306 216,284
Current Assets:
Cash and Temporary Investments 10,082 5,691
Accounts Receivable:
Utility Service 72,565 66,099
Miscellaneous 21,811 17,477
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 38,159 41,515
Fuel (at average cost) 23,155 25,459
Materials and Supplies (at average cost) 24,940 25,434
Working Funds 15,352 14,421
Deferred Energy Costs 35,678 31,434
Prepaid Excise Taxes 56,162 10,753
Other 11,876 13,339
Total Current Assets 306,280 248,322
Deferred Debits:
Unrecovered Purchased Power Costs 91,612 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 59,494 64,274
Unamortized Debt Costs 37,419 39,004
Other Regulatory Assets 57,363 54,568
Other 13,231 10,983
Total Deferred Debits 344,977 354,504
Total Assets $2,668,339 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
June 30, December 31,
1996 1995
(unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shareholders' Equity:
Common Stock $ 565,606 $ 563,436
Retained Earnings 234,945 249,741
Total Common Shareholders' Equity 800,551 813,177
Preferred Stock of Atlantic Electric:
Not Subject to Mandatory Redemption 40,000 40,000
Subject to Mandatory Redemption 114,750 114,750
Long Term Debt 829,778 829,856
Total Capitalization
(excluding current portion) 1,785,079 1,797,783
Current Liabilities:
Cumulative Preferred Stock Redemption
Requirement 10,250 22,250
Long Term Debt 47,100 65,247
Short Term Debt 107,265 30,545
Accounts Payable 53,385 60,858
Taxes Accrued 20,711 3,450
Interest Accrued 20,467 20,315
Dividends Declared 23,300 23,490
Accrued Employee Separation Costs 3,942 7,488
Deferred Income Taxes 2,540 2,569
Other 25,427 20,554
Total Current Liabilities 314,387 256,766
Deferred Credits and Other Liabilities:
Deferred Income Taxes 426,672 425,875
Deferred Investment Tax Credits 47,845 49,112
Capital Lease Obligations 38,159 40,227
Other 56,197 51,133
Total Deferred Credits and
Other Liabilities 568,873 566,347
Total Liabilities and Capitalization $2,668,339 $2,620,896
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Atlantic Energy, Inc. (the Company, AEI or parent) is the parent
of Atlantic City Electric Company (ACE) and Atlantic Energy
Enterprises, Inc. (AEE) which are wholly-owned subsidiaries.
ACE is a public utility primarily engaged in the generation,
transmission, distribution and sale of electric energy. AEE is a
holding company which is responsible for the management of the
investments in nonutility companies consisting of: Atlantic
Generation, Inc. (AGI), ATE Investment, Inc. (ATE), Atlantic
Southern Properties, Inc. (ASP), Atlantic Thermal Systems, Inc.
(ATS), 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. The
consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The results of operations of the nonutility companies are not
significant and are classified under Other Income in the
Consolidated Statement of Income.
These consolidated financial statements reflect all normal,
recurring adjustments and accruals which, in the opinion of
management, are necessary for a fair presentation of the
consolidated financial statements presented. The notes to the
consolidated financial statements accompanying the Company's 1996
proxy statement for the annual meeting of shareholders and the
Company's 1995 Annual Report on Form 10-K, which are both filed
with the Securities and Exchange Commission, should be read in
conjunction with this report. Note 1 of these annual reports
specifically identifies the significant accounting policies of
the Company. The consolidated balance sheet contained in the
financial statements presented herein that is labeled December
31, 1995 was derived from the audited consolidated balance sheet
presented in the Company's 1996 proxy statement for the annual
meeting of shareholders and the 1995 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform
to the current year reporting.
On August 12, 1996, the Boards of Directors of the Company 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
regulators. Securing the necessary approvals may take from 12 to
18 months. 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
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
On March 29, 1996, ACE filed with the New Jersey Board of Public
Utilities (BPU) a petition requesting a $49.7 million increase in
annual Levelized Energy Clause (LEC) revenues to be effective
June 1, 1996. The requested LEC rates continue to include the
cost of four BPU approved contracts with Independent Power
Producers. This request also includes the recovery of $20.6
million of LEC costs previously deferred from the 1995 LEC rates.
In order to reduce the impact of this LEC request to customers,
ACE reduced the level of its request by offering to defer $14.7
million of 1996/1997 LEC costs, to be recovered without carrying
costs in the next LEC period. ACE also requested the proposed
rates be implemented on a provisional basis until final LEC rates
are approved with the BPU. Accordingly, a stipulation was
reached by the parties, and approved by the BPU on July 17, 1996.
The stipulation allowed ACE to implement provisional rates
resulting in an increase of annual LEC revenues of $27.6 million.
The stipulation provides 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 Nuclear
Generating Station (Salem) Unit 1 and 2 ongoing outages; $1.7
million in New Jersey emission fees; and $1.7 million in 1994
Salem Unit 1 replacement power costs. 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.
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. The order
established that this matter be reviewed in a two phase
proceeding: 1) to determine and quantify the existence or non-
existence of a double recovery; and 2) if a double recovery is
found to exist to address the appropriate prospective methodology
for the recovery of these capacity costs. In September 1995, the
Ratepayer Advocate filed testimony that claims ACE's overrecovery
of capacity costs for the four-year period June 1991 through May
1995 is $46 million. This estimate was subsequently revised to
$38.3 million in the rebuttal testimony of the Ratepayer
Advocate. The Ratepayer Advocate also filed testimony supporting
similar claims for other New Jersey electric utilities. In
December 1995, ACE and the other electric utilities filed
testimony rebutting the Ratepayer Advocate's claims. Evidentiary
hearings were held in December 1995, April 1996 and July 1996.
The BPU's final decision is not expected until the latter part of
1996 pending continuing litigation. At this time, ACE cannot
predict the outcome of this proceeding and cannot estimate the
impact that the double recovery issue may have on future rates.
By Order dated March 14, 1996 the BPU initiated an investigation
of the ongoing outage at Salem. ACE has a 7.41% ownership in
Salem operated by Public Service Electric and Gas Company (PS).
By its Order the BPU declared the base rates associated with
ACE's and PS's ownership in Salem Unit 1 interim and subject to
refund pending a hearing as to whether Salem Unit 1 is currently
used and useful. Hearings have been scheduled for October 1996.
The BPU also, in an Order dated June 26, 1996, declared the base
rates associated with ACE's and PS's ownership in Salem Unit 2
interim and subject to refund. In contrast to Unit 1, the BPU
reserved judgment as to the need for discovery and hearings on
the used and useful issues related to Unit 2, pending their
review of the progress towards restart of the unit. Unit 2
remains out of service and, at this time, PS has not advised ACE
of a revised restart date. Due to this delay, the BPU voted on
July 31, 1996 to include Unit 2 in the hearings scheduled for
October to determine if both units are still considered used and
useful. (See Note 5 for further information regarding the
ongoing outage at Salem).
As part of the order, ACE submitted to the BPU plant investment
and cost information relating to Salem on April 4, 1996. Such
information was based on the test year ending May 31, 1991
utilized in ACE's last base rate proceeding and other information
provided by PS for determining the allocation of plant investment
among Salem Unit 1, Salem Unit 2 and common facilities. The
total annual revenue requirement estimate is $12.5 million for
Salem Unit 1, $10.8 million for Salem Unit 2 and $11.3 million
for facilities that are common to both Salem Units 1 and 2.
NOTE 3. DEBT AND PREFERRED STOCK
On May 1, 1996, ACE satisfied the sinking fund requirements of
$19 thousand for its 7 1/4% Debentures. 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 June 30, 1996 are approximately $159 million and
$780 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 $107.3 million outstanding at June 30, 1996 of which $20.1
million was commercial paper. ACE's short term debt at December
31, 1995 was $30.5 million which consisted of notes payable only.
At June 30, 1996 and December 31, 1995, AEI had $32 million and
$34.5 million, respectively, outstanding under its revolving
credit and term loan facility.
At June 30, 1996 and December 31, 1995, ATE had outstanding $15
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 June 30, 1996 and
December 31, 1995 was approximately $15 million and $16 million,
respectively.
NOTE 4. COMMON STOCK
As of June 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 the Company's Equity Incentive Plan and ACE's benefit
plans.
NOTE 5. CONTINGENCIES
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 dates are subject to
completion of testing, analysis, repair activity and Nuclear
Regulatory Commission (NRC) concurrence that they are prepared to
restart. Salem Unit 1 is anticipated to return to service in
mid-1997 after completion of refurbishment, including replacement
of its steam generators. Unused steam generators have been
acquired and are expected to be received at the Salem site by the
end of October 1996. The estimated cost of purchasing and
installing the steam generators is 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. PS had previously advised
ACE that Unit 2 was expected to return to service on or about
August 27, 1996. It is now anticipated that Salem Unit 2 testing
will continue well into the fourth quarter of this year. No
revised restart target date for Salem Unit 2 has been
established. ACE's share of incremental expenses associated with
the restart of Salem Units 1 and 2 is $5.4 million for the year-
to-date period ended June 1996. Updated estimates for the
remaining incremental restart costs for 1996 have not been
provided by PS.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of ACE's nuclear units is
expected to be below the zone of reasonable performance, ACE
anticipates that it will incur a nuclear performance penalty in
1996 of $2.7 million, net of tax. This penalty is being
recognized throughout 1996 as it relates to performance and
replacement power costs incurred incrementally during the year.
As of June 30, 1996, ACE has accrued $1.1 million, net of tax,
for the 1996 penalty.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $700 thousand per month per unit.
ACE believes that in the event of a unit's removal from base
rates, ACE would be entitled to recover replacement power costs
attributable to such units through its LEC and that the estimated
nuclear performance standard penalty for 1996 would be
substantially reduced. (See Note 2 - Rate Matters of ACE).
ACE has a trust to fund the future costs of decommissioning each
of the five nuclear units in which it has an ownership interest.
The current annual funding amount of this trust is based on
estimates of the future costs of decommissioning each unit
derived from studies performed in 1987. In accordance with BPU
requirements, updated site specific studies are underway.
Amounts to be recognized and recovered in rates based on the
updated studies are not presently determinable. Results of the
studies are expected by the end of the third quarter of 1996.
CONSOLIDATED STATEMENT OF INCOME
Thousands of Dollars
Quarter Ended June 30,
1996 1995
(unaudited)
Operating Revenues-Electric $226,035 $206,246
Operating Expenses:
Energy 46,495 37,167
Purchased Capacity 47,903 46,839
Operations 39,479 35,986
Maintenance 11,746 7,917
Depreciation and Amortization 19,973 19,462
State Excise Taxes 24,193 22,600
Federal Income Taxes 5,810 6,142
Other Taxes 2,429 2,378
Total Operating Expenses 198,028 178,491
Operating Income 28,007 27,755
Other Income:
Allowance for Equity Funds Used During
Construction 272 175
Miscellaneous Income-Net 1,762 3,087
Total Other Income 2,034 3,262
Interest Charges:
Interest on Long Term Debt 15,041 14,549
Other Interest Expense 1,831 1,705
Total Interest Charges 16,872 16,254
Allowance for Borrowed Funds Used
During Construction (295) (348)
Net Interest Charges 16,577 15,906
Net Income 13,464 15,111
Less Preferred Dividend Requirements 3,009 3,787
Balance Available for Common Shareholder $ 10,455 $ 11,324
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Thousands of Dollars
Year-to-Date June 30,
1996 1995
(unaudited)
Operating Revenues-Electric $471,507 $424,912
Operating Expenses:
Energy 105,278 84,392
Purchased Capacity 97,232 92,984
Operations 75,239 73,676
Maintenance 22,466 14,747
Depreciation and Amortization 40,224 38,919
State Excise Taxes 50,998 47,360
Federal Income Taxes 13,615 12,339
Other Taxes 5,372 5,175
Total Operating Expenses 410,424 369,592
Operating Income 61,083 55,320
Other Income:
Allowance for Equity Funds Used During
Construction 492 659
Miscellaneous Income-Net 3,345 5,240
Total Other Income 3,837 5,899
Interest Charges:
Interest on Long Term Debt 30,136 29,146
Other Interest Expense 2,630 1,908
Total Interest Charges 32,766 31,054
Allowance for Borrowed Funds Used
During Construction (626) (725)
Net Interest Charges 32,140 30,329
Net Income 32,780 30,890
Retained Earnings at Beginning of Period 252,484 249,767
285,264 280,657
Dividends Declared:
Cumulative Preferred Stock (6,019) (7,575)
Common Stock (40,580) (40,786)
Total Dividends Declared (46,599) (48,361)
Capital Stock Expense and Other (83) -
Retained Earnings at End of Period $238,582 $232,296
Earnings for Common Stock:
Net Income $ 32,780 $ 30,890
Less Preferred Dividend Requirements 6,019 7,575
Balance Available for Common Shareholder $ 26,761 $ 23,315
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of Dollars
Year-to-Date June 30,
1996 1995
(unaudited)
Cash Flows Of Operating Activities:
Net Income $ 32,780 $ 30,890
Deferred Purchased Power Costs 8,206 7,852
Deferred Energy Costs (4,244) (5,901)
Depreciation and Amortization 40,224 38,919
Deferred Federal Income Taxes-Net (1,121) 2,612
Prepaid State Excise Taxes 4,780 4,780
Employee Separation Costs (3,547) (11,176)
Net Increase in Other Working Capital (44,485) (59,874)
Other-Net 2,187 4,816
Net Cash Provided by Operating
Activities 34,778 12,918
Cash Flows Of Investing Activities:
Cash Construction Expenditures (40,220) (43,575)
Leased Property (1,832) (3,986)
Nuclear Decommissioning Trust Fund
Deposits (3,212) (3,212)
Plant Removal Costs (1,033) (2,360)
Other-Net 1,897 4,511
Net Cash Used in Investing Activities (44,400) (48,622)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt - 24,867
Retirement and Maturity of Long Term Debt (12,266) -
Increase in Short Term Debt 76,720 55,400
Proceeds from Capital Lease Obligations 1,832 3,986
Capital Contributions 2,132 313
Redemption of Preferred Stock (12,120) -
Dividends Declared on Preferred Stock (6,019) (7,575)
Dividends Declared on Common Stock (40,580) (40,786)
Other-Net (226) (447)
Net Cash Provided by Financing
Activities 9,473 35,758
Net (Decrease)Increase in Cash and
Temporary Investments (149) 54
Cash and Temporary Investments,
beginning of period 3,987 3,459
Cash and Temporary Investments,
end of period $ 3,838 $ 3,513
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
June 30, December 31,
1996 1995
(unaudited)
ASSETS
Electric Utility Plant:
In Service $2,469,033 $2,429,176
Less Accumulated Depreciation 833,924 794,479
Net 1,635,109 1,634,697
Construction Work in Progress 116,228 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 38,835 40,878
Electric Utility Plant-Net 1,795,776 1,801,786
Investments and Nonutility Property:
Nuclear Decommissioning Trust Fund 66,527 61,802
Other Property, Investments and Funds 3,471 2,077
Total Investments and Nonutility
Property 69,998 63,879
Current Assets:
Cash and Temporary Investments 3,838 3,987
Accounts Receivable:
Utility Service 72,565 66,099
Miscellaneous 19,683 17,379
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 38,159 41,515
Fuel (at average cost) 23,143 25,459
Materials and Supplies (at average cost) 24,940 25,434
Working Funds 15,351 14,420
Deferred Energy Costs 35,678 31,434
Prepaid Excise Taxes 56,162 10,753
Other 9,370 10,249
Total Current Assets 295,389 243,429
Deferred Debits:
Unrecovered Purchased Power Costs 91,612 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 59,494 64,274
Unamortized Debt Costs 36,911 38,924
Other Regulatory Assets 57,363 54,568
Other 12,110 9,372
Total Deferred Debits 343,348 352,813
Total Assets $2,504,511 $2,461,907
SEE NOTES TO CONSOLIDATED STATEMENTS
CONSOLIDATED BALANCE SHEET
Thousands of Dollars
June 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 (2,049) (2,131)
Retained Earnings 238,582 252,484
Total Common Shareholder's Equity 787,471 799,159
Cumulative Preferred Stock:
Not Subject to Mandatory Redemption 40,000 40,000
Subject to Mandatory Redemption 114,750 114,750
Long Term Debt 802,278 802,356
Total Capitalization
(excluding current portion) 1,744,499 1,756,265
Current Liabilities:
Preferred Stock Redemption
Requirement 10,250 22,250
Capital Lease Obligations 676 650
Long Term Debt-Current Portion 100 12,247
Short Term Debt 107,265 30,545
Accounts Payable 53,385 60,831
Federal Income Taxes Payable-Affiliate 14,235 11,574
Other Taxes Accrued 5,949 3,382
Interest Accrued 19,947 19,961
Dividends Declared 23,300 23,490
Employee Separation Costs 3,942 7,488
Deferred Income Taxes 2,540 2,569
Other 22,999 17,156
Total Current Liabilities 264,588 212,143
Deferred Credits and Other Liabilities:
Deferred Income Taxes 354,394 354,218
Deferred Investment Tax Credits 47,845 49,112
Capital Lease Obligations 38,159 40,227
Other 55,026 49,942
Total Deferred Credits and
Other Liabilities 495,424 493,499
Total Liabilities and Capitalization $2,504,511 $2,461,907
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Atlantic City Electric Company (the Company) is a wholly-owned
subsidiary of Atlantic Energy, Inc. (AEI). The consolidated
financial statements include the accounts of the Company and its
subsidiary, which is wholly-owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
These consolidated financial statements reflect all normal,
recurring adjustments and accruals which, in the opinion of
management, are necessary for a fair presentation of the
consolidated financial statements presented. The notes to the
consolidated financial statements accompanying the Company's 1995
Annual Report on Form 10-K filed with the Securities and Exchange
Commission should be read in conjunction with this report.
Note 1 of this annual report specifically identifies the
significant accounting policies of the Company. The consolidated
balance sheet contained in the financial statements presented
herein that is labeled December 31, 1995 was derived from the
audited consolidated balance sheet presented in the 1995
Form 10-K.
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 regulators. Securing
the necessary approvals may take from 12 to 18 months. The
Company would become a subsidiary of the new company. 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
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
On March 29, 1996, the Company filed with the New Jersey Board of
Public Utilities (BPU) a petition requesting a $49.7 million
increase in annual Levelized Energy Clause (LEC) revenues
effective June 1, 1996. The requested LEC rates continue to
include the cost of four BPU approved contracts with Independent
Power Producers. This request also includes the recovery of
$20.6 million of LEC costs previously deferred from the 1995 LEC
rates. In order to reduce the impact of this LEC request to
customers, the Company reduced the level of its request by
offering to defer $14.7 million of 1996/1997 LEC costs, to be
recovered without carrying costs in the next LEC period. The
Company also requested the proposed rates be implemented on a
provisional basis until final LEC rates are approved with the
BPU. Accordingly, a stipulation was reached by the parties, and
approved by the BPU on July 17, 1996. The stipulation allowed
the Company to implement provisional rates resulting in an
increase of annual LEC revenues of $27.6 million. The
stipulation provides 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 Nuclear
Generating Station (Salem) Unit 1 and 2 ongoing outages; $1.7
million in New Jersey emission fees; and $1.7 million in 1994
Salem Unit 1 replacement power costs. 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.
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. The order
established that this matter be reviewed in a two phase
proceeding: 1) to determine and quantify the existence or non-
existence of a double recovery; and 2) if a double recovery is
found to exist to address the appropriate prospective methodology
for the recovery of these capacity costs. In September 1995, the
Ratepayer Advocate filed testimony that claims the Company's
overrecovery of capacity costs for the four-year period June 1991
through May 1995 is $46 million. This estimate was subsequently
revised to $38.3 million in the rebuttal testimony of the
Ratepayer Advocate. The Ratepayer Advocate also filed testimony
supporting similar claims for other New Jersey electric
utilities. In December 1995, the Company and the other electric
utilities filed testimony rebutting the Ratepayer Advocate's
claims. Evidentiary hearings were held in December 1995, April
1996 and July 1996. The BPU's final decision is not expected
until the latter part of 1996 pending continuing litigation. At
this time, the Company cannot predict the outcome of this
proceeding and cannot estimate the impact that the double
recovery issue may have on future rates.
By Order dated March 14, 1996 the BPU initiated an investigation
of the ongoing outage at Salem. The Company has a 7.41%
ownership in Salem operated by Public Service Electric and Gas
Company (PS). By its Order the BPU declared the base rates
associated with the Company's and PS's ownership in Salem Unit 1
interim and subject to refund pending a hearing as to whether
Salem Unit 1 is currently used and useful. Hearings have been
scheduled for October 1996. The BPU also, in an Order dated June
26, 1996, declared the base rates associated with the Company's
and PS's ownership in Salem Unit 2 interim and subject to refund.
In contrast to Unit 1, the BPU reserved judgment as to the need
for discovery and hearings on the used and useful issues related
to Unit 2, pending their review of the progress towards restart
of the unit. Unit 2 remains out of service and, at this time, PS
has not advised ACE of a revised restart date. Due to this delay,
the BPU voted on July 31, 1996 to include Unit 2 in the hearings
scheduled for October to determine if both units are still
considered used and useful. (See Note 4 for further information
regarding the ongoing outage at Salem).
As part of the Order, the Company submitted to the BPU plant
investment and cost information relating to Salem on April 4,
1996. Such information was based on the test year ending May 31,
1991 utilized in the Company's last base rate proceeding and
other information provided by PS for determining the allocation
of plant investment among Salem Unit 1, Salem Unit 2 and common
facilities. The total annual revenue requirement estimate is
$12.5 million for Salem Unit 1, $10.8 million for Salem Unit 2
and $11.3 million for facilities that are common to both Salem
Units 1 and 2.
NOTE 3. DEBT AND PREFERRED STOCK
On May 1, 1996, the Company satisfied the sinking fund
requirements of $19 thousand for its 7 1/4% Debentures. The
Company's Cumulative Preferred Stock and long term debt
securities are not widely held and generally trade infrequently.
Their estimated aggregate fair market values at June 30, 1996 are
approximately $159 million and $780 million, respectively. Their
estimated aggregate fair market values at December 31, 1995 were
approximately $172 million and $851 million, respectively. With
regard to short term debt, the Company had $107.3 million
outstanding at June 30, 1996 of which $20.1 million was
commercial paper. The Company's short term debt at December 31,
1995 was $30.5 million which consisted of notes payable only.
NOTE 4. CONTINGENCIES
The Company 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 dates are subject to
completion of testing, analysis, repair activity and Nuclear
Regulatory Commission (NRC) concurrence that they are prepared to
restart. Salem Unit 1 is anticipated to return to service in
mid-1997 after completion of refurbishment, including replacement
of its steam generators. Unused steam generators have been
acquired and are expected to be received at the Salem site by the
end of October 1996. The estimated cost of purchasing and
installing the steam generators is between $150 million and $170
million, of which the Company'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. The Company's estimated share would be $1.5 million.
PS had previously advised the Company that Unit 2 was expected to
return to service on or about August 27, 1996. It is now
anticipated that Salem Unit 2 testing will continue well into the
fourth quarter of this year. No revised restart target date for
Salem Unit 2 has been established. The Company's share of
incremental expenses associated with the restart of Salem Units 1
and 2 is $5.4 million for the year-to-date period ended
June 1996. Updated estimates for the remaining incremental
restart costs for 1996 have not been provided by PS.
The Company is subject to a performance standard for its five
jointly-owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of the Company's nuclear
units is expected to be below the zone of reasonable performance,
the Company anticipates that it will incur a nuclear performance
penalty in 1996 of $2.7 million, net of tax. This penalty is
being recognized throughout 1996 as it relates to performance and
replacement power costs incurred incrementally during the year.
As of June 30, 1996, the Company has accrued $1.1 million, net of
tax, for the 1996 penalty.
The outage of each Salem unit causes the Company to incur
replacement power costs of approximately $700 thousand per month
per unit. The Company believes that in the event of a unit's
removal from base rates, the Company would be entitled to recover
replacement power costs attributable to such units through its
LEC and that the estimated nuclear performance standard penalty
for 1996 would be substantially reduced. (See Note 2 - Rate
Matters).
The Company has a trust to fund the future costs of
decommissioning each of the five nuclear units in which it has an
ownership interest. The current annual funding amount of this
trust is based on estimates of the future costs of
decommissioning each unit derived from studies performed in 1987.
In accordance with BPU requirements, updated site specific
studies are underway. Amounts to be recognized and recovered in
rates based on the updated studies are not presently
determinable. Results of the studies are expected by the end of
the third quarter of 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following is management's discussion and analysis of
significant factors which affected the Atlantic Energy, Inc. (the
Company, AEI or parent) interim financial condition and results
of operations. To properly assess and evaluate the Company's
performance one should read, in conjunction with this report, the
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's 1995 Annual
Report on Form 10-K and the 1996 proxy statement for the annual
meeting of shareholders. Atlantic City Electric Company (ACE) is
the principal subsidiary of the Company and the following
discussion focuses primarily on ACE.
LIQUIDITY AND CAPITAL RESOURCES
Atlantic Energy, Inc.
The operating needs of the Company, representing those of the
consolidated group, are dependent upon the results of its
subsidiaries, principally those of ACE.
At June 30, 1996 and December 31, 1995, AEI had $32 million and
$34.5 million outstanding, respectively, under its revolving
credit and term loan facility.
Atlantic City Electric Company
On May 1, 1996, ACE satisfied the current sinking fund
requirement of $19 thousand for its 7 1/4% Debentures.
At June 30, 1996, ACE had $107.3 million outstanding in short
term debt, compared to $30.5 million outstanding at December 31,
1995. Short term debt consisted of commercial paper and notes
payable to banks. Proceeds were used for general corporate
purposes and the remittance of the annual state excise tax
payment in March 1996 of $91.6 million.
Atlantic Energy Enterprises, Inc. and Subsidiaries
At June 30, 1996 and December 31, 1995, ATE had outstanding $15.0
million and $18.5 million, respectively, under its revolving
credit and term loan facility.
In December 1995, ATS, through a partnership arrangement,
borrowed from the New Jersey Economic Development Authority
(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 April 30, 1996, the bonds were remarketed
at a rate of 3.60% for a period of 114 days.
RESULTS OF OPERATIONS
Changes in net income and earnings per share for the periods
ended June 30, 1996 versus the corresponding periods of the
previous year are as follows:
Periods Ended June 30, 1996
Quarter Year-to-Date
Net Income (3.0%) 17.0%
Earnings Per Share - 16.7%
The change in net income for the current quarter reflects an
increase in operating expenses compared to the prior year period.
The change in net income for the current year-to-date period
reflects an increase in electric revenues due to the increase in
both electric sales and annual Levelized Energy Clause (LEC)
revenues. Increased operating expenses in both the quarter and
year-to-date periods reflects the costs supporting the increase
in the sales of energy as well as additional maintenance expense
associated with the outages of ACE's jointly-owned nuclear
generating facilities.
Unless otherwise specified, changes are in terms of the current
year period compared to the corresponding prior year period.
Utility Revenues
Changes in Operating Revenues-Electric are disclosed in the
following table:
Periods Ended June 30, 1996
(Thousands of Dollars)
Quarter Year-to-Date
Levelized Energy Clause $ 8,241 $17,843
Kilowatt-hour Sales 14,691 32,828
Unbilled Revenues (3,876) (6,722)
Sales for Resale 1,545 4,442
Other Revenues (1,155) (2,222)
Total $19,446 $46,169
LEC revenues for the periods increased due to a rate increase in
July 1995 of $37.0 million on an annual basis. Changes in
Kilowatt-hour Sales are explained in the following section
'Billed Sales to Ultimate Utility Customers'. The changes in
Unbilled Revenues are a result of the amount of kilowatt-hours
consumed by, but not yet billed to, ultimate customers at the end
of the respective periods, which are affected by weather and
economic conditions and the corresponding price per kilowatt-
hour. The changes in Sales for Resale to wholesale customers are
a function of ACE's energy mix strategy, which in turn is
dependent upon ACE's needs for energy, the energy needs of other
utilities participating in the regional power pool of which ACE
is a member, and the sources and prices of energy available. The
increase in Sales for Resale for the quarter 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
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 June 30, 1996
Quarter Year-To-Date
Average Average
Customer Class Sales Use Cust Sales Use Cust
Residential 10.8% 10.0% 0.7% 11.3% 10.4% 0.8%
Commercial 5.0 4.0 1.0 5.7 4.7 1.0
Industrial 8.4 7.1 1.2 6.8 5.1 1.6
Total 7.8 7.0 0.7 8.3 7.4 0.8
The increase in Residential sales and average use for the quarter
and year-to-date is due to warmer weather during late Spring 1996
compared to the same period in 1995. The increase in year-to-
date Residential sales is also due to colder than normal
temperatures during the first quarter of 1996 compared to above
normal temperatures during the same period last year. Sales to
the Commercial sector increased in the current quarter and on a
year-to-date basis due to ongoing economic growth and favorable
weather. Casino expansions and construction around Atlantic
City, New Jersey were significant contributors to increased
commercial sales due to economic growth. Approximately one-
quarter of the increase in the number of Commercial customers is
due to the continuing popularity of ACE's night lighting
programs. The increase in quarterly and year-to-date Industrial
sales was primarily due to the return of sales to a customer that
had previously been supplied by an independent power producer.
Expenses
Total Operating Expenses for quarter and year-to-date periods
ended June 30, 1996 increased by 10.9% and 11.1%, respectively.
Excluding depreciation and taxes, Total Operating Expenses
increased by 13.8% and 13.0%, respectively, largely due to
increases in energy and maintenance costs.
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 recorded on the
Consolidated Balance Sheet as a liability or asset as
appropriate. Amounts on the balance sheet are recognized in the
Consolidated Statement of Income within Energy expense during the
period in which they are subsequently recovered through the LEC.
ACE was underrecovered by $35.7 million at June 30, 1996, as
compared to $31.4 million at December 31, 1995.
Energy expense for the quarter and year-to-date periods ended
June 30, 1996, increased by 25.1% and 24.7%, respectively.
Excluding deferred energy costs, Energy expense for the quarter
and year-to-date periods increased by 16.1% and 19.1%,
respectively. The increases for the periods were attributable to
increased kilowatt-hour sales in the quarter and year-to-date
when compared to the same periods in the previous year, as well
as ACE's use of alternative company-owned energy sources to
replace energy lost due to the continued shutdown of the Salem
Nuclear Generating Station (Salem) units since May and June of
1995. The SNJEI reduced after tax income for the quarter and
year-to-date periods by $1 million and $2.7 million,
respectively.
Sources of energy by fuel source for the periods ended June 30,
1996 are as follows:
Quarter Year-to-Date
Coal 28% 27%
Nuclear 17 16
Interchanged and Purchased 33 34
Nonutility Purchased 20 21
Oil and Natural Gas 2 2
Total 100% 100%
Operations expense for the quarter and year-to-date periods
increased by 9.7% and 2.2%, respectively. Maintenance expense
for the quarter and year-to-date periods increased by 48.3% and
52.4%, respectively. The increase in both Operations and
Maintenance expenses is the result of costs associated with the
Salem outage.
State Excise Tax expense for the quarter and year-to-date periods
increased 7.0% and 7.7%. respectively, reflecting an increased
energy sales tax base for the quarter and year-to-date periods
compared to the same periods last year.
Federal Income Tax expense for the quarter and year-to-date
periods decreased by 5.4% and increased by 10.3%, respectively,
due to the decrease and increase of taxable income for the
current periods, respectively, when compared to the same periods
last year.
Total Interest charges for the quarter and year-to-date periods
increased by 3.8% and 5.5%, respectively, reflecting increased
interest related to short term debt outstanding during the
period.
Preferred Stock Dividend Requirements decreased 20.5% for the
quarter and year-to-date periods, respectively, as a result of
mandatory and optional sinking fund redemptions of preferred
stock during the second half of 1995 and first half of 1996.
In December 1994, ACE recorded the expected costs of an employee
separation program. The balance of the accrued separation costs
on the Consolidated Balance Sheet at June 30, 1996 is $3.9
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 dates are subject to completion of
testing, analysis, repair activity and Nuclear Regulatory
Commission (NRC) concurrence that they are prepared to restart.
Salem Unit 1 is anticipated to return to service in mid-1997
after completion of refurbishment, including replacement of its
steam generators. Unused steam generators have been acquired and
are expected to be received at the Salem site by the end of
October 1996. The estimated cost of purchasing and installing
the steam generators is 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. PS had previously advised ACE that
Unit 2 was expected to return to service on or about August 27,
1996. It is now anticipated that Salem Unit 2 testing will
continue well into the fourth quarter of this year. No revised
restart target date for Salem Unit 2 has been established. ACE's
share of incremental expenses associated with the restart of
Salem Units 1 and 2 is $5.4 million for the year-to-date period
ended June 1996. Updated estimates for the remaining incremental
restart costs for 1996 have not been provided by PS.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of ACE's nuclear units is
expected to be below the zone of reasonable performance, ACE
anticipates that it will incur a nuclear performance penalty in
1996 of $2.7 million, net of tax. This penalty is being
recognized throughout 1996 as it relates to performance and
replacement power costs incurred incrementally during the year.
As of June 30, 1996, ACE has accrued $1.1 million, net of tax,
for the 1996 penalty.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $700 thousand per month per unit.
ACE believes that in the event of a unit's removal from base
rates, ACE would be entitled to recover replacement power costs
attributable to such units through its LEC and that the estimated
nuclear performance standard penalty for 1996 would be
substantially reduced.
ACE has a trust to fund the future costs of decommissioning each
of the five nuclear units in which it has an ownership interest.
The current annual funding amount of this trust is based on
estimates of the future costs of decommissioning each unit
derived from studies performed in 1987. In accordance with BPU
requirements, updated site specific studies are underway.
Amounts to be recognized and recovered in rates based on the
updated studies are not presently determinable. Results of the
studies are expected by the end of the third quarter of 1996.
NONUTILITY ACTIVITIES
Nonutility operations, which include AEI parent, for the quarter
and year-to-date periods ended June 30, 1996, resulted in net
losses of $206 thousand and $977 thousand, respectively, compared
to the same periods of last year which resulted in net losses of
$756 thousand and $1.3 million, respectively. Of these amounts,
operations of AEE and subsidiaries for the quarter and year-to-
date periods resulted in net income of $569 thousand and $276
thousand, respectively, compared to net losses of $298 thousand
and $494 thousand, respectively, for the same periods of the
prior year. The current quarter and year-to-date net income is
largely due to equity in earnings of Enerval, LLC. The year-to-
date net income is offset in part by administrative and general
costs incurred in the continuing development of various new
businesses of AEE, primarily ATS.
AEI parent for the quarter and year-to-date periods ended June
30, 1996, resulted in net losses of $775 thousand and $1.3
million, respectively, compared to net losses of $458 thousand
and $785 thousand, respectively, for the corresponding periods of
the prior year.
OTHER
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. Related to
the 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, the Company 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, the Company cannot predict
the final outcome of the proposal, nor what impacts there may be
on the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following is management's discussion and analysis of
significant factors which affected the Company's interim
financial condition and results of operations. To properly
assess and evaluate the Company's performance one should read,
in conjunction with this report, the Management's Discussion and
Analysis of Financial Condition and Results of Operations
included in the Company's 1995 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
On May 1, 1996, the Company satisfied the current sinking fund
requirement of $19 thousand for its 7 1/4% Debentures.
At June 30, 1996, the Company had $107.3 million outstanding in
short term debt, compared to $30.5 million outstanding at
December 31, 1995. Short term debt consisted of commercial paper
and notes payable to banks. Proceeds were used for general
corporate purposes and the remittance of the annual state excise
tax payment in March 1996 of $91.6 million.
RESULTS OF OPERATION
Net income decreased 10.9% and increased 6.1% for the quarter and
year-to-date periods ended June 30, 1996, respectively, from the
corresponding prior year period.
The change in net income for the current quarter reflects an
increase in operating expenses compared to the prior year period.
The change in net income for the current year-to-date period
reflects an increase in electric revenues due to the increase in
both electric sales and annual Levelized Energy Clause (LEC)
revenues. Increased operating expenses in both the quarter and
year-to-date periods reflects the costs supporting the increase
in the sales of energy as well as additional maintenance expense
associated with the outages of the Company's jointly-owned
nuclear generating facilities.
Unless otherwise specified, changes are in terms of the current
year period compared to the corresponding prior year period.
Utility Revenues
Changes in Operating Revenues-Electric are disclosed in the
following table:
Periods Ended June 30, 1996
(Thousands of Dollars)
Quarter Year-to-Date
Levelized Energy Clause $ 8,241 $17,843
Kilowatt-hour Sales 14,691 32,804
Unbilled Revenues (3,876) (6,722)
Sales for Resale 1,545 4,442
Other Revenues (812) (1,772)
Total $19,789 $46,595
LEC revenues for the periods increased due to a rate increase in
July 1995 of $37.0 million on an annual basis. Changes in
Kilowatt-hour Sales are explained in the following section
'Billed Sales to Ultimate Utility Customers'. The changes in
Unbilled Revenues are a result of the amount of kilowatt-hours
consumed by, but not yet billed to, ultimate customers at the end
of the respective periods, which are affected by weather and
economic conditions and the corresponding price per kilowatt-
hour. The changes in Sales for Resale to wholesale customers are
a function of the Company's energy mix strategy, which in turn is
dependent upon the Company's needs for energy, the energy needs
of other utilities participating in the regional power pool of
which the Company is a member, and the sources and prices of
energy available. The increase in Sales for Resale for the
quarter 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
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 June 30, 1996
Quarter Year-To-Date
Average Average
Customer Class Sales Use Cust Sales Use Cust
Residential 10.8% 10.0% 0.7% 11.3% 10.4% 0.8%
Commercial 5.0 4.0 1.0 5.7 4.7 1.0
Industrial 8.4 7.1 1.2 6.8 5.1 1.6
Total 7.8 7.0 0.7 8.3 7.4 0.8
The increase in Residential sales and average use for the quarter
and year-to-date is due to warmer weather during late Spring 1996
compared to the same period in 1995. The increase in year-to-
date Residential sales is also due to colder than normal
temperatures during the first quarter of 1996 compared to above
normal temperatures during the same period last year. Sales to
the Commercial sector increased in the current quarter and on a
year-to-date basis due to ongoing economic growth and favorable
weather. Casino expansions and construction around Atlantic
City, New Jersey were significant contributors to increased
commercial sales due to economic growth. Approximately one-
quarter of the increase in the number of Commercial customers is
due to the continuing popularity of the Company's night lighting
programs. The increase in quarterly and year-to-date Industrial
sales was primarily due to the return of sales to a customer that
had previously been supplied by an independent power producer.
Expenses
Total Operating Expenses for quarter and year-to-date periods
ended June 30, 1996 increased by 10.9% and 11.0%, respectively.
Excluding depreciation and taxes, Total Operating Expenses
increased by 13.8% and 12.9%, respectively, largely due to
increases in energy and maintenance costs.
Energy expense reflects the amount of energy needed to meet load
requirements, as well as the various fuel and purchased energy
sources used and the operation of the LEC. Changes in costs
reflect the availability of low-cost generation from Company-
owned and purchased energy sources, the unit prices of the energy
sources used and changes in the needs of other utilities
participating in the regional power pool. The cost of energy is
recovered from customers primarily through the operation of the
LEC. Generally, earnings are not affected by energy costs
because these costs are adjusted to match the associated LEC
revenues. However, the Company 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 the Company, and are
influenced by competitive and economic factors. The Company 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
recorded on the Consolidated Balance Sheet as a liability or
asset as appropriate. Amounts on the balance sheet are
recognized in the Consolidated Statement of Income within Energy
expense during the period in which they are subsequently
recovered through the LEC. The Company was underrecovered by
$35.7 million at June 30, 1996, as compared to $31.4 million at
December 31, 1995.
Energy expense for the quarter and year-to-date periods ended
June 30, 1996, increased by 25.1% and 24.7%, respectively.
Excluding deferred energy costs, Energy expense for the quarter
and year-to-date periods increased by 16.1% and 19.1%,
respectively. The increases for the periods were attributable to
increased kilowatt-hour sales in the quarter and year-to-date
when compared to the same periods in the previous year, as well
as the Company's use of alternative company-owned energy sources
to replace energy lost due to the continued shutdown of the Salem
Nuclear Generating Station (Salem) units since May and June of
1995. The SNJEI reduced after tax income for the quarter and
year-to-date periods by $1 million and $2.7 million,
respectively.
Sources of energy by fuel source for the periods ended June 30,
1996 are as follows:
Quarter Year-to-Date
Coal 28% 27%
Nuclear 17 16
Interchanged and Purchased 33 34
Nonutility Purchased 20 21
Oil and Natural Gas 2 2
Total 100% 100%
Operations expense for the quarter and year-to-date periods
increased by 9.7% and 2.1%, respectively. Maintenance expense
for the quarter and year-to-date periods increased by 48.3% and
52.4%, respectively. The increase in both Operations and
Maintenance expenses is the result of costs associated with the
Salem outage.
State Excise Tax expense for the quarter and year-to-date periods
increased 7.0% and 7.7%. respectively, reflecting an increased
energy sales tax base for the quarter and year-to-date periods
compared to the same periods last year.
Federal Income Tax expense for the quarter and year-to-date
periods decreased by 5.4% and increased by 10.3%, respectively,
due to the decrease and increase of taxable income for the
current periods, respectively, when compared to the same periods
last year.
Total Interest charges for the quarter and year-to-date periods
increased by 3.8% and 5.5%, respectively, reflecting increased
interest related to short term debt outstanding during the period.
Preferred Stock Dividend Requirements decreased 20.5% for the
quarter and year-to-date periods, respectively, as a result of
mandatory and optional sinking fund redemptions of preferred
stock during the second half of 1995 and first half of 1996.
In December 1994, the Company recorded the expected costs of an
employee separation program. The balance of the accrued
separation costs on the Consolidated Balance Sheet at June 30,
1996 is $3.9 million compared to $7.5 million at December 31,
1995. The Company expects settlement of this obligation to be
substantially completed by the end of 1996.
The Company is a 7.41% owner of the Salem 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 dates are subject to
completion of testing, analysis, repair activity and Nuclear
Regulatory Commission (NRC) concurrence that they are prepared to
restart. Salem Unit 1 is anticipated to return to service in
mid-1997 after completion of refurbishment, including replacement
of its steam generators. Unused steam generators have been
acquired and are expected to be received at the Salem site by the
end of October 1996. The estimated cost of purchasing and
installing the steam generators is between $150 million and $170
million, of which the Company'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. The Company's estimated share would be $1.5 million.
PS had previously advised the Company that Unit 2 was expected to
return to service on or about August 27, 1996. It is now
anticipated that Salem Unit 2 testing will continue well into the
fourth quarter of this year. No revised restart target date for
Salem Unit 2 has been established. The Company's share of
incremental expenses associated with the restart of Salem Units 1
and 2 is $5.4 million for the year-to-date period ended
June 1996. Updated estimates for the remaining incremental
restart costs for 1996 have not been provided by PS.
The Company is subject to a performance standard for its five
jointly-owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. The standard
establishes a target aggregate capacity factor within a zone of
reasonable performance to be achieved by the units.
Underperformance results in penalties which are not permitted to
be recovered from customers and are charged against income.
Because the aggregate capacity factor of the Company's nuclear
units is expected to be below the zone of reasonable performance,
the Company anticipates that it will incur a nuclear performance
penalty in 1996 of $2.7 million, net of tax. This penalty is
being recognized throughout 1996 as it relates to performance and
replacement power costs incurred incrementally during the year.
As of June 30, 1996, the Company has accrued $1.1 million, net of
tax, for the 1996 penalty.
The outage of each Salem unit causes the Company to incur
replacement power costs of approximately $700 thousand per month
per unit. The Company believes that in the event of a unit's
removal from base rates, the Company would be entitled to recover
replacement power costs attributable to such units through its
LEC and that the estimated nuclear performance standard penalty
for 1996 would be substantially reduced.
The Company has a trust to fund the future costs of
decommissioning each of the five nuclear units in which it has an
ownership interest. The current annual funding amount of this
trust is based on estimates of the future costs of
decommissioning each unit derived from studies performed in 1987.
In accordance with BPU requirements, updated site specific
studies are underway. Amounts to be recognized and recovered in
rates based on the updated studies are not presently
determinable. Results of the studies are expected by the end of
the third quarter of 1996.
OTHER
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. Related to
the 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, the Company 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, the Company cannot predict
the final outcome of the proposal, nor what impacts there may be
on the Company.
Part II. Other Information
Item 1. Legal Proceedings
Certain developments have occurred in connection with matters
previously reported under Part I, Item 1-Business in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
Part I - Note 3 and Part II, Item 5 - Other Information of the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and under Item 5 - Other Events in the Current Reports on
Form 8-K dated May 29, 1996, June 26, 1996 and July 25, 1996 for
Atlantic Energy, Inc. (AEI) and Atlantic City Electric Company
(ACE). In addition, certain new information is contained herein.
Rate Matters
ACE's rates for electric service at retail are subject to the
approval of the New Jersey Board of Public Utilities (BPU).
Reference is made to the Notes to Financial Statements for AEI
and ACE filed herewith for information pertaining to the
petitions filed with the BPU concerning certain rate matters.
Such matters include changes in the Levelized Energy Clause (LEC)
revenues for the LEC period June 1, 1996 through May 31, 1997;
the BPU's investigation into the Ratepayer Advocate's allegation
of the double recovery of capacity costs; and additional
information concerning the BPU investigation of the ongoing Salem
Nuclear Generating Station (Salem) outage.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders of Atlantic
Energy, Inc. was held on April 24, 1996. Proxies for the meeting
were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, there was no solicitation in opposition to
the management's nominees as listed in the proxy statement and
all of the nominees were elected. Details of other matters voted
upon at the meeting are as follows:
Proposal #2 - To approve the Atlantic Energy, Inc. and
Subsidiaries Employee Stock Purchase Plan.
Votes For 37,141,878
Votes Against 1,534,057
Votes Abstained 766,860
Proposal #3 - To ratify the appointment of Deloitte & Touche LLP
as independent auditors for the year ending December 31, 1996.
Votes For 38,764,119
Votes Against 366,450
Votes Abstained 377,127
Item 5. Other Information
On July 24, 1996, ACE, together with eight other regional
mid-Atlantic utilities, filed with the Federal Energy Regulatory
Commission (FERC), a restructuring plan designed to establish a
new wholesale energy market. The plan proposes to 1) create an
independent system operator, a nonprofit corporation with an
independent board of directors, to manage the Pennsylvania-New
Jersey-Maryland (PJM) Power Pool's energy market and transmission
operation; 2) establish a spot-energy market open to any buyer or
seller and provide utilities, non-utility power generators and
wholesale energy brokers comparable pool-wide transmission
service; 3) provide for bilateral energy arrangements, and 4)
allow load-serving entities within the PJM control area to share
generating capacity reserves and provide mutual assistance during
emergencies. The filing follows PJM's restructuring proposal,
filed November 30, 1995, with FERC. The proposal meets the
obligations of the recent Orders 888 and 889 and is expected to
be implemented by year-end 1996 if approved by FERC. ACE cannot
predict what action FERC will take regarding this matter.
As previously reported, New Jersey's BPU is conducting Phase
II of its Energy Master Plan Proceeding. Initiated in June of
1995, the proceeding is investigating the long term structure of
the New Jersey's electric power industry. Specific issues that
are under examination are: an evaluation of actions needed to
establish a competitive wholesale electric generation
marketplace; an analysis to determine if divestiture of utility
generation assets is necessary; a determination of the
appropriateness of retail wheeling and whether it is needed, if
an efficient competitive wholesale electric power market is
achieved and; the definition and equitable treatment of stranded
costs. Working groups established to review these issues
submitted their findings to the BPU in March of 1996, and in May
of 1996 the BPU issued the Phase II Proceeding Staff Status
Report. Among other things, the report summarizes the findings
and recommendations of the groups and identifies issues where
consensus among the parties was reached. Among the
recommendations listed in the report was a proposed transition to
a competitive retail market with a three- to seven-year time
frame. Following a series of hearings and public comment, the
BPU is expected to submit final findings and recommendations to
the Governor and Legislature of New Jersey by year-end 1996.
Such findings are expected to include a specific timetable for
the introduction of full retail electric competition for all
classes of customers in New Jersey, as well as potential interim
pilot retail competition programs, and recommendations to the
N.J. Legislature for any necessary legislation.
Nuclear Generating Station Developments
PS has advised ACE that on June 24, 1996, PS and PECO Energy
(PE), operator of the Peach Bottom Atomic Power Station,
announced the commissioning of a study to investigate competitive
alternatives to the current independent nuclear power plan
operations of the two companies. The goal of this effort is to
determine if feasible alternatives exist to permit
diversification of financial risks and reduction of costs for
both companies in order to increase competitiveness. PS
anticipates that the study will be completed this year.
PS has advised ACE that on July 5, 1996, the NRC notified PS
of the need for a predecisional enforcement conference for
apparent violations involving alleged discrimination against two
employees for the engagement in protected activities in
accordance with federal regulations. The apparent violations
concern events that occurred in 1992 and early 1993. A date for
the enforcement conference has not yet been scheduled; ACE
cannot predict what actions the NRC may take in this matter.
Hope Creek
PS has advised ACE that following an Nuclear Regulatory
Commission (NRC) inspection in early 1996, Hope Creek received
notice of four potential violations. Two of the potential
violations concerned failure to properly implement corrective
actions, another concerned a safety evaluation for a service
water system design change and the last concerned a violation of
Technical Specifications for control rod testing. An NRC
enforcement conference was held on July 11, 1996 to discuss
potential violations, one of which PS contested. Neither ACE nor
PS can predict what further actions, if any, the NRC may take on
these matters.
Item 6. Exhibits and Reports on 8-K
Exhibits: See Exhibit Index Attached
Reports on Form 8-K:
Current Reports on Form 8-K were filed dated May 29, 1996, June
26, 1996 and July 25, 1996 concerning the continuing outage of
the Salem Nuclear Generation Station.
***************************************************
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: August 14, 1996 By: __________________________
L. M. Walters
Treasurer of Atlantic Energy, Inc.
and Vice President, Treasurer and
Assistant Secretary of Atlantic
City Electric Company
EXHIBIT INDEX
10 Agreement and Plan of Merger dated as of August 9, 1996, by
and among Delmarva Power & Light Company, Atlantic Energy,
Inc., DS, Inc. and DS Sub, Inc.
27 Financial Data Schedules for Atlantic Energy, Inc. and
Atlantic City Electric Company for periods ended
June 30, 1996.