FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Registrant; State of I.R.S.Employer
Commission Incorporation; Address; Identification
File No and Telephone Number Number
1-9760 ATLANTIC ENERGY, INC. 22-2871471
(a New Jersey Corporation)
6801 BLACK HORSE PIKE,
EGG HARBOR TOWNSHIP, NEW JERSEY 08234
609-645-4500
1-3559 ATLANTIC CITY ELECTRIC COMPANY 21-0398280
(a New Jersey Corporation)
6801 BLACK HORSE PIKE
EGG HARBOR TOWNSHIP, NEW JERSEY 08234
609-645-4100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, No Par Value New York Stock Exchange
of Atlantic Energy, Inc. Philadelphia Stock Exchange
Pacific Stock Exchange
8.25% Cumulative Quarterly Income New York Stock Exchange
Preferred Securities,
liquidation preference $25 per
preferred security issued by
Atlantic Capital I
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10K. X
Estimated aggregate market value of the voting stock of
Atlantic Energy, Inc. held by non-affiliates at March 6, 1997,
was $898,943,385.00 based on a closing price of $17.25 per
share for the 52,502,479 outstanding shares at such date.
Atlantic Energy, Inc. owns all of the 18,320,937 outstanding
shares of Common Stock of Atlantic City Electric Company.
Documents Incorporated by Reference:
Certain sections of the Notice of Annual Meeting of
Shareholders and Proxy Statement in connection with the
Annual Meeting of Shareholders, to be held April 23, 1997, have
been incorporated by reference to provide information required by
the following parts of this report:
Part III-Item 10, Directors and Executive Officers of the
Registrant; Item 11, Executive Compensation; Item 12, Security
Ownership of Certain Beneficial Owners and Management.
This combined Form 10-K is filed separately by Atlantic Energy,
Inc. and Atlantic City Electric Company. Information contained
herein relating to any individual registrant is filed by such
registrant on its own behalf. Atlantic City Electric Company
makes no representation as to information relating to Atlantic
Energy, Inc.
PART I
ITEM 1 BUSINESS 1
General 1
Competition 2
Nonutility Subsidiaries 8
Construction and Financing 10
Rates 12
Energy Requirements and Power Supply 13
Power Pool and Interconnection Agreements 15
Power Purchases and Sales 16
Capacity Planning 16
Nonutility Generation 18
Nuclear Generating Station Developments 19
Salem Station 22
Hope Creek Station 24
Peach Bottom 25
Fuel Supply 26
Oil 26
Coal 26
Gas 27
Nuclear Fuel 27
Nuclear Decommissioning 29
Regulation 31
Environmental Matters 33
General 33
Air 36
Water 37
Executive Officers 40
ITEM 2 PROPERTIES 43
ITEM 3 LEGAL PROCEEDINGS 43
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 44
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 44
ITEM 6 SELECTED FINANCIAL DATA 46
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 47
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 66
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 108
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 108
ITEM 11 EXECUTIVE COMPENSATION 108
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 108
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 108
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 109
SIGNATURES 110
i
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or
acronyms that are found in this report:
Term Definition
ACE ..... Atlantic City Electric Company
ACO ..... Administrative Consent Order
AEE ..... Atlantic Energy Enterprises, Inc.
AEI ..... Atlantic Energy, Inc. or the Company
AET ..... Atlantic Energy Technology, Inc.
AGI ..... Atlantic Generation Inc.
ASP ..... Atlantic Southern Properties
ATS ..... Atlantic Thermal Systems, Inc.
BPU ..... New Jersey Board of Public Utilities
BWR ..... Boiling water reactor
CAAA .... Clear Air Act Amendments
CAFRA ... New Jersey Coastal Area Facility Review Act
CCI ..... CoastalComm Inc.
CERCLA .. Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980
CON ..... Certificate of Need
CORP .... New Jersey Commission on Radiation Protection
CQIPS ... 8.25% Cumulative Quarterly Income Preferred
Securities
DOE ..... U. S. Department of Energy
DRBC .... Delaware River Basin Commission
EFNAA ... Electric Facilities Need Assessment Act
EMF ..... Electric and magnetic fields
EPA ..... Environmental Protection Agency
EPAct ... Energy Policy Act of 1992
FERC .... Federal Energy Regulatory Commission
GE ...... General Electric Company
Hope
Creek .. Hope Creek Nuclear Generating Plant
HSW ..... Harrisburg Steam Works, Ltd.
IGM ..... Interstate Gas Marketing
IPP ..... Independent power producer
ISO ..... Independent System Operator
KW ...... Kilowatt-hours
LEC ..... Levelized Energy Clause
LLRW .... Low-level radioactive waste
LLRWPA .. Low Level Radioactive Policy Act
MTC ..... Market Transition Charge
MTN ..... Medium Term Notes
MW ...... Megawatt
NJEDA ... New Jersey Economic Development Authority
NJDEP ... New Jersey Department of Environmental Protection
NJPDES .. New Jersey Pollution Discharge Elimination System
NPDES ... National Pollution Discharge Elimination System
- ii -
GLOSSARY OF TERMS, cont'd
NOx ..... Nitrogen Oxide
NPDES ... National pollution discharge elimination system
NRC ..... Nuclear Regulatory Commission
NUG ..... Nonutility generators
NWPA .... Nuclear Waste Policy Act
OTRA..... Off-Tariff rate agreements
PCCA .... Paxton Creek Cogeneration Associates
Peach
Bottom .. Peach Bottom Atomic Power Station
PE ...... PECO Energy Company
PJM ..... Pennsylvania-Jersey-Maryland Interconnection Assoc.
Plan .... New Jersey Energy Master Plan, Draft Phase II
PP&L .... Pennsylvania Power & Light Company
PS ...... Public Service Electric and Gas Company
PUHCA ... Public Utility Holding Company Act of 1935
PURPA ... Public Utility Regulatory Policy Act
PWR ..... Pressurized water reactor
RCRA .... Federal Resource Conservation and Recovery Act of
1976
Salem ... Salem Nuclear Generating Station
SALP .... Systematic Assessment of Licensee Performance
SARA .... Superfund Amendments and Reauthorization Act of 1986
SEC ..... Securities and Exchange Commission
SERT .... Significant event response team
SIP ..... State implementation plans
Spill
Act ... New Jersey Spill Compensation and Control Act
- iii -
PART I
ITEM 1 BUSINESS
General
Atlantic Energy, Inc. (AEI or the Company), the principal
office of which is located at 6801 Black Horse Pike, Egg Harbor
Township, New Jersey, 08232-4130, telephone 609-645-4500 was
organized under the laws of New Jersey in August 1986. The
Company is a public utility holding company as defined in the
Public Utility Holding Company Act of 1935 (PUHCA), and has
claimed an exemption from substantially all of the provisions of
the 1935 Act. For a complete description of the Company and its
subsidiaries, see Note 1 of the Notes to Consolidated Financial
Statements herein.
Principal cash inflows of the Company include the receipt of
dividends from Atlantic City Electric Company (ACE) and loans
outstanding from a revolving credit and term loan facility
established by AEI in September 1995. As of December 31, 1996,
AEI has $37.6 million outstanding under such facility. Principal
cash outflows of the Company in 1996 were primarily for the
payment of dividends to common shareholders.
ACE, which has a wholly-owned subsidiary, Deepwater
Operating Company, is the principal subsidiary of the Company and
is engaged in the generation, transmission, distribution, and
sale of electric energy in the southern part of New Jersey.
ACE's principal office is located at 6801 Black Horse Pike, Egg
Harbor Township, New Jersey, 08232-4130, telephone 609-645-4100,
and was organized under the laws of New Jersey on April 28, 1924,
by merger and consolidation of several utility companies. ACE is
subject to regulation by the New Jersey Board of Public Utilities
(BPU) and the Federal Energy Regulatory Commission (FERC). At
December 31, 1996, ACE had over 475,000 customers and employed
1,466 persons, of which 633 were affiliated with a national labor
organization. With the exception of a municipal electric system
providing electric service within the municipal boundaries of the
City of Vineland, New Jersey, ACE supplies electric service to
the southern one-third of the State of New Jersey. ACE is a
utility whose peak load normally occurs during the summer months.
Approximately 29% of 1996 revenues were recorded during the
quarter ended September 30, 1996.
Pending Merger
On August 12, 1996, the Boards of Directors of AEI and
Delmarva Power & Light Company (Delmarva) jointly announced an
agreement to merge the companies into a new company named
Conectiv, Inc. Following the merger, AEI will be merged into
Conectiv, which will become the parent of Delmarva and AEI as
well as AEI's subsidiaries. The purpose of the proposed merger
is to create a regional company from two companies that share a
common vision of the strategic path necessary to succeed in the
increasingly competitive utility and energy services marketplace.
Following the approval of the merger by the shareholders of
both companies on January 30, 1996, ACE and Delmarva filed
applications with the New Jersey Board of Public Utilities (BPU),
the Delaware Public Service Commission and the Virginia State
Corporation Commission. The applications seek the approval of
each state's commission, as soon as possible, or before December
31, 1997, to merge the two companies. The proposed merger is
also subject to review by the Pennsylvania Public Utility
Commission and the Maryland Public Service Commission with the
request for approval expected to be filed before the end of the
first quarter 1997.
In addition to state regulatory approvals, the proposed
merger requires the approval of the FERC, the Nuclear Regulatory
Commission (NRC), the Securities and Exchange Commission (SEC),
the U.S. Department of Justice and the Federal Trade Commission.
Application was made to the FERC on November 27, 1996 and
subsequently amended on March 7, 1997 to reflect the additional
information required under FERC's Merger Policy Statement issued
in December 1996.
The target date for receiving all necessary approvals,
fulfilling all other conditions of the Merger Agreement, and
closing the merger is December 31, 1997. For further information
regarding the pending merger, refer to Note 1 of AEI's Notes to
Consolidated Financial Statements.
Competition
Competition exists and is expected to increase for certain
electric energy markets historically served exclusively by
regulated utilities. In recent years, changing laws and
governmental regulations permitting competition from other
utilities as well as nonregulated energy suppliers have prompted
some customers to use self-generation or alternative sources to
meet their electric needs. The transition from strictly
regulated to competitive resale and retail markets is changing
the structure of the utility industry and the way in which it
conducts business.
The Public Utility Regulatory Policy Act (PURPA) created a
new class of generating facilities, operated by independent power
producers (IPPs), and required electric utilities to purchase the
excess power from each IPP. As a direct result of PURPA, ACE has
long-term contracts with four such IPPs for the purchase of 579
megawatts (MWs) of capacity and energy and experienced a decline
in its sales to industrial customers, three of which contracted
with IPPs for their power supply. ACE has subsequently regained
two such customers.
The Energy Policy Act of 1992 (EPAct) represented another
significant step toward deregulation of the electric utility
industry. The EPAct facilitated development of the wholesale
power market and increased competition between utility and non-
utility generators (NUGs). The EPAct created a class of NUGs
called exempt wholesale generators that would be exempt from
certain PUHCA regulations. The EPAct also gave the FERC the
authority to order open access to the transmission facilities of
electric utilities and the wheeling of wholesale electric power.
In April 1996, the FERC 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 Order
was designed 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, 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 were 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.
As the electric utility industry transitions from a
regulated to a competitive industry, utilities may not be able to
recover certain costs which are known as "stranded" costs.
Potential types of stranded costs could be (i) above-market costs
associated with generation facilities or long term power purchase
agreements and (ii) regulatory assets, which are expenses
deferred and expected to be recovered from customers in the
future.
Flex-rate legislation promulgated into law in New Jersey in
July 1995 allows the BPU, upon petition from any electric or gas
utility, to adopt a plan of regulation other than the traditional
rate base/rate of return regulation. In addition, on a case-by-
case basis, the law allows utilities to petition the BPU for the
right to offer customers, who meet certain conditions, off-
tariff, discounted rates. The law provides for the recovery of
up to 50 percent of the value of discounts in a subsequent base
rate case if it can be adequately demonstrated that the discount
benefits all ratepayers. A limited number of off-tariff pricing
arrangements with ACE's customers have been made. Refer to
"Results of Operations" in AEI's Management's Discussion and
Analysis of Financial Condition and Results of Operations herein
for further information regarding off-tariff rates (OTRAs).
New Jersey Energy Master Plan
On January 16, 1997, the BPU issued Draft Phase II of the
New Jersey Energy Master Plan addressing wholesale and retail
competition in New Jersey (the "Plan"). The Plan contains
specific proposals for restructuring the electric power industry
in the State of New Jersey. Beginning in October 1998, 5% of
retail electric customer load of all classes (industrial,
commercial and residential) would be given the ability to
directly choose their electric power supplier. All customers
would be phased-in, with the percentage increasing to 20% in
April 1999, 35% in October 1999, 50% in April 2000, 75% in
October 2000 and 100% in April 2001. The Plan suggests that
retail competition in New Jersey be introduced approximately 12
to 18 months after the implementation of full wholesale
competition as provided by FERC Order 888.
The BPU proposes in its Plan that beginning October 1998,
the costs for bundled electricity services, consisting of power
generation, transmission, distribution and auxiliary customer
services, such as metering and billing, be unbundled. Each
electric utility, including ACE, would continue to be
responsible for providing distribution service to all customers.
Price and service quality for distribution service would continue
to be regulated by the BPU. Other customer services would also
continue to be offered by the electric utility, for a monthly
fee, including metering, billing and account administration,
which would also be regulated by the BPU.
Transmission service would be provided by an Independent
System Operator (ISO), which would be responsible for maintaining
the reliability of the regional power grid. The ISO would be
regulated by the FERC. The utility would continue to pass
through the cost of transmission to customers in its regulated
rates. The Plan also calls for further review of metering and
billing in order to make recommendations for the long term
related to introduction of competition into the customer services
area. A distribution utility would be permitted to offer
customer-side services, such as equipment repair and service
contracts in a competitive marketplace.
The Plan suggests that the BPU is committed to assuring that
a fully competitive marketplace exists prior to the ending of its
economic regulation of power supply. At a minimum, utility
generating assets and functions must be functionally separated
and operate at arms length from the transmission, distribution
and customer service functions of the electric utility. The BPU
reserves final judgment on the issue of requiring divestiture of
utility generating assets until detailed analyses of the
potential for market power abuses by utilities have been
performed. In addition, the BPU believes that it is necessary to
have a fully independent and operating ISO prior to the
implementation of customer choice.
The Plan would require each electric utility to file, no
later than July 15, 1997, complete restructuring plans, stranded
cost filings and unbundled rate filings. Review of the filings
would be completed by October 1998.
Consumer protections proposed in the Plan include
maintaining the electric utility as a universal service or "basic
generation service" provider; continued funding of social
programs now provided by electric utilities; registration of all
third party electric power suppliers with the BPU; establishment
of standards of conduct for such third party suppliers; and
continued funding for energy efficiency programs.
The Plan proposes that utilities have an opportunity for a
limited number of years to recover through rates stranded costs
associated with generating capacity commitments made prior to the
advent of competition. However, while the BPU proposes that the
quantification of eligible stranded costs and a determination of
stranded cost recovery should be undertaken on a case-by-case
basis, the Plan recommends that there not be a guarantee for 100%
recovery of all eligible stranded costs. The Plan provides that
the opportunity for full recovery of such eligible costs is
contingent upon and may be constrained by the utility meeting a
number of conditions, including achievement of the goal of
delivering a near term rate reduction to all customers of 5% to
10%. The Plan states that independent power contracts must be
eligible for stranded cost recovery and strongly encourages all
stakeholders to renew efforts to explore all reasonable means to
mitigate independent power contracts. The Plan invites the FERC,
the Congress and the New Jersey State Legislature to review the
issue in order to provide an added impetus for parties to these
contracts to seriously consider mitigation.
With regard to utility-owned generation, the Plan states
that the utility-owned generation costs permitted to be recovered
in rates in the last base rate case prior to the Plan would be
presumed to be eligible for recovery through a Market Transition
Charge (MTC). Costs for utility generating plants incurred
subsequent to the last base rate case of the utility would not be
presumptively eligible for recovery through the MTC. The Plan
further states that the BPU would entertain requests for recovery
of such costs incurred after the conclusion of a utility's last
base rate case; however, there would be a substantial shift in
the burden of proof to be met by the utility to demonstrate that
the utility had no more cost effective resource alternatives
available to it at the time the commitment was made, which may
include evidence of a market test.
The BPU's Plan further states that utilities are
obligated to take all reasonably available measures to mitigate
stranded costs caused by the introduction of retail competition.
The Plan notes that New Jersey is studying the "securitization"
of stranded costs as a means of financing these costs at interest
rates lower than the utility cost of capital, thereby helping to
mitigate the rate impact of stranded cost recovery.
A specific MTC would be established for each utility and
would be a separate component of a customer's electric bill. The
MTC would provide a mechanism to allow utilities the opportunity
to recover stranded costs for a limited number of years, ranging
from four to eight. Recovery of securitization may occur over a
different period of time. The proposal also suggests that a cap
may be imposed on the level of the MTC as a mechanism to achieve
the goal of overall rate reduction.
The Plan suggests the need for federal action in a number of
areas as an integral part of electric restructuring. Of
particular concern is the transport of nitrogen oxides and other
pollutants to New Jersey from power plants located in the Midwest
and Southeast. The Plan states that New Jersey will develop a
contingency action plan if federal action fails to mitigate
adverse environmental impacts caused by electric restructuring.
The Plan states that the preliminary findings and
recommendations contained therein are being released for the
purpose of making the preliminary conclusions of the BPU
concerning electric restructuring known and available to the
State Legislature, the public, and interested parties, and for
soliciting and receiving further public comments. After the
analysis of the next round of public comments, the Plan states
that the BPU intends to issue final findings and recommendations
on electric industry restructuring in New Jersey to the Governor
and the State Legislature for their consideration in April 1997.
ACE is currently analyzing the BPU's Plan to determine its
impact if adopted as drafted and intends to file its comments
during the public comment period. ACE cannot predict what action
will ultimately be taken by the BPU.
If changes in the regulatory environment ultimately require
a recognition of any amounts considered to be stranded costs,
ACE, as the case may be, would be required to write down asset
values, and such writedowns could be material. The effect of
competition on the Company's equity from reductions in profit
margins or extraordinary charges against income would reduce the
amount of common equity in the capital structure and could result
in lowered credit ratings on existing debt securities and higher
corresponding financing costs. To the extent that additional
equity capital is required, issuances of common stock may be
necessary. To the extent that additional equity capital is
required, the effect would be to reduce reported earnings per
share, the amount of which ACE cannot presently determine.
Other proposed regulatory and accounting changes have been
suggested relating to matters at the state and Federal level
which could have operating and financial implications for ACE.
See "Regulation" and "Environmental Controls" herein for
additional information and Note 10 of the accompanying Notes to
Financial Statements herein.
Nonutility Subsidiaries
Atlantic Energy Enterprises, Inc.
In January 1995, the Company formed a subsidiary,
Atlantic Energy Enterprises, Inc. (AEE), a holding company, to
which ownership of the existing nonutility businesses was
transferred. Information regarding the principal assets and the
results of operation of each these subsidiaries can be found in
Note 6 of AEI's Consolidated Financial Statements.
AEE's five-year business plan projects an investment of
approximately $307 million primarily in Atlantic Thermal
Systems, Inc. (ATS), Atlantic Generation, Inc. (AGI) and ATE
Investment, Inc. (ATE). The amount of capital invested by AEE in
these and other nonutility subsidiaries will be affected, to a
large degree, by the rate of development of the respective
businesses, by the business opportunities which may exist and by
the opportunities for external financings by such subsidiaries.
Atlantic Thermal Systems, Inc.
AEE's wholly-owned subsidiary, ATS, commenced operations in
1994 and is engaged in the development and operation of thermal
heating and cooling systems. Through a special purpose limited
partnership, ATS currently provides heating and cooling service
to six hotel/casinos located in Atlantic City under long-term
requirements contracts, and is actively engaged in negotiations
to provide comparable service to other large use commercial and
institutional customers located in Atlantic City, New Jersey.
This subsidiary is currently completing construction of a $60
million district heating and cooling production plant and
distribution piping system. When completed in mid-1997, this
system will produce steam and chilled water for distribution to a
number of casino/hotel and other large use customers located in
the Midtown region of Atlantic City.
In April 1995, ATS filed a petition with the BPU for an
Order declaring that ATS is not a public utility subject to the
BPU's jurisdiction by reason of its business activities in
Atlantic City. It is ATS' position that its service to a limited
number of large use energy consumers does not invoke the
requisite public interest that is a prerequisite to public
utility classification. The petition is still pending final
resolution. ATS has obtained $12.5 million for certain qualified
equipment at the Atlantic City facility from the New Jersey
Economic Development Authority (NJEDA). These funds are
currently held in escrow pending resolution of the public utility
issue. During 1997, ATS expects to apply for additional funds
from the NJEDA and will seek to have the public utility issue
restriction removed as a condition for use of the NJEDA funds.
ATS is actively pursuing potential business opportunities
throughout the United States. Depending on the degree of success
that ATS will have in bringing these projects to completion, ATS
anticipates the potential of an additional capital investment of
$221.6 million over the next five years.
Atlantic Generation, Inc.
At December 31, 1996, AGI's activities were represented by
partnership interests in three cogeneration power projects:
Project Fuel Capacity Commercial Ownership
Location Type Megawatt (MW) Operation Interest
Pedricktown,
New Jersey gas 117 1992 50%
Vineland,
New Jersey gas 46.5 1994 50%
Binghamton,
New York gas 50 1992 33%
Subsidiaries of Tristar Ventures Corporation, a subsidiary
of The Columbia Gas System, Inc. have partnership interests in
the Pedricktown and Vineland projects. In addition to Tristar
Ventures Corporation, Stone & Webster Development Corporation has
a one-third partnership interest in the Binghamton project. In
December 1996, the Boards of AEE and AEI authorized the
restructuring of Binghamton which became effective in January
1997. Under the restructuring, the power purchase agreement with
New York State Gas & Electric was sold to a third party and the
project debt was retired. As a result of the restructuring, AGI
recorded a loss from the sale of the Binghamton facility of $1.6
million, net-of-tax.
The Pedricktown facility is hosted by a chemical
manufacturer, currently a retail customer of ACE, and provides
116 MW of generating capacity to ACE. The Vineland facility is
hosted by a food processor and provides 46.5 MW of capacity and
related energy to the City of Vineland under a 25 year contract.
AGI anticipates additional capital investments of $46.0
million over the next five years.
ATE Investment, Inc.
ATE provides financing to affiliates and manages a portfolio
of $79.7 million in investments in leveraged leases of three
commercial aircraft and two containerships. In August 1996, ATE
joined with Safeguard Scientifics, Inc., an unaffiliated company,
to create EnerTech Capital Partners, L.P., (EnerTech) an equity
limited partnership to make, manage, own and supervise private
equity investments in early-to-late stage energy-related growth
companies. At December 31, 1996, EnerTech had invested $7.3
million in five such companies. ATE anticipates additional
capital investment of $39.6 million over the next five years.
Enerval, LLC
In 1995, AEE and Cenerprise, a subsidiary of Northern States
Power, established Enerval, LLC (Enerval), formerly known as
Atlantic CNRG Services, LLC. AEE and Cenerprise each own 50
percent of Enerval. Enerval provides energy management services,
including natural gas procurement, transportation and marketing.
On February 1, 1996, Enerval acquired the natural gas marketing
assets of Interstate Gas Marketing (IGM). IGM, which has offices
in Scranton and Pittsburgh, Pennsylvania, markets natural gas to
customers in the northeastern United States. Enerval has certain
gas transportation agreements, which include obligations for the
transportation of specified volumes of gas, or to make payments
in lieu thereof. At December 31, 1996, Enerval was committed to
approximately $3.4 million in such obligations under generally
short-term contracts.
For further information regarding AEI's nonutility
subsidiaries, refer to Note 6 of the accompanying Notes to
Financial Statements and to the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial
Condition and Results of Operation herein.
Construction and Financing
ACE maintains a continuous construction program, principally
for electric generation, transmission and distribution
facilities. The construction program, including the estimates of
construction expenditures, as well as the timing of construction
additions, undergoes continuous review. ACE's construction
expenditures will depend upon factors such as long-term load,
customer growth, the effects of competition and retail wheeling,
general economic conditions, the ability of ACE to raise the
necessary capital, regulatory and environmental requirements, the
availability of capacity and energy from utility and nonutility
sources and the Company's return on such investments. Although
deferrals in construction timing may result in near-term
expenditure reductions, changes in capacity plans and general
inflationary price trends could increase ultimate construction
costs. Reference is made to "Energy Requirements and Power
Supply" herein for information with respect to ACE's estimates of
future load growth and capacity plans. The table below presents
ACE's estimated cash construction costs for utility plant for the
years 1997 through 1999:
(Millions of Dollars) 1997 1998 1999 Total
Nuclear Generating $ 9,615 $ 5,108 $ 5,677 $20,400
Fossil Steam
Generating 8,961 8,750 17,070 34,781
Transmission and
Distribution 46,135 45,614 42,844 134,593
General Plant 32,384 26,335 16,113 74,832
Combustion Turbine 2,400 11,175 5,275 18,850
Total Cash
Construction Costs $99,495 $96,982 $86,979 $283,456
For additional information regarding construction of a
district heating and cooling facility in Atlantic City, New
Jersey refer to "Nonutility Subsidiaries" herein.
ACE's debt securities are currently rates "A-/A3" by two
major rating agencies. Its preferred stock is rated "BBB+/Baa1"
and its commercial paper is rated "A-2/P2."
One rating agency has recently placed ACE's ratings on
Creditwatch with positive implications reflecting the proposed
merger between AEI and Delmarva Power & Light Company. See Note
1 of the Notes to Consolidated Financial Statements for further
information relating to the proposed merger.
No assurances can be given that the ratings of ACE's
securities will be maintained or continue at their present
levels, or be withdrawn if such credit rating agency should, in
its opinion, take such action. Downward revisions or changes in
ratings of a company's securities could have an adverse effect on
the market price of such securities and could increase a
company's cost of capital.
Rates
ACE's rates for retail electric service are subject to the
approval of the BPU. For information concerning changes in base
rates and the levelized energy clause (LEC) for the years 1994
through 1996 and certain other proceedings relating to rates, see
"Purchased Power" herein and Note 3 of the Company's Notes to
Consolidated Financial Statements.
A performance standard for ACE's five jointly-owned nuclear
units was adopted in 1987 by the BPU, with certain aspects of the
performance standards revised, effective January 1, 1990. Under
the standard, the composite target capacity factor for such units
is 70%, based upon the maximum dependable capacity of the units.
The zone of reasonable performance (deadband) is between 65% and
75%. Penalties or rewards are based on graduated percentages of
estimated costs of replacement power. Such amount is calculated
monthly, utilizing the average PJM monthly billing rate as the
cost basis for replacement power, to the boundaries of the
deadband, with penalties calculated incrementally in steps. Any
penalties incurred are not permitted to be recovered from
customers and are required to be charged against income.
Adjustments to rates based on the nuclear unit performance
standard is done through ACE's annually adjusted LEC.
The 1996 composite capacity factor for Peach Bottom and Hope
Creek was 83.9%. Salem Units 1 and 2 have been out-of-service
since May 16, 1995 and June 7, 1995, respectively. Based on an
agreement among ACE, the NJ Division of Ratepayer Advocate and
the Staff of the BPU, the performance of the Salem units was not
to be included in the calculation of the composite capacity
factor for the purpose of assessing a penalty. In addition, no
penalty or reward would be imposed on ACE for the years 1995 and
1996 as part of such agreement.
On February 27, 1997, the Coalition for Competitive Energy
filed an appeal in the Superior Court of New Jersey, Appellate
Division. The appeal was based on the BPU's Summary Decision and
Order dated December 31, 1996 approving settlements regarding the
rate treatment of the Salem Nuclear Generating Station and
alleges, among other things, that the BPU's use of a Summary
Order was illegal under the Administrative Procedure Act. ACE is
unable to predict the outcome of this appeal.
For further information concerning this agreement and Board
Order and the Salem Station, refer to "Nuclear Generating Station
Developments" herein and to Note 3 of the Company's Consolidated
Financial Statements.
On February 28, 1997, ACE filed a petition with the BPU
requesting an increase in LEC revenues of $20 million for the
period June 1, 1997 through May 31, 1998. Among other things,
the filing includes the recovery of $29.5 million of previously
deferred replacement power costs associated with Salem Units 1
and 2 and a deferral of $1.4 million in recoverable costs until
ACE's next LEC period. ACE also requested that the BPU approve
the proposed rates as provisional, in the event a final decision
cannot be rendered by June 1, 1997. ACE cannot predict what
action the BPU will take in this matter.
Energy Requirements and Power Supply
ACE's 1996 kilowatt-hour sales increased by approximately
3.6% over 1995 sales. Residential sales grew 3.2%; commercial
sales grew 3.0%; and, industrial sales grew 7.1%. The 1996
Utility System Peak demand of 1,774 MWs occurred on August 23,
1996 and was 13.1% below the previous peak demand recorded on
July 10, 1995 of 2,042 MWs.
For the five year period beginning in 1997, ACE's estimate
of projected compound annual sales growth is 3.5%, and peak load
growth (weather adjusted) is 2.8%. Sales growth for the five
year forecast period reflects the on-going and anticipated
expansion of the Atlantic City casino-hotel and entertainment
industries and the associated spin-off effects of stronger labor
and housing markets in the region. ACE's energy sales forecast
quantifies the expected consumption in ACE's traditional
franchise area and does not reflect any potential developments
regarding open retail access to competitive energy markets.
ACE's forecast is adjusted for the effects of demand-side
management programs, customer-initiated energy efficiency
improvements and customers taking service under off-tariff rates.
ACE has generally been able to provide for the growth of
energy requirements through the capacity purchases from other
utilities and nonutilities, joint ownership in larger units and
construction of additional generating capacity. ACE's net summer
installed capacity, at December 31, 1996, consisted of the
following:
Year(s) Net
Station and Primary Unit(s) Capability
Location Fuels Installed (MW)
Deepwater
Salem Co., N.J. Oil/Coal/Gas 1930/ 54.0
1954-1958 166.0
B.L. England
Cape May Co., N.J. Coal/Oil 1962-1964/ 284.0
1974 155.0
Keystone
Indiana Co., PA. Coal 1967-1968 42.0 (1)
Conemaugh
Indiana Co., PA. Coal 1970-1971 65.0 (1)
Peach Bottom
York Co., PA. Nuclear 1974 164.0 (1)
Salem
Salem Co., N.J. Nuclear 1977-1981 164.0 (1)
Hope Creek
Salem Co., N.J. Nuclear 1987 52.0 (1)
Combustion Turbine
Units Oil/Gas 1967-1991 524.0
(various locations)
Diesel Units Oil 1961-1970 8.7
Firm Capacity Purchases and Sales-Net 707.0 (2)
Total Generating Capability 2,385.7
==========
Notes
(1) ACE's share of jointly-owned stations. See Note 5 of AEI's
Notes to Consolidated Financial Statements. (2)Primarily
consists of 125 MW from thirteen coal-fired units of PP&L and
579 MW from four nonutility suppliers.
Certain of ACE's units at the Deepwater and B. L. England
Stations and certain combustion turbine units have the capability
of using more than one primary fuel type. In such instances, the
use of a particular fuel type depends upon relative cost,
availability and applicable environmental regulations and
requirements. See Note 5 of the accompanying Notes to Financial
Statements for additional information regarding capital and
operating expenses of ACE's jointly-owned nuclear facilities.
Power Pool and Interconnection Agreements
ACE is a member of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM), an integrated power pool which
coordinates the bulk power supply of eight electric utility
companies in Pennsylvania, New Jersey, Delaware, Maryland,
Virginia and the District of Columbia, and is interconnected with
other major utilities in the northeastern United States. The
member utilities coordinate generation/supply planning and own
and control the bulk power transmission system in the region. As
a member of PJM, ACE is required to plan for reserve capacity
based on estimated aggregate PJM requirements allocated to member
companies. ACE periodically files its capacity addition plans
with PJM which are intended to meet forecast capacity and reserve
obligations. ACE is also a party to the Mid-Atlantic Area
Coordination Agreement, which provides for coordinated planning
of generation and transmission facilities by the companies
included in PJM. Further coordination of short-term power supply
planning is provided by inter-area agreements with adjacent power
pools. PJM currently operates on the basis of reliability of
service and operating economy whereby generating units are
subject to central dispatch, from order of lowest operating cost
to highest cost.
In July 1996, ACE, together with other regional
mid-Atlantic utilities, filed with the FERC, a restructuring plan
designed to establish a new wholesale energy market. The plan
proposed to 1) create an independent system operator, a nonprofit
corporation with an independent board of directors, to manage the
PJM Power Pool's energy market and transmission operation; 2)
establish a spot-energy market open to any buyer or seller and
provide utilities, nonutility 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 restructuring plan was designed to meet the
FERC requirements of Order 888 to functionally unbundle
transmission services. PECO Energy Company (PE), also a member
of the PJM, filed a competing proposal to FERC. While both
proposals outlined the establishment of an ISO, there were a
number of differences between the proposals. FERC failed to
accept either proposal as filed, set a deadline of December 31,
1996 for resubmission of the filing and suggested that all
parties achieve consensus around certain issues concerning
reliability, savings to ratepayers, market access, etc. In
compliance with the FERC, ACE filed an interim proposal with PE
and other members of the PJM.
On February 28, 1997, FERC issued an order approving the
implementation of the restructuring proposed by the PJM
companies, on an interim basis, with an exception noted in the
area of congestion pricing. FERC plans to hold a technical
conference on the issue of congestion pricing. Implementation of
the interim guidelines is expected to occur by April 1, 1997. A
final proposal is to be submitted by May 31, 1997, which will
address remaining ISO issues and congestion pricing.
Power Purchases and Sales
ACE is currently purchasing 125 MW of capacity and energy
from PP&L coal-fired sources. By letter dated March 16, 1995,
the Company notified PP&L that this capacity and energy sales
agreement will be terminated effective March 1998. To replace
the PP&L arrangement, the Company has signed a letter of intent
with PECO Energy (PE) for the purchase of 125 MWs of capacity and
energy for the period beginning March 16, 1998 through May 31,
2000. A second agreement with PE, subject to the approval of the
BPU, arranges for the purchase of 175 MWs of capacity and energy
beginning in June 1999 through May 2009. ACE also has agreements
with certain other electric utilities for the purchase of short-
term generating capacity, energy and transmission capacity on an
as-needed basis, which are utilized to the extent they are
economic and available.
Bulk Power Marketing
As a result of the developing wholesale bulk power market,
in 1996, ACE applied to, and was approved by, the FERC to trade
wholesale electric power in the United States. In the course of
this business, ACE enters into commitments to buy and sell power.
At December 31, 1996, ACE has agreements to purchase from
unaffiliated companies energy associated with 1,740 MW of
capacity. At December 31, 1996, these purchases result in
commitments of approximately $11.4 million through 1997. The
duration of each of these contracts does not exceed three months.
Capacity Planning
The Electric Facilities Need Assessment Act (EFNAA) requires
public utilities in the State of New Jersey to obtain a
Certificate of Need (CON) prior to constructing any electric
power generating unit or combination of units at a single site
with a combined capacity of 100 MW or more of any electric
generating units added to an existing generating facility which
will increase its installed capacity by 25% or by more than 100
MW, whichever is smaller. In addition, New Jersey utilities are
required to comply with a stipulation of settlement approved by
the BPU in July 1988 the purpose of which is to procure future
capacity and energy from qualified cogeneration and small power
production facilities through an annual competitive bidding
process, based on a long-term capacity plan. The amount to be
bid upon is subject to BPU review and will be based upon such
factors as a utility's five year projected capacity needs and its
current generating capacity, service life extension plans for
existing units, new construction, power purchases and commitments
from other utilities and nonutility sources.
The stipulation of settlement referred to above was due to
expire on September 15, 1993. Similarly, the CON was
set to expire on January 30, 1994. Since no processes were in
place to replace the CON, the New Jersey Department of
Environmental Protection (NJDEP) readopted the legislation and
extended it through January 28, 1999. ACE, pursuant to the terms
of the July 1988 stipulation, filed data with the BPU in
September 1996 covering the 15 year period from 1996 through
2010. The filing indicated that ACE did not require additional
capacity until 2000 when the need would be met with combined
cycle units and/or power purchases.
The ongoing outage of the Salem units has reduced ACE's
installed generating capacity and has required ACE to secure
additional capacity, sufficient to meet PJM reserve requirements.
Assuming the return of the Salem units in 1997, ACE's installed
capacity and capacity purchase arrangements for 1997-1999 are
expected to be sufficient to supply its share of PJM reserve
requirements during that period. On an operational basis, ACE
expects to be able to continue to meet the demand for electricity
on its system through operation of available equipment and by
power purchases. However, if periods of unusual demand should
coincide with forced outages of equipment, ACE could find it
necessary at times to reduce or curtail load in order to
safeguard the continued operation of its system.
The BPU's Energy Master Plan, Draft Phase II report,
recommends that, concurrent with the transition to a competitive
retail electric marketplace, the EFNAA be repealed. In addition,
the Plan also suggests that in order to provide for an orderly
transition to a competitive market, the local distribution
utility should be assigned the responsibility of providing basic
generation service. This basic generation service will apply to
service for any customer 1) who has not notified the distribution
company of an alternative supplier and 2) who is dropped by its
alternative supplier for any reason, including non-payment. As
the 'provider of last resort', ACE will be required to draft a
basic generation service plan with greater uncertainty as to how
large this customer group will be. See Note 10 of the
accompanying Notes to Consolidated Financial Statements herein
for additional information.
Nonutility Generation
Additional sources of capacity for use by ACE are made
available by nonutility sources, principally cogenerators. ACE
currently has four, BPU-approved power purchase agreements for
the purchase of capacity and energy from nonutility sources
under the standard offer methodology developed and approved by
the BPU in August 1987 and as previously discussed.
Project Fuel MW Date of
Location Type Provided Commercial Operation
Chester, solid
Pennsylvania waste 75 September 1991
Pedricktown,
New Jersey gas 116 March 1992
Carney's Point,
New Jersey coal 188 March 1994
Logan Township,
New Jersey coal 200 September 1994
Total 579
Amendments to the agreements between ACE and the sponsors
of the Logan and Pedricktown facilities have restructured ACE's
payment for capacity and energy reducing the energy component of
such payments. The amendment to the agreement between ACE and
the sponsors of the Pedricktown facility, which includes an
affiliate of ACE, also increased the available capacity of the
facility from 106 MW to 116 MW and returned the project's thermal
host to ACE as a retail customer effective November 1995.
Nuclear Generating Station Developments
ACE is a joint owner of the Hope Creek and Salem Nuclear
Generating Stations, to the extent of 5% and 7.41%, respectively.
The Hope Creek Unit and Salem Units 1 and 2 are located
adjacent to each other in Salem County, New Jersey and are
operated by PS.
ACE is also a joint owner of 7.51% of Peach Bottom Units 2
and 3, which are located in York County, Pennsylvania and are
operated by PE. See Note 5 of AEI's Notes to Consolidated
Financial Statements for additional information relating to the
Company's investment in jointly-owned generating stations.
In 1996, nuclear generation provided 15% of ACE's total
energy output. The approximate capacity factors (based on
maximum dependable capacity ratings) for ACE's jointly-owned
units for 1995 and 1996 were as follows:
Unit 1996 1995
Salem Unit 1 0.0% 26.0%
Salem Unit 2 0.0% 20.8%
Peach Bottom Unit 2 79.8% 95.8%
Peach Bottom Unit 3 98.2% 88.2%
Hope Creek 74.6% 78.2%
See "Salem Station" below for additional information on operating
performance at Salem.
ACE has been advised that the Nuclear Regulatory Commission
(NRC) has raised concerns that the Thermo-Lag 330 fire barrier
systems used to protect cables and equipment at the Peach Bottom
Station may not provide the necessary level of fire protection
and has requested licensees to describe short- and long-term
measures being taken to address this concern. ACE has been
advised that PE has informed the NRC that it has taken short-term
corrective actions to address the inadequacies of the Thermo-Lag
barriers installed at Peach Bottom and is participating in an
industry-coordinated program to provide long-term corrective
solutions. By letter dated December 21, 1992, the NRC stated
that PE's interim actions were acceptable. PE has advised ACE
that PE has been in contact with the NRC regarding PE's long-term
measures to address Thermo-Lag fire barrier issues. In 1995, PE
completed its engineering re-analysis for Peach Bottom. The
re-analysis identified proposed modifications to be performed
over the next several years in order to implement the long-term
measures addressing the concern over Thermo-Lag use.
ACE has been advised that in 1990 General Electric Company
(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. Both Peach Bottom Units 2 and 3 and Hope
Creek are affected by this issue and both PE and PS are
participating in the GE BWR Owners Group to evaluate this issue
and develop long-term corrective action. In June 1994, an
industry group was formed and subsequently established generic
inspection guidelines which were approved by the NRC. PE has
advised ACE that Peach Bottom 3 was last examined during its fall
1995 refueling outage and the extent of the cracking identified
was determined to be within industry-established guidelines. In
a letter to the NRC dated November 3, 1995, PE concluded that
there is a substantial margin for each core shroud weld to allow
for continued operation of Unit 3. PE has also advised ACE
that Peach Bottom 2 was reinspected during its 1996 refueling
outage. The examinations disclosed that while additional minor
flaw indications were discovered, PE concluded, and the NRC
concurred, that neither repair nor modification to the core
shroud was necessary prior to restarting the reactor. At the
Hope Creek Unit, PS advised ACE that during the spring 1994
refueling outage, PS inspected the shroud of Hope Creek in
accordance with GE's recommendations and found no cracks. PS
reports that due to the age and materials of the Hope Creek
shroud and the historical maintenance of low conductivity water
chemistry, Hope Creek has been placed in the lowest
susceptibility category under industry-established guidelines.
Hope Creek must undergo another shroud inspection during its next
refueling outage in 1997, or install a preemptive repair that
would maintain the structural integrity of the shroud under all
normal and design basis accident conditions for the remaining
life of the plant. ACE cannot predict what further action will
be taken with regard to these units or what long-term corrective
actions, if any, will be identified.
In a separate matter, PS has advised that as a result of
several BWRs experiencing clogging of some emergency core cooling
system suction strainers, which supply water from the suppression
pool for emergency cooling of the core and related structures,
the NRC issued a Bulletin in May 1996 to operators of BWRs
requesting that measure be taken to minimize the potential for
clogging. The NRC has proposed three resolution options, with a
request that actions be completed by the end of the unit's first
refueling outage after January 1997. Alternative resolution
options will be subject to NRC approval. PS has advised ACE that
PS has responded to the NRC, indicating its intention to comply
with the Bulletin, and expects to submit its planned actions and
schedules for Hope Creek after the NRC approves a utility
resolution guidance document. PE has advised ACE that large
capacity passive strainers will be installed at Peach Bottom
Units 2 and 3 during their next refueling outages in September
1998 and September 1997, respectively. ACE, PE or PS cannot
predict what actions, if any, the NRC may take in this matter.
PS has advised ACE that in October 1996, PS, along with
other nuclear plant owners, received a request for information
regarding the adequacy and availability of each plant's design
bases data. The NRC is requiring that information be submitted
under oath and affirmation to provide it added confidence and
assurance that all nuclear units are operated and maintained
within the design bases of the facilities and that any deviations
are reconciled in a timely manner. PS advised ACE that PS
responded to the NRC's request on February 11, 1997 with a
detailed description of ongoing activities and new initiatives to
ensure that Salem and Hope Creek are operated and maintained
within their design bases. Since the information which was
submitted will be used by the NRC to determine follow-up
inspection activity or potential enforcement actions, neither
ACE, nor PS, can predict at this time what impact the NRC's
request will have.
ACE has been advised by PS that in August 1996, the NRC
conducted an investigation of the Physical Security Program for
Salem and Hope Creek. Based on the results of that inspection,
apparent violations were identified. On December 11, 1996, PS
received a $100,000 civil penalty for two severity level III
violations. Three severity level IV violations were received with
no civil penalty. PS has advised ACE that PS will not dispute
these violations.
ACE has been advised that on December 11, 1996, PS received
a severity level II violation and an $80,000 civil penalty from
the NRC for apparent violations which occurred in 1993 and early
1994, involving alleged discrimination against two employees for
their engagement in protected activities in accordance with
federal regulations. PS has advised ACE that PS will not dispute
this violation.
As previously reported, PS, operator of the Salem and Hope
Creek Nuclear Generating Stations and PE, operator of the Peach
Bottom Atomic Power Station, announced on June 24, 1996 the
commissioning of a study to investigate competitive alternatives
to the current independent nuclear power plant operations of the
two companies. The goal of the study is to determine viable
alternatives to permit diversification of financial risks and
reduction of costs for both companies in order to increase
competitiveness. PE has advised that a preliminary draft of the
study indicates opportunities for risk diversification,
performance improvement and cost savings. PE indicates further
review will take place, the timing of which is unknown.
The periodic review and evaluation of nuclear generating
station licensees conducted by the NRC is known as the Systematic
Assessment of Licensee Performance (SALP). Under the revised
SALP process, ratings are assigned in four assessment areas,
reduced from seven assessment areas: Operations, Maintenance,
Engineering and Plant Support (the Plant Support area includes
security, emergency preparedness, radiological controls, fire
protection, chemistry and housekeeping). Ratings are assigned
from "1" to "3", with "1" being the highest and "3" being the
lowest.
Salem Station
ACE is a 7.41% owner of Salem Nuclear Generating Station
(Salem) operated by PS. Salem consists of two 1,106 MW
pressurized water nuclear reactors (PWR) representing 164 MWs of
ACE's total installed capacity of 2,385.7 MW.
The NRC's most recent SALP report for the Salem Station for
the period covering June 20, 1993 through November 5, 1994 was
issued on January 3, 1995. The NRC assigned ratings of "1" in
the functional area of Plant Support, "2" in the area of
Engineering and "3" in the areas of Operations and Maintenance.
Due to the current outage at Salem, described below, the end of
the current SALP period has not yet been determined.
As previously reported, Salem 1 and 2 have been out of
service since May 16, 1995 and June 7, 1995, respectively.
During these outages, ACE has been advised that PS has made
significant changes and improvements related to the people,
processes and equipment at Salem to improve the long-term
reliability of the units.
ACE has been advised by PS that Salem Unit 2 is in the final
stage of preparation for restart. The reactor has been refueled
and reassembled and the reactor coolant pumps have been tested
and placed in service. Over 90% of the total work activities
have been completed and approximately 80% of the plant systems
have been restored. The unit is scheduled to enter Mode 4 in
March 1997 which will allow additional testing to be performed in
preparation for start-up.
During the course of these outages, PS has also been
required to address certain generic issues applicable to nuclear
power plants, which have also affected the length of the outages.
ACE was advised by PS that a Generic Letter from the NRC
identified an issue that impacted the Salem Unit 2 startup
schedule. This Generic Letter (96-06) requested all nuclear
utilities, including PS, to review systems for potential
waterhammer events (hydrodynamic stress caused by steam formation
in a piping system) and the impact that these events could have
on the system's safety function. PS reported that in order to
address the concerns of Generic Letter 96-06, modifications were
necessary to the containment fan coil units of Salem Units 1 and
2, which provide containment air cooling. As a result of these
modifications and the time required for NRC acceptance of PS's
proposed resolution of these issues, PS reported that the
expected start-up of Salem Unit 2 will be in the second quarter
of 1997.
PS has advised ACE that Salem Unit 1 is now expected to
return to service in the Fall of 1997, after replacement of the
unit's four steam generators, which was required in order to
correct a generic problem with certain PWRs. All four of the
original generators have been removed from the containment
structure and two have been shipped offsite for disposal at the
Barnwell, South Carolina low-level radioactive waste burial
facility. The remaining two will be shipped offsite in the near
future. Installation of all four replacement steam generators is
scheduled to be complete in March 1997. Salem Unit 1 will also
require modifications similar to Salem Unit 2 to respond to
Generic Letter 96-06, but PS advises that such modifications are
not expected to further delay that unit's return to service.
On January 29, 1997, PS advised ACE that the NRC held a
public meeting and identified Salem Units 1 and 2 as Category 2
plants placed on the "NRC Watch List". In the press release, the
staff of the NRC announced that the decision to place the Salem
units on the Watch List was not based on any recent performance
problems or decline. In addition, the staff believes that
Salem's efforts to achieve needed improvements are correctly
targeted and that the NRC is satisfied with the licensee's
overall approach. However, the staff noted that Salem should
have been placed on the Watch List previously because of Salem's
past safety performance. The staff also indicated that the
agency increased its attention and resources at Salem
commensurate with a Watch List plant. The staff concluded that,
notwithstanding the improvements at Salem, it would not have been
removed from the Watch List at this time had it been previously
identified because it has yet to demonstrate a period of safe
performance at power. A Category 2 facility is a plant that is
authorized to operate but that the NRC will monitor closely. A
plant will remain in this category until the licensee either
demonstrates a period of improved performance, or until a further
deterioration of performance results in the plant being shutdown
until the licensee can demonstrate that adequate programs have
been established and implemented to ensure substantial
improvement.
Restart of the units is subject to completion of the
requirements of the restart plan to the satisfaction of PS and
the NRC, which encompasses a review and improvement of personnel,
process and equipment issues. On January 14, 1997, U.S. Senator
Joseph Biden of Delaware wrote to the NRC to request that the
full Commission vote on the decision to restart Salem, rather
than permit the NRC staff to authorize the restart under
applicable NRC rules. By letter to Senator Biden dated February
20, 1997, the NRC advised that it would not require a full
commission vote on Salem restart.
On February 27, 1996, the Salem co-owners filed a Complaint
in United States District Court for the District of New Jersey
against Westinghouse Electric Corporation, the designer and
manufacturer of the Salem steam generators, under state and
federal RICO statutes alleging fraud, negligent misrepresentation
and breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. Subsequently, Westinghouse
filed a counterclaim of $2.5 million for unpaid work. The
litigation is now in the process of discovery and investigation.
While ACE cannot predict the outcome of this litigation, the co-
owners are aggressively pursuing the claim.
ACE has been advised that on October 5, 1995, PS declared an
alert at Salem Unit 1. The event involved a problem with the
overhead annunciator panel in the Unit 1 control room. PS had
chartered a significant event response team (SERT) to investigate
the event, determine the root causes and suggest corrective
actions. Simultaneously, the NRC formed a special inspection
team to investigate the event during the period October 6 through
October 18. What actions the NRC might take, if any, cannot be
determined at this time. At the time of the event there was no
fuel in the reactor, no release of radiation and no danger to the
public or on-site personnel.
For information concerning 1) the BPU's 1996 investigation
into the ongoing Salem outage, 2) capital, operations and
maintenance costs associated with Salem Units 1 and 2, and 3) the
effects of the Salem outage on operations, see Notes 3 and 10 of
the Company's Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations, respectively.
Hope Creek Station
ACE is a 5% owner of Hope Creek Nuclear Generating Station
(Hope Creek) which is operated by PS. ACE has been advised that
Hope Creek completed its sixth refueling and maintenance outage
in March 1996.
PS advised ACE that on December 24, 1996, the NRC issued its
latest periodic SALP report for Hope Creek for the period between
April 23, 1995 to November 9, 1996. The NRC noted that overall
performance improved during the SALP period, after a significant
decline in performance that occurred early in the period.
Further, the NRC noted that PS's actions to address the areas of
concern, once identified, were comprehensive and generally
effective. Three areas, Operations, Maintenance and Engineering,
were each rated Category 2, as they had been in the previous SALP
rating. Improvements were noted in these areas with most of the
improvement in Operations and Maintenance occurring later in the
period. The fourth area, Plant Support, was also rated Category
2, a decline from the previous SALP rating due to problems
principally with security, radiation protection and emergency
preparedness implementation. Weaknesses in communication
contributed to performance issues across the organization.
Peach Bottom Station
ACE is a 7.51% owner of Peach Bottom Atomic Power Station
(Peach Bottom) operated by PE. ACE has been advised that PE
successfully completed a scheduled refueling and maintenance
outage in November 1996.
ACE has also been advised that on January 19, 1996, the NRC
issued its SALP report for the Peach Bottom Station for the
period covering May 1, 1994 through October 14, 1995. The NRC
assigned ratings of "1" in the functional areas of Plant
Operations, Maintenance and Plant Support. Engineering received
a rating of "2". The NRC found continued improvement in
performance during the period. Operator performance continued to
be a strength, as well as operations management oversight.
Effective engineering management actions to improve the overall
self-assessment and system performance were noted, as well as
good management oversight activities. Response to emerging
issues, equipment problems and event related issues were noted as
particularly strong. However, lapses in the quality of technical
work and in modification implementation indicated inconsistent
performance, and resulted in a repeat rating of "2" for the
Engineering area. ACE has been advised that PE will be taking
actions to address weaknesses discussed in the SALP Report.
An NRC inspection of the implementation of the Peach Bottom
Maintenance Rule Program was conducted on August 5 through 9,
1996. During that inspection, an apparent violation of NRC
requirements was identified involving the failure to establish
adequate performance criteria for the determination of
appropriate preventive maintenance. An enforcement conference
was held on November 15, 1996 to discuss the apparent violation
and for PE to present its plan to respond to the associated
issues. On January 3, 1997, the NRC issue the violation,
exercising enforcement discretion by not assessing an associated
civil penalty.
During the subject routine NRC Resident Inspector's
inspection for the period of July 7 through September 7, 1996, an
apparent violation of NRC requirements was identified involving
inadequate engineering analysis of control circuitry and load
sequencing of the plant's emergency diesel generators. An
enforcement conference was held on December 11, 1996 to discuss
the issue and PE's response to it. On December 27, 1996, the NRC
issued one violation with no associated civil penalty.
Fuel Supply
ACE's sources of electrical energy (including power
purchases) for the years indicated are shown below:
Source 1996 1995 1994
Coal 28% 33% 29%
Nuclear 15% 19% 23%
Oil/Natural Gas 2% 3% 7%
Interchange and
Purchased Power 35% 21% 24%
Nonutility 20% 24% 17%
The prices of all types of fuels used by ACE for the
generation of electricity are subject to various factors, such as
world markets, labor unrest and actions by governmental
authorities, including allocations of fuel supplies, over which
ACE has no control.
Oil
Residual oil and distillate oil for ACE's wholly-owned
stations are furnished under two separate contracts with a major
fuel supplier. ACE has a contract for the supply of 1.0% sulfur
residual oil for both Deepwater and B. L. England Stations and
for distillate oil sufficient to supply ACE's combustion
turbines. Both contracts expire October 31, 1997. See
"Environmental Controls-Air" for information concerning the use
of particular fuels at B. L. England Station.
On December 31, 1996, the oil supply at Deepwater Station
was sufficient to operate Deepwater Unit 1 for 24 days, and the
supply at B. L. England Station was sufficient to operate Unit 3
for 42 days.
Coal
ACE has contracted with one supplier for the purchase of
2.6% sulfur coal for B. L. England Units 1 and 2 through April
30, 1999. On December 31, 1996, the coal inventory at the B. L.
England Station was sufficient to operate Units 1 and 2 for 60
days. See "Environmental Controls-Air" herein for additional
information relating to B.L. England Station.
ACE has contracted with one supplier for the purchase of
1.0% sulfur coal for Deepwater Unit 6/8 through June 30, 2001.
On December 31, 1996, the coal inventory at Deepwater Station was
sufficient to operate Unit 6/8 for 54 days.
The Keystone and Conemaugh Stations, in which ACE has joint
ownership interests of 2.47% and 3.83%, respectively, are mine-
mouth generating stations located in western Pennsylvania. The
owners of the Keystone Station have a contract through 2004,
providing for a portion of the annual bituminous coal
requirements of the Keystone Station. A combination of long and
short term contracts provide for the annual bituminous coal
requirements of the Conemaugh Station. To the extent that the
requirements of both plants are not covered by these contracts,
coal supplies are obtained from local suppliers. As of December
31, 1996, Keystone and Conemaugh had approximately a 24 day
supply and a 34 day supply of coal, respectively.
Gas
ACE is currently capable of firing natural gas in six
combustion turbine peaking units and in two conventional steam
turbine generating units. ACE has entered into a firm electric
service tariff with the local distribution company for the supply
of natural gas to its units. The tariff provides for the payment
of certain commodity and demand charges. Portions of the gas
supply are obtained from the spot market under short term
renewable gas supply and transportation contracts with various
producers/suppliers and pipelines.
Nuclear Fuel
As a joint-owner of the Peach Bottom, Salem and Hope Creek
generating units, ACE relies upon the respective operating
company for arrangements for nuclear fuel supply and management.
ACE is responsible for the costs thereof to the extent of its
particular ownership interest through an arrangement with a third
party. Generally, the supply of fuel for nuclear generating
units involves the mining and milling of uranium ore to uranium
concentrate, conversion of the uranium concentrate to uranium
hexafluoride, enrichment of uranium hexafluoride gas, conversion
of the enriched gas to fuel pellets and fabrication of fuel
assemblies. After spent fuel is removed from a nuclear
reactor, it is placed in temporary storage for cooling in a spent
fuel pool at the nuclear station site. Under the Nuclear Waste
Policy Act of 1982 (NWPA), the Federal government has a
contractual obligation for transportation and ultimate disposal
of the spent fuel. See Note 12 of the accompanying Notes to
Consolidated Financial Statements for financing arrangements for
nuclear fuel.
ACE has been advised by PE, operator of the Peach Bottom
units, that it has contracts for uranium concentrates to fully
operate Peach Bottom Units 2 and 3 through 2002. ACE has been
advised by PS, operator for the Salem and Hope Creek Stations,
that it has arrangements which are expected to provide sufficient
uranium concentrates to meet the currently projected requirements
of the Salem and Hope Creek units fully through the year 2001
and, thereafter, 50% of the requirements through 2003. ACE has
been advised that neither PE, nor PS, anticipate any difficulties
in obtaining its requirements for uranium concentrates. PE
advises that its contracts for uranium concentrates will be
allocated to the Peach Bottom units, and other PE nuclear
facilities in which ACE has no ownership interest, on an
as-needed basis.
PE and PS report contracts for the following segments of the
nuclear fuel supply cycle with respect each of the joint-owned
units through the following years:
Nuclear Unit Conversion Enrichment Fabrication
Peach Bottom Unit 2 (1) (2) 1999
Peach Bottom Unit 3 (1) (2) 2000
Salem Unit 1 2001 (3) 2004
Salem Unit 2 2001 (3) 2005
Hope Creek 2001 (3) 2000
(1) 100% of conversion services for Peach Bottom through 2001 and
at least 60% of the conversion services requirements are covered
through 2002. PE does not anticipate any difficulty in obtaining
necessary conversion services for Peach Bottom.
(2) Contractual commitments for enrichment services for Peach
Bottom with the Unites State Enrichment Corporation represent
100% of the enrichment services through 2004. PE does not
anticipate any difficulty in obtaining necessary enrichment
services for Peach Bottom.
(3) Contractual commitments for 100% of enrichments requirements
through 1998, approximately 50% through 2002; and approximately
30% through 2004. PS does not anticipate difficulties in
obtaining necessary enrichment service for the Salem and Hope
Creek units.
There are no commercial facilities for the reprocessing of
nuclear fuel currently in operation in the United States, nor has
the NRC licensed any such facilities. PE currently stores all
spent nuclear fuel from its nuclear generating facilities in on-
site, spent-fuel storage pools. Spent-fuel racks at Peach Bottom
have storage capacity until 2000 for Unit 2 and 2001 for Unit 3.
Options for expansion of storage capacity at Peach bottom,
including rod consolidation, has been investigated. ACE has been
advised by PS that as a result of reracking the two spent-fuel
pools at Salem, the spent-fuel storage capability of Salem Units
1 and 2 is estimated to be 2008 and 2012, respectively. The Hope
Creek pool is also fully racked and it is conservatively expected
to provide storage capacity until 2006.
In conformity with the NWPA, PS and PECO, on behalf of the
co-owners of the Salem and Hope Creek, and Peach Bottom stations,
respectively, have entered into contracts with the U.S.
Department of Energy (DOE) for the disposal of spent nuclear fuel
from those stations. Under these contracts, the DOE is to take
title to the spent fuel at the site, then transport it and
provide for its permanent disposal at a cost to utilities based
on nuclear generation, subject to such escalation as may be
required to assure full cost recovery by the Federal government.
Under NWPA, the DOE was to begin accepting spent fuel for
permanent offsite storage no later than 1998, but it is possible
that such storage may be delayed indefinitely. ACE has been
advised that the DOE has stated that it would not be able to open
a permanent, high-level nuclear waste storage facility until
2015, at the earliest. In July 1996, the Circuit Court for the
District of Columbia decided that the DOE has a legal obligation
to begin to accept spent fuel in January 1998. The DOE chose not
to appeal this ruling. The U.S. Senate passed an amendment to
the NWPA that would have required the DOE to construct an interim
storage facility which would accept spent nuclear fuel from
utilities beginning in 1998 or soon thereafter. The U.S. House
of Representatives did not vote on the legislation. The bill has
been reintroduced for consideration in 1997. Although progress
is being made at the Yucca Mountain site and several communities
have expressed interest in providing a temporary storage site, it
is unknown when the temporary federal storage facilities or
permanent repository will become available. The DOE is exploring
options to address delays in the currently projected waste
acceptance schedules. The options under consideration include
offsetting a portion of the financial burden associated with the
costs of continued on-site storage of spent fuel after 1998.
Nuclear Decommissioning
The Energy Policy Act states, among other things, that
utilities with nuclear reactors must pay for the decommissioning
and decontamination of the DOE nuclear fuel enrichment
facilities. The total costs are estimated to be $150 million per
year for 15 years, of which ACE's share is estimated to be $8.5
million. The Act provides that these costs are to be recoverable
in the same manner as other fuel costs. ACE has recorded a
liability of $5.3 million and a related regulatory asset of $5.7
million for such costs at December 31, 1996. ACE made its first
payment related to this liability to the respective operating
companies in September 1993 and continues to make payments as
required. In ACE's 1993 LEC filing, the BPU approved a
stipulation of settlement which included, among other things, the
full LEC recovery of this and future assessments.
In January 1993, the BPU adopted N.J.A.C. 14:5A which was
designed to provide a mechanism for periodic review of the
estimated costs of decommissioning nuclear generating stations
owned by New Jersey electric utilities. The purpose of this
regulation is to insure that adequate funds are available to
assure completion of decommissioning activities at the cessation
of commercial operation. The regulation established
decommissioning trust fund reporting requirements for electric
utilities in order to provide the BPU with timely information for
its oversight of these funds. N.J.A.C. 14:5A-2.1 requires that
all New Jersey electric utilities file with the BPU a nuclear
decommissioning cost update by January 1, 1996 and every four
years thereafter.
On January 3, 1996, PS and ACE jointly filed with the BPU
its 1995 Nuclear Decommissioning Cost updates. ACE and PS
jointly filed NRC cost estimates for each of their five jointly-
owned nuclear units. These cost estimates are based on the NRC's
existing generic formula. ACE and PS do not believe that these
NRC generic estimates provide an accurate estimate of the cost of
decommissioning the nuclear units. Inclusion of these NRC
generic estimates should not be interpreted as a validation by
ACE and PS of the appropriateness of these estimates for
estimating the cost of decommissioning the nuclear units. ACE
and PS believe these costs are best estimated with periodic
site-specific studies. PS, on behalf of the co-owners of the
Salem, Hope Creek and Peach Bottom stations, has engaged an
independent engineer to develop this estimate. Site specific
studies have been performed and have been filed with the BPU for
review. Adjustments to funding amount may be required.
ACE is collecting through rates amounts to fund its share of
estimated future costs relating to the decommissioning of the
five nuclear units in which it has joint-ownership interests.
Funding to cover the future costs of decommissioning each of the
five nuclear units, as currently authorized by the BPU and
provided for in rates, is $6.4 million annually. See Note 10 -
Nuclear Plant Decommissioning and Other of the accompanying Notes
to Consolidated Financial Statements for information relating to
decommissioning of the five nuclear units in which ACE has an
ownership interest.
Regulation
ACE is a public utility organized under the laws of New
Jersey and is subject to regulation as such by the BPU, among
others, which is also charged with the responsibility for energy
planning and coordination within the State of New Jersey. ACE is
also subject to regulation by the Pennsylvania Public Utility
Commission in limited respects concerning property and operations
in Pennsylvania. ACE is also subject, in certain respects, to
the jurisdiction of the FERC, and ACE maintains a system of
accounts in conformity with the Uniform System of Accounts
prescribed for public utilities and licensees subject to the
provisions of the Federal Power Act.
The construction of generating stations and the availability
of generating units for commercial operation are subject to the
receipt of necessary authorizations and permits from regulatory
agencies and governmental bodies. Standards as to environmental
suitability and operating safety are subject to change.
Litigation or legislation designed to delay or prevent
construction of generating facilities and to limit the use of
existing facilities may adversely affect the planned installation
and operation of such facilities. No assurance can be given that
necessary authorizations and permits will be received or
continued in effect, or that standards as to environmental
suitability or operating safety will not be changed in a manner
to adversely affect the Company, ACE or its operations.
Operation of nuclear generating units involves continuous
close regulation by the NRC. Such regulation involves testing,
evaluation and modification of all aspects of plant operation in
light of NRC safety and environmental requirements, and
continuous demonstration to the NRC that plant operations meet
applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating plant may operate. In
addition, the Federal Emergency Management Agency has
responsibility for the review, in conjunction with the NRC, of
certain aspects of emergency planning relating to the operation
of nuclear plants.
As a by-product of nuclear operations, nuclear generating
units produce substantial amounts of low-level radioactive waste
(LLRW). Such waste is presently accumulated on-site and
permanently disposed of at a federally licensed disposal
facility. ACE had been advised by both PE and PS that LLRW
generated at Peach Bottom, Salem and Hope Creek is shipped to the
site located in Barnwell, South Carolina for disposal. Due to
the uncertainty of the continued availability of LLRW disposal
sites, on-site storage facilities were constructed at Peach
Bottom with a five-year storage capacity. PS advises that it
also has an on-site LLRW storage facility at Salem also with a
five-year storage capacity.
PE has advised ACE that PE is pursuing alternative disposal
strategies for LLRW generated at Peach Bottom including an
aggressive LLRW reduction program. Pennsylvania is the host site
for LLRW generators located in Pennsylvania, Delaware, Maryland
an West Virginia and is pursuing a permanent disposal site
through a volunteer sitting process. PS has advised ACE that New
Jersey also plans to host a LLRW disposal site.
In March 1983, New Jersey enacted the Public Utility Fault
Determination Act which requires that the BPU make a
determination of fault with regard to any past or future accident
at any electric generating or transmission facility, prior to
granting a request by that utility for a rate increase to cover
accident-related costs in excess of $10 million. However, the
law allows the affected utility to file for non-accident related
rate increases during such fault determination hearings and to
recover contributions to federally mandated or voluntary cost-
sharing plans. The law further allows the BPU to authorize the
recovery of certain fault-related repair, cleanup, power
replacement or damage costs if substantiated by the evidence
presented and if authorized in writing by the BPU.
For information regarding the regulation of AEI's
subsidiary, ATS, refer to "Nonutility Subsidiaries" herein.
For information regarding ACE's nuclear power replacement
cost insurance and liability under the Federal Price-Anderson
Act, see Note 10 of AEI's Notes to Consolidated Financial
Statements, herein.
Environmental Matters
General
ACE is subject to regulation with respect to air and water
quality and other environmental matters by various Federal, state
and local authorities. Emissions and discharges from ACE's
facilities are required to meet established criteria, and
numerous permits are required to construct new facilities and to
operate new and existing facilities. Additional regulations and
requirements are continually being developed by various
government agencies. The principal laws, regulations and
agencies relating to the protection of the environment which
affect ACE's operations are described below.
Construction projects and operations of ACE are affected by
the National Environmental Policy Act under which all Federal
agencies are required to give appropriate consideration to
environmental values in major Federal actions significantly
affecting the quality of the human environment.
The Federal Resource Conservation and Recovery Act of 1976
(RCRA) provides for the identification of hazardous waste and
includes standards and procedures that must be followed by all
persons that generate, transport, treat, store or dispose of
hazardous waste. ACE has filed notifications and plans with the
U. S. Environmental Protection Agency (EPA) relating to the
generation and treatment of hazardous waste at certain of its
facilities and generating stations.
The Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA), as amended by
the Superfund Amendments and Reauthorization Act of 1986 (SARA),
and RCRA authorize the EPA to bring an enforcement action to
compel responsible parties to take investigative and/or cleanup
actions at any site that is determined to present an imminent and
substantial danger to the public or to the environment because of
an actual or threatened release of one or more hazardous
substances. The New Jersey Spill Compensation and Control Act
(Spill Act) provides similar authority to the NJDEP. Because of
the nature of ACE's business, including the production of
electricity, various by-products and substances are produced
and/or handled which are classified as hazardous under the above
laws. ACE generally provides for the disposal and/or processing
of such substances through licensed independent contractors.
However, the statutory provisions may impose joint and several
responsibility without regard to fault on the generators of
hazardous substances for certain investigative and/or cleanup
costs at the site where these substances were disposed and/or
processed. Generally, actions directed at funding such site
investigations and/or cleanups include all known allegedly
responsible parties.
ACE has received requests for information under CERCLA with
respect to certain sites. One site, a sanitary landfill
comprising approximately 40 acres, is situated in Atlantic
County, New Jersey. ACE received a Directive, dated November 7,
1991, from the NJDEP, identifying ACE as one of a number of
parties allegedly responsible for the placement of certain
hazardous substances, namely, flyash which had been approved as
landfill material. An Administrative Consent Order (ACO) has
been executed and submitted to the NJDEP by ACE and at least four
other identified responsible parties. Site remediation will
include a soil cover of the site. ACE has joined with three
other parties and will cooperate in implementing the terms of the
ACO. Approximately eight additional responsible parties have
also been identified by the NJDEP. ACE, together with the other
signatories to the ACO, will pursue recovery against those
persons who may also pursue recovery against other responsible
parties not named in the NJDEP Directive. ACE's contribution to-
date for the remediation and clean-up of the Atlantic County site
has been approximately $300,000. It is not anticipated that
future contributions, if any, will be significant.
ACE has been served a Summons and Complaint dated June 30,
1992 in a civil action brought pursuant to Section 107(a) of
CERCLA on behalf of the EPA. ACE has been named as one of
several defendants in connection with the recovery of costs
incurred, and to be incurred, in response to the alleged release
of hazardous substances located in Gloucester County, New Jersey.
Approximately 70 separate financially solvent entities have been
identified as having responsibility for remediation which is now
predicted to be in excess of $175 million. Sufficient discovery
has been conducted to establish that ACE's contribution to the
clean-up and remediation activity will be within the lower tiers
of financial participation. Notwithstanding the joint and
several liability imposed by law, primary responsibility will be
apportioned among others, including Federal and state agencies
and private parties. ACE's contribution to-date for the
remediation and clean-up of the Gloucester County site has been
$105,000. It is not anticipated that future contributions, if
any, will be significant.
The New Jersey Environmental Clean-up Responsibility Act was
supplemented and amended in June 1993 and became the New Jersey
Industrial Site Recovery Act. The act provides, among other
things, that any business having certain Standard Industrial
Classification Code numbers that generates, uses, transports,
manufactures, refines, treats, stores, handles or disposes of
hazardous substances or hazardous wastes is subject to the
requirements of the act upon the closing of operations or a
transfer of ownership or operations. As a precondition to such
termination or transfer of ownership or operations, the approval
of the NJDEP of a negative declaration, a remedial action work
plan or a remediation agreement and the establishment of the
remediation funding source is required.
Various state and Federal legislation has established a
comprehensive program for the disclosure of information about
hazardous substances in the workplace and the community, and
provided a procedure whereby workers and residents can gain
access to this information. Implementing the regulations
provides for extensive recordkeeping, labeling and training to be
accomplished by each employer responsible for the handling of
hazardous substances. ACE has implemented the requirements of
this legislation to achieve substantial compliance with
appropriate schedules.
ACE is also subject to the Wetlands Act of 1970, which
requires applications to and permits from the NJDEP for
conducting regulated activities (including construction and
excavation) within the "coastal wetlands," as defined therein.
Legislation enacted in 1987 by the State of New Jersey designates
certain areas as fresh water wetlands and restricts development
in those areas.
The New Jersey Coastal Area Facility Review Act (CAFRA)
requires applications to and permits from the NJDEP for
construction of certain types of facilities within the "coastal
area" as defined by CAFRA. Recent amendments to the CAFRA
regulations expanded the area under CAFRA control as well as the
types of developments subject to CAFRA. The current regulations
provide exemptions for the maintenance and repair of existing
electrical substations, but are not clear as to whether a CAFRA
permit would be required for construction, maintenance and/or
repair of transmission lines within the CAFRA area.
Public concern continues over the health effects from
exposure to electric and magnetic fields (EMF). To date, there
are not conclusive scientific studies to support such concerns.
The New Jersey Commission on Radiation Protection (CORP) is
considering promulgation of regulations which would authorize the
NJDEP to review all new power line projects of 100 kilovolts or
more. While the promulgation of such regulations may affect the
design and location of ACE's existing and future electric power
lines and facilities and the cost thereof, current discussions
with CORP indicate that such regulations would not significantly
impact ACE's operations. ACE's program of Prudent Field
Management implements reasonable measures, at modest cost, to
limit magnetic field levels in the design and location of new
facilities. Such amounts as may be necessary to comply with any
new EMF rules cannot be determined at this time and are not
included in ACE's 1997-1999 estimated construction expenditures.
Air
The Federal Clean Air Act, as amended, requires that all
states achieve specified primary ambient air quality standards
(relating to public health) by December 31, 1982 unless the
deadline is extended for certain pollutants for a particular
state by appropriate action taken by the EPA, and also requires
that states achieve secondary ambient air quality standards
(relating to public welfare) under the Clean Air Act within a
reasonable time. The Clean Air Act also requires the
Administrator of the EPA to promulgate revised new source
performance standards for sulfur dioxide, particulates and
nitrogen dioxide, mandate the use of the "best technological
system of continuous emission reduction" and preclude the use of
low sulfur coal as a sole means of achieving compliance with
sulfur regulations for new power plants. The Clean Air Act
Amendments (CAAA), which provide for penalties in the event of
noncompliance, further provide that State Implementation Plans
(SIP) contain emission limitations and such other measures as may
be necessary, as determined under regulations promulgated by the
EPA, to prevent "significant deterioration" of air quality based
on regional non-degradation classifications.
The NJDEP is using the New Jersey Administrative Code, Title
7, Chapter 27 (NJAC 7:27) as its SIP to achieve compliance with
the national ambient air quality standards adopted by EPA under
the Clean Air Act. NJAC 7:27 currently provides ambient air
quality standards and emission limitations, all of which have EPA
approval, for seven pollutants, including sulfur dioxide and
particulates. ACE believes that all of its fossil fuel-fired
generating units are, in all substantial respects, currently
operating in compliance with NJAC 7:27 and the EPA approved SIP.
In November 1990, the CAAA was enacted to provide for
further restrictions and limitations on sulfur dioxide and other
emission sources as a means to reduce acid deposition. Phase I
of the legislation mandated compliance with the sulfur dioxide
reduction provisions of the legislation by January 1, 1995 by
utility power plants emitting sulfur dioxide at a rate of above
2.5 pounds per million BTU. Plants utilizing certain control
technologies to meet the Phase I sulfur dioxide reductions could
be permitted, subject to EPA approval, to either postpone
compliance until 1997 or receive an early reduction bonus
allowance for reductions achieved between 1995 and 1997. Phase
II of the legislation requires controls by January 1, 2000 on
plants emitting sulfur dioxide at a rate above 1.2 pounds per
million BTU.
ACE's wholly-owned B. L. England Units 1 and 2 and its
jointly-owned Conemaugh Units 1 and 2, in which ACE has a 3.83%
ownership interest, were affected by Phase I, and all of ACE's
other fossil-fueled steam generating units are affected by Phase
II. The Keystone Station, in which ACE has a 2.47% ownership
interest, is impacted by the sulfur dioxide provisions of Title
IV of the CAAA during Phase II. In addition, all of ACE's
fossil-fueled steam generating units will be affected by the
nitrogen oxide provisions of the CAAA.
A portion of the capital costs necessary to continue
compliance with the CAAA are included in ACE's current estimate
of construction expenditures shown under "Construction and
Financing" above. ACE expects that costs associated with
compliance would be recoverable through rates, and may be offset,
in part, by utilization of certain allowances as permitted by the
CAAA.
The CAAA requires that reductions in nitrogen oxide (NOx) be
made from the emissions of major contributing sources and each
state must impose reasonable available control technologies on
these major sources. NJDEP regulations adopted in November 1993
require that a compliance plan be filed with the NJDEP. ACE's
compliance plan, filed April 22, 1994, and subsequent amendments,
have been accepted by the NJDEP. Preliminary capital
expenditures are estimated at $8.5 million over the next five
years to achieve compliance with Phase II NOx reductions. The
necessary emission reductions are based on modeling results and
regulatory agency discussions and could result in additional
changes to equipment and in methods of operation and fuel, the
extent of which has not been fully determined.
On April 26, 1991, the NJDEP renewed ACE's expiring
Certificates to Operate Control Apparatus or Equipment for the
three generating units at B.L. England Station for a period of
five years, expiring April 26, 1995. The NJDEP issued the permit
renewal in June 1996. The CAAA Title V operating permit,
becoming effective in 1997, will supersede the current permitting
requirements.
On January 23, 1997, the EPA issued Compliance Order 113-97-
001 (Order) for failure to comply with emission monitoring
requirements on a combustion turbine unit at the Sherman Avenue
Generating Station. The Order carries a potential penalty of
$25,000 a day, retroactive to May 30, 1991. ACE has installed
and continues to modify the necessary emissions monitoring
equipment satisfying the EPA's request for compliance plans. ACE
cannot predict the outcome of this matter.
Water
The Federal Water Pollution Control Act, as amended (the
Clean Water Act) provides for the imposition of effluent
limitations to regulate the discharge of pollutants, including
heat, into the waters of the United States. The Clean Water Act
also requires that cooling water intake structures be designed to
minimize adverse environmental impact. Under the Clean Water
Act, compliance with applicable effluent limitations is to be
achieved by a National Pollution Discharge Elimination System
(NPDES) permit program to be administered by the EPA or by the
state involved if such state establishes a permit program and
water quality standards satisfactory to the EPA. Having
previously adopted the New Jersey Pollution Discharge Elimination
System (NJPDES), NJDEP assumed authority to operate the NJPDES
permit program. During 1981, ACE received NJPDES permits for
discharges to surface waters for all facilities with existing
EPA-issued NPDES permits. During 1986, ACE received draft
renewal permits for both B.L.England Station and Deepwater
Station for discharges to surface waters as well as groundwater.
Most of the contested conditions were resolved with the NJDEP
with the issuance of the NJPDES permit renewal effective January
1, 1995. There are no other outstanding issues relative to this
permit for B.L.England station.
Effective December 2, 1974, the NJDEP adopted new surface
water quality standards which, in part, provide guidelines for
heat dissipation from any source and which become standards for
subsequent Federal permits. These NJDEP guidelines were included
in the final EPA permits issued for the B. L. England, Deepwater,
Salem, and Hope Creek stations. On receipt of the permits for B.
L. England and Deepwater stations, ACE filed with the EPA a
request for alternative thermal limitations (variance) in
accordance with the provisions of Section 316(a) of the Act. The
NJDEP and EPA have subsequently determined that B. L. England
Units 1 and 2 are in compliance with applicable thermal water
quality standards. The request for a Section 316(a) variance for
Deepwater Station has not yet been acted upon and ACE is
currently awaiting a draft of the new NJPDES permit. ACE is not
able
at this time to predict the outcome of the request, but it
believes that it has adequately supported the request for such
variance. ACE believes that all of its wholly-owned steam
electric generating units are, in all substantial respects,
currently operating in compliance with all applicable standards
and NJPDES permit limitations, except as described herein above.
All current surface water discharge permits for B.L. England have
been renewed as of January 1, 1995 and ACE has filed for renewal
of the ground water discharge permits for B. L. England and
surface water discharge permits for Deepwater.
The Delaware River Basin Commission (DRBC) has required
various electric utilities, as a condition of being permitted to
withdraw water from the Delaware River for use in connection with
the operation of certain electric generating stations, to provide
for a means of replacing water withdrawn from the river during
certain periods of low river flow. Such a requirement presently
applies to the Salem and Hope Creek Stations. As a result of
such requirement, ACE and certain other electric utilities
constructed the Merrill Creek Reservoir Project. ACE owns a 4.8%
ownership interest in the reservoir project. Although ACE
expects that sufficient replacement water would be provided by
Merrill Creek during periods of low river flow to permit the full
operation of Salem and Hope Creek, such events cannot be assured.
Environmental control technology, generally, is in the
process of further development and the implementation of such may
require, in many instances, balancing of the needs for additional
quantities of energy in future years and the need to protect the
environment. As a result, ACE cannot estimate the precise effect
of existing and potential regulations and legislation upon any of
its existing and proposed facilities and operations, or the
additional costs of such regulations. ACE's capital expenditures
related to compliance with environmental requirements in 1996
amounted to $18 million, and its most recent estimate for such
compliance for the years 1997-1999 is $30 million. Such
estimates do not include amounts which ACE may be required to
expend to comply with Phase II requirements of the CAAA at B.L.
England Unit 1 and Keystone Station or the normal costs of
compliance with radiation protection. Such additional costs
which ACE may incur in affecting compliance with potential
regulations and legislation are not included in the estimated
construction costs for the period 1997-1999 (see "Construction
and Financing"). Future regulatory and legislative developments
may require ACE to further modify, supplement or replace
equipment and facilities, and may delay or impede the
construction and operation of new facilities, at costs which
could be substantial. See Note 10 of the accompanying Notes to
Consolidated Financial Statements for further information.
Executive Officers
Information concerning the Executive Officers of the Company
and ACE, as of December 31, 1996, is set forth below. Executive
Officers are elected by the respective Boards of Directors of the
Company and ACE and may be removed from office at any time by a
vote of a majority of all the Directors in office.
Name (age) Title(s) (effective date of
election to current position(s)
Jerrold L. Jacobs (57) Chairman and Chief Executive Officer
of the Company (7/1/96) and Chairman
and Chief Executive Officer of ACE
(4/27/96).
Michael J. Chesser (48) President and Chief Operating Officer
of the Company (7/1/96) and
President and Chief Operating Officer
of ACE (4/27/95). Director of ACE.
Michael J. Barron (47) Vice President and Chief Financial
Officer of the Company and Senior
Vice President and Chief Financial
Officer of ACE (9/15/95). Director of
ACE.
Frank E. DiCola (49) Vice President, Thermal Systems &
Enerval (10/10/96).
Robert H. Fiedler (50) Acting Vice President-Distribution
of ACE (10/10/96).
James E. Franklin II (50) Vice President, Secretary and General
Counsel to the Company (4//26/95)and
Senior Vice President, Secretary and
General Counsel of ACE (4/27/95).
Director of ACE.
Meredith I. Vice President-Power System of the
Harlacher, Jr.(54) Company(4/26/95) and Senior Vice
President-Power System of ACE
(4/3/95), Director of ACE.
Ernest L. Jolly (44) Vice President-Energy Supply for the
Company and Acting Senior Vice
President-Energy Supply of ACE
(10/10/96).
Henry K. Levari, Jr. (48) Vice President-External Affairs of
the Company and Senior Vice
President-External Affairs of ACE
(11/13/95), Director of ACE.
J. David McCann (45) Vice President-Strategic Customer
Support of ACE (4/27/94).
Marilyn T. Powell (49) Vice President Marketing and
Distribution of the Company and
Senior Vice President-Marketing
and Distribution of ACE (10/10/96).
Director of ACE.
Scott B. Ungerer (38)
Vice President-Energy Technology
of the Company (10/10/96).
Louis M. Walters (44) Treasurer of the Company (4/26/95)
and Vice President-Treasurer and
Assistant Secretary of ACE (1/31/95).
Prior to election to the positions above, the following
officers held other positions with the Company and ACE (unless
otherwise noted) since January 1, 1992:
J.L. Jacobs Chairman and Chief Executive Officer of ACE
(4/26/95); President and Chief Executive
Officer of the Company (4/27/94);
Chairman, President and Chief Executive
Officer of ACE (4/28/93).
M.J. Chesser Senior Vice President of the Company
(4/26/95); President and Chief Operating
Officer of ACE (4/27/95);
Vice President of the Company (2/1/94);
Executive Vice President and Chief Operating
Officer of ACE (2/1/94);
Vice President-Marketing & Gas Operations,
Baltimore Gas & Electric Company
M.J. Barron Vice President and Treasurer of Maxus Energy
Corporation, Dallas, Texas.
J.E. Franklin II Secretary and General Counsel to the Company
and ACE (2/1/95); General Counsel to the
Company and ACE (10/1/94); Partner in the law
firm Megargee, Youngblood, Franklin &
Corcoran, P.A.
M.I. Harlacher, Jr. Vice President of the Company and Senior Vice
President-Energy Supply of ACE (4/28/93);
Senior Vice President-Utility Operations of
ACE (8/9/91).
R. H. Fiedler General Manager Customer Operations of ACE
(3/13/95); Manager Ocean Region of ACE
(11/1/93); Manager Customer Service &
Information of ACE (1/4/93); General Manager
Administration of ACE (9/7/92)
E.L. Jolly Vice President-Human Resources and
Transformation of the Company and ACE
(1/8/96); Vice President-Atlantic
Transformation of ACE (5/23/94); Vice
President-External Affairs of ACE (3/1/92).
H.K. Levari, Jr. Senior Vice President-Planning and External
Affairs of ACE (4/3/95);
Vice President- Planning & External Affairs
of the Company (4/26/95);
Vice President of the Company (4/27/94);
Senior Vice President-Customer Operations of
ACE (9/16/94); Senior Vice President-
Marketing & Customer Operations of ACE
(4/28/93). Senior Vice President-Planning
and Services of ACE (8/9/91).
J. D. McCann Vice President-Power Delivery of ACE
(8/9/91).
M.T. Powell Vice President-Marketing of the Company
and Senior Vice President-Marketing of ACE
(11/9/95); Vice President-Marketing of ACE
(9/16/94);
Director of marketing process, International
Business Machines Corporation.
S.B. Ungerer Vice President-Enterprise Activities of the
Company (4/26/95); Vice President of the
Company (1/17/94);
Manager, Business Planning Services (1/4/93);
Manager, Strategic Business Planning
(1/6/92).
L.M. Walters Treasurer and Acting Chief Financial Officer
(4/26/95); Vice President-Treasurer and
Secretary (4/28/94); Vice President-Treasurer
and Assistant Secretary (4/28/93);
General Manager, Treasury and Finance
(8/9/91).
ITEM 2 PROPERTIES
Under New Jersey law, the State of New Jersey owns in fee
simple for the benefit of the public schools all lands now or
formerly flowed by the tide up to the mean high-water line,
unless it has made a valid conveyance of its interests in such
property. In 1981, because of uncertainties raised as to
possible claims of State ownership, the New Jersey Constitution
was amended to provide that lands formerly tidal-flowed, but
which were not then tidal-flowed at any time for a period of 40
years, were not to be subject to State claim unless the State has
specifically defined and asserted a claim within one year period
ending November 2, 1982. As a result, the State published maps
of the eastern (Atlantic) coast of New Jersey depicting claims to
portions of many properties, including certain properties owned
by the Company. The Company believes it has good title to such
properties and will vigorously defend its title, or will obtain
such grants from the State as may ultimately be required. The
cost to acquire any such grants may be covered by title insurance
policies. Assuming that all of such State claims were determined
adversely to the Company, they would relate to land, which,
together with the improvements thereon, would amount to less than
1% of net utility plant. No maps depicting State Claims to
property owned by the Company on the western (Delaware River)
side of New Jersey were published within one year period mandated
by the Constitutional Amendment. Nevertheless, the Company
believes it has obtained all necessary grants from the State for
its improved properties along the Delaware River.
Reference is made to the Consolidated Financial Statements
for information regarding investment in such property by the
Company and ACE. Substantially all of ACE's electric plant is
subject to the lien of the Mortgage and Deed of Trust under which
First Mortgage Bonds of ACE are issued. Reference is made to
Item 1 - Business "General" and "Energy Requirements and Power
Supply" for information regarding ACE's properties. Information
concerning leases is set forth in Note 10 of AEI's Notes to
Consolidated Financial Statements incorporated herein by
reference. Information regarding electric generating stations is
set forth in Item 1, Business-"Energy Requirements and Power
Supply."
ITEM 3 LEGAL PROCEEDINGS
Reference is made to Item 1-Business and the Notes to
the Consolidated Financial Statements of the Company (Notes 3 and
10) for information regarding various pending administrative and
judicial proceedings involving rate and operating and
environmental matters, respectively.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on January 30,
1997 to approve The Agreement and Plan of merger between AEI and
Delmarva. Shareholders voted to approve the merger as well as an
incentive compensation plan for the new company created by the
merger. See SEC Form 8-K dated January 31, 1997, which is
incorporated herein by reference.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock
Exchange. All of ACE's Common Stock is owned by the Company. At
December 31, 1996, there were 48,825 holders of record of the
Company's Common Stock. The following table indicates the high
and low sale prices for the Company's Common Stock as reported in
the Wall Street Journal-Composite Transactions, and dividends
paid for the periods indicated:
Dividends
High Low per Share
Common Stock:
1996
First Quarter $20.000 $16.625 $ .385
Second Quarter $18.750 $16.000 $ .385
Third Quarter $18.500 $17.000 $ .385
Fourth Quarter $18.875 $17.000 $ .385
1995
First Quarter $19.000 $17.750 $ .385
Second Quarter $19.625 $17.875 $ .385
Third Quarter $19.875 $18.125 $ .385
Fourth Quarter $20.125 $19.000 $ .385
The funds required to enable the Company to pay dividends on
its Common Stock are derived primarily from the dividends paid by
ACE on its Common Stock, all of which is held by the Company.
Therefore the ability of the Company to pay dividends on its
Common Stock will be governed by the ability of ACE to pay
dividends on its Common Stock. The rate and timing of future
dividends of the Company will depend upon the earnings and
financial condition of the Company and its subsidiaries,
including ACE, and upon other factors affecting dividend policy
not presently determinable. ACE is subject to certain
limitations on the payment of dividends to the Company. Whenever
full dividends on Preferred Stock have been paid for all past
quarter-yearly periods, ACE may pay dividends on its Common Stock
from funds legally available for such purpose. Until all
cumulative dividends have been paid upon all series of Preferred
Stock and until certain required sinking fund redemptions of such
Preferred Stock have been made, no dividend or other distribution
may be paid or declared on the Common Stock of ACE and no Common
Stock of ACE shall be purchased or otherwise acquired for value
by ACE. In addition, as long as any Preferred Stock is
outstanding, ACE may not pay dividends or make other
distributions to the holder of its Common Stock if, after giving
effect to such payment or distribution, the capital of ACE
represented by its Common Stock, together with its surplus as
then stated on its books of account, shall in the aggregate, be
less than the involuntary liquidation value of the then
outstanding shares of Preferred Stock.
ITEM 6 SELECTED FINANCIAL DATA
Selected financial data for the Company and ACE for each of
the last five years is listed below.
Atlantic Energy, Inc.
1996 1995 1994 1993 1992
(Thousands of Dollars)
Operating
Revenues $ 980,255 $ 953,137 $ 913,039 $ 865,675 $ 816,825
Net Income $ 58,767 $ 81,768 $ 76,113 $ 95,297 $ 86,210
Earnings per Average
Common Share $ 1.12 $ 1.55 $ 1.41 $ 1.80 $ 1.67
Total Assets
(Year-end) $2,670,762 $2,617,888 $2,542,385 $2,487,508 $2,219,338
Long Term Debt and
Redeemable Preferred
Stock (Year-end)(b) $1,051,945 $1,032,103 $ 940,788 $ 952,101 $ 842,236
Capital Lease
Obligations
(Year-end)(b) $ 39,914 $ 40,886 $ 42,030 $ 45,268 $ 49,303
Common Dividends
Declared $ 1.54 $ 1.54 $ 1.54 $ 1.535 $ 1.515
Atlantic City Electric Company
1996 1995 1994 1993 1992
(Thousands of Dollars)
Operating
Revenues $ 982,492 $ 953,779 $ 913,226 $ 865,799 $ 816,931
Net Income $ 75,017 $ 98,752 $ 93,174 $ 109,026 $ 107,446
Earnings for Common
Shareholder (a) $ 65,113 $ 84,125 $ 76,458 $ 91,621 $ 89,634
Total Assets
(Year-end) $2,460,741 $2,459,104 $2,418,784 $2,363,584 $2,100,278
Long Term Debt and
Redeemable Preferred
Stock (Year-end)(b) $ 926,370 $ 951,603 $ 924,788 $ 937,101 $ 817,108
Capital Lease
Obligations
(Year-end)(b) $ 39,914 $ 40,877 $ 42,030 $ 45,268 $ 49,303
Common Dividends
Declared (a) $ 82,162 $ 81,239 $ 83,482 $ 81,347 $ 78,336
(a) Amounts shown as total, rather than on a per-share basis, since ACE is a
wholly-owned subsidiary of the Company.
(b) Includes current portion.
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Summary
Consolidated operating revenues for 1996, 1995 and 1994 were
$980.3 million, $953.1 million and $913.0 million, respectively.
The increase in 1996 revenues over 1995 reflects an increase in
sales and an increase in annual Levelized Energy Clause (LEC)
revenues in July 1995 of $37 million and an increase in July 1996
of $27.6 million. These increases were offset in part by a $13.0
million revenue credit recorded in September 1996 as a result of
stipulation agreements (See Note 3 to the consolidated financial
statements) and a decrease in unbilled revenues. The increase in
1995 revenue over 1994 largely reflects the increase in annual
LEC revenues granted in July 1995 and an increase in unbilled
revenues.
Consolidated earnings per share for 1996 were $1.12 on net income
of $58.8 million compared to a $1.55 on net income of $81.8
million in 1995 and $1.41 on net income of $76.1 million in 1994.
The 1996 earnings reflect charges resulting from provisions for
rate refunds, write-downs of nonutility property, losses from
nonutility investments and higher operations and maintenance
expenses associated with the continuing outage at the Salem
Station. Excluding the 1994 special charges of $.37 cents per
share, 1995 earnings per share decreased from 1994 primarily due
to reduced sales of energy.
The quarterly dividend paid on Common Stock was $.385 per share,
or an annual rate of $1.54 per share. Information with respect
to Common Stock is as follows:
1996 1995 1994
Dividends Paid Per Share $ 1.54 $ 1.54 $ 1.54
Book Value Per Share $15.00 $15.42 $15.50
Annualized Dividend Yield 9.0% 8.0% 8.7%
Return on Average Common Equity 7.4% 9.9% 9.1%
Total Return (Dividends paid
plus change in share price) (3.0)% 18.0% (11.9)%
Market to Book Value 114% 125% 114%
Price/Earnings Ratio 15 12 13
Year End Closing Price-NYSE $17.13 $19.25 $17.63
Liquidity and Capital Resources
Atlantic Energy, Inc.
Atlantic Energy, Inc. (AEI, Company or parent) 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. The Company's cash
flows are dependent on the cash flows of its subsidiaries,
primarily ACE.
Principal cash inflows of the Company were as follows:
1996 1995 1994
(millions)
Dividends from ACE $82.2 $81.2 $83.5
Credit Facility 3.1 34.5 -
Dividend Reinvestment
and Stock Purchase Plan - - 6.7
AEI has a $75 million revolving credit and term loan facility.
The revolver is comprised of a 364-day senior revolving credit
facility in the amount of $35 million and a three-year senior
revolving credit facility in the amount of $40 million. Interest
rates are based on senior debt ratings and on the borrowing
option selected by the Company. As of December 31, 1996 and
1995, AEI had $37.6 million and $34.5 million outstanding,
respectively, from this credit facility. This facility can be
used to fund further reacquisitions of Company Common Stock and
for other general corporate purposes.
Principal cash outflows of the Company were as follows:
1996 1995 1994
(Millions)
Dividends to Shareholders $81.2 $81.2 $83.5
Advances and Capital
Contributions to Subsidiaries* (1.4) (6.7) 25.6
Common Stock Reacquisitions - 29.6 3.9
Loans to Subsidiaries (7.5) 7.5 -
* Net of repayments
The Company has a program to reacquire up to three million shares
of the Company's Common Stock outstanding. There is no schedule
or specific share price target associated with the
reacquisitions. The authorized number of shares is not to be
affected. During 1995, the Company reacquired and cancelled
1,625,000 shares for a total cost of $29.6 million with prices
ranging from $17.625 to $18.875 per share. At December 31, 1996
and 1995, the Company has reacquired and cancelled a total of
1,846,700 shares of its Common Stock at a cost of $33.5 million.
The Company did not reacquire and cancel any shares under this
program during 1996.
Miscellaneous Receivables on the Consolidated Balance Sheet at
December 31, 1996 increased compared to December 31, 1995
primarily due to receivables from amounts advanced to Enerval,
LLC to fund operations in the amount of $10.0 million.
Agreements between the Company and its subsidiaries provide for
allocation of tax liabilities and benefits generated by the
respective subsidiaries. Credit support agreements exist between
the Company and ATE and AGI.
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 new company named Conectiv, Inc.
(Conectiv). Conectiv, a newly formed Delaware corporation, will
become the parent of Atlantic Energy's subsidiaries and the
parent of DP&L and its subsidiaries.
The merger is 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 Conectiv's common
stock for each share of DP&L common stock held. AEI shareholders
will receive 0.75 shares of Conectiv's common stock and 0.125
shares of Conectiv's 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. In order for the merger
to become effective, approvals are still needed from a number of
Federal and state regulatory agencies. The Company expects the
regulatory approval process to be completed in late 1997 or early
1998.
The total consideration to be paid to the Company's common
stockholders, measured by the average daily closing market price
of the Company's common stock for the ten trading days following
public announcement of the merger, is $948.6 million. The
consideration paid plus estimated acquisition costs and
liabilities assumed in connection with the merger are expected to
exceed the net book value of the Company's net assets by
approximately $204.5 million, which will be recorded as goodwill
by Conectiv. The goodwill will be amortized over 40 years.
Atlantic City Electric Company
ACE is a public utility primarily engaged in the generation,
transmission, distribution and sale of electric energy. ACE's
service territory encompasses approximately 2,700 square miles
within the southern one-third of New Jersey with the majority of
customers being residential and commercial. ACE, with its
wholly-owned subsidiary that operates certain generating
facilities, is the principal subsidiary within the consolidated
group. Cash construction expenditures for 1994-1996 amounted to
$307.7 million and included expenditures for upgrades to existing
transmission and distribution facilities and compliance with
provisions of the Clean Air Act Amendments of 1990. ACE's
current estimate of cash construction expenditures for 1997-1999
is $283.5 million. These estimated expenditures reflect
necessary improvements to generation, transmission and distribu-
tion facilities.
On an interim basis, ACE finances construction costs and other
capital requirements in excess of internally generated funds
through the issuance of unsecured short term debt, consisting of
commercial paper and notes from banks. As of December 31, 1996,
ACE had authority to issue $150 million of short term debt,
comprised of $100 million of committed lines of credit and $50
million on a when offered basis. At December 31, 1996, ACE had
$85.1 million of unused short-term borrowing capacity. Permanent
financing by ACE is undertaken through the issuance of long term
debt and preferred stock, and from capital contributions by AEI.
ACE's nuclear fuel requirements associated with its jointly-owned
units have been financed through arrangements with a third party.
ACE also utilizes cash for mandatory redemptions of preferred
stock and maturities and redemption of long term debt. Optional
redemptions of securities are reviewed on an ongoing basis with a
view toward reducing the overall cost of capital. Redemptions of
Preferred Stock for the period were as follows:
Shares
1996 1995 1994 Redemption
Preferred Stock Price
(Series)
$8.53 120,000 $101.00
7.52% 100,000 101.88
$8.20 200,000 100.00
$8.25 50,000 104.45
$7.80 460,500 111.00
$8.53 240,000 240,000 100.00
$8.25 5,000 5,000 100.00
Aggregate Amount
(000) $98,876* $24,500 $24,500
*includes commissions and premiums
Long term debt redeemed, acquired and retired or matured in the
period 1994-1996 were as follows:
Date Series Principal Redemption
Amount Price %
(000)
February 1996 5-1/8% due 1996 $ 9,980 100.00
February 1996 5-1/4% due 1996 2,267 100.00
October 1995 9-1/4% due 2019 53,857 105.15
October 1995 10-1/2% due 2014 850 101.00
November 1994 7-5/8% due 2005 6,500 100.00
June 1994 10-1/2% due 2014 23,150 102.00
Various 1994 Dates 9-1/4% due 2019 11,910 105.38*
* Average price
Scheduled maturities and sinking fund requirements for long term
debt and preferred stock aggregate $216.5 million for 1997-2001.
On or before April 1 of each year, ACE and other New Jersey
utilities are required to pay excise taxes to the State of New
Jersey. In March 1996, ACE paid $91.7 million funded through the
issuance of short term debt with repayment of such debt occurring
during the second and third quarters.
During 1996 and 1995, ACE made $7.2 million and $19.1 million,
respectively, in payments related to its workforce reduction
program. Payments in settlement of this obligation are
substantially complete.
Short term debt at December 31, 1996 increased $34.4 million
compared to December 31, 1996 due to funding of $12.3 million for
maturing long term debt and debentures and other general
corporate funding.
A summary of the issue and sale of ACE's long term debt and
preferred securities for 1994-1996 is as follows:
(millions) 1996 1995 1994
Medium Term Notes - $105 -
Pollution Control Bonds - - $55
Cumulative Quarterly Income
Preferred Securities $70 - -
The proceeds from these financings were used to refund higher
cost debt, preferred stock, and for construction purposes.
During 1997-1999, ACE may issue up to $175 million in long term
debt to be used for construction, refundings and repayment of
short term debt. The provisions of ACE's charter, mortgage and
debenture agreements can limit, in certain cases, the amount and
type of additional financing which may be used. At December 31,
1996, ACE estimates additional funding capacities of $346 million
of First Mortgage Bonds, or $333 million of preferred stock, or
$196 million of unsecured debt. These amounts are not
necessarily additive.
On October 1, 1996, Atlantic Capital I, a newly formed grantor
trust, issued $70 million of 8.25% Cumulative Quarterly Income
Preferred Securities (CQIPS) with a stated liquidation preference
of $25 each. Atlantic Capital I, established for the sole
purpose of issuing the CQIPS, invested the proceeds in 8.25%
Junior Subordinated Deferrable Interest Debentures (Junior
Debentures) of ACE. ACE reserves the right to defer payment of
interest on the debentures for up to 20 consecutive quarters.
During such a deferral period, certain dividend restrictions
would apply to ACE's capital stock. The CQIPS and Junior
Debentures are scheduled to mature on October 1, 2026, but such
maturity may be extended to a date not later than October 1,
2045, if certain conditions are met. Proceeds from the sale of
the Junior Debentures were used to fund the redemption and
purchase of shares of ACE's preferred stock described above.
Atlantic Capital I is a grantor trust of ACE and as such, the
transactions of the trust are consolidated into the financial
statements of ACE. The Junior Debentures are eliminated in
consolidation.
Atlantic Energy Enterprises, Inc.
AEE is a holding company which is responsible for the management
of the investments in the nonutility companies consisting of:
Atlantic Generation, Inc. (AGI); Atlantic Southern Properties,
Inc. (ASP); ATE Investment, Inc. (ATE); Atlantic Thermal Systems,
Inc. (ATS); CoastalComm, Inc. (CCI) and Atlantic Energy
Technology, Inc. (AET). Also, AEE has a 50% equity interest in
Enerval, LLC, a company which provides energy management
services, including natural gas supply, transportation and
marketing. As of December 31, 1996, AEE had an equity investment
of $3.9 million in the partnership. AEE obtains funds for its
investments and operating needs through advances from AEI and
notes payable from ATE. Management has developed a five-year
business strategy to expand operations and improve its financial
performance. AEE's business strategy reflects the potential
investment of approximately $307 million over the next five
years. Funds for AEE capital investments will be provided
through issuance of long term debt and equity investments by AEI.
Atlantic Generation, Inc.
AGI and its wholly-owned subsidiaries are engaged in the
development, acquisition, ownership and operation of cogeneration
power projects. AGI's activities through its subsidiaries are
primarily represented by partnership interests in cogeneration
facilities located in New Jersey and New York. In December 1996
AGI recorded a loss contingency in the amount of $1.6 million,
net of tax, for the sale of its cogeneration facility in New
York. AGI, through a support agreement with AEI, has entered
into an indemnification agreement secured by a $6.0 million
letter of credit in connection with the sale of this facility.
All conditions of the sale are expected to be complete by the
middle of 1997. At December 31, 1996, total investments in these
partnerships amounted to $21.8 million. Net cash outlays for
capital investments by AGI for 1994-1996 totaled $3.2 million.
AGI obtained the funds for its investments through capital
contributions from AEI.
Atlantic Southern Properties, Inc.
ASP owns and manages a 280,000 square-foot commercial office and
warehouse facility located in Atlantic County, New Jersey with a
net book value of $8.5 million at December 31, 1996 after a
write-down of the carrying value in 1996 of $0.8 million, net of
tax. The write-down reflects the recognition of the diminished
value due to the excess vacancy and a decline in the local
commercial real estate market. This investment has been funded
by capital contributions from AEI and borrowings under a loan
agreement with ATE.
ATE Investment, Inc.
ATE provides financing to affiliates and manages a portfolio of
investments in leveraged leases. ATE has invested $79.7 million
in leveraged leases of three commercial aircraft and two
containerships. In August 1996, ATE joined with an unaffiliated
company to create EnerTech Capital Partners, L.P., an equity
limited partnership that will invest in and support a variety of
energy related technology growth companies. At December 31, 1996
ATE had invested $7.3 million in this partnership. ATE obtained
funds for its business activities and loans to affiliates through
capital contributions from AEI and external borrowings. These
borrowings include $15 million principal amount of 7.44% Senior
Notes due 1999 and a revolving credit and term loan facility of
up to $25 million. At December 31, 1996, $18.5 million was
outstanding under this facility. ATE's cash flows are provided
from lease rental receipts and realization of tax benefits
generated by the leveraged leases. ATE has notes receivable,
including interest, outstanding with ASP which totaled $10.0
million at December 31, 1996. ATE has established credit
arrangements with AEE, of which $14.1 million was a receivable,
including interest, from AEE at December 31, 1996.
Atlantic Thermal Systems, Inc.
ATS and its wholly-owned subsidiaries are engaged in the
development and operation of thermal heating and cooling systems.
ATS plans to make $125 million in capital expenditures related to
district heating and cooling systems to serve the business and
casino district in Atlantic City, New Jersey and has invested
$29.3 million as of December 31, 1996. Construction for the
Midtown Energy Center is expected to be completed by mid-1997.
ATS has obtained funds for its project development through a $100
million revolving credit agreement and term loan facility in
August 1996. As of December 31, 1996, $42 million was
outstanding under this facility. Additional funding for the
project is expected from $12.5 million from the proceeds of bonds
issued by the New Jersey Economic Development Authority with a
remarketed rate of interest of 3.5%. These funds are currently
restricted in trust and invested in U.S. Treasury Securities
pending resolution of certain conditions. ATS cannot estimate,
with any certainty, when or if the conditions attached to the
escrow release will be satisfied. ATS has a $10 million
revolving credit agreement with ATE. There were no outstanding
amounts under the agreement at December 31, 1996.
ATS has agreements with three casinos in Atlantic City, New
Jersey to operate their heating and cooling systems. As part of
these agreements, ATS has paid $18.0 million in license fees for
the right to operate and service such systems for a period of 20
years. These fees are recorded on the Consolidated Balance Sheet
as License Fees and are being amortized to expense over the life
of the contracts.
Atlantic Energy International, Inc.
In July 1996, AEI formed AEII, to provide utility consulting
services and equipment sales to international markets. AEII funds
its operating needs from advances from AEI.
RESULTS OF OPERATIONS
Operating results of AEI as a consolidated group are dependent
upon the performance of its subsidiaries, primarily ACE. Since
ACE is the principal subsidiary within the consolidated group,
the operating results presented in the Consolidated Statement of
Income are those of ACE, after elimination of transactions among
members of the consolidated group. Results of the nonutility
companies are reported in Other Income.
Revenues
Operating Revenues - Electric increased 2.9% and 4.4% in 1996 and
1995, respectively. Components of the overall changes are shown
as follows:
1996 1995
(millions)
Base Revenues $ (8.9) $(1.9)
Refund Credits (13.0) -
Levelized Energy Clause 29.3 49.2
Kilowatt-hour Sales 32.2 (10.0)
Unbilled Revenues (17.6) 16.6
Sales for Resale 6.0 (11.9)
Other (0.9) (1.9)
Total $ 27.1 $40.1
The decrease in Base Revenues for the current year reflect a
reduced average realization per kilowatt-hour sold resulting from
less favorable summer weather conditions relative to last year
and the effects of ACE's BPU approved Off-Tariff Rate Agreements
(OTRAs). OTRAs are special reduced rates offered by ACE to at-
risk customers which aggregated $3.5 million, or $2.2 million,
net of tax. At-risk customers are customers who may choose to
leave ACE's energy system because they have alternative energy
sources available. The Refund Credits are the result of the
October 22, 1996 stipulations for the $13.0 million settlement
concerning the outages of the Salem Units and the alleged
overrecovery of capacity costs from nonutility generation
facilities. See Note 3 of the consolidated financial statements
for further details regarding the stipulations.
LEC revenues increased in 1996 due to a rate increase of $27.6
million in July 1996 and a $37 million increase in July 1995.
Changes in kilowatt-hour sales are discussed under "Billed Sales
to Ultimate Utility Customers." Overall, the combined effects of
changes in rates charged to customers and kilowatt-hour sales
resulted in increases of 9.4% and 5.9% in revenues per
kilowatt-hour in 1996 and 1995, respectively. 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 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 the 1996 Sales for
Resale reflects an increase in bulk power market sales outside of
the regional power pool. The decline in the 1995 Sales for
Resale reflects a decrease in the demand of the power pool, the
decline in market prices and a reduction in excess energy sources
when compared to the previous year.
Billed Sales to Ultimate Utility Customers
Changes in 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 previous year,
are shown as follows:
1996 1995
Avg Avg# Avg Avg #
Customer Class Sales Use of Cust Sales Use of Cust
Residential 3.2% 2.4% 0.8% (2.0)% (3.1)% 1.2%
Commercial 3.0 2.0 1.0 1.4 (0.1) 1.5
Industrial 7.1 5.5 1.5 (7.4) (9.0) 1.7
Total 3.6 2.8 0.8 (1.4) (2.6) 1.2
In 1996, the growth rate of actual billed sales increased
significantly from 1995 due to an increase in the number of
billing days and more favorable weather conditions. Unfavorable
weather conditions in 1995 reduced sales significantly, compared
to the weather conditions in 1996. Sales growth was offset by
cooler than normal summer weather conditions in 1996. Casino
expansions and construction around Atlantic City, New Jersey were
significant contributors to commercial sales growth in 1996. The
increases in 1996 Industrial sales were primarily due to the
impact of two customers that had previously been supplied by an
independent power producer.
Costs and Expenses
Total Operating Expenses increased 5.4% and 3.6% in 1996 and
1995, respectively. Included in these expenses are the costs of
energy, purchased capacity, operations, maintenance, depreciation
and taxes.
Energy expense reflects costs incurred for energy needed to meet
load requirements, various energy supply sources used and
operation of the LEC. Changes in costs reflect the varying
availability of low-cost generation from ACE-owned and purchased
energy sources, and the corresponding unit prices of the energy
sources used, as well as changes in the needs of other utilities
participating in the Pennsylvania-New Jersey-Maryland
Interconnection 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
elected not to continue the SNJEI beyond May 1996. Otherwise, in
any period, the actual amount of LEC revenue recovered from
customers may be greater or less than the actual amount of energy
cost incurred in that period. Such respective overrecovery or
underrecovery of energy costs is recorded on the Consolidated
Balance Sheet as a liability or an asset as appropriate. Amounts
from the balance sheet are recognized in the Consolidated
Statement of Income within Energy expense during the period in
which they are subsequently recovered through the LEC. ACE was
underrecovered by $33.5 million and by $31.4 million at December
31, 1996 and 1995, respectively.
As a result of implementing the SNJEI, ACE has foregone the
recovery of energy costs in LEC rates in the amount of $10.0
million and $28.0 million for the 1995 and 1994 LEC periods,
respectively. After tax net income has been reduced by $2.7
million and $12.2 million due to the effects of the initiative
for 1996 and 1995, respectively.
Energy expense increased 16.3% in 1996 primarily due to the
changes in the LEC effective July 17, 1996, permitting ACE to
begin recovering over $35.3 million in previously deferred energy
costs. Energy expense decreased 9.1% in 1995 primarily due to
the increase in underrecovered fuel costs, offset in part by the
effects of the SNJEI referred to above. Production related
energy costs for 1996 increased 5.3% due to increased sales and
decreased 1.9% for 1995 due to reduced generation.
Purchased Capacity expense reflects entitlement to generating
capacity owned by others. Purchased Capacity expense increased
2.7% and 45.6% in 1996 and 1995, respectively. The increases
reflect additional contract capacity supplied by nonutility power
producers in each year.
Operations expense increased in 1996 by 3.1% and decreased in
1995 by 2.8%. The 1996 increase reflects additional costs
associated with Salem Station restart activities offset in part
by a credit of the estimated 1995 Nuclear Performance Penalty.
The 1995 decrease reflected the benefits of ACE's employee
separation programs, offset in part by the aforementioned costs
associated with Salem Station.
Maintenance expense increased 29.2% in 1996 as a result of
additional costs associated with Salem Station restart activities
and increased maintenance initiatives. The 1995 decrease of 8.5%
was due to cost saving measures employed by ACE.
State Excise Taxes expense increased 5.9% in 1995 due to an
increase in the tax base used to calculate the tax in comparison
to the 1994 tax base.
Federal Income Taxes decreased 29.7% in 1996 and increased 37.9%
in 1995 as a result of the level of taxable income during those
periods.
Other-Net within Other Income (Expense) decreased in 1996 due to
the net after-tax impacts of the write-down of the carrying value
of ASP's commercial property of $0.8 million, the contingency
loss for the sale of Binghamton Cogeneration facility of $1.6
million, reduced nonutility earnings and increased income taxes
related to other income. Also included is a loss of $1.1 million
after-tax from AEE's investment in Enerval, LLC due to a
combination of unhedged gas sales agreements and higher spot
market prices for gas.
Interest on Long Term Debt increased 5.2% in 1995 due to
increased amounts of debt outstanding during the year. Other
Interest expense increased 88.9% in 1996 and 128.9% in 1995 due
primarily to increased short-term debt borrowings.
Preferred Securities Dividend Requirements decreased 22.5% and
12.5% in 1996 and 1995, respectively, as a result of mandatory
and optional redemptions.
Salem Nuclear Generating Station
ACE is an owner of 7.41% of Salem Units 1 and 2, which are
operated by Public Service Electric & Gas Co. (PS). Salem Units
1 and 2 have been out of service since May 16, 1995 and June 7,
1995, respectively. The Salem units represent 164 megawatts (MWs)
of ACE's total installed capacity of 2,385.7 MWs.
During these outages, PS has made significant changes and
improvements related to the people, processes and equipment at
Salem to improve the long-term reliability of the units. Salem
Unit 2 is in the final stages of preparation for restart. The
reactor has been refueled and reassembled and the reactor coolant
pumps have been tested and placed in service. Over 90% of the
total work activities have been completed and approximately 80%
of the plant systems have been restored. Salem Unit 2 is
currently expected to return to service in the second quarter of
1997.
Salem Unit 1 is currently expected to return to service in the
fall of 1997, after replacement of the unit's four steam
generators, which was required in order to correct a generic
problem with certain pressurized water reactors. Removal of the
old steam generators has been completed and installation of the
new steam generators is underway. 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, the cost of the disposal
of the old steam generators could be as much as $20 million, of
which ACE's share would be $1.5 million.
Effective December 31, 1996, ACE entered into a Stipulation
Agreement (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 $10.0 million of O&M expense as a fixed charge payable in
twelve equal installments beginning February 1, 1997. ACE's
obligation for any additional contribution to 1997 Salem O&M
expenses, of which ACE's estimated share would be $21.8 million,
is based on performance and directly related to the timely return
and operation of Salem Units 1 and 2. To the extent ACE derives
a savings against 1997 O&M expenditures, those savings will
offset replacement power costs incurred due to the unavailability
of the Salem Units. As a result of this Agreement, ACE has
agreed to dismiss the complaint filed in the Superior Court of
New Jersey in March 1996 alleging negligence and breach of
contract.
On February 27, 1996, the Salem co-owners filed a Complaint in
United States District Court for the District of New Jersey
against Westinghouse Electric Corporation, the designer and
manufacturer of the Salem steam generators, under Federal and
state statutes alleging fraud, negligent misrepresentation and
breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. On April 30, 1996,
Westinghouse filed an answer and a counterclaim of $2.5 million
for unpaid work. The litigation is in the process of discovery
and investigation.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. Underperformance
results in penalties which are not permitted to be recovered from
customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear
performance penalty for 1995 and had recorded a provision for
such. According to the Salem outage stipulation agreement as
previously discussed in Note 3, the performances of Salem Units 1
and 2 are not included in the calculation of a nuclear
performance penalty for the period each unit was taken out of
service up to each unit's respective return-to-service date. The
parties to the stipulation agreed that for the years 1995 and
1996, there will be no penalty or reward under the nuclear
performance standard. ACE had recorded a 1995 performance
penalty of $0.8 million, net of tax. This amount has been
incorporated into the net amount recorded for the Salem
stipulation as discussed in Note 3 to the Consolidated Financial
Statements.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $0.7 million per unit per month.
ACE's replacement power costs for the current outage for each
unit, up to the agreed upon return-to-service dates, will be
recoverable in rates in ACE's next LEC proceeding. As discussed
above, replacement power costs incurred after the respective
agreed upon return-to-service dates for the Salem Units will not
be recoverable in rates.
Competition
Competition is expected to increase for electric energy markets
historically served exclusively by regulated utilities. In
recent years, changing laws and governmental regulations
permitting competition from other utilities and nonregulated
energy suppliers have prompted some customers to use self-
generation or alternative sources to meet their electric needs.
As the electric utility industry transitions from a regulated to
a competitive industry, utilities may not be able to recover
certain costs. These costs, which are known as "stranded" costs,
could result from the shift from cost of service based pricing to
market-based pricing and from customers choosing different energy
suppliers than ACE. Potential types of stranded costs include 1)
above-market costs associated with generation facilities or long
term power purchase agreements and 2) regulatory assets, which
are expenses deferred and expected to be recovered from customers
in the future.
In April 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 Order is designed 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, utilities are required to offer transmission services for
wholesale energy transactions to others on a nondiscriminatory
basis. Tariffs have been established by ACE for these services,
which ACE must also apply to its own wholesale energy
transactions.
On January 16, 1997, the BPU issued a Draft Phase II of the New
Jersey Energy Master Plan (the Plan). In the Plan, the BPU has
recommended that retail customers in New Jersey have the ability
to choose their electric energy supplier beginning in October
1998 using a phase-in plan that will include all retail customers
by April 2001. Customers would be able to sign an agreement with
a third-party energy supplier and each electric utility,
including ACE, would continue to be responsible for providing
distribution service. Price and service quality for such
distribution would continue to be regulated by the BPU.
Beginning October 1998, costs for electric service, which consist
of power generation, transmission, distribution, metering and
billing will need to be unbundled. Transmission service would be
provided by an Independent System Operator which would be
responsible for maintaining a regional power grid that would
continue to be regulated by FERC.
The Plan states that the BPU is committed to assuring that a
fully competitive marketplace exists prior to the ending of its
economic regulation of power supply. At a minimum, utility
generating assets and functions must be separated and operate at
arms length from the transmission, distribution and customer
service functions of the electric utility. The BPU reserves
final judgment on the issue of requiring divestiture of utility
generating assets until detailed analyses of the potential for
market power abuses by utilities have been performed.
The Plan addresses the issue of "stranded" costs related to the
generating capacity currently in utility rates. High costs of
construction and operations incurred by the jointly-owned nuclear
power plants and the long-term high cost supply contracts with
independent power producers are two significant contributing
factors. The report proposes recovery of stranded costs over a
four to eight year period, through a specific market transition
charge which will be a separate component of a customer's bill.
Determination of the recoverability of costs will be on a case by
case basis with no guarantee for 100% recovery of eligible
stranded costs.
The Plan provides that the opportunity for full recovery of such
eligible costs is contingent upon and may be constrained by the
utility meeting a number of conditions, including achievement of
a BPU goal of delivering a near term rate reduction to customers
of five to ten percent. The Plan states that the independent
power contracts must be eligible for stranded cost recovery.
The Plan further states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused
by the introduction of retail competition. The Plan further
notes that New Jersey is studying the "securitization" of
stranded costs as a means of financing these costs at interest
rates lower than the utility cost of capital, thereby helping to
mitigate the rate impact of stranded cost recovery. Recovery of
securitization may occur over a different period of time. The
plan also suggest that a cap may be imposed on the level of the
charge as a mechanism to achieve the goal of overall rate
reduction.
The BPU intends to issue final findings and recommendations on
the electric utility industry restructuring plan in April 1997.
Each electric utility in the State is to file a complete
restructuring plan, stranded cost filing and unbundled rate
filing no later than July 15, 1997.
ACE has not filed for accelerated depreciation of any capital
assets or special rate plans applicable to particular classes of
customers. However, in 1996 ACE has entered into BPU approved
Off-Tariff Rate Agreements (OTRA's) with at-risk customers which
provide for special rates for customers who may choose to leave
ACE's energy system because they have alternative energy sources
available. To date, the aggregate amount of such reduced rate
agreements was $2.2 million, net of tax.
ACE has significant long term contract commitments to purchase
capacity and energy from nonutility sources at above-market
costs. Recovery of amounts associated with these contracts is
through ACE's LEC, for which rates are subject to approval by the
BPU annually.
In connection with the BPU's Plan, ACE is uncertain as to the
level of stranded costs that may arise or the degree to which
these costs will be recovered. If the final restructuring plan
requires ACE to recognize amounts as unrecoverable, ACE may be
required to write down asset values, and such writedowns could be
material.
In March 1996, the New Jersey Department of Treasury and the BPU
jointly proposed to replace the energy excise tax currently
imposed on electric and gas utilities. Under the proposal,
utilities would pay a state corporate business tax, a state sales
tax of six percent collected on all retail sales of energy
services and a state transitional energy facilities assessment
tax (TEFA) for a limited number of years. A gradual phase-out of
the TEFA is proposed. At the completion of the TEFA phase-out,
the total energy tax burden would be reduced by approximately
45%.
Statement of Position of the Accounting Standards Board 96-1
"Environmental Remediation Liabilities" (SOP 96-1) is effective
for fiscal years that begin after December 15, 1996. SOP 96-1
provides guidance where remediation is required because of the
threat of litigation, a claim or an assessment. This Statement
does not provide guidance on accounting for pollution control
costs as it applies to current operations, costs of future site
restoration or closure that are required upon the cessation of
operations or sale of facilities or for remediation obligations
undertaken at the sole discretion of management. The adoption of
SOP 96-1 is not expected to have a material impact on the
financial position, results of operations or net cash flows of
the Company.
Outlook
The electric utility industry is undergoing fundamental change
through the introduction of competition and customer choice. The
timing and scope of regulatory changes currently being proposed
in New Jersey will have a significant impact on ACE's economic
viability and ability to compete in the energy marketplace. Any
legislative initiatives permitting the orderly and efficient
transition to competition, through such means as market
transition charges, tax reallocation or enabling amendments to
existing laws, will serve to insure recovery of prudently
incurred investments.
In anticipation of heightened competition in energy markets, ACE
is pursuing a number of initiatives designed to strengthen its
position in the marketplace. The proposed merger and formation
of Conectiv provides strategic and operational opportunities to
better meet the coming competitive environment. Those
opportunities are derived from increased financial strength,
improved management, efficiencies of operations, better
utilization and coordination of existing and future facilities.
The proposed merger is part of a wider trend in the utility
industry toward consolidation and strategic partnerships in order
to create larger, stronger companies ready for the onset of
competition. The receipt of all requisite regulatory approvals
to consummate the merger is expected to be obtained by late 1997
or early 1998, but cannot be assured.
The cost of ACE's power supply, including the cost of power
purchased from independent power producers, along with its retail
prices are expected to be critical success factors in a
competitive marketplace. ACE is focusing on cost and rate
control measures as well as the development of new energy-related
products and services. Alternate pricing mechanisms and rate
discounts for key at-risk customers will be necessary, and while
having a long term economic benefit, will cause detrimental
impacts on revenues and income in the near term. New value-added
products and services for the retail energy consumer which create
customer loyalty and satisfaction will be a keystone of the
Company's strategic business focus.
AEI's utility business will continue to be affected by regional
economic trends and social initiatives, as well as the impacts of
abnormal weather and inflation. Such regional economic trends
are favorable and include the growth of the Atlantic City gaming
industry which appears poised for a "second wave" of development.
Ongoing requirements for service reliability, and compliance with
existing and new environmental regulations, will cause additional
capital investments to be made by ACE. ACE's planned
construction budget is $417 million for the five year period
beginning in 1997 with an expected reduction in its external cash
requirements. ACE's ability to generate cash flows or access the
capital markets may be affected by competitive pressures on
revenues and income.
The operational performance of ACE's jointly-owned nuclear units,
as well as significant changes in the costs to decommission those
facilities at the end of their useful lives, will continue to be
a factor in ACE's financial results. ACE will attempt to
mitigate such factors whenever possible. ACE has entered into a
performance-based agreement with PS, the operator of the Salem
Station to limit its exposure for operations and maintenance
expenses in 1997. To the extent that ACE derives a savings in
1997 O&M expenditures, those savings will offset unrecovered
replacement power costs incurred as a result of the
unavailability of the Salem units.
AEI's utility business will continue to be the primary factor
influencing the Company's overall financial performance.
However, growth in new business ventures such as ATS and enabling
strategic alliances like Enerval, LLC, will require the efficient
development of entrepreneurial expertise and financial resources
to be successful.
Inflation
Inflation affects the level of operating expenses and also the
cost of new utility plant placed in service. Traditionally, the
rate making practices that have applied to ACE have involved the
use of historical test years and the actual cost of utility
plant. However, the ability to recover increased costs through
rates, whether resulting from inflation or otherwise, depends
upon both market circumstances and the frequency, timing and
results of rate case decisions.
Other
The Private Securities Litigation Reform Act of 1995 (the Act)
provides a new "safe harbor" for forward-looking statements to
encourage such disclosures without the threat of litigation
providing 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 and will be made in written
documents and oral presentation of AEI and its subsidiaries.
Such statements are based on managements beliefs as well as
assumptions made by and information currently available to
management. When used in AEI and subsidiary documents or oral
presentation, the words "anticipate", "estimate", "expect",
"objective" and similar expressions are intended to identify such
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;
an increasingly competitive energy marketplace; sales retention
and growth potential in a mature service territory and a need to
contain costs; ability to obtain adequate and timely rate relief,
cost recovery, including the potential impact of stranded costs,
and other necessary regulatory approvals; federal and state
regulatory actions; costs of construction; operating
restrictions, increased cost and construction delays attributable
to environmental regulations; controversies regarding electric
and magnetic fields; nuclear decommissioning and the availability
of reprocessing and storage facilities for spent nuclear fuel;
licensing and regulatory approval necessary for nuclear and other
operating station; and credit market concerns with these issues.
AEI and its subsidiaries undertake 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 Act should not be
construed as exhaustive or as any admission regarding the
adequacy of disclosures made by AEI and its subsidiaries prior to
the effective date of the Act.
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:
Financial Summary, Liquidity and Capital Resources - Atlantic
City Electric Company, Results of Operations, Salem Nuclear
Generating Station, Competition, Outlook, Inflation and Other.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT-Atlantic Energy, Inc.
The management of Atlantic Energy, Inc. and its subsidiaries (the
Company) is responsible for the preparation of the consolidated
financial statements presented in this Annual Report. The
financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the
consolidated financial statements, management made informed
judgments and estimates, as necessary, relating to events and
transactions reported.
Management has established a system of internal accounting and
financial controls and procedures designed to provide reasonable
assurance as to the integrity and reliability of financial
reporting. In any system of financial reporting controls,
inherent limitations exist. Management continually examines the
effectiveness and efficiency of this system, and actions are
taken when opportunities for improvement are identified.
Management believes that, as of December 31, 1996, the system of
internal accounting and financial controls over financial
reporting is effective. Management also recognizes its
responsibility for fostering a strong ethical climate in which
the Company's affairs are conducted according to the highest
standards of corporate conduct. This responsibility is
characterized and reflected in the Company's code of ethics and
business conduct policy.
The consolidated financial statements have been audited by
Deloitte & Touche LLP, Certified Public Accountants. Deloitte &
Touche LLP, provides objective, independent audits as to
management's discharge of its responsibilities insofar as they
relate to the fairness of the financial statements. Their audits
are based on procedures believed by them to provide reasonable
assurance that the financial statements are free of material
misstatement.
The Company's internal auditing function conducts audits and
appraisals of the Company's operations. It evaluates the system
of internal accounting, financial and operational controls and
compliance with established procedures. Both the external
auditors and the internal auditors periodically make
recommendations concerning the Company's internal control
structure to management and the Audit Committee of the Board of
Directors. Management responds to such recommendations as
appropriate in the circumstances. None of the recommendations
made for the year ended December 31, 1996 represented significant
deficiencies in the design or operation of the Company's internal
control structure.
/s/ J. L. Jacobs /s/ M. J. Barron
J. L. Jacobs M. J. Barron
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer
February 7, 1997
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
independent directors. The members of the Committee are: Matthew
Holden, Jr., Kathleen MacDonnell, Bernard J. Morgan and Harold J.
Raveche. The Committee held 5 meetings during 1996.
The Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility,
the Committee recommended to the Board of Directors, subject to
shareholder ratification, the selection of the Company's independent
auditors, Deloitte & Touche LLP. The Committee discussed with the
Company's internal auditors and Deloitte & Touche LLP, the overall
scope of and specific plans for their respective activities concerning
the Company. The Committee meets regularly with the internal and
external auditors, without management present, to discuss the results
of their activities, the adequacy of the Company's system of
accounting, financial and operational controls and the overall quality
of the Company's financial reporting. The meetings are designed to
facilitate any private communication with the Committee desired by the
internal and external auditors. No significant actions by the
Committee were required during the year ended December 31, 1996 as a
result of any communications conducted.
/s/ Matthew Holden, Jr.
Matthew Holden, Jr.
Chairman, Audit Committee
February 7, 1997
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors
of Atlantic Energy, Inc.:
We have audited the accompanying consolidated balance sheets of
Atlantic Energy, Inc. and subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in
common shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Atlantic Energy,
Inc. and subsidiaries at December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 7, 1997
Parsippany, New Jersey
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars, except per share amounts)
For the Years Ended December 31,
1996 1995 1994
Operating Revenues-Electric $980,255 $953,137 $913,039
Operating Expenses:
Energy 223,091 191,766 210,891
Purchased Capacity 195,699 190,570 130,929
Operations 156,799 152,060 156,409
Employee Separation Costs - - 26,600
Maintenance 44,418 34,379 37,568
Depreciation and Amortization 80,845 78,461 73,344
State Excise Taxes 104,815 102,811 97,072
Federal Income Taxes 32,272 45,876 33,264
Other Taxes 9,888 8,677 10,757
Total Operating Expenses 847,827 804,600 776,834
Operating Income 132,428 148,537 136,205
Other Income and Expense:
Allowance for Equity Funds Used
During Construction 879 817 3,634
Other-Net 663 8,241 8,678
Total Other Income and Expense 1,542 9,058 12,312
Income Before Interest Charges 133,970 157,595 148,517
Interest Charges:
Interest on Long Term Debt 60,029 60,329 57,346
Other Interest Expense 4,818 2,550 1,114
Total Interest Charges 64,847 62,879 58,460
Allowance for Borrowed Funds
Used During Construction (976) (1,679) (2,772)
Net Interest Charges 63,871 61,200 55,688
Less Preferred Securities Dividend
Requirements of Subsidiary 11,332 14,627 16,716
Net Income $ 58,767 $ 81,768 $ 76,113
Average Number of Shares of Common
Stock Outstanding(in thousands) 52,702 52,815 54,149
Per Common Share:
Earnings $1.12 $1.55 $1.41
Dividends Declared $1.54 $1.54 $1.54
Dividends Paid $1.54 $1.54 $1.54
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars) For the Years Ended December 31,
1996 1995 1994
Cash Flows Of Operating Activities:
Net Income $ 58,767 $ 81,768 $ 76,113
Unrecovered Purchased Power Costs 16,417 15,721 14,920
Deferred Energy Costs (2,095) (20,435) (3,819)
Preferred Securities Dividend of ACE 11,332 14,627 16,716
Depreciation and Amortization 80,845 78,461 73,344
Deferred Income Taxes-Net 6,192 25,946 17,863
Unrecovered State Excise Taxes 9,560 9,560 (40,128)
Employee Separation Costs (7,179) (19,112) 26,600
Net Changes Working Capital Components:
Accounts Receivable&Unbilled Revenues (5,004) (24,400) 1,840
Accounts Payable 5,651 (5,222) 2,233
Inventory (2,602) 4,960 (12,988)
Other 26,372 (18,406) (12,557)
Other-Net (3,772) 4,893 (2,457)
Net Cash Provided by Operating
Activities 194,484 148,361 157,680
Cash Flows Of Investing Activities:
Utility Construction Expenditures (86,805) (100,904) (119,961)
Leased Nuclear Fuel Material (6,833) (10,446) (10,713)
Nonutility Construction Expenditures (25,451) (5,226) (6,807)
Other-Net (14,783) (23,794) (10,893)
Net Cash Used by Investing Activities (133,872) (140,370) (148,374)
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt 45,075 168,904 54,572
Retirement/Maturity of Long Term Debt (12,266) (57,489) (42,664)
Issuance of Cumulative Quarterly Income
Preferred Securities 70,000 - -
Increase in Short Term Debt 34,405 21,945 8,600
Proceeds from Common Stock Issued - - 10,289
Repurchase of Common Stock - (29,626) (3,909)
Redemption of Preferred Stock-ACE (98,876) (24,500) (24,500)
Dividends Declared-ACE Preferred
Securities (11,332) (14,627) (16,716)
Dividends Declared on Common Stock (81,163) (81,088) (75,829)
Proceeds-Capital Lease Obligations 6,833 10,466 10,734
Other-Net (3,701) (1,399) 1,596
Net Cash Used by Financing Activities (51,025) (7,414) (77,827)
Net Increase (Decrease) in Cash and
Temporary Investments 9,587 577 (68,521)
Cash and Temporary Investments:
Beginning of year 5,691 5,114 73,635
End of year $ 15,278 $ 5,691 $ 5,114
Supplemental Schedule of Payments:
Interest $ 68,551 $ 61,160 $ 62,855
Income taxes $ 28,101 $ 30,769 $ 23,374
Noncash Financing Activities:
Common Stock issued
under stock plans-net $ - $ 120 $ 7,652
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31,
1996 1995
Assets
Electric Utility Plant:
In Service:
Production $1,212,380 $1,187,169
Transmission 373,358 366,242
Distribution 731,272 691,830
General 191,210 183,935
Total In Service 2,508,220 2,429,176
Less Accumulated Depreciation 871,531 794,479
Utility Plant in Service-Net 1,636,689 1,634,697
Construction Work in Progress 117,188 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 39,914 40,878
Electric Utility Plant-Net 1,799,395 1,801,786
Investments and Nonutility Property:
Investment in Leveraged Leases 79,687 78,959
Nuclear Decommissioning Trust Fund 71,120 61,802
Nonutility Property and Equipment-Net 46,147 22,743
Other Investments and Funds 53,550 52,780
Total Investments and Nonutility Property 250,504 216,284
Current Assets:
Cash and Temporary Investments 15,278 5,691
Accounts Receivable:
Utility Service 64,432 66,099
Miscellaneous 32,547 17,477
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 33,315 41,515
Fuel (at average cost) 29,682 25,459
Materials and Supplies (at average cost) 23,815 25,434
Working Funds 15,517 14,421
Deferred Energy Costs 33,529 31,434
Prepaid Excise Tax 7,125 10,753
Other 11,354 13,339
Total Current Assets 263,094 248,322
Deferred Debits:
Unrecovered Purchased Power Costs 83,400 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 54,714 64,274
Unamortized Debt Costs 44,423 39,004
Other Regulatory Assets 59,575 54,568
License Fees 17,733 -
Other 12,066 7,975
Total Deferred Debits 357,769 351,496
Total Assets $2,670,762 $2,617,888
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31,
1996 1995
Liabilities and Capitalization
Capitalization:
Common Shareholders' Equity:
Common Stock, no par value; 75,000,000
shares authorized; issued and outstanding:
1996 - 52,502,479 ; 1995 - 52,531,878 $ 562,746 $ 563,436
Retained Earnings 227,630 249,741
Unearned Compensation (2,982) (3,008)
Total Common Shareholders' Equity 787,394 810,169
Preferred Securities of Atlantic Electric:
Not Subject to Mandatory Redemption 30,000 40,000
Subject to Mandatory Redemption 43,950 114,750
Cumulative Quarterly Income
Preferred Securities 70,000 -
Long Term Debt 829,745 829,856
Total Capitalization (excluding current
portion) 1,761,089 1,794,775
Current Liabilities:
Preferred Stock Redemption Requirement 10,000 22,250
Capital Lease Obligation-Current Portion 702 659
Long Term Debt-Current Portion 98,250 65,247
Short Term Debt 64,950 30,545
Accounts Payable 66,508 60,858
Taxes Accrued 7,504 3,450
Interest Accrued 20,241 20,315
Dividends Declared 21,701 23,490
Deferred Income Taxes 3,190 2,569
Provision for Rate Refunds 13,000 -
Other 24,696 27,383
Total Current Liabilities 330,742 256,766
Deferred Credits and Other Liabilities:
Deferred Income Taxes 434,108 425,875
Deferred Investment Tax Credits 46,577 49,112
Capital Lease Obligations 39,212 40,227
Other 59,034 51,133
Total Deferred Credits and Other Liabilities 578,931 566,347
Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization $2,670,762 $2,617,888
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Atlantic Energy, Inc. (the Company, AEI or parent) 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. ACE's service territory encompasses approximately 2,700
square miles within the southern one-third of New Jersey with the
majority of customers being residential and commercial. ACE, with its
wholly-owned subsidiary that operates certain generating facilities,
is the principal subsidiary within the consolidated group. AEE is a
holding company which is responsible for the management of the
investments in the nonutility companies consisting of: Atlantic
Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP), ATE
Investment, Inc. (ATE), Atlantic Thermal Systems, Inc. (ATS),
CoastalComm, Inc. (CCI) and Atlantic Energy Technology, Inc. (AET).
AGI and its wholly-owned subsidiaries are engaged in the development,
acquisition, ownership and operation of cogeneration power projects.
AGI's activities, through its subsidiaries, are represented by
partnership interests in cogeneration facilities located in New Jersey
and New York. ASP owns and manages a commercial office and warehouse
facility located in Atlantic County, New Jersey. ATE provides
financing management and financing to affiliates and manages a
portfolio of investments in leveraged leases for equipment used in the
airline and shipping industries. In August 1996, ATE joined with an
unaffiliated company to create EnerTech Capital Partners, L.P., an
equity limited partnership that will invest in a variety of energy-
related technology growth companies. ATS and its wholly-owned
subsidiaries are engaged in the development and operation of thermal
heating and cooling systems. CCI manages an investment in
telecommunication technology. AEE also has a 50% equity interest in
Enerval, LLC which provides energy management services, including
natural gas supply, transportation and marketing. In July 1996, AEI
formed a new subsidiary AEII, to provide utility consulting services
and equipment sales to international markets.
Pending Merger
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 new company named Conectiv, Inc. (Conectiv).
Conectiv, a newly formed Delaware corporation, will become the parent
of Atlantic Energy's subsidiaries and the parent of DP&L and its
subsidiaries.
DP&L is predominately a public utility engaged in electric and gas
service. DP&L provides retail and wholesale electric service to
customers located in about a 6,000 square mile territory located in
Delaware, eastern shore counties in Maryland and the eastern shore
area of Virginia. DP&L provides gas service to retail and
transportation customers in an area consisting of about 275 square
miles in Northern Delaware, including the City of Wilmington.
The merger is to be a tax-free, stock-for-stock transaction accounted
for as a purchase by Conectiv. Under the terms of the agreement, DP&L
shareholders will receive one share of Conectiv's common stock for
each share of DP&L common stock held. AEI shareholders will receive
0.75 shares of Conectiv's common stock and 0.125 shares of Conectiv's
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. In order for the merger to become effective, approvals are
still needed from a number of Federal and state regulatory agencies.
The Company expects the regulatory approval process to be completed in
late 1997 or early 1998.
The total consideration to be paid to the Company's common
stockholders, measured by the average daily closing market price of
the Company's common stock for the ten trading days following public
announcement of the merger, is $948.6 million. The consideration paid
plus estimated acquisition costs and liabilities assumed in connection
with the merger are expected to exceed the net book value of the
Company's net assets by approximately $204.5 million, which will be
recorded as goodwill by Conectiv. The goodwill will be amortized over
40 years.
Selected information on each company at December 31, 1996 and the year
then ended is shown below (in thousands, except for number of
customers):
AEI DP&L
Operating Revenues $ 980,255 $1,094,961
Net Income $ 58,767 $ 116,187
Assets $2,670,762 $2,979,153
Electric Customers 477,611 442,116
Gas Customers - 100,904
Combination of the above amounts would not necessarily be reflective
of the amounts that would result from a consolidation of the
companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. ACE and AEE
consolidate their respective subsidiaries. Ownership interests in
other entities, between 20% and 50%, where control is not evident, are
accounted for using the equity method of accounting. Certain prior
year amounts have been reclassified to conform to the current year
reporting of these items.
Regulation - ACE
The accounting policies and rates of service for ACE are subject to
the regulations of the New Jersey Board of Public Utilities (BPU) and
in certain respects to the Federal Energy Regulatory Commission
(FERC). ACE follows generally accepted accounting principles (GAAP)
and financial reporting requirements employed by all industries as
specified by the Financial Accounting Standards Board (FASB) and the
Securities and Exchange Commission (SEC). However, accounting for
rate regulated industries may depart from GAAP as permitted by
Statement of Financial Accounting Standards No. 71 (SFAS No. 71).
SFAS No. 71 provides guidance on circumstances where the economic
effect of a regulator's decision warrants different applications of
GAAP as a result of the rate making process. In setting rates, a
regulator may provide recovery of an incurred cost in a year or years
other than the year the cost was incurred. As permitted by SFAS No.
71, costs ordered by a regulator to be deferred or capitalized for
future recovery are recorded as a regulatory asset because the
regulator's rate action provides reasonable assurance of future
economic benefits attributable to these costs. In a non-rate
regulated industry, such costs are charged to expense in the year
incurred. SFAS No. 71 further specifies that a regulatory liability
is recorded when a regulator orders a refund to customers of revenues
previously collected, or when existing rates provide for recovery of
future costs not yet incurred. Such treatment is not afforded to non-
rate regulated companies. When collection of regulatory assets or
relief of regulatory liabilities is no longer probable, the assets and
liabilities are applied to income in the year that the assessment is
made. Specific regulatory assets and liabilities that have been
recorded are discussed in Note 11.
Electric Operating Revenues - ACE
Revenues are recognized when electric energy services are rendered,
and include estimates for amounts unbilled at the end of the year for
energy used by customers subsequent to the last bill rendered for the
calendar year.
Nuclear Fuel - ACE
Fuel costs associated with ACE's participation in jointly-owned
nuclear generating stations, including spent nuclear fuel disposal
costs, are charged to Energy expense based on the units of thermal
energy produced.
Electric Utility Plant and Depreciation - ACE
Property is stated at original cost. Generally, Utility Plant is
subject to a first mortgage lien. The cost of property additions,
including replacement of units of property and betterments, are
capitalized. Included in certain property additions is an Allowance
for Funds Used During Construction (AFDC), which is defined in the
applicable regulatory system of accounts as the cost, during the
period of construction, of borrowed funds used for construction
purposes and a reasonable rate on other funds when so used. AFDC has
been calculated using a semi-annually compounded rate of 8.25% for all
periods. ACE provides for straight-line depreciation based on:
transmission and distribution property - estimated remaining life;
nuclear property - remaining life of the related plant operating
license in existence at the time of the last base rate case; other
depreciable property - estimated average service life. The overall
composite rate of depreciation was 3.3% for the last three years.
Accumulated depreciation is charged with the cost of depreciable
property retired together with removal costs less salvage and other
recoveries.
Nonutility Property and Equipment
Nonutility Property and Equipment includes project development costs
and construction work in progress, including capitalized interest,
related to the development and construction of thermal heating and
cooling systems of ATS. Capitalized interest related to Nonutility
expenditures was not material to the financial results of the Company.
ASP's commercial site, including the cost of improvements and certain
preacquisition costs is stated at fair market value. In 1996 and
1994, management of the Company authorized write-downs of $1.2 million
and $2.6 million, respectively, of the carrying value of this
commercial site reflecting diminished value due to excess vacancy and
the decline in the local commercial real estate market.
Nuclear Plant Decommissioning Reserve - ACE
A reserve for decommissioning costs is presented as a component of
accumulated depreciation and amounted to $70.2 million and $60.9
million at December 31, 1996 and 1995, respectively.
The SEC has questioned certain accounting practices employed by the
electric utility industry concerning decommissioning costs for nuclear
generating facilities. In 1996, the FASB issued a Proposed Statement
of Financial Accounting Standard "Accounting for Certain Liabilities
Related to Closure or Removal of Long-lived Assets" which would
establish accounting standards for certain obligations that are
incurred for the closure and removal of long-lived assets. Under the
proposed statement, which includes decommissioning costs for nuclear
generating facilities, a regulated utility would recognize a
regulatory asset or liability for differences, if any, in the timing
of recognition of the costs of closure and removal of assets for
financial reporting purposes and rate making treatment. To date, the
FASB has not issued a final accounting standard.
Deferred Energy Costs - ACE
As approved by the BPU, ACE has a Levelized Energy Clause (LEC)
through which energy and energy-related costs (energy costs) are
charged to customers. LEC rates are based on projected energy costs
and prior period underrecoveries or overrecoveries. Generally, energy
costs are recovered through levelized rates over the period of
projection, which is usually a 12-month period. In any period, the
actual amount of LEC revenues recovered from customers may be greater
or less than the recoverable amount of energy costs incurred in that
period. Energy expense is adjusted to match the associated LEC
revenues. Any underrecovery (an asset representing energy costs
incurred that are to be collected from customers) or overrecovery (a
liability representing previously collected energy costs to be
returned to customers) of costs is deferred on the Consolidated
Balance Sheet as Deferred Energy Costs. These deferrals are
recognized in the Consolidated Statement of Income as Energy expense
during the period in which they are subsequently included in the LEC.
Income Taxes
Deferred Federal and state income taxes are provided on all
significant temporary differences between book bases and tax bases of
assets and liabilities, transactions that reflect taxable income in a
year different than book income and tax carryforwards. Investment tax
credits previously used for income tax purposes have been deferred on
the Consolidated Balance Sheet and are recognized in book income over
the life of the related property. The Company and its subsidiaries
file a consolidated Federal income tax return. Income taxes are
allocated to each of the companies within the consolidated group based
on the separate return method.
Cash & Temporary Investments
AEI and ACE consider all highly liquid investments and debt securities
purchased with a maturity of three months or less to be cash
equivalents.
Earnings Per Common Share
This is computed based upon the weighted average number of common
shares outstanding during the year. Common stock equivalents exist
but are not included in the computation of earnings per share because
they are currently antidilutive.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management at times to make certain judgments, estimates and
assumptions that affect amounts and matters reported at the year end
dates and for the annual periods presented. Actual results could
differ from those estimates. Any change in the judgments, estimates
and assumptions used, which in management's opinion would have a
significant effect on the financial statements, will be reported when
management becomes aware of such changes.
Other
Debt premium, discount and expense of ACE are amortized over the life
of the related debt. Premiums associated with the 1996 Preferred Stock
redemptions are being deferred and amortized over the life of the
related Cumulative Quarterly Income Preferred Securities in accordance
with BPU approval.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. On January 1, 1996, the Company
adopted SFAS No. 121 and there was no material impact on its results
of operations.
The FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation"(SFAS No. 123), effective January 1, 1996. This statement
encourages a fair value method to account for stock-based
compensation, as an alternative to the intrinsic value currently
permitted by Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees". The Company is continuing
to use the intrinsic value method presented by APB No. 25 to record
compensation expense. See Note 4.
NOTE 2. INCOME TAXES
The components of Federal income tax expense for the years ended
December 31 are as follows:
(000) 1996 1995 1994
Current $ 27,061 $ 20,483 $ 19,729
Deferred 6,587 25,993 17,414
Investment Tax Credits Recognized
on Leveraged Leases (78) (28) -
Total Federal Income Tax Expense 33,570 46,448 37,143
Less Amounts in Other Income 1,298 572 3,879
Federal Income Taxes in
Operating Expenses $ 32,272 $ 45,876 $ 33,264
A reconciliation of the expected Federal income taxes compared to the
reported Federal income tax expense computed by applying the statutory
rate for the years ended December 31 follows:
1996 1995 1994
Statutory Federal Income Tax Rate 35% 35% 35%
(000)
Income Tax Computed at the
Statutory Rate $ 36,058 $ 49,995 $ 45,490
Plant Basis Differences 3,096 1,307 (27)
Amortization of Investment Tax
Credits (2,612) (2,562) (2,534)
Tax Adjustments (68) (897) (4,097)
Other-Net (2,904) (1,395) (1,689)
Total Federal Income Tax Expense $ 33,570 $ 46,448 $ 37,143
Effective Federal Income Tax Rate 33% 33% 29%
State income tax expense is not significant.
Items comprising deferred tax balances as of December 31 are as
follows:
(000) 1996 1995
Deferred Tax Liabilities:
Plant Basis Differences $326,673 $316,834
Leveraged Leases 76,671 71,180
Unrecovered Purchased Power Costs 22,630 28,209
State Excise Taxes 20,141 22,527
Other 33,192 32,825
Total Deferred Tax Liabilities 479,307 471,575
Deferred Tax Assets:
Deferred Investment Tax Credits 25,143 26,511
Employee Separation Costs 526 2,621
Other 16,340 13,999
Total Deferred Tax Assets 42,009 43,131
Total Deferred Taxes-Net $437,298 $428,444
At December 31, 1996 and 1995, deferred tax assets exist for
cumulative state income tax net operating loss (NOL's)
carryforwards. Valuation allowances of virtually the same
amounts have been recorded. The effects of the state NOL's and
associated valuation allowances are not material to consolidated
results of operations and financial position. At December 31,
1996 unexpired state NOL's amount to approximately $72 million,
with expiration dates from 1997 through 2003.
As of December 31, 1996, AEI used the balance of its Federal
Alternative Minimum Tax credit. This credit was included in the
tax effects of the ATE leveraged leases.
NOTE 3. RATE MATTERS OF ACE
Energy Clause Proceedings
Changes in Levelized Energy Clause Rates
1994 - 1996
Amount Amount
Date Requested Granted Date
Filed (millions) (millions) Effective
2/94 $63.0 $55.0 7/94
4/95 37.0 37.0 7/95
3/96 49.7 27.6 7/96
ACE's LEC is subject to annual review by the BPU.
In February 1994, ACE filed a petition with the BPU requesting an
increase in LEC revenues of $63 million for the period June 1,
1994 through May 31, 1995. This filing introduced the Southern
New Jersey Economic Initiative (SNJEI), an ACE initiative
designed to phase in the impact of nonutility purchased power
contracts by forgoing the recovery of $28 million in energy costs
incurred during the 1994/1995 LEC period. In November 1994, the
BPU approved the continuation of a provisional LEC rate increase
of $55 million that had been in effect since July 1994.
In April 1995, ACE filed a petition with the BPU requesting a $37
million increase in LEC revenues for the period June 1, 1995
through May 31, 1996. ACE reduced the amount requested by $10
million under the SNJEI. ACE also reduced the request by $20.6
million for deferral, without carrying costs, to be recovered in
the next LEC period. In March 1996, the BPU approved the
continuance of the provisional increase of $37 million that had
been in effect since July 1995.
On March 29, 1996, ACE submitted to the BPU a request for a $49.7
million increase in annual LEC revenues effective June 1, 1996.
The request included the recovery of $20.6 million of LEC costs
previously deferred from the 1995 LEC request as well as a
proposal to defer $14.7 million of 1996/1997 LEC costs, to be
recovered without carrying costs in the next LEC period. A
stipulation was reached among ACE, the New Jersey Division of the
Ratepayer Advocate (Ratepayer Advocate) and the Staff of the BPU
(collectively the parties) and approved by the BPU on July 17,
1996, allowing ACE to implement provisional rates resulting in an
increase of annual LEC revenues of $27.6 million. The
stipulation provided for hearings to decide the following LEC
rate issues: recovery of $27.8 million for the estimated
replacement power costs related to the Salem Nuclear Generating
Station (Salem) Unit 1 and 2 outages; $1.7 million in deferred
replacement power costs associated with a 1994 Salem Unit 1
outage and $1.7 million in New Jersey emission fees. The
provisional LEC rates also included the deferral of $6.4 million
in 1996/97 LEC costs to be recovered without carrying costs in
the next LEC period. On December 19 and December 31, 1996, the
BPU issued Orders approving two stipulations reached on October
22, 1996 among the parties settling certain issues concerning the
LEC petition. The issue of the $1.7 million in emission fees
remains unresolved. See Other Rate Proceedings below and Note 10
for information relating to the return to service of Salem
Station.
ACE filed a petition with the BPU on February 28, 1997 for a
request of $20.0 million for the 1997/1998 LEC period.
Other Rate Proceedings
The Ratepayer Advocate has previously alleged that ACE, along
with other New Jersey electric utility companies, were recovering
cogeneration capacity costs concurrently in base rates and LEC
rates. ACE and other New Jersey electric utilities have entered
into separate stipulations of settlement with respect to this
matter. ACE's stipulation of settlement specifies that ACE would
provide credits to customers totaling $1.0 million during the
months of January and February 1997 based on customers usage
between January 1, 1996 and October 31, 1996. All issues raised
previously with regard to alleged overrecovery of nonutility
capacity costs are deemed closed and resolved.
By an Order dated March 14, 1996 the BPU initiated an
investigation of the ongoing outage at Salem. ACE has a 7.41%
ownership in Salem which is operated by Public Service Electric
and Gas Company (PS). By its Order, the BPU declared the base
rates associated with ACE's ownership in Salem Unit 1 interim and
subject to refund pending a hearing as to whether Salem Unit 1 is
currently used and useful. The BPU, in an Order dated June 26,
1996, also declared the base rates associated with ACE's
ownership in Salem Unit 2 interim and subject to refund. The BPU
voted on July 31, 1996 to include Unit 2 in the hearings
originally scheduled for October 1996 to determine if both units
were still considered used and useful. On December 31, 1996, the
BPU issued an Order approving a stipulation of settlement among
the parties relating to the ongoing outage of the Salem Station.
Under the terms of the stipulation, ACE provided credits to
customers totaling $12.0 million. The credits were made during
January and February 1997 and were based on customer usage
between January 1, 1996 and October 31, 1996. The stipulation
also provided that replacement power costs incurred, up to the
agreed upon return-to-service dates (June 30, 1997 for Unit 1 and
December 31, 1996 for Unit 2) will be recoverable in the next
annual LEC revenue proceeding. Should either unit not return to
service by its agreed upon return-to-service date, replacement
power costs incurred after such dates will not be recoverable by
ACE. In addition, the stipulation provided that the performance
of the Salem Units will not be included in the calculation of the
BPU Nuclear Performance Standard from the period each unit was
taken out of service to each unit's respective return-to-service
date. As such, ACE was not subject to a penalty or reward under
the Nuclear Performance Standard for 1995 or 1996.
Net income reflects a net charge of $7.6 million, net of tax, ACE
recorded in 1996 as a result of the stipulations regarding the
Provision for Rate Refund discussed above. The net charge
consists of a $13 million reduction in revenues, a reduction of
$1.3 million in operations expense for amounts previously
recorded for the nuclear performance penalty and a Federal income
tax benefit of $4.1 million.
On January 8, 1997, the BPU approved a stipulation related to its
generic proceeding for methods of implementing FASB Statement of
Financial Accounting Standard No. 106 - "Employers' Accounting
for Post-retirement Benefits Other Than Pensions" (SFAS No. 106).
SFAS No. 106 required publicly held companies to change from the
practice of accounting for post-retirement benefits such as
medical benefits, hospitalization and life insurance (OPEB), on a
pay-as-you-go basis to an accrual basis of accounting. For the
transition, SFAS No. 106 required that companies recognize an
obligation composed of the present value of OPEB obligations for
retirees and current employees incurred as of the date of
adoption. SFAS No. 71 allowed the recognition of a regulatory
asset relating to costs for which rate recovery has been
deferred. By an Order dated August 1, 1996, the BPU initiated a
generic proceeding to inquire into methods of implementing
recovery of SFAS No. 106 expenses through utility rates. Under
the terms of a stipulation, ACE will file a petition requesting
ratemaking treatment of OPEB expenses in the second quarter of
1997. See Notes 4 and 11 for further information regarding OPEB
expenses and the corresponding regulatory asset.
NOTE 4. BENEFITS
Retirement Benefits - ACE
Pension
ACE has a noncontributory defined benefit pension plan covering
substantially all of its employees and those of its wholly-owned
subsidiary. Benefits are based on an employee's years of service
and average final pay. ACE's policy is to fund pension costs
within the guidelines of the minimum required by the Employee
Retirement Income Security Act and the maximum allowable as a tax
deduction.
Net periodic pension costs include:
(000) 1996 1995 1994
Service cost-benefits earned
during the period $ 6,870 $ 6,363 $ 6,871
Interest cost on projected benefit
obligation 14,569 14,794 15,390
Actual return on plan assets (36,443) (44,067) (860)
Other-net 19,123 28,379 (16,885)
Net periodic pension costs $ 4,119 $ 5,469 $ 4,516
Of these costs, $3.0 million annually was charged to operating expense
in 1996, 1995 and 1994. The remaining costs, which are associated
with construction labor, were charged to the cost of new utility
plant. Actual return on plan assets and Other-net for 1996 and 1995
primarily reflect the favorable market conditions from the investment
of plan assets and expected returns compared with unfavorable market
conditions in 1994.
A reconciliation of the funded status of the plan as of December 31 is
as follows:
(000) 1996 1995
Fair value of plan assets $236,000 $212,000
Projected benefit obligation 207,340 213,470
Plan assets in excess of (less
than) projected benefit obligation 28,660 (1,470)
Unrecognized net transition asset (1,377) (1,550)
Unrecognized prior service cost 259 282
Unrecognized net(gain)loss (18,958) 10,006
Prepaid pension cost $ 8,584 $ 7,268
Accumulated benefit obligation:
Vested benefits $170,751 $169,044
Nonvested benefits 2,023 3,413
Total $172,774 $172,457
At December 31, 1996, approximately 66% of plan assets were invested
in equity securities, 25% in fixed income securities and 9% in other
investments. The assumed rates used in determining the actuarial
present value of the projected benefit obligation at December 31 were
as follows:
1996 1995 1994
Weighted average discount 7.5% 7.0% 8.0%
Anticipated increase in compensation 3.5% 3.5% 3.5%
Assumed long term rate of return 8.5% 8.5% 8.5%
Other Postretirement Benefits
ACE and its subsidiary provide certain health care and life insurance
benefits for retired employees and their eligible dependents.
Substantially all employees may become eligible for these benefits if
they reach retirement age while working for the companies. Benefits
are provided through insurance companies and other plan providers
whose premiums and related plan costs are based on the benefits paid
during the year. ACE has a tax-qualified trust to fund these
benefits.
Net periodic other postretirement benefit costs include:
(000) 1996 1995 1994
Service cost-benefits attributed to
service during the period $ 2,688 $ 2,891 $ 3,817
Interest cost on accumulated
postretirement benefits obligation 7,482 8,107 8,450
Actual return on plan assets (771) (1,437) 100
Amortization of unrecognized
transition obligation 2,768 3,893 3,893
Other-net 215 404 (700)
Net periodic other postretirement
costs $12,382 $13,858 $15,560
These costs were allocated as follows:
(millions) 1996 1995 1994
Operating expense $3.6 $3.1 $3.8
New utility plant-associated with
construction labor 2.4 2.5 2.0
Regulatory asset 6.4 8.3 9.8
The regulatory asset represents the amount of annual costs in excess
of the amount of cost currently recovered in rates. These excess
costs are deferred as authorized by an accounting order of
the BPU pending future recovery through rates. See Note 3 for
additional information.
A reconciliation of the funded status of the plan as of December 31
is as follows:
(000) 1996 1995
Accumulated benefits obligation:
Retirees $ 63,095 $ 64,516
Fully eligible active plan participants 4,038 6,954
Other active plan participants 39,972 33,649
Total accumulated benefits obligation 107,105 105,119
Less fair value of plan assets 18,000 16,500
Accumulated benefits obligation in
excess of plan assets 89,105 88,619
Unrecognized net loss (12,207) (15,335)
Unamortized unrecognized transition
obligation (44,289) (47,057)
Accrued other postretirement benefits
cost obligation $ 32,609 $ 26,227
At December 31, 1996, approximately 75% of plan assets were invested
in fixed income securities and 25% in other investments.
The assumed health care costs trend rate for 1997 is 8% and is assumed
to evenly decline to an ultimate constant rate of 5% in the year 2001
and thereafter. If the assumed health care costs trend rate was
increased by 1% in each future year, the aggregate service and
interest costs of the 1996 net periodic benefits cost would increase
by $1.3 million, and the accumulated postretirement benefits
obligation at December 31, 1996 would increase by $10.8 million. The
weighted average discount rate assumed in determining the accumulated
benefits obligation was 7.5%, 7% and 7.5% for 1996, 1995 and 1994,
respectively. The assumed long term return rate on plan assets was 7%
for each of the three year periods.
Other
Savings and Investment Plans A and B (401(k))
ACE has two 401(k) plans for union and non-union employees that match
plan contributions up to 6% of a participating employee's base pay.
The rate at which Company contributions are made is 50%. All full and
part-time employees are eligible to participate. The cost of the
plans for 1996, 1995 and 1994 was $1.9 million, $1.9 million and $2.0
million, respectively.
Equity Incentive Plan(EIP) - AEI
Eligible participants of the EIP are officers, general managers and
nonemployee directors of the Company and its subsidiaries. Under the
EIP, nonemployee director participants are entitled to receive a grant
of 1,000 shares of restricted stock. Restrictions on these grants
expire over a five-year period. Employee participants may be awarded
shares of restricted common stock, stock options and other common
stock-based awards. Actual awards of restricted shares are based on
attainment of certain Company performance criteria within a three-year
period. Restrictions lapse upon actual award at the end of the three-
year performance period. Shares not awarded are forfeited. Dividends
earned on restricted stock issued through the EIP are invested in
additional restricted stock under the EIP which is subject to the same
award criteria.
Restricted stock activity of the EIP, initiated in April 1994, was as
follows:
Weighted Average
Restricted Fair Value
Shares Grant Date
Issued/Granted 175,712 $20.975
Balance, December 31, 1994 175,712
Issued/Granted 24,435
Forfeited (7,587)
Balance, December 31, 1995 192,560 20.697
Issued/Granted 237,782
Forfeited (207,805)
Balance, December 31, 1996 222,537 19.160
The 1996 and 1995 restricted shares granted include 13,786 shares and
7,614 shares, respectively, purchased on the open market from
reinvestment of dividends on EIP shares outstanding. Compensation
expense for the restricted stock has been measured based on the
intrinsic value of the stock. The total compensation expense for the
years 1996 through 1994 amounted to less than $.7 million and reflect
an adjustment for the restricted shares associated with the first
three-year period that were not awarded and were forfeited.
Stock options granted are nonqualified and are exercisable three years
after but within ten years from the date of grant. Stock options are
priced at an amount at least equal to 100% of the fair market value of
the related common stock at the date of grant.
The Company applied APB No. 25 in accounting for its EIP plan.
Accordingly, no compensation expense has been recognized for its stock
option plan. Fair value compensation cost of the options was
determined using the Black-Scholes model with the following
assumptions for 1996: dividend yield of 7.9%, an average expected life
of 3-7 years, expected volatility of 17.85% and a risk-free interest
rate of 5.04%. Option information is as follows:
1996 1995
Weighted Weighted
Average Average
Exercise Exercise
Options Shares Price Shares Price
Outstanding
beginning of year 166,987 $ 21.125 167,300 $21.125
Granted 207,250 19.296 6,387 21.125
Forfeited (2,800) 21.125 (6,700) 21.125
Outstanding at end
of year 371,437 20.105 166,987 21.125
Options exercisable
at year end - -
Weighted Average Fair
Value of Options
Granted $1.33 N/A
The combined effects of accounting for restricted shares and options
under the EIP plans consistent with the fair value disclosure
requirements of SFAS No. 123 upon the net income of the Company for
1996 is less than $.2 million and as such is not considered material.
NOTE 5. JOINTLY-OWNED GENERATING STATIONS - ACE
ACE owns jointly with other utilities several electric production
facilities. ACE is responsible for its pro-rata share of the costs of
construction, operation and maintenance of each facility.
The amounts shown represent ACE's share of each facility at, or for
the year ended, December 31, including AFDC as appropriate.
Peach Hope
Keystone Conemaugh Bottom Salem Creek
Energy Source Coal Coal Nuclear Nuclear Nuclear
Company's Share
(%/MWs) 2.47/42.3 3.83/65.4 7.51/164.0 7.41/164.0 5.00/52.0
(000)
Electric Plant in Service:
1996 $13,275 $34,489 $130,011 $218,603 $240,079
1995 12,719 35,371 128,398 214,306 239,499
Accumulated Depreciation:
1996 $ 3,609 $ 7,333 $ 54,854* $ 79,635* $ 68,286*
1995 3,277 6,445 50,825* 73,088* 60,998*
Construction Work in Progress:
1996 $ 300 $ 270 $ 12,992 $ 27,015 $ 1,321
1995 442 873 11,056 11,198 655
Operations and Maintenance Expenses (including fuel):
1996 $ 5,626 $ 7,507 $ 29,337 $ 34,403 $ 10,899
1995 5,143 7,252 29,647 28,306 10,360
1994 5,085 7,211 29,530 27,731 10,471
Working Funds:
1996 $ 44 $ 69 $ 3,833 $ 7,252 $ 3,545
1995 44 69 4,505 5,782 1,919
Generation (MWHr):
1996 311,934 436,289 1,275,371 - 336,872
1995 285,899 451,211 1,232,921 334,572 352,316
1994 257,561 419,313 1,214,776 836,725 355,390
* Excludes Nuclear Decommissioning Reserve.
ACE provides financing during the construction period for its share of
the jointly-owned facilities and includes its share of direct
operations and maintenance expenses in the Consolidated Statement of
Income. Additionally, ACE provides an amount of working funds to the
operators of the facilities to fund operational needs.
The decrease in Salem's generation for 1996 and 1995 is due to both
Units 1 and 2 being taken out of service in May and June 1995,
respectively, by its operator PS for review and resolution of certain
equipment and management issues. Effective December 31, 1996, ACE
entered into an agreement with PS in its capacity as operator of Salem
for the purpose of limiting ACE's exposure to operation and
maintenance expenses to be incurred during calendar year 1997. See
Note 10 for further information concerning Salem Nuclear Generating
Station.
NOTE 6. NONUTILITY COMPANIES
Principal assets of each of the subsidiary companies of AEE at
December 31, 1996 were: AGI - investments of approximately $21.8
million in cogeneration facilities; ASP - commercial real estate site
with a net book value of $8.5 million; ATE - leveraged lease
investments of $79.7 million and $7.3 million invested in EnerTech
Capital Partners, L.P.; ATS - construction costs in thermal heating
and cooling projects of $29.3 million. CCI has $0.5 million invested
in telecommunication licenses. Other financial information regarding
the subsidiary companies is as follows:
Net Worth Net Income (Loss)
Company 1996 1995 1996 1995 1994
(000)
AGI $21,361 $26,082 $ 979 $2,513 $ 2,959
ASP 561 2,334 (1,773) (841) (1,956)
ATE 11,139 9,399 71 (50) 266
ATS 2,498 2,187 311 (213) (327)
CCI 544 5,258 (18) - -
AGI's results in each year primarily reflect the equity in earnings of
cogeneration facilities in which AGI has an ownership interest. AGI's
1996 results reflect the contingency of a $1.6 million net of tax loss
from the sale of a cogeneration facility located in New York.
ASP's results in each year reflect the vacancy in its commercial site
due to generally poor market conditions in commercial real estate.
Additionally, 1996 and 1994 include net after tax write-downs of the
carrying value of the commercial site of $0.8 million and $1.7
million, respectively.
ATE's 1996 and 1995 results reflect changes in interest expense
associated with its revolving credit and term loan agreement during
each year.
ATS's results for the years 1996 and 1995 reflect administrative and
general costs for business development and construction of heating and
cooling systems. Operating expenses were offset in part by revenues
generated from the operation and maintenance of customer heating and
cooling facilities in 1996 and 1995. ATS has agreements with three
casinos in Atlantic City, New Jersey to operate their heating and
cooling systems. As part of these agreements, ATS has paid $18.0
million in license fees for the right to operate and service such
systems for a period of 20 years. These fees are recorded on the
Consolidated Balance Sheet as License Fees and are being amortized to
expense over the life of the contracts.
AEI and AEE parent-only operations, excluding equity in the results of
subsidiary companies, generally reflect administrative and general
expenses for management of their respective subsidiaries. AEI
incurred losses of $3.6 million and $1.6 million in 1996 and 1995,
respectively. AEI's 1996 results reflect the impact of merger-related
costs. AEI's 1996 and 1995 results also reflect interest charges
associated with a line of credit established to fund repurchases of
common stock and certain affiliate capital needs. AEE incurred losses
of $1.7 million and $2.4 million in 1996 and 1995, respectively. AEE
1996 activity reflects an after tax loss of $1.1 million from its
equity investment in Enerval, LLC, due to a combination of unhedged
gas sales agreements and higher spot market prices for gas.
AEII reflects a net loss of $0.6 million in 1996 due to the consulting
and administrative costs of developing a new line of business.
NOTE 7. CUMULATIVE PREFERRED SECURITIES OF ACE
ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100
Par Value, two million shares of No Par Preferred Stock and three
million shares of Preference Stock, No Par Value. Information
relating to outstanding shares at December 31 is shown in the table
below.
Current
Optional
Par 1996 1995 Redemption
Series Value Shares (000) Shares (000) Price
Not Subject to Mandatory Redemption:
4% $100 77,000 $ 7,700 77,000 $ 7,700 $105.50
4.10% 100 72,000 7,200 72,000 7,200 101.00
4.35% 100 15,000 1,500 15,000 1,500 101.00
4.35% 100 36,000 3,600 36,000 3,600 101.00
4.75% 100 50,000 5,000 50,000 5,000 101.00
5% 100 50,000 5,000 50,000 5,000 100.00
7.52% 100 - - 100,000 10,000 -
Total $30,000 $ 40,000
Subject to Mandatory Redemption:
$8.25 None - $ - 50,000 $ 5,000 -
$8.53 None - - 120,000 12,000 -
$8.20 None 300,000 30,000 500,000 50,000 -
$7.80 None 239,500 23,950 700,000 70,000 -
Total 53,950 137,000
Less portion due within
one year 10,000 22,250
Total $43,950 $114,750
Cumulative Quarterly Preferred Income Securities:
8.25% None 2,800,000 $70,000 $ - -
Cumulative Preferred Stock Not Subject to Mandatory Redemption is
redeemable solely at the option of ACE. If preferred dividends are in
arrears for at least a full year, preferred stockholders have the
right to elect a majority of directors to the Board of Directors until
all dividends in arrears have been paid.
On February 1, 1996, ACE redeemed the remaining 120,000 shares of its
$8.53 No Par Preferred Stock at a price of $101.00 per share.
On August 1, 1996, ACE redeemed 200,000 shares of its $8.20 No Par
Preferred Stock at a price of $100 per share in accordance with its
annual sinking fund requirement. Sinking fund provisions require
100,000 shares be redeemed annually on August 1st and, at ACE's
option, an additional 100,000 shares may be redeemed on any sinking
fund date without premium.
On September 16, 1996, ACE redeemed 100,000 shares of its 7.52%
Preferred Stock $100 Par Value at a price of $101.88 per share and the
remaining 50,000 shares of its $8.25 No Par Preferred Stock at a price
of $104.45 per share. On August 29, 1996, a tender offer was
initiated for ACE's $7.80 No Par Preferred Stock. Pursuant to the
tender offer and subsequent agreements, ACE purchased a total of
460,500 shares at a price of $111.00 per share. In accordance with
BPU approval, premiums associated with these redemptions are being
deferred and amortized over the life of the 8.25% Cumulative Quarterly
Income Preferred Securities.
Beginning May 1, 2001, 115,000 shares of the remaining $7.80 No Par
Preferred Stock must be redeemed annually through the operation of a
sinking fund at a redemption price of $100 per share. ACE has the
option to redeem up to an additional 115,000 shares without premium on
any annual sinking fund date.
Embedded cost of Preferred Securities as of December 31, 1996, 1995
and 1994 was 7.4%, 7.4% and 7.6%, respectively.
At December 31, 1996, the minimum annual sinking fund requirements of
the Cumulative Preferred Stock Subject to Mandatory Redemption for the
next five years are $10 million in each of the years 1997 through 1999
and $11.5 million in 2001.
On October 1, 1996, Atlantic Capital I, a newly formed grantor trust,
issued $70 million of 8.25% Cumulative Quarterly Income Preferred
Securities (CQIPS) with a stated liquidation preference of $25 each.
Atlantic Capital I, established for the sole purpose of issuing the
CQIPS, invested the proceeds in 8.25% Junior Subordinated Deferrable
Interest Debentures (Junior Debentures) of ACE. ACE reserves the
right to defer payment of interest on the debentures for up to 20
consecutive quarters. During such a deferral period, certain dividend
restrictions would apply to ACE's Common and Preferred stock. The
CQIPS and Junior Debentures are scheduled to mature on October 1,
2026, but such maturity may be extended to a date not later than
October 1, 2045, if certain conditions are met. Proceeds from the
sale of the Junior Debentures were used to fund the redemption and
purchase of shares of ACE's preferred stock described above. Atlantic
Capital I is a grantor trust of ACE and as such, the transactions of
the trust are consolidated into the financial statements of ACE. The
Junior Debentures are eliminated in consolidation.
NOTE 8. DEBT
Maturity December 31,
Series Date 1996 1995
(000)
5-1/8% First Mortgage Bonds 2/1/1996 $ - $ 9,980
Medium Term Notes Series B (6.28%) 1998 56,000 56,000
Medium Term Notes Series A (7.52%) 1999 30,000 30,000
Medium Term Notes Series B (6.83%) 2000 46,000 46,000
Medium Term Notes Series C (6.86%) 2001 40,000 40,000
7-1/2% First Mortgage Bonds 4/1/2002 20,000 20,000
Medium Term Notes Series C (7.02%) 2002 30,000 30,000
Medium Term Notes Series B (7.18%) 2003 20,000 20,000
7-3/4% First Mortgage Bonds 6/1/2003 29,976 29,976
Medium Term Notes Series A (7.98%) 2004 30,000 30,000
Medium Term Notes Series B (7.125%) 2004 28,000 28,000
Medium Term Notes Series C (7.15%) 2004 9,000 9,000
Medium Term Notes Series B (6.45%) 2005 40,000 40,000
6-3/8% Pollution Control Series 12/1/2006 2,500 2,500
Medium Term Notes Series C (7.15%) 2007 1,000 1,000
Medium Term Notes Series B (6.76%) 2008 50,000 50,000
Medium Term Notes Series C (7.25%) 2010 1,000 1,000
6-5/8% First Mortgage Bonds 8/1/2013 75,000 75,000
7-3/8% Pollution Control Series A 4/15/2014 18,200 18,200
Medium Term Notes Series C (7.63%) 2014 7,000 7,000
Medium Term Notes Series C (7.68%) 2015 15,000 15,000
Medium Term Notes Series C (7.68%) 2016 2,000 2,000
8-1/4% Pollution Control Series A 7/15/2017 4,400 4,400
6.80% Pollution Control Series A 3/1/2021 38,865 38,865
7% First Mortgage Bonds 9/1/2023 75,000 75,000
5.60% Pollution Control Series A 11/1/2025 4,000 4,000
7% First Mortgage Bonds 8/1/2028 75,000 75,000
6.15% Pollution Control Series A 6/1/2029 23,150 23,150
7.20% Pollution Control Series A 11/1/2029 25,000 25,000
7% Pollution Control Series B 11/1/2029 6,500 6,500
Total 802,591 812,571
Debentures:
5-1/4% 2/1/1996 - 2,267
7-1/4% 5/1/1998 2,600 2,619
Total 2,600 4,886
Amortized Premium and Discount-Net (2,771) (2,854)
Total Long Term Debt-ACE 802,420 814,603
Less Portion Due within one year-ACE 175 12,247
Long Term Debt-ACE 802,245 802,356
Long Term Debt-AEI 37,575 34,500
Long Term Debt-ATE 33,500 33,500
Long Term Debt-ATS 54,500 12,500
Less Portion Due within One Year 98,075 53,000
$829,745 $829,856
Medium Term Notes have varying maturity dates and are shown with the
weighted average interest rate of the related issues within the year
of maturity. Substantially all of ACE's utility plant is subject to
the lien of the Mortgage and Deed of Trust dated January 15, 1937, as
amended and supplemented, collateralizing ACE's First Mortgage Bonds.
ACE
ACE had authority to issue $150 million in short term debt,
comprised of $100 million of committed lines of credit and $50
million on a when offered basis. At December 31, 1996 ACE had
$85.1 million of unused short-term borrowing capacity. ACE's
weighted daily average interest rate on short term debt was 5.6%
for 1996 and 6.3% for 1995.
On February 1, 1996, $9.98 million of 5-1/8% First Mortgage Bonds
and $2.267 million of 5-1/4% Debentures of the Company matured.
On May 1, 1996, the Company satisfied the sinking fund
requirements of $0.1 million for its 7-1/4% Debentures.
At December 31, 1996, 1995 and 1994, ACE's embedded cost of long
term debt was 7.5%, 7.5% and 7.6%, respectively.
AEE
Long term debt of ATE includes $15 million of 7.44% Senior Notes
due 1999. Also, ATE has a revolving credit and term loan
agreement which provides for borrowings of up to $25 million
during successive revolving credit and term loan periods through
June 1997. There were $18.5 million in borrowings outstanding
under this agreement at December 31, 1996 and 1995. Interest
rates on borrowings when outstanding are determined by reference
to periodic pricing options available under the facility. ATE
was charged interest rates ranging from 5.8% to 6.5% on these
loans during 1996.
In December 1995, ATS through a partnership arrangement, borrowed
$12.5 million of proceeds from the sale of special, limited bonds
issued by the New Jersey Economic Development Authority due
December 1, 2009. The bonds paid an initial rate of 3.7% for the
120 day period ending on April 30, 1996. The bonds were subject
to a mandatory tender and were remarketed at fixed rates ranging
from 3.5% to 3.6% twice within the year. The borrowed funds are
currently restricted in trust and invested in U. S. Treasury
Securities. The availability of the borrowed funds for their
intended use and the ultimate term of the borrowings are subject
to certain conditions. The bonds may be remarketed for
additional periods until December 1998, at which time, the bonds
must be redeemed if the escrow release conditions are not
satisfied. ATS cannot estimate, with any certainty, when or if
the conditions attached to the escrow release will be satisfied.
In August 1996, ATS established a $100 million revolving credit
and term loan facility, of which up to $20 million can be used to
establish letters of credit. As of December 31, 1996, $42
million was outstanding under this facility. Interest rates on
borrowings are based on senior debt ratings and on the borrowing
options selected by ATS. Interest rates on the borrowings
outstanding ranged from 5.8% to 6.0% in 1996. This facility will
be primarily used for construction of the Midtown Energy Center
in Atlantic City, New Jersey which began in November 1996.
Aggregate commitment fees on unused credit lines of revolving AEE
credit agreements were not significant.
AEI
Under AEI's $75 million revolving credit and term loan facility,
AEI had $37.6 million and $34.5 million outstanding in borrowings
at December 31, 1996 and 1995, respectively. Interest rates are
based on senior debt ratings and on the borrowing option selected
by AEI. Interest on the borrowings outstanding ranged from 5.59%
to 8.25% for 1996. This facility, established in September 1995,
has been used to fund acquisitions of Company common stock and
other general corporate purposes. Commitment fees were not
significant.
AEI's weighted daily average interest rate on its short term debt
was 6.3% for 1995. AEI had no short term debt in 1996.
Long Term Debt
Maturities and Sinking Fund Requirements
ACE AEI ATS ATE TOTAL
(000)
1997 $ 175 $37,575 $42,000 $18,500 $98,250
1998 58,575 - 12,500 - 71,075
1999 30,075 - - 15,000 45,075
2000 46,075 - - - 46,075
2001 40,075 - - - 40,075
NOTE 9. COMMON SHAREHOLDERS' EQUITY
In addition to public offerings, Common Stock may be issued
through the Dividend Reinvestment and Stock Purchase Plan (DRP),
ACE benefit plans (ACE plans), the Equity Incentive Plan (EIP)
and Employee Stock Purchase Plan (ESPP). The number of shares of
Common Stock issued (forfeited), and the number of shares
reserved for issuance at December 31, 1996, were as follows:
1996 1995 1994 Reserved
DRP - - 699,493 723,975
ACE Plans (28,844) (7,601) (5,046) 177,483
EIP (555) 9,234 175,712 615,609
ESPP - - - 400,000
Total (29,399) 1,633 870,159
The Company has a program to reacquire up to three million shares
of the Company's Common Stock outstanding. There is no schedule
or specific share price target associated with the
reacquisitions. The authorized number of shares is not to be
affected. During 1995, the Company reacquired and cancelled
1,625,000 shares for a total cost of $29.6 million with prices
ranging from $17.625 to $18.875 per share. At December 31, 1996
and 1995, the Company has reacquired and cancelled 1,846,700
shares of its common stock at a total cost of $33.5 million. The
Company did not reacquire and cancel any shares under this
program during 1996.
In April 1996, the shareholders of AEI approved the ESPP. Under
this plan, eligible employees can purchase shares of common stock
at a 15% discount. The offering periods begin on August 15 in
each of the years 1996-1999 and end August 14 of the following
year. The maximum number of shares that shall be issued under
this plan shall be 100,000 in each of the offering periods up to
a total of 400,000 shares.
Pursuant to ACE's certificate of incorporation, ACE is subject to
certain limitations on the payment of dividends to the Company,
which is the holder of all of ACE's common stock. When full
dividends have been paid on the Preferred Stock Securities of ACE
for all past quarterly-yearly dividend periods, dividends may be
declared and paid by ACE on its common stock, as determined by
the Board of Directors of ACE, out of funds legally available for
the payment of dividends.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Construction Program
ACE cash construction expenditures for 1997 are estimated to be
approximately $99 million. Nonutility capital expenditures for
1997 are estimated to be $67 million.
Insurance Programs - ACE
Nuclear
ACE is a member of certain insurance programs that provide
coverage for contamination and property damage to members'
nuclear generating plants. Facilities at the Peach Bottom, Salem
and Hope Creek stations are insured against property damage
losses up to $2.75 billion per site under these programs.
In addition, ACE is a member of an insurance program which
provides coverage for the cost of replacement power during
prolonged outages of nuclear units caused by certain specific
conditions. The insurer for nuclear extra expense insurance
provides stated value coverage for replacement power costs
incurred in the event of an outage at a nuclear unit resulting
from physical damage to the nuclear unit. The stated value
coverage is subject to a deductible period of the first 21 weeks
of any outage. Limitations of coverage include, but are not
limited to, outages 1) not resulting from physical damage to the
unit, 2) resulting from any government mandated shutdown of the
unit, 3) resulting from any gradual deterioration, corrosion,
wear and tear, etc. of the unit, 4) resulting from any
intentional acts committed by an insured and 5) resulting from
certain war risk conditions. Under the property and replacement
power insurance programs, ACE could be assessed retrospective
premiums in the event the insurers' losses exceed their reserves.
As of December 31, 1996, the maximum amount of retrospective
premiums ACE could be assessed for losses during the current
policy year was $4.9 million under these programs.
The Price-Anderson provisions of the Atomic Energy Act of 1954,
as amended by the Price-Anderson Amendments Act of 1988, govern
liability and indemnification for nuclear incidents. All nuclear
facilities could be assessed, after exhaustion of private
insurance, up to $79.275 million each reactor per incident,
payable at $10 million per year. Based on its ownership share of
nuclear facilities, ACE could be assessed up to an aggregate of
$27.6 million per incident. This amount would be payable at an
aggregate of $3.48 million per year, per incident.
Other
ACE's comprehensive general liability insurance provides
pollution liability coverage, subject to certain terms and
limitations for environmental costs incurred in the event of
bodily injury or property damage resulting from the discharge or
release of pollutants into or upon the land, atmosphere or water.
Limitations of coverage include any pollution liability 1)
resulting subsequent to the disposal of such pollutants, 2)
resulting from the operation of a storage facility of such
pollutants, 3) resulting in the formation of acid rain, 4) caused
to property owned by an insured and 5) resulting from any
intentional acts committed by an insured.
Nuclear Plant Decommissioning - 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, as authorized by the BPU,
totals $6.4 million and is provided for in rates charged to
customers. The funding amount is based on estimates of the
future cost of decommissioning each of the units, the dates that
decommissioning activities are expected to begin and return to be
earned by the assets of the fund. The present value of ACE's
nuclear decommissioning obligation, based on costs adopted by the
BPU in 1991 and restated in 1996 dollars, is $158 million.
Decommissioning activities as approved by the BPU were expected
to begin in 2006 and continue through 2032. The total estimated
value of the trust at December 31, 1996, inclusive of the present
value of future funding, based on current annual funding amounts
and expected decommissioning dates approved by the BPU, is
approximately $137 million, without earnings on or appreciation
of the fund assets. In accordance with BPU regulations, updated
site-specific studies based on 1995 costs have been performed and
submitted to the BPU for review. Any revisions to the amounts to
be recognized and recovered in rates as a result of the updated
studies are subject to the review and approval of the BPU and
cannot be determined at this time. ACE will seek to adjust these
estimates and the level of rates collected from customers in
future BPU proceedings to reflect changes in decommissioning cost
estimates and the expected levels of inflation and interest to be
earned by the assets in the trust.
Purchased Capacity and Energy Arrangements - ACE
ACE arranges with various providers of bulk energy to obtain
sufficient supplies of energy to satisfy current and future
energy requirements of the company. Arrangements may be for
generating capacity and associated energy or for energy only.
Terms of the arrangements vary in length to enable ACE to
optimally manage its supply portfolio in response to changing
near and long term market conditions. At December 31, 1996, ACE
has contracted for 707 megawatts (MWs) of purchased capacity with
terms remaining of 2 to 28 years and an additional 175 MWs
commencing in 1999 for 10 years. Information regarding these
arrangements relative to ACE was as follows:
1996 1995 1994
As a % of Capacity (year end) 30% 30% 29%
As a % of Generation 55% 52% 48%
Capacity charges (millions) $195.7 $190.6 $130.9
Energy charges (millions) $145.1 $135.4 $128.6
Amounts for purchased capacity are shown on the Consolidated
Statement of Income as Purchased Capacity. Of these amounts,
charges of certain nonutility providers are recoverable through
the LEC, which amounted to $165.3 million, $162.7 million and
$77.0 million in 1996, 1995 and 1994, respectively. Minimum
future payments for purchased capacity and energy under contract
for the years 1997 through 2001 are performance driven and cannot
be reasonably estimated.
Environmental Matters - ACE
The provisions of Title IV of the Clean Air Act Amendments of
1990 (CAAA) require, among other things, phased reductions of
sulfur dioxide (SO2) emissions by 10 million tons per year, a
limit on SO2 emissions nationwide by the year 2000 and reductions
in emissions of nitrogen oxides (NOx) by approximately 2 million
tons per year. ACE's wholly-owned B.L. England Units 1 and 2 and
its jointly-owned Conemaugh Units 1 and 2 are in compliance with
Phase I requirements as the result of installation of scrubbers
at each station. All of ACE's fossil-fuel steam generating units
are affected by Phase II (2000) of the CAAA. A compliance plan
for these units currently reflects capital expenditures of
approximately $8.5 million in 1997 through 2001. The jointly-
owned Keystone Station is impacted by the SO2 and NOx provisions
of Title IV of the CAAA during Phase II. The Keystone owners
plan to primarily rely on emission allowances to comply with the
CAAA through the year 2000.
Salem Nuclear Generating Station
ACE is an owner of 7.41% of Salem Units 1 and 2, which are
operated by PS. Salem Units 1 and 2 have been out of service
since May 16, 1995 and June 7, 1995, respectively. The Salem
units represent 164 MWs of ACE's total installed capacity of
2,385.7 MWs.
During these outages, PS has made significant changes and
improvements related to the people, processes and equipment at
Salem to improve the long-term reliability of the units. Salem
Unit 2 is in the final stages of preparation for restart. The
reactor has been refueled and reassembled and the reactor coolant
pumps have been tested and placed in service. Over 90% of the
total work activities have been completed and approximately 80%
of the plant systems have been restored. Salem Unit 2 is
currently expected to return to service in the second quarter of
1997.
Salem Unit 1 is currently expected to return to service in the
fall of 1997, after replacement of the unit's four steam
generators, which was required in order to correct a generic
problem with certain pressurized water reactors. Removal of the
old steam generators has been completed and installation of the
new steam generators is underway. 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, the cost of the disposal
of the old steam generators could be as much as $20 million, of
which ACE's share would be $1.5 million.
Effective December 31, 1996, ACE entered into a Stipulation
Agreement (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 $10.0 million of O&M expense as a fixed charge payable in
twelve equal installments beginning February 1, 1997. ACE's
obligation for any additional contribution to 1997 Salem O&M
expenses, of which ACE's estimated share would be $21.8 million,
is based on performance and directly related to the timely return
and operation of Salem Units 1 and 2. To the extent ACE derives
a savings against 1997 O&M expenditures, those savings will
offset replacement power costs incurred due to the unavailability
of the Salem Units. As a result of this Agreement, ACE has
agreed to dismiss the complaint filed in the Superior Court of
New Jersey in March 1996 alleging negligence and breach of
contract.
On February 27, 1996, the Salem co-owners filed a Complaint in
United States District Court for the District of New Jersey
against Westinghouse Electric Corporation, the designer and
manufacturer of the Salem steam generators, under Federal and
state statutes alleging fraud, negligent misrepresentation and
breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. On April 30, 1996,
Westinghouse filed an answer and a counterclaim of $2.5 million
for unpaid work. The litigation is in the process of discovery
and investigation.
ACE is subject to a performance standard for its five jointly-
owned nuclear units. This standard is used by the BPU in
determining recovery of replacement energy costs when output from
the nuclear units is reduced or not available. Underperformance
results in penalties which are not permitted to be recovered from
customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear
performance penalty for 1995 and had recorded a provision for
such. According to the Salem outage stipulation agreement as
previously discussed in Note 3, the performance of Salem Units 1
and 2 shall not be included in the calculation of a nuclear
performance penalty for the period each unit was taken out of
service up to each unit's respective return-to-service date. The
parties to the stipulation agreed that for the years 1995 and
1996, there will be no penalty or reward under the nuclear
performance standard. ACE had recorded a 1995 performance
penalty of $0.8 million, net of tax. This amount has been
incorporated into the net amount recorded for the Salem
stipulation discussed in Note 3.
The outage of each Salem unit causes ACE to incur replacement
power costs of approximately $0.7 million per unit per month.
ACE's replacement power costs for the current outage for each
unit, up to the agreed upon return-to-service dates, will be
recoverable in rates in ACE's next LEC proceeding. As discussed
above, replacement power costs incurred after the respective
agreed upon return-to-service dates for the Salem units will not
be recoverable in rates.
Competition
Competition is expected to increase for electric energy markets
historically served exclusively by regulated utilities. In
recent years, changing laws and governmental regulations
permitting competition from other utilities and nonregulated
energy suppliers have prompted some customers to use self-
generation or alternative sources to meet their electric needs.
As the electric utility industry transitions from a regulated to
a competitive industry, utilities may not be able to recover
certain costs. These costs, which are known as "stranded" costs,
could result from the shift from cost of service based pricing to
market based pricing and from customers choosing different energy
suppliers than ACE. Potential types of stranded costs include 1)
above-market costs associated with generation facilities or long
term power purchase agreements and 2) regulatory assets, which
are expenses deferred and expected to be recovered from customers
in the future.
In April 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 Order is designed 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
utilities are required to offer transmission services for
wholesale energy transactions to others on a nondiscriminatory
basis. Tariffs have been established by ACE for these services,
which ACE must also apply to its own wholesale energy
transactions.
On January 16, 1997, the BPU issued a Draft Phase II of the New
Jersey Energy Master Plan (the Plan). In the Plan, the BPU has
recommended that retail customers in New Jersey have the ability
to choose their electric energy supplier beginning in October
1998 using a phase-in plan that will include all retail customers
by April 2001. Customers would be able to sign an agreement with
a third-party energy supplier and each electric utility,
including ACE, would continue to be responsible for providing
distribution service. Price and service quality for such
distribution would continue to be regulated by the BPU.
Beginning October 1998, costs for electric service, which consist
of power generation, transmission, distribution, metering and
billing will need to be unbundled. Transmission service would be
provided by an Independent System Operator which would be
responsible for maintaining a regional power grid that would
continue to be regulated by FERC.
The Plan states that the BPU is committed to assuring that a
fully competitive marketplace exists prior to the ending of its
economic regulation of power supply. At a minimum, utility
generating assets and functions must be separated and operate at
arms length from the transmission, distribution and customer
service functions of the electric utility. The BPU reserves
final judgment on the issue of requiring divestiture of utility
generating assets until detailed analyses of the potential for
market power abuses by utilities have been performed.
The Plan addresses the issue of "stranded" costs related to the
generating capacity currently in utility rates. High costs of
construction and operations incurred by the jointly-owned nuclear
power plants and the long-term high cost supply contracts with
independent power producers are two significant contributing
factors. The report proposes recovery of stranded costs over a
four to eight year period, through a specific market transition
charge which will be a separate component of a customer's bill.
Determination of the recoverability of costs will be on a case by
case basis with no guarantee for 100% recovery of eligible
stranded costs.
The Plan provides that the opportunity for full recovery of such
eligible costs is contingent upon and may be constrained by the
utility meeting a number of conditions, including achievement of
a BPU goal of delivering a near term rate reduction to customers
of five to ten percent. The Plan states that the independent
power contracts must be eligible for stranded cost recovery.
The Plan further states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused
by the introduction of retail competition. The Plan further
notes that New Jersey is studying the "securitization" of
stranded costs as a means of financing these costs at interest
rates lower than the utility cost of capital, thereby helping to
mitigate the rate impact of stranded cost recovery. Recovery of
securitization may occur over a different period of time. The
Plan also suggests that a cap may be imposed on the level of the
charge as a mechanism to achieve the goal of overall rate
reduction.
The BPU intends to issue final findings and recommendations on
the electric utility industry restructuring Plan in April 1997.
Each electric utility in the State is to file a complete
restructuring plan, stranded cost filing and unbundled rate
filing no later than July 15, 1997.
ACE has not filed for accelerated depreciation of any capital
assets or special rate plans applicable to particular classes of
customers. However, in 1996 ACE entered into BPU approved Off-
Tariff Rate Agreements (OTRA's) with at-risk customers which
provide for special rates for customers who may choose to leave
ACE's energy system because they have alternative energy sources
available. To date, the aggregate amount of such reduced rate
agreements was $2.2 million, net of tax.
ACE has significant long term contract commitments to purchase
capacity and energy from nonutility sources at above-market
costs. Recovery of amounts associated with these contracts is
through ACE's LEC, for which rates are subject to approval by the
BPU annually.
In connection with the BPU's Plan, ACE is uncertain as to the
level of stranded costs that may arise or the degree to which
these costs will be recovered. If the final restructuring plan
requires ACE to recognize amounts as unrecoverable, ACE may be
required to write down asset values, and such writedowns could be
material.
Other
The Energy Policy Act of 1992 permits the Federal government to
assess investor-owned electric utilities that have ownership
interests in nuclear generating facilities. The assessment funds
the decontamination and decommissioning of Federally operated
nuclear enrichment facilities. Based on its ownership in five
nuclear generating units, ACE has a liability of $5.3 million and
$6.0 million at December 31, 1996 and 1995, respectively, for its
obligation to be paid over the next 12 years. ACE has an
associated regulatory asset of $5.7 million and $6.4 million at
December 31, 1996 and 1995, respectively. Amounts are currently
being recovered in rates for this liability and the regulatory
asset is concurrently being amortized to expense based on the
annual assessment billed by the Federal government.
In March 1996, the New Jersey Department of Treasury and the BPU
jointly proposed to replace the energy excise tax currently
imposed on electric and gas utilities. Under the proposal,
utilities would pay a state corporate business tax, a state sales
tax of six percent collected on all retail sales of energy
services and a state transitional energy facilities assessment
tax (TEFA) for a limited number of years. A gradual phase-out of
the TEFA is proposed. At the completion of the TEFA phase-out,
the total energy tax burden would be reduced by approximately
45%.
Note 11. REGULATORY ASSETS AND LIABILITIES - ACE
Costs incurred by ACE that have been permitted, or are expected to be
permitted, by the BPU to be deferred for recovery in rates in more than
one year, or for which future recovery is probable, are recorded as
regulatory assets. Regulatory assets are amortized to expense over the
period of recovery. Total regulatory assets at December 31 are as
follows:
Remaining
Recovery
(000) 1996 1995 Period*
Recoverable Future Federal
Income Taxes $85,858 $85,858 (A)
Unrecovered Purchased Power Costs:
Capacity Cost 64,658 80,598 4 years
Contract Renegotiation Costs 18,742 19,219 18 years
Unrecovered State Excise Taxes 54,714 64,274 6 years
Unamortized Debt Costs-Refundings 29,878 33,110 1-30 years
Deferred Energy Costs(See Note 1) 33,529 31,434 (B)
Other Regulatory Assets:
Postretirement Benefits Other
Than Pensions (See Notes 3&4) 32,609 26,227 (A)
Asbestos Removal Costs 9,086 9,356 33 years
Decommissioning/Decontaminating
Federally-owned Nuclear Units
(See Note 10) 5,726 6,404 12 years
Other 12,154 12,581
$346,954 $369,061
*From December 31, 1996
(A) Pending future recovery
(B) Recovered over annual LEC period
Recoverable Future Federal Income Taxes is the amount of revenue
expected to be collected from ratepayers for deferred tax costs to be
paid in future years. Unrecovered Purchased Power Capacity Costs
represent deferrals of prior capacity costs then in excess of
levelized revenues associated with a certain long term capacity
arrangement. Levelized revenues have since been greater than costs,
permitting the deferred costs to be amortized to expense. Contract
Renegotiation Costs were incurred through renegotiation of a long
term capacity and energy contract with a certain independent power
producer. Unrecovered State Excise Taxes represent additional
amounts paid as a result of prior legislative changes in the
computation of state excise taxes. Unamortized Debt Costs
associated with debt reacquired by refundings are amortized over
the life of the related new debt. Asbestos Removal Costs were
incurred to remove asbestos insulation from a wholly-owned generating
station. Included in Other are certain amounts being recovered over a
period of one to five years. At December 31, 1996, ACE had a $13
million liability recorded as a result of the credits to customers
from the October 22, 1996 Stipulation Agreements (See Note 3). The
credits have been made during January and February 1997 and were based
on customer usage from January through October 1996. No regulatory
liabilities existed at December 31, 1995.
NOTE 12. LEASES
ACE leases from others various types of property and equipment for use
in its operations. Certain of these lease agreements are capital
leases consisting of the following at December 31:
(000) 1996 1995
Production plant $ 6,642 $ 9,097
Less accumulated amortization 5,005 6,810
Net 1,637 2,287
Nuclear fuel 38,277 38,591
Leased property-net $39,914 $40,878
ACE has a contractual obligation to obtain nuclear fuel for the Salem,
Hope Creek and Peach Bottom stations. The asset and related
obligation for the leased fuel are reduced as the fuel is burned and
are increased as additional fuel purchases are made. No commitments
for future payments beyond satisfaction of the outstanding obligation
exist. Operating expenses for 1996, 1995 and 1994 include leased
nuclear fuel costs of $8.7 million, $11.2 million and $14.1 million,
respectively, and rentals and lease payments for all other capital and
operating leases of $2.6 million, $3.9 million and $5.3 million,
respectively. Future minimum rental payments for all noncancellable
lease agreements are less than $2.4 million per year for each of the
next 5 years.
ATE is the lessor in five leveraged lease transactions consisting of
three aircraft and two containerships with total respective costs of
approximately $168 million and $76 million. Remaining lease terms for
all leases approximate 14 to 15 years. The Company's equity
participation in the leases range from 22% to 32%. Funding of the
investment in the leveraged lease transactions is comprised of equity
participation by ATE and financing provided by third parties as long
term debt without recourse to ATE. The lease transactions provide
collateral for such third parties, including a security interest in
the leased equipment. Net investment in leveraged leases at December
31 was as follows:
(000) 1996 1995
Rentals receivable (net of principal
and interest on nonrecourse debt) $ 50,898 $ 50,955
Estimated residual values 53,435 53,435
Unearned and deferred income (24,646) (25,431)
Investment in leveraged leases 79,687 78,959
Deferred taxes arising from leveraged
leases (76,671) (71,064)
Net investment in leveraged leases $ 3,016 $ 7,895
Note 13. Financial Instruments
A number of items within Current Assets and Current Liabilities on the
Consolidated Balance Sheet are considered to be financial instruments
because they are cash or are to be settled in cash. Due to their
short-term nature, the carrying values of these items approximate
their fair market values. Accounts Receivable - Utility Service and
Unbilled Revenues are subject to concentration of credit risk because
they pertain to utility service conducted within a fixed geographic
region. Investments in Leveraged Leases are subject to concentration
of credit risk because they are exclusive to a small number of parties
within two industries. The Company has recourse to the affected
assets under lease. These leased assets are of general use within
their respective industries.
ACE's long term debt and preferred securities and ATE's long term debt
securities are not widely held and generally trade infrequently. The
estimated aggregate fair market value of debt securities has been
determined based on quoted market prices for the same or similar debt
issues or on securities of companies with similar credit quality,
coupon rates and maturities. The aggregate fair market value of
preferred securities has been determined using market information
available from actual trades or of trades of similar instruments of
companies with similar credit quality. At December 31 the amounts are
as follows:
Market Value
Long Term Debt and Preferred Securities
(in millions)
1996 1995
Carrying Market Carrying Market
Value Value Value Value
ACE Long Term Debt $802.4 $828.8 $814.6 $851.0
ACE Preferred Stock 74.0 77.1 177.0 172.0
CQIPS 70.0 69.3 - -
ATE Long Term Debt 33.5 34.0 33.5 34.5
ATS Long Term Debt 54.5 54.5 12.5 12.5
AEI Long Term Debt 37.6 37.6 34.5 34.5
NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial data, reflecting all adjustments necessary in the
opinion of management for a fair presentation of such amounts, are as
follows:
Dividends
Operating Operating Net Earnings Paid
Quarter Revenues Income Income Per Share Per Share
1996 (000) (000) (000)
1st $245,325 $ 32,980 $15,535 $ .29 $.385
2nd 225,678 27,685 10,250 .20 .385
3rd 281,965 51,344 32,567 .62 .385
4th 227,287 20,418 415 .01 .385
Annual $980,255 $132,428 $58,767 $1.12 $1.54
1995
1st $218,626 $ 27,584 $ 11,469 $ .21 .385
2nd 206,232 27,771 10,568 .20 .385
3rd 302,685 66,482 48,745 .93 .385
4th 225,594 26,700 10,986 .21 .385
Annual $953,137 $148,537 $81,768 $1.55 $1.54
Third quarter results generally exceed those of other quarters due to
increased sales and higher residential rates for ACE.
Individual quarters may not add to the total due to rounding.
The fourth quarter 1996 Net Income reflects an increase in ACE's
electric sales offset in part by the increase in energy expense due to
increased sales, recovery of previously deferred energy costs and an
increase in operations and maintenance expense related to Salem.
During the fourth quarter of 1996 nonutility operations recorded a
$1.6 million, net of tax loss contingency for the sale of the
Binghamton Cogeneration Facility by AGI, $0.8 million, net of tax
write-down of the carrying value of ASP's commercial building and $1.1
million, net of tax loss for AEE's investment in Enerval, LLC.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information for this item concerning Directors of the
Company is set forth in the section entitled "Nominees for
Election" on page 3 of the Company's Notice of 1997 Annual
Meeting of Shareholders and definitive Proxy Statement, which is
incorporated by reference. The information required by Item 10
of Form 10-K with respect to the executive officers of the
Company and the directors of ACE is, pursuant to Instruction 3
to Item 401(b) of Regulation S-K, set forth in Part I of this
Form 10-K under the heading "Executive Officers".
ITEM 11 EXECUTIVE COMPENSATION
Information for this item with respect to the amounts paid
to the five most highly compensated executive officers of the
Company and ACE, is set forth in the section entitled "Table 1-
Summary Compensation Table" on page 14 of the Company's Notice
of 1997 Annual Meeting of Shareholders and definitive Proxy
Statement, which is incorporated herein by reference. The cash
compensation paid to 11 executive officers of ACE, as a group,
in 1996 was $2,399,052.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item as to compliance with
Section 16(a) of the Exchange Act is contained in the section
captioned "Stock Ownership of Directors and Officers" on page 6
of the Company's Notice of 1997 Annual Meeting of Shareholders
and definitive Proxy Statement, which is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Marilyn T. Powell, Vice President of the
Company and Senior Vice President-Marketing and Distribution of
ACE was provided a bridge loan for the purpose of establishing a
local residence within commuting distance of the Company's
principal offices. This bridge loan had been offered as an
inducement to the employment of Marilyn T. Powell in order to
relocate from the State of Connecticut. Pursuant to an
agreement, an interest-free loan in the amount of $185,000 was
made, to be repaid six months from the date of the agreement or
upon sale of Ms. Powell's primary residence. The loan was
repaid in full on May 23, 1996.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Exhibits: See Exhibit Index attached.
The following financial information, financial statements and
notes to financial statements for the Company and ACE are filed
herein:
Management's Discussion and Analysis of Financial Condition and
Results of Operations; Consolidated Statement of Income for the
three years ended December 31, 1996; Consolidated Statement of
Cash Flows for the three years ended December 31, 1996;
Consolidated Balance Sheet - December 31, 1996 and December 31,
1995; Consolidated Statement of Changes in Common Shareholder's
Equity; Notes to Consolidated Financial Statements;
Independent Auditors' Report.
Reports on Form 8-K:
Current Reports on Form 8-K were filed, dated February 23,
1996, May 29, 1996, June 26, 1996, July 25, 1996, August 13,
1996, October 23, 1996, January 6, 1997, January 27, 1997 and
January 31, 1997 relating to the shutdown, and subsequent
events, of Salem Units 1 and 2, the announcement of the merger
agreement between the Company and Delmarva Power & Light
Company, the settlement agreement between ACE and PS and the
BPU's Draft Phase II of the New Jersey Energy Master Plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, who also signed in the capacity
indicated.
ATLANTIC ENERGY, INC.
ATLANTIC CITY ELECTRIC COMPANY
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities and on the date indicated.
Date: March 14, 1997 By: /s/ J. L. Jacobs
J. L. Jacobs
Title: Chairman, Chief Executive Officer
and Director of Atlantic Energy, Inc. and Chairman,
Chief Executive Officer and Director of
Atlantic City Electric Company
Date: March 14, 1997 By: /s/ M. J. Barron
M. J. Barron
Title: Vice President and Chief Financial Officer of Atlantic
Energy, Inc. and Senior Vice President and Chief
Financial Officer of Atlantic City Electric Company
DIRECTORS OF ATLANTIC ENERGY, INC.:
Gerald A. Hale* Richard B. McGlynn*
Matthew Holden, Jr.* Bernard J. Morgan*
Cyrus H. Holley* Harold J. Raveche*
Kathleen MacDonnell*
A MAJORITY OF DIRECTORS OF ATLANTIC CITY ELECTRIC COMPANY:
Michael J. Chesser* James E. Franklin II*
Meredith I. Harlacher, Jr.* Henry K. Levari, Jr.*
M. T. Powell *
Date: March 14, 1997 *By: /s/ M. J. Barron
M. J. Barron
Attorney-in-Fact
EXHIBIT INDEX
3a Restated Certificate of Incorporation of Atlantic Energy,
Inc. (File No. 1-9760, Form 10-Q for quarter ended September 30,
1987-Exhibit 4(a)); Certificate of Amendment to restated
Certificate of Incorporation of Atlantic Energy, Inc. dated
April 15, 1992. File No. 33-53511, Form S-8 dated May 6,
1994-Exhibit No. 3(ii).
3b By-Laws of Atlantic Energy, Inc. as amended July 13, 1995
(File No. 1-9760, Form 10-Q for the quarter ended June 30, 1995
- - Exhibit 3b(1).
3c Agreement of Merger between Atlantic City Electric Company
and South Jersey Power & Light Company filed June 30, 1949, and
Amendments through May 3, 1991 (File No. 2-71312-Exhibit No.
3(a); File No. 1-3559, Form 10-Q for quarter ended June 30,
1982- Exhibit No. 3(b); Form 10-Q for quarter ended March 31,
1985- Exhibit No. 3(a); Form 10-Q for quarter ended March 31,
1987- Exhibit No. 3(a): Form 8-K dated October 12, 1988-Exhibit
No. 3(a); Form 10-K for fiscal year ended December 31,
1990-Exhibit No. 3c; and Form 10-Q for quarter ended September
30, 1991- Exhibit No. 3c).
3d By-Laws of Atlantic City Electric Company, as amended April
24, 1989 (File No. 1-3559, Form 10-Q for the quarter ended
September 31, 1989-Exhibit No. 3).
4b Mortgage and Deed of Trust, dated January 15, 1937, between
Atlantic City Electric Company and The Bank of New York
(formerly Irving Trust Company) and Supplemental Indentures
through November 1, 1994 (File No. 2-66280-Exhibit No. 2(b);
File No. 1- 3559, Form 10-K for year ended December 31,
1980-Exhibit No. 4(d); Form 10-Q for quarter ended June 30,
1981-Exhibit No. 4(a); Form 10-K for year ended December 31,
1983-Exhibit No. 4(d); Form 10-Q for quarter ended March 31,
1984-Exhibit No. 4(a); Form 10-Q for quarter ended June 30,
1984-Exhibit 4(a); Form 10-Q for quarter ended September 30,
1985-Exhibit 4; Form 10-Q for quarter ended March 31,
1986-Exhibit No. 4; Form 10-K for year ended December 31,
1987-Exhibit No. 4(d); Form 10-Q for quarter ended September 30,
1989-Exhibit No. 4(a); Form 10-K for year ended December 31,
1990-Exhibit No. 4(c); File No. 33-49279-Exhibit No. 4(b); File
No. 1-3559, Form 10-Q for the quarter ended September 30, 1993 -
Exhibits 4(a) & 4(b); Form 10-K for the year ended December 31,
1993 - Exhibit 4c(i); File no. 1-3559, Form 10-Q for the quarter
ended June 30, 1994 - Exhibit 4(a); File No. 1-3559, Form 10-Q
for the quarter ended September 30, 1994 - Exhibit 4(a); Form
10-K for year ended December 31, 1994-Exhibit 4(c)(1).
4e Agreement dated as of February 1, 1966, between Atlantic
City Electric Company and Fidelity Union Trust Company and
Supplement dated as of May 1, 1968. (File No. 1-3559, Form 8-K
dated March 7, 1966-Exhibit 13(b)(2); Form 8-K dated June 6,
1968- Exhibit No. 13(b)(1)).
4f(1) Revolving Credit and Term Loan Agreement dated as of May
24, 1988 by and between ATE Investment, Inc. and The Bank of New
York (File No.1-9760, Form 10-K for year ended December 31,
1988- Exhibit No. 4g(1)).
4f(2) Support Agreement dated as of May 24, 1988 between
Atlantic Energy, Inc. and ATE Investment, Inc. (File No. 1-9760,
Form 10-K for year ended December 31, 1988-Exhibit No. 4g(2)).
4f(3) Letter Agreement dated as of May 24, 1988 between
Atlantic Energy, Inc. and The Bank of New York (File No. 1-9760,
Form 10-K for year ended December 31, 1988-Exhibit No. 4g(3)).
4f(4) Amendment No. 1 dated as of February 22, 1989 to
Revolving Credit and Term Loan Agreement dated as of May 24,
1988 by and between ATE Investment, Inc. and The Bank of New
York (File No. 1-9760, Form 10-K for the fiscal year ended
December 31, 1988).
4f(5) Amendment No. 2 dated as of June 1, 1991, to Revolving
Credit and Term Loan Agreement dated as of May 24, 1988 by and
between ATE Investment, Inc. and The Bank of New York (File No.
1-9760, Form 10-K for year ended December 31, 1991-Exhibit No.
4f(5)).
4f(6) Revolving Credit Agreements dated as of September 28, 1995
by and among Atlantic Energy, Inc., The Bank of New York, as
agent, and Lender party thereto (File No. 1-9760, Form 10-K for
year ended December 31, 1995-Exhibit 4f(6)).
4f(7) Amended and Restated Trust Agreement, dated as of October
1, 1996, by and among Atlantic City Electric Company, as
Depositor, The Bank of New York, as Property Trustee, The Bank
of New York (Delaware) as Delaware Trustee and the
Administrative Trustees Named Therein, filed herewith.
4f(8) Junior Subordinated Indenture, dated as of October 1,
1996, by and between Atlantic City Electric Company and The Bank
of New York, as Trustee, filed herewith.
4f(9) Guarantee Agreement, dated as of October 1, 1996, by and
between Atlantic City Electric Company as Guarantor, and The
Bank of New York as Guarantee Trustee, filed herewith.
10a(1) Atlantic Energy, Inc. Directors Deferred Compensation
Plan revised as of February 4, 1988 (File No. 1-9760, Form 10-K
for year ended December 31, 1988-Exhibit No. 10a(1)). Amendment
to the Deferred Compensation Plan for Directors effective
December 10, 1992 (File No. 1-9760, Form 10-K for year ended
December 31, 1992-Exhibit No. 10a(2)).
10a(2) Deferred Compensation Plan for Employees of Atlantic
Energy, Inc. and Participating Subsidiaries (File No. 1-9760,
Form 10-K for year ended December 31, 1988-Exhibit No. 10a(2)).
Amendment to Deferred Compensation Plan for Employees of
Atlantic Energy, Inc. and Participating Subsidiaries effective
December 10, 1992 (File No. 1-9760, Form 10-K for year ended
December 31, 1992-Exhibit No. 10a(4)).
10a(3) Supplemental Executive Retirement Plan for Officers of
Atlantic City Electric Company, as amended effective March 1,
1990 (File No. 1-9760, Form 10-K for year ended December 31,
1989-Exhibit No. 10a(4)).
10a(4) Supplemental Executive Retirement Plan - II for Officers
of Atlantic City Electric effective September 8, 1995 (File No.
1-9760, Form 10-K for year ended December 31, 1995- Exhibit No.
10a(5)1).
10a(5) Description of amendment to Supplemental Executive
Retirement Plan effective December 10, 1992 (File No. 2-9760,
Form 10-K for year ended December 31, 1992-Exhibit 10a(3)).
Supplemental Executive Retirement Plan for Officers of
Atlantic City Electric Company, amendment No. 1995-1 (File No.
1-9760, Form 10-K for year ended December 31, 1995-Exhibit
10a(6)1).
10a(6) Copy of Atlantic Electric Excess Benefit Retirement
Income Program, as amended, effective as of August 2, 1990 (File
No. 1-3559, Form 10-K for year ended December 31, 1991-Exhibit
No. 10a(6)). Amendment to the Excess Benefit Retirement Income
Program effective December 10, 1992 (File No. 1-9760, Form 10-K
for year ended December 31, 1992-Exhibit 10a(6)). Atlantic City
Electric Company Excess Benefit Retirement Income Program,
Amendment No. 1995-1 (File No. 1-9760, Form 10-K for year ended
December 31, 1995-Exhibit 10a(10)1).
10a(7) Atlantic Energy, Inc. Retirement Plan for Directors, as
amended effective November 13, 1991 (File No. 1-9760, Form 10-K
for year ended December 31, 1991-Exhibit No. 10a(9)). Atlantic
Energy, Inc. Retirement Plan for Directors, Amendment No. 1995-1
(File No. 1-9760, Form 10-K for year ended December 31,
1995-Exhibit 10a(14)1).
10a(8) Copy of Atlantic Energy, Inc. Restricted Stock Plan for
Non-employee Directors, effective January 1, 1991 (File No. 1-
9760, Form 10-K for year ended December 31, 1991-Exhibit No.
10a(10)).
10a(9) Agreement dated August 10, 1995 between Atlantic
Energy, Inc. and Jerrold L. Jacobs, as supplemented (File No.
1-9760, Form 10-K for year ended December 31, 1995-Exhibit
10a(16)1).
10a(10) Agreement dated August 10, 1995 between Atlantic
Energy, Inc. and Meredith I. Harlacher, Jr. as supplemented
(File No. 1-9760, Form 10-K for year ended December 31, 1995 -
Exhibit 10a(17)1).
10a(11) Agreement dated August 10, 1995 between Atlantic
Energy, Inc. and Michael J. Chesser, as amended (File No.
1-9760, Form 10-K for year ended December 31, 1995- Exhibit
10a(20)1).
10a(12) Atlantic Energy, Inc. Equity Incentive Plan (File No.
33-53511, Form S-8 filed May 6, 1994-Exhibit 10.)
10a(13) Employment Agreement dated September 15, 1995 between
Atlantic Energy, Inc. and Michael J. Barron, as supplemented,
filed herewith.
10a(14) Employment Agreement dated August 10, 1995 between
Atlantic Energy, Inc. and James E. Franklin II, as supplemented,
filed herewith.
Agreements in substantially the same form have been entered into
with the following other executive officers of the Company:
Scott Ungerer, Ernest L. Jolly, H. K. Levari, Jr., Louis M.
Walters and Frank E. DiCola.
10b(1) Agreement as to ownership as tenants in common of the
Salem Nuclear Generating Station Units 1, 2, and 3, dated
November 24, 1971, and of Supplements, dated as of September 1,
1975, and as of January 26, 1977 (File No. 2-43137-Exhibit No.
5(p); File No. 2-60966-Exhibit No. 5(m); and File No. 2-58430-
Exhibit No. 5(o)).
10b(2) Agreement as to ownership as tenants in common of the
Peach Bottom Atomic Power Station Units 2 and 3, dated November
24, 1971 and of Supplements dated as of September 1, 1975 and as
of January 26, 1977 (File No. 2-43137-Exhibit No. 5(o); File No.
2-60966-Exhibit No. 5(j); File No. 2-58430-Exhibit No. 5(m)).
10b(3) Owners Agreement, dated April 28, 1977 between Atlantic
City Electric Company and Public Service Electric & Gas Company
for the Hope Creek Generating Station Units No. 1 and 2 (File
No. 2-60966-Exhibit No. 5(v)).
10b(3-1) Amendment to Owners Agreement for Hope Creek
Generating Station, dated as of December 23, 1981, between
Atlantic City Electric Company and Public Service Electric & Gas
Company (File No. 1-3559, Form 10-K for year ended December 31,
1983-Exhibit No. 10b(3-2)).
10b(4) Pennsylvania-New Jersey-Maryland Interconnection
Agreement, dated September 26, 1956 between Public Service
Electric & Gas Company, Philadelphia Electric Company,
Pennsylvania Power & Light Company, Baltimore Gas & Electric
Company, Jersey Central Power & Light Company, Metropolitan
Edison Company, Pennsylvania Electric Company, Potomac Electric
Power Company and supplemental agreements through June 15, 1977
(File No. 1-3559, Form 10-K for year ended December 31, 1981-
Exhibit No. 10(p)).
10b(5) Pennsylvania-New Jersey-Maryland Interconnection
Supplemental Agreement, dated March 26, 1981, between Public
Service Electric & Gas Company, Philadelphia Electric Company,
Pennsylvania Power & Light Company, Baltimore Gas & Electric
Company, Jersey Central Power & Light Company, Metropolitan
Edison Company, Pennsylvania Electric Company, Potomac Electric
Power Company, Atlantic City Electric Company and Delmarva Power
& Light Company (File No. 1-3559, Form 10-Q for quarter ended
March 31, 1981-Exhibit No. 20b).
12 Computation of Ratios of Earnings to Fixed Charges, filed
herewith.
21 Subsidiaries of the Registrants, filed herewith.
24 Independent Auditors' Consent, filed herewith.
25a Powers of Attorney for Atlantic Energy, Inc. dated as of
March 13, 1997, filed herewith.
25b Powers of Attorney for Atlantic City Electric Company dated
as of March 10, 1997, filed herewith.
27 Financial Data Schedules for Atlantic Energy, Inc. and
Atlantic City Electric Company for periods ended December 31,
1996.
INDEPENDENT AUDITORS' REPORT
To Atlantic City Electric Company:
We have audited the accompanying consolidated balance sheets of
Atlantic City Electric Company and subsidiary as of December 31,
1996 and 1995 and the related consolidated statements of income,
changes in common shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Atlantic City Electric Company and subsidiary at December 31,
1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 7, 1997
Parsippany, New Jersey
REPORT OF MANAGEMENT-Atlantic City Electric Company
The management of Atlantic City Electric Co. and its subsidiary
(the Company) is responsible for the preparation of the
consolidated financial statements presented in this Annual
Report. The financial statements have been prepared in
conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management made
informed judgments and estimates, as necessary, relating to
events and transactions reported.
Management has established a system of internal accounting and
financial controls and procedures designed to provide reasonable
assurance as to the integrity and reliability of financial
reporting. In any system of financial reporting controls,
inherent limitations exist. Management continually examines the
effectiveness and efficiency of this system, and actions are
taken when opportunities for improvement are identified.
Management believes that, as of December 31, 1996, the system of
internal accounting and financial controls over financial
reporting is effective. Management also recognizes its
responsibility for fostering a strong ethical climate in which
the Company's affairs are conducted according to the highest
standards of corporate conduct. This responsibility is
characterized and reflected in the Company's code of ethics and
business conduct policy.
The consolidated financial statements have been audited by
Deloitte & Touche LLP, Certified Public Accountants. Deloitte &
Touche LLP, provides objective, independent audits as to
management's discharge of its responsibilities insofar as they
relate to the fairness of the financial statements. Their
audits are based on procedures believed by them to provide
reasonable assurance that the financial statements are free of
material misstatement.
The Company's internal auditing function conducts audits and
appraisals of the Company's operations. It evaluates the system
of internal accounting, financial and operational controls and
compliance with established procedures. Both the external
auditors and the internal auditors periodically make
recommendations concerning the Company's internal control
structure to management and the Audit Committee of the Board of
Directors. Management responds to such recommendations as
appropriate in the circumstances. None of the recommendations
made for the year ended December 31, 1996 represented
significant deficiencies in the design or operation of the
Company's internal control structure.
/s/ M. J. Chesser
M. J. Chesser
President and Chief Operating Officer
/s/ M. J. Barron
M. J. Barron
Senior Vice President and Chief Financial Officer
February 7, 1997
Atlantic City Electric Company and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
For the Years Ended December 31,
1996 1995 1994
Operating Revenues-Electric $982,492 $953,779 $913,226
Operating Expenses:
Energy 223,091 191,766 210,891
Purchased Capacity 195,699 190,570 130,929
Operations 156,891 152,277 157,047
Employee Separation Costs - - 26,600
Maintenance 44,462 34,414 37,662
Depreciation and Amortization 80,845 78,461 73,344
State Excise Taxes 104,815 102,811 97,072
Federal Income Taxes 32,272 45,876 33,264
Other Taxes 9,888 8,677 10,757
Total Operating Expenses 847,963 804,852 777,566
Operating Income 134,529 148,927 135,660
Other Income and Expense:
Allowance for Equity Funds Used
During Construction 879 817 3,634
Other-Net 4,908 10,208 9,568
Total Other Income and Expense 5,787 11,025 13,202
Income Before Interest Charges 140,316 159,952 148,862
Interest Charges:
Interest on Long Term Debt 60,029 60,329 57,346
Other Interest Expense 4,818 2,550 1,114
Total Interest Charges 64,847 62,879 58,460
Allowance for Borrowed Funds Used
During Construction (976) (1,679) (2,772)
Net Interest Charges 63,871 61,200 55,688
Less Cumulative Quarterly Income
Preferred Securities Dividend
of Trust 1,428 - -
Net Income $ 75,017 $ 98,752 $ 93,174
Earnings for Common Stock:
Net Income $ 75,017 $ 98,752 $ 93,174
Less Preferred Stock Dividend
Requirements 9,904 14,627 16,716
Income Available for Common Stock $ 65,113 $ 84,125 $ 76,458
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars) For the Years Ended December 31,
1996 1995 1994
Cash Flows Of Operating Activities:
Net Income $ 75,017 $ 98,752 $ 93,174
Unrecovered Purchased Power Costs 16,417 15,721 14,920
Deferred Energy Costs (2,095) (20,435) (3,819)
Cumulative Quarterly Income Preferred
Securities Dividends of Trust 1,428 - -
Depreciation and Amortization 80,845 78,461 73,344
Deferred Income Taxes-Net 1,448 15,694 6,116
Unrecovered State Excise Taxes 9,560 9,560 (40,128)
Changes-Net Working Capital Components:
Accounts Receivable and Unbilled
Revenues 5,795 (22,565) 337
Accounts Payable 2,814 (4,801) 1,813
Inventory (2,523) 4,960 (12,988)
Other 14,125 (8,890) (11,726)
Employee Separation Costs (7,179) (19,112) 26,600
Other-Net 17,020 10,318 3,935
Net Cash Provided by Operating
Activities 212,672 157,663 151,578
Cash Flows Of Investing Activities:
Construction Expenditures (86,805) (100,904) (119,961)
Leased Nuclear Fuel Material (6,833) (10,446) (10,713)
Plant Removal Costs (2,109) (4,525) (8,000)
Other-Net (15,707) 892 799
Net Cash Used by Investing Activities (111,454) (114,983) (137,875)
Cash Flows Of Financing Activities:
Issuance of Cumulative Income
Preferred Securities 70,000 - -
Proceeds from Long Term Debt - 104,404 53,572
Retirement and Maturity of
Long Term Debt (12,266) (57,489) (42,664)
Increase in Short Term Debt 34,405 21,945 8,600
Proceeds from Nuclear Fuel Capital
Lease Obligations 6,833 10,446 10,713
Redemption of Preferred Stock (98,876) (24,500) (24,500)
Dividends Declared on Capital Stock (92,066) (95,866) (100,198)
Dividends on Cumulative Quarterly
Income Preferred Securities of Trust (1,428) - -
Capital Contributions from Parent(net) (567) (223) 22,389
Other-Net (3,313) (869) 1,601
Net Cash Used by Financing Activities (97,278) (42,152) (70,487)
Net Increase (Decrease) in Cash
and Temporary Investments 3,940 528 (56,784)
Cash and Temporary Investments:
beginning of year 3,987 3,459 60,243
end of year $ 7,927 $ 3,987 $ 3,459
Supplemental Schedule of Payments:
Interest $ 65,269 $ 58,274 $ 61,035
Federal income taxes $ 36,937 $ 31,999 $ 32,254
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31,
1996 1995
Assets
Electric Utility Plant:
In Service:
Production $1,212,380 $1,187,169
Transmission 373,358 366,242
Distribution 731,272 691,830
General 191,210 183,935
Total In Service 2,508,220 2,429,176
Less Accumulated Depreciation 871,531 794,479
Utility Plant in Service-Net 1,636,689 1,634,697
Construction Work in Progress 117,188 119,270
Land Held for Future Use 5,604 6,941
Leased Property-Net 39,914 40,878
Electric Utility Plant-Net 1,799,395 1,801,786
Investments and Nonutility Property:
Nuclear Decommissioning Trust Fund 71,120 61,802
Other 9,750 2,077
Total Investments and Nonutility
Property 80,870 63,879
Current Assets:
Cash and Temporary Investments 7,927 3,987
Accounts Receivable:
Utility Service 64,432 66,099
Miscellaneous 21,650 17,379
Allowance for Doubtful Accounts (3,500) (3,300)
Unbilled Revenues 33,315 41,515
Fuel (at average cost) 29,603 25,459
Materials and Supplies (at average cost) 23,815 25,434
Working Funds 15,517 14,420
Deferred Energy Costs 33,529 31,434
Prepaid Excise Tax 7,125 10,753
Other Prepayments 10,089 10,249
Total Current Assets 243,502 243,429
Deferred Debits:
Unrecovered Purchased Power Costs 83,400 99,817
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 54,714 64,274
Unamortized Debt Costs 43,579 38,924
Other Regulatory Assets 59,575 54,568
Other 9,848 6,569
Total Deferred Debits 336,974 350,010
Total Assets $2,460,741 $2,459,104
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31,
1996 1995
Liabilities and Capitalization
Capitalization:
Common Shareholder's Equity:
Common Stock $ 54,963 $ 54,963
Premium on Capital Stock 231,081 231,081
Contributed Capital 259,078 259,645
Capital Stock Expense (1,645) (2,131)
Retained Earnings 234,948 252,484
Total Common Shareholder's Equity 778,425 796,042
Preferred Securities:
Not Subject to Mandatory Redemption 30,000 40,000
Subject to Mandatory Redemption 43,950 114,750
Cumulative Quarterly Income
Preferred Securities of Trust 70,000 -
Long Term Debt 802,245 802,356
Total Capitalization(excluding current
portion) 1,724,620 1,753,148
Current Liabilities:
Preferred Stock Redemption Requirement 10,000 22,250
Capital Lease Obligations-Current 702 650
Long Term Debt-Current 175 12,247
Short Term Debt 64,950 30,545
Accounts Payable 63,644 60,831
Federal Income Taxes Payable-Affiliate 7,398 11,574
Other Taxes Accrued 7,494 3,382
Interest Accrued 19,619 19,961
Dividends Declared 21,701 23,490
Deferred Income Taxes 3,190 2,569
Provision for Rate Refunds 13,000 -
Other 22,980 24,958
Total Current Liabilities 234,853 212,457
Deferred Credits and Other Liabilities:
Deferred Income Taxes 357,580 354,218
Deferred Investment Tax Credits 46,577 49,112
Capital Lease Obligations 39,212 40,227
Other 57,899 49,942
Total Deferred Credits and Other
Liabilities 501,268 493,499
Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization $2,460,741 $2,459,104
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
CONSOLIDATED STATEMENT OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
(Thousands of Dollars)
Premium On Capital
Common Capital Contrib. Stock Retained
Stock Stock Capital Expense Earnings
Balance,
December 31, 1993 $54,963 $231,081 $237,479 $(2,470) $256,961
Net Income 93,174
Capital stock
expense 170 (170)
Capital contrib.
from parent (net) 22,389
Less dividends
declared:
Preferred (16,716)
Common (83,482)
Balance,
December 31, 1994 54,963 231,081 259,868 (2,300) 249,767
Net Income 98,752
Capital stock
expense 169 (169)
Capital contrib.
from parent (net) (223)
Less dividends
declared:
Preferred (14,627)
Common (81,239)
Balance,
December 31, 1995 54,963 231,081 259,645 (2,131) 252,484
Net Income 75,017
Capital Stock expense 486 (486)
Capital Contributions
from parent (net) (567)
Less dividends
declared:
Preferred (9,904)
Common (82,163)
Balance $54,963 $231,081 $259,078 (1,645) $234,948
December 31, 1996
As of December 31, 1996, the Company had 25 million authorized
shares of Common Stock at $3 par value. Shares outstanding at
December 31, 1996, 1995 and 1994 were 18,320,937.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
Except as modified below, Notes 1 through 14, excluding Note 6
and Note 9, to the Consolidated Financial Statements of Atlantic
Energy Inc. (AEI) are incorporated herein by reference insofar as
they relate to Atlantic City Electric Company (ACE) and its
subsidiary:
Note 1. Principles of Consolidation
The consolidated financial statements include the accounts of ACE
and its subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain
prior year amounts have been reclassified to conform to the
current year reporting of these items.
Related Party Transactions - ACE has a contract for a total of
116 megawatts of capacity and related energy from a cogeneration
facility that is 50% owned by a wholly-owned subsidiary of
Atlantic Energy Enterprises, Inc.(AEE). Capacity costs totaled
$27.8 million in 1996, $23.8 million in 1995 and $23.0 million in
1994. ACE sells electricity to subsidiaries of AEE. The
electric sales totaled $2.2 million for 1996, $0.6 million for
1995 and $0.2 million for 1994. ACE also rents office space from
a wholly-owned subsidiary of AEE which amounts are not
significant. The amounts receivable from affiliates were not
significant at December 31, 1996 and 1995.
Note 2. Income Taxes
The components of Federal income tax expense for the years ended
December 31 are as follows:
(000) 1996 1995 1994
Current $ 35,510 $ 32,457 $ 30,013
Deferred 1,448 15,694 6,116
Total Federal Income Tax Expense 36,958 48,151 36,129
Less Amounts in Other Income 4,686 2,275 2,865
Federal Income Taxes in
Operating Expenses $ 32,272 $ 45,876 $ 33,264
A reconciliation of the expected Federal income taxes compared to
the reported Federal income tax expense computed by applying the
statutory rate for the years ended December 31 follows:
1996 1995 1994
Statutory Federal Income Tax Rate 35% 35% 35%
(000)
Income Tax Computed at the
Statutory Rate $39,191 $51,417 $ 45,256
Plant Basis Differences 3,096 1,307 (27)
Amortization of Investment Tax
Credits (2,534) (2,534) (2,534)
Tax Adjustments - - (4,874)
Other-Net (2,795) (2,039) (1,692)
Total Federal Income Tax Expense $36,958 $48,151 $ 36,129
Effective Federal Income Tax Rate 33% 33% 28%
Items comprising deferred tax balances as of December 31 are as
follows:
(000) 1996 1995
Deferred Tax Liabilities:
Plant Basis Differences $326,673 $316,834
Unrecovered Purchased
Power Costs 22,630 28,209
State Excise Taxes 20,141 22,527
Other 29,344 29,519
Total Deferred Tax
Liabilities 398,788 397,089
Deferred Tax Assets:
Deferred Investment
Tax Credits 25,143 26,511
Employee Separation Costs 526 2,621
Other 12,349 11,170
Total Deferred Tax Assets 38,018 40,302
Total Deferred Taxes-Net $360,770 $356,787
Note 14. Quarterly Financial Results (Unaudited).
Quarterly financial data of ACE, reflecting all adjustments
necessary in the opinion of management for all fair presentation
of such amounts, are as follows:
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
Operating Operating Net Earnings for
Quarter Revenues Income Income Common Stock
1996 (000) (000) (000) (000)
1st $245,472 $33,075 $19,316 $16,307
2nd 226,035 28,007 13,464 10,455
3rd 282,577 51,929 35,611 33,154
4th 228,408 21,518 6,627 5,197
Annual $982,492 $134,529 $75,017 $65,113
1995
1st $218,666 $27,565 $15,779 $11,992
2nd 206,246 27,755 15,111 11,324
3rd 303,031 67,026 52,666 48,879
4th 225,836 26,581 15,195 11,930
Annual $953,779 $148,927 $98,752 $84,125
Individual quarters may not add to the total due to rounding.
Third quarter results generally exceed those of other quarters
due to increased sales and higher residential rates for ACE.
The fourth quarter 1996 Net Income reflects an increase in ACE's
electric sales offset in part by the increase in energy expense
due to the increased sales, recovery of previously deferred
energy costs and an increase in operations and maintenance
expense related to Salem.