SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 8-K
Current Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report March 3, 1998
Registrant;
Commission State of Incorporation IRS Employer
File No. Address and Telephone No. Identification No.
1-9760 Atlantic Energy, Inc. 22-2871471
(New Jersey)
6801 Black Horse Pike
Egg Harbor Township, NJ 08234
(609) 645-4500
1-3559 Atlantic City Electric Company 21-0398280
(New Jersey)
6801 Black Horse Pike
Egg Harbor Township, NJ 08234
(609) 645-4100
ITEM 5 Other Events.
This report on Form 8-K includes the financial information listed
below for:
Atlantic Energy, Inc.
Selected Financial Data (1997-1993)
Management's Discussion and Analysis of Financial Condition and
Results of Operations (for the three years ended December 31,
1997, 1996 and 1995)
Report of Management
Report of Audit Committee
Independent Auditors' Report
Consolidated Statements of Income for the three years ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Common Stockholders' Equity
for the three years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Atlantic City Electric Company
Independent Auditors' Report
Consolidated Statements of Income for the three years ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Common Stockholders' Equity
for the three years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
i
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ITEM 5. Other Events
SELECTED FINANCIAL DATA
Selected financial data for the Company and ACE for each of
the last five years is listed below.
Atlantic Energy, Inc.
1997 1996 1995 1994 1993
(Thousands of Dollars)
Operating
Revenue $1,102,360 $ 997,038* $ 958,054* $ 913,039* $ 865,675*
Net Income $ 74,405 $ 58,767 $ 81,768 $ 76,113 $ 95,297
Basic and Diluted
Earnings per Average
Common Share $ 1.42 $ 1.12 $ 1.55 $ 1.41 $ 1.80
Total Assets(Year-end) $2,723,884 $2,670,762 $2,617,888 $2,542,385 $2,487,508
Long Term Debt and
Redeemable Preferred
Securities(Year-end)(b) $1,131,260 $1,051,945 $1,032,103 $ 940,788 $ 952,101
Capital Lease
Obligations
(Year-end)(b) $ 39,730 $ 39,914 $ 40,886 $ 42,030 $ 45,268
Common Dividends
Declared $ 1.54 $ 1.54 $ 1.54 $ 1.54 $ 1.535
Atlantic City Electric Company
1997 1996 1995 1994 1993
(Thousands of Dollars)
Operating
Revenues $1,084,890 $ 989,647* $ 954,783* $ 913,226 $ 865,799
Net Income $ 85,747 $ 75,017 $ 98,752 $ 93,174 $ 109,026
Earnings for Common
Shareholder (a) $ 80,926 $ 65,113 $ 84,125 $ 76,458 $ 91,621
Total Assets (Year-end) $2,436,755 $2,460,741 $2,459,104 $2,418,784 $2,363,584
Long Term Debt and
Redeemable Preferred
Securities(Year-end)(b) $ 937,694 $ 926,370 $ 951,603 $ 924,788 $ 937,101
Capital Lease
Obligations
(Year-end)(b) $ 39,730 $ 39,914 $ 40,877 $ 42,030 $ 45,268
Common Dividends
Declared (a) $ 80,857 $ 82,163 $ 81,239 $ 83,482 $ 81,347
(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.
*Prior year amounts have been reclassified to conform to current year
reporting
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
Atlantic Energy, Inc. (the Company, AEI or parent) merged with
Delmarva Power & Light Company (DP&L) into a new company named
Conectiv, Inc. (Conectiv) effective March 1, 1998. AEI 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. In October 1997, the
Company and DP&L entered into an agreement to form Conectiv
Solutions,LLC., a limited liability corporation to market and
sell offerings of energy, energy related services and other
value-added services to large customers.
Financial Summary
Consolidated operating revenues for 1997, 1996 and 1995 were
$1,102 million, $997 million and $958 million, respectively. The
increase in 1997 revenues over 1996 is mostly due to increases in
Wholesale Market Sales and Other Services revenues. The increase
in 1996 revenues over 1995 reflects an increase in kilowatt hour
sales and in annual Levelized Energy Clause (LEC) revenues.
These increases were offset in part by a $13.0 million revenue
credit recorded as a result of stipulation agreements. Prior
years consolidated operating revenues have been reclassified to
conform to current year presentation. (See Operating Revenues
under Results of Operations).
Consolidated basic and diluted earnings per share for 1997 were
$1.42 on net income of $74.4 million compared to $1.12 on net
income of $58.8 million in 1996 and $1.55 on net income of $81.8
million in 1995. The 1997 earnings primarily reflect reduced
Operations and Maintenance expenses associated with the Salem
outages which were offset by termination of employee benefit plan
costs in anticipation of the merger and losses from nonutility
investments. 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.
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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:
1997 1996 1995
Dividends Paid Per Share $ 1.54 $ 1.54 $ 1.54
Book Value Per Share $14.95 $15.00 $15.42
Annualized Dividend Yield 7.3% 9.0% 8.0%
Return on Average Common Equity 9.5% 7.4% 9.9%
Total Return (Dividends paid
plus change in share price) 32.7% (3.0)% 18.0%
Market to Book Value 142% 114% 125%
Price/Earnings Ratio 15 15 12
Year End Closing Price-NYSE $21.19 $17.13 $19.25
Merger
On August 12, 1996, the Boards of Directors of AEI and DP&L
jointly announced an agreement to merge the companies into a new
company named Conectiv. Conectiv, a newly formed Delaware
corporation, became the parent of AEI's subsidiaries and the
parent of DP&L and its subsidiaries effective March 1, 1998. See
discussion on approvals below.
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 under the purchase method of accounting with DP&L
as the acquirer. 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
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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. Approvals have since been obtained from the
Federal Energy Regulatory Commission (FERC), Delaware and
Maryland Public Service Commissions, the Virginia State Corporate
Commission, the Pennsylvania Public Utilities Commission, the
Board of Public Utilities (BPU), and the Nuclear Regulatory
Commission (NRC). The last and final approval was received from
the Securities and Exchange Commission (SEC) on February 25,
1998. The merger became effective March 1, 1998.
Under the terms of the BPU's approval of the merger,
approximately 75 percent or $15.75 million of ACE's total average
projected annual merger savings will be returned to ACE's
customers for an overall merger-related reduction of 1.7 percent.
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 three trading days
immediately preceding and the three days immediately following
public announcement of the merger, is $921.0 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 $200.5 million, which will be recorded as goodwill
by Conectiv. The actual amount of goodwill recorded will be
based on the Company's net assets as of the merger date and,
accordingly, will vary from this estimate which is based on the
Company's net assets as of December 31, 1997. The goodwill will
be amortized over 40 years.
On June 26, 1997, the Company and DP&L jointly announced an
enhanced retirement offer and separation program that will be
utilized to achieve workforce reductions as a result of the
merger. The Company and DP&L initially anticipated a combined
loss of approximately 400 positions to accomplish the merger-
related rate reductions to customers. This initial level of
reductions will be achieved primarily through the DP&L early
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retirement and the Company's enhanced retirement programs.
Additional reductions are also anticipated to better align
staffing requirements to skill and work process needs. The
combined additional reductions could range between 250 to 350
positions. The total cost to the Company for these programs, as
well as the cost of executive severance, employee relocation and
facilities integration is estimated to range from $38 million to
$43 million. ACE is required to recognize these costs through
expense in accordance with GAAP. The actual cost to the Company
and ACE will depend on a number of factors related to the
employee mix as well as the actual number of employees who will
be eligible for the enhanced retirement or separation programs.
In the fourth quarter of 1997, the Company recorded an expense of
$23.6 million as a result of terminating certain benefit programs
of the Company in anticipation of the merger. Termination of the
plans resulted in charges of $10.0 million for a supplemental
executive retirement plan, $6.3 million due to a pension plan
curtailment, $3.8 million from the Equity Incentive Plan (EIP)
and $3.5 million from other benefit plans and executive contract
terminations. Refer to Note 5. in the Notes to the Consolidated
Financial Statements for discussion of the effects on the defined
benefit pension plan and the EIP.
Electric Utility Industry Restructuring and Stranded Costs
In April 1997, the BPU issued its Final Report containing
findings and recommendations on the electric utility industry
restructuring in New Jersey to the Governor and the State
Legislature for their consideration. The recommendation for
phase-in of retail choice to electric consumers calls for choice
to 10% of all customers beginning October 1, 1998 and to 100% by
July 1, 2000. The Report required each electric utility in the
state to file complete restructuring plans, stranded cost filings
and unbundled rate filings by July 15, 1997. The Report would
allow utilities the opportunity to recover stranded costs on a
case-by-case basis, with no guarantee of 100 percent recovery of
eligible stranded costs.
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ACE filed its response to the BPU on July 15, 1997. ACE's
restructuring plan met the BPU's recommendations for phase-in of
retail electric access based on a first-come, first-served basis,
proposing choice to 10% of all customers beginning October 1,
1998 and to 100% by July 1, 2000. Customers remaining with ACE
will be charged a market-based electricity price beginning
October 1, 1998. The restructuring plan included a two-phased
approach to future rate reductions.
In an October 31, 1997 letter to the BPU, ACE added specificity
to the framework set out in the restructuring plan with regard to
steps ACE anticipates taking to meet the BPU's rate reduction and
restructuring goals. First, specific, definable cost reductions
of approximately 4% after 1998 were outlined. Further, ACE
offered that an appropriate resolution of the merger proceedings
will allow ACE to reduce its rates, due to the merger,
approximately 1.25% upon consummation of the change in control.
In addition, ACE's current estimate showed that, through the use
of securitized debt for the full amount of stranded costs
associated with its own generation assets, a further rate
decrease of up to 2% was possible based on appropriate
legislation and orders of the BPU with respect to securitization.
Finally, ACE estimates that the results of good-faith
negotiations with the nonutility generators could provide a
reduction of up to an additional 1.75%. In summary, ACE outlined
a total rate reduction of 9% by the end of the transition. On
January 28, 1998, the BPU issued its Order establishing the
procedural schedule regarding the restructuring plan. Under that
order, hearings on the restructuring plan are to be completed by
mid-May 1998. It is anticipated that the BPU will issue its
final order during the summer of 1998.
Under the stranded cost filing, ACE specified its total stranded
cost estimated to be approximately $1.3 billion, of which $911
million is attributable to above-market nonutility generation
(NUG) contracts. The remaining amount, approximately $415
million, is related to wholly- and jointly-owned generation
investments. The stranded cost filing supports full recovery of
stranded costs, which ACE believes is necessary to move to a
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competitive environment. On February 5, 1998, the Company filed
rebuttal testimony in the stranded cost filing. As part of the
filing, the Company updated its stranded cost estimates for the
effects of tax law changes in the State of New Jersey and to
modify certain assumptions made in estimating the stranded costs.
The total stranded costs in the rebuttal filing are approximately
$1.2 billion with $812 million attributable to contracts and $397
million related to wholly- and jointly-owned generation
investments. Determination of the stranded cost filing will be
heard by the Office of Administrative Law. The Administrative
Law Judge is expected to render a decision in May 1998. If ACE
is required to recognize amounts as unrecoverable, ACE may be
required to write down asset values, and such writedowns could be
material.
ACE continues to meet the criteria set forth in SFAS 71 and has
presented these financial statements in accordance therewith.
(See Note 1 - Regulation - ACE). The Financial Accounting
Standards Board (FASB), through the Emerging Issue Task Force
(EITF), has recently set forth guidance intended to clarify the
accounting treatment of specific issues associated with the
restructuring of the electric utility industry through EITF Issue
No. 97-4, "Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statements No. 71, Accounting
for the Effects of Certain Types of Regulation, and No. 101
Regulated Enterprises-Accounting for the Discontinuation of
application of FASB Statement No. 71" (EITF No. 97-4)". The
consensus reached in EITF No. 97-4 as to when an enterprise
should stop applying SFAS 71 to a separable portion of its
business whose pricing is being deregulated, is defined as "when
deregulatory legislation or a rate order (whichever is necessary
to effect change in the jurisdiction) is issued that contains
sufficient detail for the enterprise to reasonably determine how
the transition plan will effect the separable portion of its
business" (e.g. generation).
Consensus was also reached "that the regulatory assets and
regulatory liabilities that originated in the separable portion
of an enterprise to which Statement 101 (SFAS 101," Regulated
Enterprises-Accounting for the Discontinuance of Application of
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FASB Statement No. 71") is being applied should be evaluated on
the basis of where (that is, the portion of the business in
which) the regulated cash flows to realize and settle them,
respectively, will be derived." Additionally, the "source of the
cash flow approach adopted in the consensus should be used for
recoveries of all costs and settlements of all obligation (not
just for regulatory assets and regulatory liabilities that are
recorded at the date Statement 101 is applied) for which
regulated cash flows are specifically provided in the
deregulatory legislation or rate order".
At this time ACE cannot predict, with certainty when it will stop
applying SFAS 71 for its generation business. ACE also cannot
predict the impacts for its generation business nor can it
predict the impacts on its financial condition as a result of
applying SFAS 101. The outcome will be dependent upon when a
plan is approved and the level of recovery of stranded costs
allowed by the BPU. If assets require a write-down as a result
of the application of SFAS 101, ACE may need to record an
extraordinary noncash charge to operations that could have a
material impact on the financial position and results of
operations of ACE.
Liquidity and Capital Resources
Atlantic Energy, Inc.
The Company's cash flows are dependent on the cash flows of its
subsidiaries, primarily ACE. Principal cash inflows of the
Company were dividends from ACE and proceeds from the Company's
credit facility. Dividends from ACE were $80.9 million, $82.2
million and $81.2 million for the years 1997, 1996 and 1995,
respectively. Cash inflows from the Company's credit facility
amounted to $15.9 million, $3.1 million and $34.5 million
during the years 1997, 1996 and 1995, respectively.
The Company 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
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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,
1997 and 1996, AEI had $53.5 million and $37.6 million
outstanding, respectively, from this credit facility. This
facility can be used to fund further reacquisitions of Company
Common Stock and other general corporate purposes up until the
effective date of the merger. At that time, a credit facility
under Conectiv will provide financing for general corporate
purposes.
Principal cash outflows of the Company are dividends to
shareholders and disbursements to subsidiaries and affiliated
companies in the form of capital contributions, loans and
advances. Dividends to shareholders amounted to $80.9 million in
1997 and $81.2 million in 1996 and 1995. Net Disbursements to
subsidiaries and affiliated companies amounted to $12.8 million,
$1.2 million and $.5 million for the years ended 1997, 1996 and
1995, respectively.
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 and 1997. The Company's program to reacquire up to three
million shares of the it's common stock outstanding will expire
with the merger.
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.
Atlantic City Electric Company
ACE is a public utility primarily engaged in the generation,
purchase, transmission, distribution and sale of electric energy.
ACE's service territory encompasses approximately 2,700 square
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miles within the southern one-third of New Jersey with the
majority of customers being residential and commercial. Cash
construction expenditures for 1995-1997 amounted to $268.6
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 1998-2000
is $207.6 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, 1997,
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, 1997, ACE had
$77.9 million of unused short-term borrowing capacity. Short-
term debt at December 31, 1997 decreased $9.3 million compared to
December 31, 1996 and was used for general corporate purposes.
This decrease is net of $16.4 million reclassified to noncurrent
long-term debt due to the January 1998 issuance of medium term
notes discussed below.
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.
A summary of the issue and sale of ACE's long term debt and
preferred securities for 1995-1997 is as follows:
(millions) 1997 1996 1995
Medium Term Notes $65 - $105
Pollution Control Bonds 22.6 - -
Cumulative Quarterly Income
Preferred Securities - $70 -
The proceeds from these financings were used to refund higher
cost debt, preferred stock, and for construction purposes. ACE
may issue up to $150 million in long term debt to be used for
construction, refundings and repayment of short term debt up
through 2000. 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,
1997, ACE estimates additional funding capacities of $264.3
million of First Mortgage Bonds, or $489 million of preferred
stock, or $110.8 million of unsecured debt. These amounts are
not necessarily additive.
On July 30, 1997, ACE issued $22.6 million aggregate principal
amount of variable rate, tax-exempt pollution control bonds in
two separate series: $18.2 million Pollution Control Revenue
Refunding Bonds, 1997 Series A due April 15, 2014 (Series A) and
$4.4 million Pollution Control Revenue Refunding Bonds, 1997
Series B due July 15, 2017 (Series B). The Series A and the
Series B bonds paid an initial weekly rate of 3.4% and 3.5%,
respectively. Each subsequent rate is determined by the
remarketing agent. The proceeds from the sale of the Series A
and Series B bonds were applied to the September 2, 1997
redemption of $18.2 million aggregate principal amount of 7 3/8%
Pollution Control Revenue Bonds of 1984, Series A and $4.4
million aggregate principal amount of 8 1/4% Pollution Control
Revenue Bonds of 1987, Series B. Aggregate premiums paid for the
September 2, 1997, redemption were $546,000 and $88,000,
respectively.
During 1997, ACE issued and sold $65 million aggregate principal
amount of unsecured Medium Term Notes. Primarily, the notes were
sold to cover the December 1, 1997, redemption of $20 million
principal amount of 7.5% First Mortgage Bonds due April 1, 2002
and $29.976 million principal amount of 7.75% First Mortgage
Bonds due June 1, 2003. Aggregate premiums paid for the
redemption of these bonds were $240,000 and $440,647,
respectively.
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On January 12, 1998, ACE issued $85 million of Secured Medium
Term Notes, Series D maturing at January 2003 and January 2006.
The Notes paid fixed interest rates of 6.0%, 6.2% and 6.2%. The
net proceeds to be received by the Company from the issuance and
sale of the Medium Term Notes will be applied to the repayment of
outstanding short-term and long-term indebtedness, including the
redemption of certain series of First Mortgage Bonds, Preferred
Stock and unsecured short-term debt due in 1998.
Listed below is a schedule of redemptions of Preferred Stock and
long term debt redeemed, acquired and retired or matured for the
period 1995-1997.
Preferred Stock:
Shares
1997 1996 1995 Redemption
Price
(Series)
$8.20 200,000 200,000 $100.00
$8.53 120,000 101.00
7.52% 100,000 101.88
$8.25 50,000 104.45
$7.80 460,500 111.00
$8.53 240,000 100.00
$8.25 5,000 100.00
Aggregate Amount
(000) $20,000 $98,876* $24,500
*includes commissions and premiums
Long Term Debt:
Date Series Principal Redemption
Amount Price %
(000)
September 1997 7-3/8% due $18,200 103.00
September 1997 8-1/4% due 4,400 102.00
December 1997 7-1/2% due 2002 20,000 101.20
December 1997 7-3/4% due 2003 29,976 101.47
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
On May 1, 1997, ACE satisfied the sinking fund requirements of
$100,000 for its 7-1/4% Debentures and on December 1, 1997
satisfied the sinking fund requirement of $75,000 of its 6 3/8%
Pollution Control Series due December 1, 2006. Scheduled
maturities and sinking fund requirements for long term debt and
preferred stock aggregate $199.3 million for 1998-2002.
On April 1, 1997 ACE and other New Jersey utilities were required
to pay excise taxes to the State of New Jersey. ACE paid $91.1
million funded through the issuance of short term debt with
repayment of such debt occurring during the second and third
quarters.
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, (Enerval) a company which provides energy
management services, including natural gas supply, transportation
and marketing.
As a service to Enerval, the other 50% owner enters into futures
contracts on Enerval's behalf. As of December 31, 1997, this
owner entered into natural gas futures contracts on behalf of
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Enerval for 9.3 million DTH at a price range of $1.90 to $3.20,
through March 2000 in the notional amount of $21.2 million. The
original contract terms range from one month to two years.
Enerval's futures contracts hedge $21.7 million in anticipated
natural gas sales. The counterparties to the futures contracts
are the New York Mercantile Exchange and major over the counter
market traders. The Company believes the risk of nonperformance
by these counterparties is not significant. If the contracts had
been terminated at December 31, 1997, $0.6 million would have
been payable by Enerval for the natural gas price fluctuations.
AEE obtains funds for its investments and operating needs through
advances from AEI and notes payable to ATE. Funds for AEE
capital investments will be provided through issuance of ATE long
term debt and equity investments by AEI up to the effective
merger date.
Atlantic Generation, Inc.
AGI is 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. At
December 31, 1997, total investments in these partnerships
amounted to $18.7 million.
Atlantic Southern Properties, Inc.
ASP owns and manages two commercial office buildings and a
warehouse facility located in Atlantic County, New Jersey with a
net book value of $9.2 million at December 31, 1997. In 1996 a
write-down of the carrying value of a facility of $0.8 million,
net of tax was recorded to reflect 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.
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ATE Investment, Inc.
ATE provides financing to affiliates and manages a portfolio of
investments in leveraged leases. ATE has invested $80.4 million
in leveraged leases of three commercial aircraft and two
containerships. ATE along with an unaffiliated company joined
together to create an equity limited partnership, EnerTech
Capital Partners, L.P., (Enertech). Enertech invests in and
support a variety of energy related technology growth companies.
At December 31, 1997 ATE had invested $10.2 million in this
partnership. Enertech accounts for its investment under the
investment method of accounting. 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, 1997, $5.0 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 $10.3 million at December 31,
1997. ATE has established credit arrangements with AEE, of which
$8.3 million was a receivable, including interest, at December
31, 1997.
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
$84.8 million as of December 31, 1997. Construction for the
Midtown Energy Center is complete and has been in a testing phase
since October 1997. Commercial operation began January 1, 1998.
ATS has obtained funds for its project development through a
revolving credit agreement and term loan. ATS's $100 million
credit facility was amended and restated to $143 million in
October 1997. Up to $50 million of the available credit
commitment can be used to establish letters
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of credit. As of December 31, 1997, $89.1 million was
outstanding under this facility. Additional funding for the
project came from $12.5 million from the proceeds of special,
limited obligation bonds issued by the New Jersey Economic
Development Authority (NJEDA). Proceeds from the sale were
placed in escrow. The proceeds may be released to the ATS
partnership and used to pay certain "qualified costs" subject to
satisfaction of certain conditions. In November 1997, ATS
satisfied the escrow release conditions and remarketed, through
underwriters, $12.5 million principal amount, Series 1995 Thermal
Energy Facilities Revenue Bonds due December 1, 2009 at variable
rates of interest. Since issuance, the interest rates to the ATS
partnership have ranged from 2.5% to 4.1%. In addition, the
NJEDA issued an additional $18.5 million in limited obligation
bonds which were sold, through underwriters, as Series 1997
Thermal Energy Facilities Revenue Bonds due December 1, 2031 at
variable rates which have ranged from 2.5% to 4.1%. ATS applied
$20.0 million of bond proceeds to reimburse it for certain
qualifying costs incurred during construction of the Midtown
Energy Center in Atlantic City, New Jersey. Proceeds of $11.0
million remained in escrow at December 31, 1997 pending
verification of compliance with NJEDA qualifications.
ATS has agreements with six casinos in Atlantic City, New Jersey
to operate their heating and cooling systems. As part of these
agreements, ATS has paid $27.5 million in license fees for the
right to operate and service such systems for a period of 20
years. ATS recorded $1.2 million in expense for these license
fees which are recorded on the Consolidated Balance Sheet as
License Fees and are being amortized to expense over the life of
the contracts.
RESULTS OF OPERATIONS
Operating results of AEI as a consolidated group are dependent
upon the performance of its subsidiaries, primarily ACE.
PAGE
Operating Revenues
Operating revenues increased 10.6% and 4.1% in 1997 and 1996,
respectively. Electric revenues increased 8.1% and 3.0% in 1997
and 1996, respectively. Components of the overall operating
revenue changes are shown as follows:
1997 1996
(millions)
Base Revenues $ 1.0 $ (8.9)
Refund Credits - (13.0)
Levelized Energy Clause 15.3 29.3
Kilowatt-hour Sales (4.1) 32.2
Unbilled Revenues 11.8 (17.6)
Wholesale Market Sales 70.2 1.9
Sales for Resale (16.9) 6.0
Other Services 25.4 10.0
Other 2.6 (.9)
Total $105.3 $ 39.0
The increase in Base Revenues for the current year reflects the
$13.0 million refund to customers recorded in 1996 as the result
of a stipulation agreement which was offset by 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 $10.5 million and $3.5 million for the years ended
December 31, 1997 and 1996, respectively. 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 1997 due to a rate increase of $27.6
million in July 1996. 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 2.4%
PAGE
and 0.9% in revenues per kilowatt-hour in 1997 and 1996,
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.
Wholesale Market Sales represent bulk power sales, which are not
subject to price regulation. ACE began making such sales in July
1996. Wholesale Market Sales and the related expenses were
previously included in Other-Net, within Other Income on the
Consolidated Statement of Income. (See Note 1 -
Reclassification). The increase in 1997 sales represent an
increase in bulk power sales due to a full year's operation as
well as a result of ACE's strategy and development of a business
opportunity.
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 decrease in the 1997 Sales for
Resale is primarily due to a change in ACE's energy mix strategy,
using Wholesale Market Sales to service previous Sales for Resale
customers.
Other Services Revenues represent non-regulated energy services
of ACE and revenues of AEE which were previously included in
Other-Net, within Other Income on the Consolidated Statement of
Income. Other Services Revenues increased significantly
primarily reflecting ATS's casino heating and cooling service
contracts and the growth of ACE's energy services programs.
PAGE
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:
1997 1996
Avg Avg# Avg Avg #
Customer Class Sales Use of Cust Sales Use of Cust
Residential (3.7)% (4.6)% 1.0% 3.2% 2.4 % 0.8%
Commercial 1.3 (0.5) 1.8 3.0 2.0 1.0
Industrial 3.2 2.6 0.6 7.1 5.5 1.5
Total (0.6) (1.7) 1.1 3.6 2.8 0.8
The 1997 decrease in actual billed sales was due to unfavorable
weather in 1997 and a lesser number of billing days in 1997
compared to 1996. The decrease in 1997 Residential sales was a
result of above normal temperatures in the first quarter of 1997
and cooler than normal weather in late August and early September
1997. Casino expansions and construction around Atlantic City,
New Jersey were significant contributors to commercial sales
growth in 1997. The increased 1997 Industrial sales were
primarily due to the impact of two customers that had previously
been supplied by an independent power producer.
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. 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 increase in 1996 Industrial sales was
primarily due to the impact of two customers, which began service
in late 1996, that had previously been supplied by an independent
power producer.
PAGE
Costs and Expenses
Total Operating Expenses for the Company increased 8.9% and 9.1%
in 1997 and 1996, respectively. Operating expenses for ACE
increased 8.5% in both 1997 and 1996. Included in these expenses
are the costs of energy, purchased capacity, operations,
maintenance, depreciation, state excise taxes and taxes other
than income tax.
Operating Expenses
Energy expense reflects costs incurred for energy needed to meet
load requirements, various energy supply sources used, wholesale
market purchases 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,
except for the nonregulated purchases, is recovered from
customers primarily through the operation of the LEC. Generally,
earnings are not affected by recoverable energy costs because
these costs are adjusted to match the associated LEC revenues.
However, ACE had 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. Otherwise, in any period,
the actual amount of LEC revenue recovered from customers may be
greater or less than the actual amount of recoverable 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 $27.4 million and by $33.5 million at December
31, 1997 and 1996, respectively.
Energy expense increased 30.3% in 1997 primarily due to expenses
associated with the first full year of activity in Wholesale
Market Sales. Energy expense increased 17.4% 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. Production related energy costs for 1996
increased 5.3% due to increased sales. As a result of
implementing the SNJEI, after tax net income has been reduced by
$2.7 million for 1996.
Purchased Capacity expense reflects entitlement to generating
capacity owned by others. Purchased Capacity expense increased
2.7% in 1996. The increase reflects additional contract capacity
supplied by nonutility power producers.
Operations expenses decreased 3.4% in 1997 and increased 9.9% in
1996. The decrease in 1997 reflects reductions in operations
expense relating to the Salem outages. The 1996 increase
reflects additional costs associated with Salem Station restart
activities offset in part by a credit for the estimated 1995
Nuclear Performance Penalty.
Maintenance expense decreased 26.2% in 1997. This decrease
reflects reductions in maintenance expenses relating to the Salem
outage. Maintenance expense increased 28.8% in 1996 as a result
of additional cost associated with the Salem Station restart
activities, and increased maintenance initiatives.
Termination of Employee Benefits represents amounts recorded in
December 1997 for the cost to terminate various pension and
compensation plans in anticipation of the merger.
Other-Net within Other Income increased 20.6% in 1997, this was
primarily due to a gain on the sale of property. Other-net
decreased 29.5% in 1996 due to the net after-tax impacts of the
write-down of the carrying value of ASP's commercial property of
$1.2 million, the contingency loss for the sale of Binghamton
Cogeneration facility of $2.5 million. Also included is a loss
of $1.6 million from AEE's investment in Enerval due to a
combination of unhedged gas sales agreements and higher spot
PAGE
market prices for gas.
Interest expense increased 2.2% in 1997 and 4.6% in 1996 due
primarily to increased short-term debt borrowings.
Preferred Securities Dividend Requirements decreased 6.5% and
22.5% in 1997 and 1996, respectively, as a result of mandatory
and optional redemptions.
Income Taxes
Federal Income Taxes increased 33.1% in 1997 and decreased 28.5%
in 1996 as a result of the level of taxable income during those
periods.
Salem Nuclear Generating Station
ACE is an owner of 7.41% of Salem Units 1 and 2, which are
operated by PS. The Salem units represent 164 MWs of ACE's total
installed capacity of 2,385.7 MWs. Salem Unit 1 has been out of
service since May 16, 1995. Salem Unit 2, out of service since
June 7, 1995 returned to service on August 30, 1997 and reached
100% power on September 23, 1997.
PS has advised ACE that the installation of Salem Unit 1 steam
generators has been completed. The cost of purchasing and
installing the steam generators, as well as the disposal of the
old generators is $186 million, of which ACE's share is $13.8
million. The unit is currently expected to return to service
near the end of the first quarter of 1998. Restart of Salem Unit
1 is also subject to NRC approval.
The Salem Station outages has caused ACE to incur replacement
power costs of approximately $700 thousand per month per unit.
As previously discussed, ACE's replacement power costs for the
current and recent outage, up to the agreed-upon return-to-
service date of June 30, 1997 for Salem Unit 1 and December 31,
1996 for Salem Unit 2, will be recoverable in rates in ACE's 1997
LEC proceeding. Replacement power costs incurred after the
PAGE
agreed-upon return-to-service date for the Salem Station will not
be recoverable in rates. ACE has incurred $10.2 million in non-
recoverable replacement power costs to date related to Salem.
ACE entered into an agreement with PS for the purpose of limiting
ACE's exposure to Salem's 1997 operation and maintenance (O&M)
expenses. Pursuant to the terms of the agreement, ACE was
obligated to pay to PS $10 million of O&M expense, as a fixed
charge payable in twelve equal installments beginning February 1,
1997. ACE's obligation for any contributions, above the $10
million, to Salem 1997 O&M expenses up to ACE's estimated share
of $21.8 million, is based on performance and directly related to
the timely return and operation of the units. As a result of
this Agreement, ACE 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 litigation is continuing in accordance
with the schedule established by the court.
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 for the
decontamination and decommissioning of Federally operated nuclear
enrichment facilities. Based on its ownership in five nuclear
generating units, ACE has a liability of $4.6 million and $5.3
million at December 31, 1997 and 1996, respectively, for its
obligation to be paid over the next 12 years. ACE has an
associated regulatory asset of $5.0 million and $5.7 million at
December 31, 1997 and 1996, 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.
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
PAGE
results in penalties which are not permitted to be recovered from
customers and are charged against income. According to a
December 1996 stipulation agreement, 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 under the nuclear
performance standard. Additionally, ACE will not incur a nuclear
performance penalty for 1997.
Year 2000 Disclosure
The Company's Information Technology Department (IT), through a
Conectiv project team, has developed a strategy to address and
correct the year 2000 problem (Y2K). An inventory of the
Company's computer applications, hardware and system software and
infrastructure has been completed. An initial assessment of
these systems has been made as they relate to the Y2K. The
project team's goal is to resolve Y2K related problems associated
with core systems by the close of 1998. The Company has also
contacted major vendors to review remediation of their Y2K
issues. The Company estimates that approximately $3 million is
necessary for IT to complete the scope of their responsibilities.
The Company has not estimated the expected cost to complete this
project in all other areas. The Company believes that it is
taking the necessary steps to minimize the risk of an
interruption of service to it's operations and customers.
Outlook
With the merger of AEI into a new company known as Conectiv the
Company is focusing on the objectives of Conectiv which will be
carried out by three strategic business units- Regulated
Delivery, Energy Supply and Retail Businesses. The business
units will provide services to the competitive regional
marketplace aligning Conectiv's organization with the changing
needs of its customers and markets. Regulated Delivery will
focus on providing high value utility delivery service to
customers. Energy Supply will maximize the value of generation,
while managing the transition to a competitive generation market.
The goal of the Retail businesses is to become a regional full-
service company providing value-added products and services for
the retail energy consumer which create customer loyalty and
satisfaction.
The utility business will continue to be the primary factor
influencing Conectiv's overall financial performance. For ACE,
legislative changes in the regulated electric utility industry in
New Jersey will have a significant impact on ACE's economic
viability and ability to compete in the energy marketplace.
ACE's restructuring filing, which proposes customer choice
starting October 1998, outlines a plan that could ultimately
reduce rates by 9%. Achievement of such goals will depend upon
the success of ACE's commitment to good-faith negotiations with
independent power producers, as well as legislation to support
securitization for the full amount of its stranded costs.
ACE's restructuring filing supports full recovery of stranded
costs, which it believes is also necessary to move to a
competitive environment. If ACE is required to recognize amounts
as unrecoverable, ACE may be required to write down asset values,
and such writedowns could be material.
ACE's generation business will be faced with the effects of
competition in the very near term. ACE's retail prices are
expected to be critical success factors in a competitive
marketplace. At this time ACE cannot predict, with certainty
when it will stop applying SFAS 71 for its generation business
and cannot predict the impacts for its generation business or
predict the impacts on its financial condition as a result of
applying SFAS 101.
ACE'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 Atlantic City and the
gaming industry. Ongoing requirements for service reliability,
and compliance with existing and new environmental regulations,
will continue to cause additional capital investments to be made
by ACE. ACE's planned construction budget is $324.8 million for
the five year period beginning in 1998. ACE's ability to
generate cash flows or access the capital markets may be affected
by competitive pressures on revenues and income.
As of January 1, 1998 ATS's Midtown Energy Center began
operations servicing casino-hotels within the city of Atlantic
City. These operations are for phase 1 of a 5 phase plan to
service customers in the "Midtown" section of the city. As of
January 1, 1998, 78% of the capitalized costs for the Midtown
Energy Center are in operation. ATS arose out of a business
PAGE
opportunity resulting from the combination of casino growth and
expansion and state environmental and regulatory changes. ATS
has undertaken additional projects and continues to explore
opportunities locally and throughout the United States. All of
AEE's businesses will be blended into Conectiv's strategic plans
and current businesses and investments will be evaluated to
support corporate objectives.
The merger is part of a wider trend in the utility industry
toward consolidation and strategic partnerships in order to
create larger, stronger companies for the onset of competition.
The opportunities which will be derived from increased financial
strength, improved management, efficiencies of operations and
better utilization and coordination of existing and future
facilities will provide Conectiv the strategic and operational
opportunities to better meet the coming competitive environment.
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
PAGE
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.
PAGE
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, 1997, 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, 1997 represented
significant deficiencies in the design or operation of the Company's
internal control structure.
/s/ J. L. Jacobs
J. L. Jacobs
Chairman and Chief Executive Officer
/s/ M. J. Barron
M. J. Barron
Senior Vice President and Chief Financial Officer
February 2, 1998
PAGE
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 four meetings during 1997.
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, 1997 as a
result of any communications conducted.
/s/ Matthew Holden, Jr.
Matthew Holden, Jr.
Chairman, Audit Committee
February 2, 1998
PAGE
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, 1997 and
1996 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, 1997. 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 2, 1998 (March 1, 1998 as to Note 4)
Parsippany, New Jersey
PAGE
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars, in Thousands) December 31,
1997 1996
ASSETS
ELECTRIC UTILITY PLANT
In Service:
Production $1,242,049 $1,212,380
Transmission 383,577 373,358
Distribution 763,915 731,272
General 195,745 191,210
Total In Service 2,585,286 2,508,220
Less Accumulated Depreciation 934,235 871,531
Utility Plant in Service-Net 1,651,051 1,636,689
Construction Work in Progress 95,120 117,188
Land Held for Future Use 5,604 5,604
Leased Property-Net 39,730 39,914
1,791,505 1,799,395
INVESTMENTS AND NONUTILITY PROPERTY
Investment in Leveraged Leases 80,448 79,687
Nuclear Decommissioning Trust Fund 81,650 71,120
Nonutility Property and Equipment-Net 105,356 46,147
Other Investments and Funds 53,859 53,550
321,313 250,504
CURRENT ASSETS
Cash and Temporary Investments 17,224 15,278
Accounts Receivable:
Utility Service 64,511 64,432
Miscellaneous 42,034 32,547
Allowance for Doubtful Accounts (3,500) (3,500)
Unbilled Revenues 36,915 33,315
Fuel (at average cost) 29,242 29,682
Materials and Supplies (at average cost) 20,893 23,815
Working Funds 15,126 15,517
Deferred Energy Costs 27,424 33,529
Prepaid Excise Tax 3,804 7,125
Other 14,349 11,354
268,022 263,094
DEFERRED DEBITS
Unrecovered Purchased Power Costs 66,264 83,400
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 45,154 54,714
Unamortized Debt Costs 44,947 44,423
Deferred Other Post Employee Benefit Costs 37,476 32,609
Other Regulatory Assets 24,637 26,966
License Fees 26,081 17,733
Other 12,627 12,066
343,044 357,769
TOTAL ASSETS $2,723,884 $2,670,762
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars, in Thousands)
December 31,
1997 1996
LIABILITIES AND CAPITALIZATION
CAPITALIZATION
COMMON SHAREHOLDERS' EQUITY
Common Stock, no par value; 75,000,000
shares authorized; issued and outstanding:
1997 - 52,504,479; 1996 - 52,502,479 $ 563,460 $ 562,746
Retained Earnings 221,623 227,630
Unearned Compensation - (2,982)
Total Common Shareholders' Equity 785,083 787,394
Preferred Securities of ACE:
Not Subject to Mandatory Redemption 30,000 30,000
Subject to Mandatory Redemption 33,950 43,950
ACE-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated
Debentures of ACE 70,000 70,000
Long Term Debt 879,744 829,745
1,798,777 1,761,089
CURRENT LIABILITIES
Preferred Stock Redemption Requirement - 10,000
Capital Lease Obligation-Current Portion 653 702
Long Term Debt-Current Portion 147,566 98,250
Short Term Debt 55,675 64,950
Accounts Payable 65,369 66,508
Taxes Accrued 6,049 7,504
Interest Accrued 20,116 20,241
Dividends Declared 21,215 21,701
Deferred Income Taxes 1,888 3,190
Provision for Rate Refunds - 13,000
Other 23,995 20,853
342,526 326,899
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 439,267 434,108
Deferred Investment Tax Credits 44,043 46,577
Capital Lease Obligations 39,077 39,212
Accrued Other Post Retirement Employee
Benefit Costs 37,476 32,609
Other 22,718 30,268
582,581 582,774
Commitments and Contingencies (Note 11)
TOTAL LIABILITIES AND CAPITALIZATION $2,723,884 $2,670,762
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, in Thousands, except per share amounts)
For the Years Ended December 31,
1997 1996 1995
OPERATING REVENUES
Electric $1,061,986 $982,123 $953,137
Other Services 40,374 14,915 4,917
1,102,360 997,038 958,054
OPERATING EXPENSES
Energy 293,457 225,185 191,766
Purchased Capacity 197,386 195,699 190,570
Operations 170,340 176,326 160,503
Maintenance 32,858 44,534 34,564
Termination of Employee Benefit
Plans 23,559 - -
Depreciation and Amortization 83,950 81,595 79,232
State Excise Taxes 103,991 104,815 102,811
Taxes Other Than Income 7,616 10,207 8,977
913,157 838,361 768,423
OPERATING INCOME 189,203 158,677 189,631
OTHER INCOME AND EXPENSE
Allowance for Equity Funds Used
During Construction 815 879 817
Other-Net 14,598 12,100 17,155
15,413 12,979 17,972
INTEREST CHARGES
Interest Expense 70,619 69,116 66,049
Allowance for Borrowed Funds
Used During Construction (1,003) (976) (1,678)
69,616 68,140 64,371
LESS PREFERRED SECURITIES DIVIDENDS
REQUIREMENTS OF SUBSIDIARY 10,596 11,332 14,627
INCOME BEFORE INCOME TAXES 124,404 92,184 128,605
INCOME TAXES 49,999 33,417 46,837
NET INCOME $ 74,405 $ 58,767 $ 81,768
COMMON STOCK
Average Basic Shares
Outstanding(000) 52,281 52,299 52,595
Average Diluted Shares
Outstanding(000) 52,492 52,299 52,595
Basic and Diluted Earnings Per Share $ 1.42 $1.12 $1.55
Dividends Declared Per Share $ 1.54 $1.54 $1.54
Dividends Paid Per Share $ 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 STATEMENTS OF CASH FLOWS
(Dollars, in Thousands) For the Years Ended December 31,
1997 1996 1995
CASH FLOWS OF OPERATING ACTIVITIES
Net Income $ 74,405 $ 58,767 $ 81,768
Unrecovered Purchased Power Costs 17,136 16,417 15,721
Deferred Energy Costs 6,105 (2,095) (20,435)
Depreciation and Amortization 83,950 81,595 79,232
Deferred Income Taxes-Net 993 6,192 25,946
Unrecovered State Excise Taxes 9,560 9,560 9,560
Employee Separation Costs (308) (7,179) (19,112)
Net Changes Working Capital Components:
Accounts Receivable & Unbilled
Revenues (13,166) (5,004) (24,400)
Accounts Payable (1,139) 5,651 (5,222)
Inventory 3,362 (2,602) 4,960
Other (6,178) 11,503 (20,125)
Rate Refunds (13,000) 13,000 -
Other-Net 6,055 (2,653) 5,841
Net Cash Provided by Operating
Activities 167,775 183,152 133,734
CASH FLOWS OF INVESTING ACTIVITIES
Utility Construction Expenditures (80,849) (86,805) (100,904)
Leased Nuclear Fuel Material (9,105) (6,833) (10,446)
Nonutility Construction Expenditures (59,879) (25,451) (5,226)
Other-Net (15,210) (14,783) (23,794)
Net Cash Used by Investing Activities (165,043) (133,872) (140,370)
CASH FLOWS OF FINANCING ACTIVITIES
Proceeds from Long Term Debt 169,091 45,075 168,904
Retirement/Maturity of Long Term Debt (87,566) (12,266) (57,489)
Issuance of Preferred Securities of
Subsidiary Trust - 70,000 -
Increase in Short Term Debt 7,150 34,405 21,945
Repurchase of Common Stock - - (29,626)
Redemption of Preferred Stock-ACE (20,000) (98,876) (24,500)
Dividends Declared on Common Stock (80,856) (81,163) (81,088)
Proceeds-Capital Lease Obligations 9,105 6,833 10,466
Other-Net 2,290 (3,701) (1,399)
Net Cash (Used) Provided by Financing
Activities (786) (39,693) 7,213
Net Increase in Cash and
Temporary Investments 1,946 9,587 577
Cash and Temporary Investments:
Beginning of Year 15,278 5,691 5,114
End of Year $ 17,224 $ 15,278 $ 5,691
Supplemental Schedule of Payments:
Interest $ 73,859 $ 68,551 $ 61,160
Income taxes $ 49,072 $ 28,101 $ 30,769
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic Energy, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDERS' EQUITY
(Dollars, in Thousands, except share data)
Common Retained Unearned
Shares Stock Earnings Compensation
Balance, December 31, 1994 54,155,245 $593,475 $249,181 $(3,170)
Net Income 81,768
Dividends on Common Stock (81,208)
Common Stock Issued:
Equity Incentive Plan 9,234 (144) 162
ACE Plan (7,601) (163)
Common Stock Expenses (106)
Reacquired Shares (1,625,000) (29,626)
Balance, December 31, 1995 52,531,878 563,436 249,741 (3,008)
Net Income 58,767
Dividends on Common Stock (81,163)
Common Stock Issued:
Equity Incentive Plan (555) (29) 285 26
ACE Plan (28,844) (567)
Common Stock Expenses (94)
Balance, December 31, 1996 52,502,479 562,746 227,630 (2,982)
Net Income 74,405
Dividends on Common Stock (80,856)
Common Stock Issued:
Equity Incentive Plan 2,000 794 588 2,982
Employee Stock Purchase
Plan (144)
Common Stock Expenses (80)
Balance, December 31, 1997 52,504,479 $563,460 $221,623 $ -
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
PAGE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Atlantic Energy, Inc. (the Company, AEI or parent) plans to merge
with Delmarva Power & Light Company (DP&L) into a new company
named Conectiv, Inc. (Conectiv) effective March 1, 1998. The
Company is the parent of Atlantic City Electric Company (ACE),
Atlantic Energy Enterprises, Inc. (AEE) and Atlantic Energy
International, Inc. (AEII), which are wholly-owned subsidiaries.
In October 1997, the Company and DP&L entered into an agreement
to form Conectiv Solutions, LLC, a limited liability corporation
to market and sell offerings of energy and energy-related and
other value-added services to large energy users.
ACE is a public utility primarily engaged in the generation,
purchase, transmission, distribution and sale of electric energy.
Sales of electric energy include sales at regulated retail and
unregulated wholesale levels. 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 is the principal subsidiary
within the consolidated group.
AEE is a holding company which is responsible for the management
of the investments in the following nonutility companies:
Atlantic Generation, Inc. (AGI) is engaged in the development,
acquisition, ownership and operation of cogeneration power
projects. AGI's activities are represented by partnership
interests in cogeneration facilities in New Jersey. Atlantic
Southern Properties, Inc. (ASP) owns and manages commercial
offices and warehouse facilities located in Atlantic County, New
Jersey. ATE Investment, Inc. (ATE) provides financing to
affiliates and manages a portfolio of investments in leveraged
leases for equipment used in the airline and shipping industries.
ATE joined with an unaffiliated company to create EnerTech
Capital Partners, L.P. (Enertech), a limited partnership that
invests in a variety of energy-related technology growth
companies. Atlantic Thermal Systems, Inc. (ATS) is engaged in
the development and operation of thermal heating and cooling
systems. CoastalComm, Inc. (CCI) is engaged in fiberoptic
network development, construction, and site services. AEE also
has a 50% equity interest in Enerval, LLC (Enerval) which
provides energy management services, including natural gas
supply, transportation and marketing.
AEII was organized to pursue utility consulting services and
equipment sales to international markets. The Company is in the
process of dissolving AEII.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
PAGE
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.
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.
Reclassification
Certain prior year amounts have been reclassified to conform to
the current year reporting of these items. The most notable
reclassification, with no effect on net income, pertains to the
Company's nonutility activities previously reported in the Other
Income line on the Consolidated Statement of Income. The
revenues, operating expenses and income taxes from those
operations are now reflected on the appropriate line 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 "Accounting for the Effects of
Certain Types of Regulation" (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
PAGE
liabilities is no longer probable, the assets and liabilities are
applied to income in the year that the assessment is made.(See
Note 12-Electric Utility Industry Restructuring and Stranded
Costs for further discussion about the effects of regulation in a
competitive environment). Specific regulatory assets and
liabilities that have been recorded are discussed in Note 13.
Operating Revenues
ACE'S electric operating revenues are recognized when electric
energy services are rendered, and include estimates for amounts
unbilled at the end of the period for energy used by customers
subsequent to the last bill rendered for the calendar year. ACE
also records revenues for non-regulated wholesale energy market
sales transactions as they occur.
Other services revenues primarily represent revenues of ATS which
are recognized when heating and cooling services are rendered and
include estimates for amounts consumed by but not yet billed to
customers at the end of the period.
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
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.
Nonutility Property and Equipment
Nonutility Property and Equipment are generally stated at cost
and 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. ASP's commercial sites, including the cost of
improvements and certain preacquisition costs are stated at the
lower of cost or fair market value. Capitalized interest related
to nonutility expenditures was $3.7 million for 1997.
Depreciation
ACE provides for straight-line depreciation based on the
following: 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
PAGE
service life. ACE's 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.
ASP's facilities are being depreciated over a thirty-one and one-
half year life using the straight-line method. Land improvements
are being depreciated using an accelerated method over a fifteen
year life. Furniture and equipment are depreciated over lives
ranging from three to seven years. ATS's Midtown Energy Center
and its components will be depreciated on a straight-line basis
over their respective useful lives starting in January 1998.
Nuclear Plant Decommissioning Reserve - ACE
A reserve for decommissioning costs is presented as a component
of accumulated depreciation and amounted to $80.7 million and
$70.2 million at December 31, 1997 and 1996, respectively.
The Securities and Exchange Commission (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. In
January 1998, the FASB changed the title of its project to
"Accounting for Obligations Related to the Retirement of Long-
Lived Assets", which continues to include nuclear plant
decommissioning costs. Under the original proposed statement 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. The Company cannot predict
when the FASB will issue a final accounting standard or the
outcome of this matter at this time.
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.
License Fees
ATS has entered into agreements with six hotel casino's in
Atlantic City, New Jersey to operate their heating and cooling
systems. As part of these agreements, ATS has paid $27.5 million
in fees to date, for the right to operate and service such
systems for a period of 20 years. These fees are recorded on
the balance sheet as License Fees and are being amortized over
the life of the agreements.
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
The FASB issued Statement No. 128, "Earnings Per Share"(SFAS
No.128) which specifies the computation, presentation and
disclosure requirements of earnings per share for entities with
publicly held common stock and potential common stock. Earnings
per share (EPS) presented on the face on the consolidated income
statement has been calculated to reflect the adoption of SFAS No.
128 by the Company. Basic EPS is computed based upon the
weighted average number of common shares, excluding contingently
issuable shares, outstanding during the year. Diluted EPS is
computed based upon the weighted average number of common shares
including contingently issuable shares and other dilutive items.
The difference between the 1997 basic and diluted EPS reflects
the effects of the EIP shares which are considered to be
outstanding throughout 1997 for the diluted EPS calculation.
Contingently issuable shares existed for all periods but were not
included in the diluted EPS computation for 1996 and 1995 because
the restrictions were determined to not be met at the end of the
period. Options existed for 1996 and 1995 but were not included
as common stock equivalents in the dilutive calculation because
they were antidulitve. See Note 5 - Benefits for further
discussion of the EIP.
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
PAGE
the life of the related ACE Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of ACE in accordance with BPU approval.
In June 1997, the FASB issued Statement No. 130 "Reporting
Comprehensive Income" and Statement No. 131 "Disclosure About
Segments of an Enterprise and Related Information". These
statements are effective for fiscal years beginning after
December 15, 1997. Since these statements are primarily
disclosure related, the Company currently believes that they will
not have a significant effect on the Consolidated Financial
Statements.
NOTE 2. INCOME TAXES
The components of Federal income tax expense for the years ended
December 31 are as follows:
(000) 1997 1996 1995
Current $48,739 $27,061 $ 20,483
Deferred 1,217 6,587 25,993
Investment Tax Credits Recognized
on Leveraged Leases (136) (78) (28)
Total Federal Income Tax Expense $49,820 $33,570 $46,448
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:
1997 1996 1995
Statutory Federal Income Tax Rate 35% 35% 35%
(000)
Income Tax Computed at the
Statutory Rate $45,166 $36,058 $49,995
Plant Basis Differences 4,952 3,096 1,307
Amortization of Investment Tax
Credits (2,670) (2,612) (2,562)
Other-Net 2,372 (2,972) (2,292)
Total Federal Income Tax Expense $49,820 $33,570 $46,448
Effective Federal Income Tax Rate 39% 33% 33%
The increase in the effective Federal income tax expense rate is
due primarily to permanently non-deductible merger and merger
related expenses. State income tax expense is not significant.
PAGE
Items comprising deferred tax balances as of December 31 are as
follows:
(000) 1997 1996
Deferred Tax Liabilities:
Plant Basis Differences $332,288 $326,673
Leveraged Leases 76,362 76,671
Unrecovered Purchased Power Costs 16,813 22,630
State Excise Taxes 16,326 20,141
Other 38,481 33,192
Total Deferred Tax Liabilities 480,270 479,307
Deferred Tax Assets:
Deferred Investment Tax Credits 23,775 25,143
Other 15,797 16,866
Total Deferred Tax Assets 39,572 42,009
Total Deferred Taxes-Net $440,698 $437,298
At December 31, 1997 and 1996, deferred tax assets exist for
cumulative state income tax net operating loss (NOL's)
carryforwards. At December 31, 1997 unexpired state NOL's amount
to approximately $60.6 million, with expiration dates from 1998
through 2004. As of December 31, 1997, deferred state tax assets
of $5.5 million offset by a valuation allowance of $4.0 million
have been recorded.
On July 14, 1997 the Governor signed a bill into law eliminating
the Gross Receipts and Franchise Tax (GR & FT) paid by the
electric, natural gas and telecommunication public utilities. In
its place, utilities will be subject to the state's corporate
business tax. In addition, the state's existing sales and use
tax will be expanded to include retail sales of electric power
and natural gas, and a transitional energy facility assessment
tax (TEFA) will be applied for a limited time on electric and
natural gas utilities and will be phased-out over a five year
period. The law took effect January 1, 1998 and on January 1 of
each of the years thereafter, the TEFA will be reduced by 20%.
By the year 2003, the TEFA will be fully phased-out and the
savings will be passed through to ACE's customers. As a result
of this law, ACE will record deferred state taxes beginning in
1998 for state tax basis versus book basis differences.
PAGE
NOTE 3. RATE MATTERS OF ACE
Energy Clause Proceedings
Changes in Levelized Energy Clause Rates
1995 - 1997
Amount Amount
Date Requested Granted Date
Filed (millions) (millions) Effective
4/95 $37.0 $37.0 7/95
3/96 49.7 27.6 7/96
2/97 20.0 -- --
ACE's LEC is subject to annual review by the BPU.
In July 1995, the BPU approved a provisional increase of $37
million in annual LEC revenues for the period June 1, 1995
through May 31, 1996. The BPU approved a continuance of the
provisional increase in March 1996.
In March 1996, ACE requested a $49.7 million increase in 1996-
1997 annual revenues effective June 1, 1996. Through a
stipulation reached and approved in July 1996 among ACE, the New
Jersey Division of the Ratepayer Advocate (Ratepayer Advocate)
and the Staff of the BPU (collectively, the parties), ACE
implemented provisional rates reflecting an increase of annual
LEC revenues of $27.6 million. The BPU approved a continuance of
the provisional rates in December 1996 when the Salem Station
replacement power issues, among others, were resolved.
In December 1996, the BPU issued an Order approving a stipulation
of settlement reached among the parties settling the issues
regarding replacement power costs related to an extended Salem
Nuclear Generating station (Salem) outage and a 1994 Salem Unit 1
outage. The stipulations provided that ACE's replacement power
costs for the Salem Station outage, up to each Unit's agreed-upon
return-to-service date (June 30, 1997 for Unit 1 and December 31,
1996 for Unit 2), and the 1994 Salem Unit 1 outage would be
recoverable in LEC rates implemented in ACE's next LEC filing.
In February 1997, ACE filed a petition with the BPU requesting an
increase in 1997-1998 annual LEC revenues of $20.0 million to be
made effective for service rendered on and after June 1, 1997.
The increase requested is primarily the result of ACE seeking
recovery of previously deferred costs, which includes recovery of
the Salem Station replacement power costs in accordance with the
Orders issued in December 1996. In April 1997, ACE's filing was
transferred to the Office of Administrative Law and evidentiary
hearings have been completed. The administrative Law Judge's
(ALJ) initial decision is expected in the first quarter of 1998.
ACE expects to file a petition with the BPU during the first
quarter of 1998 requesting an increase in 1998-1999 annual LEC
revenues.
Other Rate Proceedings
On July 15, 1997, ACE filed its electric industry restructuring
plan with the BPU, as required by the Energy Master Plan,
proposing ACE's plans to move to retail access and the possible
effect on rates. (See Note 12 - ACE's Electric Utility
Restructuring and Stranded Costs).
In 1996, the BPU declared base rates associated with ACE's 7.41%
ownership in Salem interim and subject to refund. In
December 1996, the BPU issued an Order approving a stipulation of
settlement reached among the parties regarding the issue of base
rates. In January and February 1997, in accordance with the
stipulation, ACE provided credits to customers totaling $12
million. An additional credit of $1 million resolved an
allegation previously made by the Ratepayer Advocate that ACE,
along with other New Jersey electric utility companies, were
recovering cogeneration capacity costs concurrently in base rates
and LEC rates.
In December 1997, the BPU approved an increase in annual base
rate revenues of $5.0 million for recovery of expenses associated
with post-retirement benefits other than pensions (OPEB). Also
in a related action to this matter, the BPU approved the request
for a change in ownership to merge AEI into Conectiv and found
that an annual rate decrease of $15.8 million should be provided
to ACE's customers effective with the merger. The BPU ordered a
pre-merger credit of $5.0 million to offset the increase in rates
associated with OPEB. This increase was effective on January 1,
1998. See Notes 5 and 13 for further information regarding OPEB
expenses and the corresponding regulatory asset and Note 4 for
further information regarding the merger.
NOTE 4. 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,
became the parent of AEI's subsidiaries and the parent of DP&L
and its subsidiaries effective March 1, 1998. See discussions on
approvals below.
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
PAGE
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 under the purchase method of accounting with DP&L
as the acquirer. 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. Approvals have since been obtained from the
FERC, Delaware and Maryland Public Service Commissions, the
Virginia State Corporate Commission, the Pennsylvania Public
Utilities Commission, the BPU and the Nuclear Regulatory
Commission (NRC). The last and final approval was received from
the SEC on February 25, 1998. The merger became effective March
1, 1998.
Under the terms of the BPU's approval of the merger,
approximately 75 percent or $15.75 million of ACE's total average
projected annual merger savings will be returned to ACE's
customers for an overall merger-related reduction of 1.7 percent.
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 three trading days
immediately preceding and the three trading days immediately
following the public announcement of the merger, is $921.0
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 $200.5 million, which will be recorded as
goodwill by Conectiv. The actual amount of goodwill recorded
will be based on the Company's net assets as of the merger date
and, accordingly, will vary from this estimate which is based on
the Company's net assets as of December 31, 1997. The goodwill
will be amortized over 40 years.
PAGE
Selected information on each company at December 31, 1997 and the
year then ended is shown below (in thousands, except for number
of customers):
AEI DP&L
(Unaudited)
Operating Revenues $1,102,360 $1,423,502
Net Income $ 74,405 $ 105,709
Assets $2,723,884 $3,015,481
Electric Customers 480,960 448,323
Gas Customers - 103,248
Combination of the above amounts would not necessarily be
reflective of the amounts that would result from a consolidation
of the companies.
On June 26, 1997, the Company and DP&L jointly announced an
enhanced retirement offer and separation program that will be
utilized to achieve workforce reductions as a result of the
merger. The Company and DP&L initially anticipated a combined
loss of approximately 400 positions to accomplish the merger-
related rate reductions to customers. This initial level of
reductions will be achieved primarily through the DP&L early
retirement and the Company's enhanced retirement programs.
Additional reductions are also anticipated to better align
staffing requirements to skill and work process needs. The
combined additional reductions could range between 250 to 350
positions. The total cost to the Company for these programs, as
well as the cost of executive severance, employee relocation and
facilities integration is estimated to range from $38 million to
$43 million. ACE is required to recognize these costs through
expense in accordance with GAAP. The actual cost to the Company
and ACE will depend on a number of factors related to the
employee mix as well as the actual number of employees who will
be eligible for the enhanced retirement or separation programs.
In the fourth quarter of 1997, the Company recorded an expense of
$23.6 million as a result of terminating certain benefit programs
of the Company in anticipation of the merger. Termination of the
plans resulted in charges of $10.0 million for a supplemental
executive retirement plan, $6.3 million due to a pension plan
curtailment, $3.8 million from the EIP and $3.5 million from
other benefit plans and executive contract terminations. See
Note 5. below for discussion of the effects on the defined
pension plan and the EIP.
PAGE
NOTE 5. BENEFITS
Retirement Benefits - ACE
Pension
ACE has a noncontributory defined benefit pension plan covering
substantially all of its employees. Benefits are based on an
employee's years of service and average final pay. ACE's policy
is to fund pension costs within the range 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) 1997 1996 1995
Service cost-benefits earned
during the period $ 6,763 $ 6,870 $ 6,363
Interest cost on projected benefit
obligation 15,840 14,569 14,794
Actual return on plan assets (39,394) (36,443) (44,067)
Other-net 25,611 19,123 28,379
Net periodic pension costs $ 8,820 $ 4,119 $ 5,469
Of these costs for 1997, $6.3 million was due to a curtailment as
a result of the lump-sum payments to certain plan participants
who will terminate employment effective with the consummation of
the merger or shortly then after. This amount is included in the
Termination of Employee Benefit Plans line item of the
Consolidated Statement of Income. Of the remaining net periodic
payment costs, $1.9 million was charged to operating expense in
1997. In 1996 and 1995 $3.0 million annually was charged to
operating expense. 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 1997 and
1996 primarily reflect the favorable market conditions from the
investment of plan assets and expected returns.
A reconciliation of the funded status of the plan as of December
31 is as follows:
(000) 1997 1996
Fair value of plan assets $259,500 $236,000
Projected benefit obligation 239,000 207,340
Plan assets in excess of projected
benefit obligation 20,500 28,660
Unrecognized net transition asset (1,532) (1,377)
Unrecognized prior service cost 232 259
Unrecognized net gain (10,810) (18,958)
Prepaid pension cost $ 8,390 $ 8,584
Accumulated benefit obligation:
Vested benefits $207,102 $170,751
Nonvested benefits 1,487 2,023
Total $208,589 $172,774
At December 31, 1997, approximately 66% of plan assets were
invested in equity securities, 27% in fixed income securities and
7% in other investments. The assumed rates used in determining
the actuarial present value of the projected benefit obligation
at December 31 were as follows:
1997 1996 1995
Weighted average discount 7.0% 7.5% 7.0%
Anticipated increase in compensation 3.5% 3.5% 3.5%
Assumed long term rate of return 9.0% 8.5% 8.5%
Other Postretirement Employee Benefits (OPEB)
ACE provides 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 ACE. 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) 1997 1996 1995
Service cost-benefits attributed to
service during the period $ 2,531 $ 2,688 $ 2,891
Interest cost on accumulated
postretirement benefits obligation 6,843 7,482 8,107
Actual return on plan assets (800) (771) (1,437)
Amortization of unrecognized
transition obligation 2,768 2,768 3,893
Other-net (475) 215 404
Net periodic other postretirement
costs $10,867 $12,382 $13,858
These costs were allocated as follows:
(millions) 1997 1996 1995
Operating expense $3.0 $3.6 $3.1
New utility plant-associated with
construction labor 3.0 2.4 2.5
Regulatory asset 4.9 6.4 8.3
The regulatory asset represents the amount of annual costs in
excess of the amount of cost currently recovered in rates. These
excess costs were deferred as authorized by an accounting order
of the BPU pending future recovery through rates. ACE will begin
to recover these costs over a 15 year period beginning in 1998.
See Note 3 and Note 13 for additional information.
PAGE
A reconciliation of the funded status of the plan as of December
31 is as follows:
(000) 1997 1996
Accumulated benefits obligation:
Retirees $ 51,786 $ 63,095
Fully eligible active plan participants 6,075 4,038
Other active plan participants 45,963 39,972
Total accumulated benefits obligation 103,824 107,105
Less fair value of plan assets 20,100 18,000
Accumulated benefits obligation in
excess of plan assets 83,724 89,105
Unrecognized net loss (4,727) (12,207)
Unamortized unrecognized transition
obligation (41,521) (44,289)
Accrued other postretirement benefits
cost obligation $ 37,476 $ 32,609
At December 31, 1997, approximately 73% of plan assets were
invested in fixed income securities and 27% in other investments.
The assumed health care costs trend rate for 1998 is 7% 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 1997 net periodic benefits cost
would increase by $1.2 million, and the accumulated
postretirement benefits obligation at December 31, 1997 would
increase by $10.8 million. The weighted average discount rate
assumed in determining the accumulated benefits obligation was
7.0%, 7.5% and 7.0% for 1997, 1996 and 1995, 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 one for union and another for 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 1997,
1996 and 1995 was $2.0 million, $1.9 million and $1.9 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
PAGE
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 was as follows:
Weighted Average
Restricted Fair Value
Shares Grant Date
Balance, December 31, 1994 175,712 20.975
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
Issued/Granted 22,255 17.376
Awarded (244,792)
Balance, December 31, 1997 -0-
The 1997, 1996 and 1995 restricted shares granted include 20,255
shares, 13,786 shares and 7,614 shares, respectively, purchased
on the open market from reinvestment of dividends on EIP shares
outstanding. On November 13, 1997, the Board of Directors of the
Company in accordance with the EIP provisions with respect to a
potential change in control declared that the restrictions
applicable to any of the Restricted Stock removed and shares
deemed fully vested. Distribution of the awards could be either
in cash or common stock, based on the election of the
participant. The change in control price was established at
$19.50 per share. In the fourth quarter the Company recognized
$3.7 million in expense due to the termination of the plan with
respect to the restricted shares. Compensation expense for 1996
and 1995 for the restricted stock has been measured based on the
intrinsic value of the stock. The total compensation expense for
the years 1996 through 1995 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.
PAGE
Option information is as follows:
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options
Beginning
Balance 371,437 20.105 166,987 $21.125 167,300 $21.125
Granted 207,250 19.296 6,387 21.125
Forfeited (371,437) (2,800) 21.125 (6,700) 21.125
Ending
Balance -0- 371,437 20.105 166,987 21.125
Weighted
Average Fair
value-each N/A $1.33 N/A
In addition, the Board took appropriate action with respect to
the Stock Options issued pursuant to the EIP. The Company
recognized $.1 million in expense due to the termination of the
plan with respect to the options forfeited under phase II of the
EIP. The options associated with phase 1 of the EIP Plan were
forfeited because grant price exceeded the established change in
control price.
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 would have been a reduction in expense of $.4 million
in 1997 and an increase in expense of less than $.2 million in
1996. The effect of the application of SFAS No. 123 on basic and
diluted earnings per share for both 1997 and 1996 is less than
one cent.
PAGE
NOTE 6. JOINTLY-OWNED GENERATING STATIONS - ACE
ACE owns jointly with other utilities several electric generating
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:
1997 $13,559 $34,304 $135,775 $237,281 $240,612
1996 13,275 34,489 130,011 218,603 240,079
Accumulated Depreciation:
1997 $ 3,840 $ 7,791 $ 58,501* $ 78,189* $ 74,108*
1996 3,609 7,333 54,854* 79,635* 68,286*
Construction Work in Progress:
1997 $ 209 $ 266 $ 8,714 $ 11,754 $ 1,281
1996 300 270 12,992 27,015 1,321
Operations and Maintenance Expenses (including fuel):
1997 $ 5,145 $ 7,654 $ 28,520 $ 14,146 $ 10,593
1996 5,626 7,507 29,337 34,403 10,899
1995 5,143 7,252 29,647 28,306 10,360
Working Funds:
1997 $ 44 $ 69 $ 3,693 $ 6,977 $ 3,617
1996 44 69 3,833 7,252 3,545
* 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 Operations and Maintenance
for Salem reflects the effects of the December 31, 1996 agreement
ACE entered into with Public Service Electric & Gas (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 11 for further information
concerning Salem Nuclear Generating Station.
NOTE 7. NONUTILITY COMPANIES
Principal assets of each of the subsidiary companies of AEE at
December 31, 1997 were: AGI - investments of approximately $18.7
million in cogeneration facilities; ASP - commercial real estate
properties with a net book value of $9.2 million; ATE -
leveraged lease investments of $80.4 million and $10.2 million
invested in EnerTech Capital Partners, L.P.; ATS - construction
costs in thermal heating and cooling projects of $84.8 million.
Other financial information regarding the subsidiary companies is
as follows:
Net Worth Operating Revenues Net Income (Loss)
Company 1997 1996 1997 1996 1995 1997 1996 1995
(000)
AGI $22,000 $21,361 $1,471 $1,683 $1,578 $1,640 $ 979 $2,513
ASP (99) 561 998 758 687 (660) (1,773) (841)
ATE 17,010 11,139 683 707 772 231 71 (50)
ATS 10,394 2,498 19,816 6,845 1,315 1,896 311 (213)
CCI 948 544 806 - - 126 (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 includes a net after tax write-down of
the carrying value of the commercial site of $0.8 million.
ATE's 1997 net income reflects reductions in interest expense and
an income tax benefit offset in-part by a $0.9 million after tax
loss in ATE's investment in Enertech Capital Partners, L.P.
ATS's 1997 results reflect earnings generated from the operation
and maintenance of customer heating and cooling facilities, offset
in-part by increased amortization and interest expense related to
the license fees. ATS's 1996 results primarily reflect
administrative and general costs for business development and
construction of heating and cooling systems. See Note 1 - License
Fees for further discussion.
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 $4.1 million and $3.6 million in 1997 and
1996, respectively. AEI's 1997 results reflect increased interest
expense in addition to a $.5 million after tax loss from the
investment in Conectiv Solutions, LLC. AEI's 1996 results reflect
PAGE
the impact of merger-related costs and interest charges. The
interest charges which affect all three years of operation are
associated with a line of credit established to fund certain
affiliated capital needs, the repurchase of common stock and
general corporate purposes.
AEE incurred losses of $4.9 million and $1.7 million in 1997 and
1996, respectively. AEE's 1997 results include an after-tax loss
of $2.2 million from its equity investment in Enerval and a $0.9
million charge for the Termination of Employee Benefit Plans.
AEE's 1996 activity reflects an after tax loss of $1.1 million
from its investment in Enerval due to a combination of unhedged
gas sales agreements and higher spot market prices.
NOTE 8. CUMULATIVE PREFERRED SECURITIES OF ACE
The embedded cost of ACE Preferred Securities as of December 31,
1997, 1996 and 1995 was 7.5%, 7.4% and 7.4%.
At December 31, 1997, the minimum annual sinking fund requirements
of the Cumulative Preferred Stock Subject to Mandatory Redemption
over the next five years are $10 million for 1998 and $11.5
million for 2001 and 2002.
Cumulative Preferred Stock
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 1997 1996 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
Total $30,000 $30,000
Subject to Mandatory Redemption:
$8.20 None 100,000 10,000 300,000 30,000 -
$7.80 None 239,500 23,950 239,500 23,950 -
Total 33,950 53,950
Current Portion - 10,000
Total $33,950 $43,950
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 August 1, 1997 ACE redeemed 200,000 shares of its $8.20 Series
No Par Preferred Stock. Under a mandatory sinking fund
requirement 100,000 shares were required to be redeemed and ACE
elected to redeem an optional 100,000 additional shares for a
total of $20.0 million using short term debt.
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.
ACE reclassified to long term $10.0 million of preferred stock due
in 1998 due to the January 12, 1998 issuance of Medium Term Notes
that will, in part, be used to redeem the balance of it's $8.20
Series No Par Preferred Stock in May 1998. (See Note 9)
ACE Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of
ACE.
Atlantic Capital I, a grantor trust, is the issuer of $70 million
(2,800,000 shares) of 8.25% Cumulative Quarterly Income ACE
Obligated Mandatorily Redeemable Preferred Securities with a
stated liquidation preference of $25 each outstanding at December
31, 1997 and 1996. Atlantic Capital's sole investment is ACE's
8.25% Junior Subordinated Deferrable Interest Debentures (Junior
Debentures). 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 transactions of the trust
are consolidated into the financial statements of ACE, the Junior
Debentures are eliminated in consolidation.
PAGE
NOTE 9. DEBT
Series Maturity December 31,
(000) Date 1997 1996
SECURED DEBT:
Medium Term Notes Series B (6.28%) 2/1/1998 $ 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 Bond 4/1/2002 - 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
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 2,425 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
Variable Rate Pollution Control
Series A 2014 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
Variable Rate Pollution Control
Series B 2017 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
752,540 802,591
UNSECURED DEBT:
6.46% Medium Term Notes Series A 4/1/2002 20,000 -
6.63% Medium Term Notes Series A 6/2/2003 30,000 -
7.52% Medium Term Notes Series A 4/2/2007 5,000 -
7.50% Medium Term Notes Series A 4/2/2007 10,000 -
65,000 -
DEBENTURES:
7-1/4% 5/1/1998 2,500 2,600
2,500 2,600
Amortized Premium and Discount-Net (2,721) (2,771)
Total Long Term Debt-ACE 817,319 802,420
Add Short Term Debt to be Refinanced 16,425 -
Less Current Portion - (175)
Long Term Debt-ACE $833,744 $802,245
Series December 31,
(000) 1997 1996
Long Term Debt-ACE $833,744 $802,245
Long Term Debt-AEI 53,500 37,575
Long Term Debt-ATE 20,000 33,500
Long Term Debt-ATS 120,066 54,500
Less Portion Due within One Year 147,566 98,075
Total AEI Noncurrent Long-Term Debt $879,744 $829,745
Secured 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, 1997 ACE had
$77.9 million of unused short-term borrowing capacity. ACE's
weighted daily average interest rate on short term debt was 5.8%
for 1997 and 5.6% for 1996.
On May 1, 1997, ACE satisfied the sinking fund requirements of
$100,000 for its 7-1/4% Debentures and on December 1, 1997
satisfied the sinking fund requirement of $75,000 for its
6 3/8% Pollution Control Series due December 1, 2006.
On July 30, 1997, ACE issued $22.6 million aggregate principal
amount of variable rate, tax-exempt pollution control bonds in two
separate series: $18.2 million Pollution Control Revenue
Refunding Bonds, 1997 Series A due April 15, 2014 (Series A) and
$4.4 million Pollution Control Revenue Refunding Bonds, 1997
Series B due July 15, 2017 (Series B). The Series A and the
Series B bonds paid an initial weekly rate of 3.4% and 3.5%,
respectively. Each subsequent rate is determined by the
remarketing agent. The proceeds from the sale of the Series A and
Series B bonds were applied to the September 2, 1997 redemption of
$18.2 million aggregate principal amount of 7 3/8% Pollution
Control Revenue Bonds of 1984, Series A and $4.4 million aggregate
principal amount of 8 1/4% Pollution Control Revenue Bonds of
1987, Series B. Aggregate premiums paid for the September 2, 1997
redemption were $546,000 and $88,000, respectively.
During 1997, ACE issued and sold $65 million aggregate principal
amount of Unsecured Medium Term Notes. Primarily, the notes were
sold to cover the December 1, 1997 redemption of $20 million
principal amount of 7.5% First Mortgage Bonds due April 1, 2002
and $29.976 million principal amount of 7.75% First Mortgage Bonds
due June 1, 2006. Aggregate premiums paid for the redemption of
PAGE
these bonds were $240,000 and $440,647 respectively.
On January 12, 1998, ACE issued $85 million of Secured Medium Term
Notes, Series D maturing in January 2003 and January 2006. The
Bonds paid a fixed interest rate of 6.0%, 6.2% and 6.2%. The net
proceeds to be received by the Company from the issuance and sale
of the Medium Term Notes will be applied to the repayment of
outstanding short-term and long-term indebtedness, including the
redemption of certain series of First Mortgage Bonds and
Debentures ($58.575 million), Preferred Stock ($10 million) and
unsecured short-term debt ($16.425 million) due in 1998.
At December 31, 1997, 1996 and 1995, ACE's embedded cost of long
term debt was 7.3%, 7.5% and 7.5%, respectively.
AEE
Long term debt of ATE includes $15 million of 7.44% Senior Notes
due 1999. ATE also 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
1998. There were $5 million and $18.5 million in borrowings
outstanding under this agreement at December 31, 1997 and 1996,
respectively. Interest rates on borrowings are determined by
reference to periodic pricing options available under the
facility. Interest on the borrowings outstanding during 1997
ranged from 5.9% to 6.5%. This credit facility will be available
up until the effective date of the merger.
In December 1995, ATS through a partnership, arranged for the
issuance of $12.5 million of special, limited obligation bonds of
the New Jersey Economic Development Authority (NJEDA). Proceeds
from the sale of the bonds were placed in escrow. The proceeds
may be released to the ATS partnership and used to pay certain
"qualified costs" subject to satisfaction of certain conditions.
In November 1997, ATS satisfied the escrow release conditions and
remarketed, through underwriters, $12.5 million principal amount,
Series 1995 Thermal Energy Facilities Revenue Bonds due December
1, 2009 at variable rates of interest. Since issuance, the
interest rates to the ATS partnership have ranged from 2.5% to
4.1%. In addition, the NJEDA issued an additional $18.5 million
in limited obligation bonds which were sold, through underwriters,
as Series 1997 Thermal Energy Facilities Revenue Bonds due
December 1, 2031 at variable rates which have ranged from 2.5% to
4.1%. ATS applied $20.0 million of bond proceeds to reimburse it
for certain qualifying costs incurred during construction of the
Midtown Energy Center in Atlantic City, New Jersey. Proceeds of
$11.0 million remained in escrow at December 31, 1997 pending
verification of compliance with NJEDA qualifications.
ATS's $100 million revolving credit and term loan facility, was
amended and restated to $143 million in October 1997. Up to $50
million of available credit commitment can be used to establish
PAGE
letters of credit. As of December 31, 1997 and 1996, $89.1
million and $42.0 million was outstanding under this facility,
respectively. Interest rates on borrowings are based on periodic
pricing options selected by ATS. Interest rates on the borrowings
outstanding ranged from 5.8% to 8.5% in 1997. This facility has
been primarily used for construction of the Midtown Energy Center,
which began commercial operation in January 1998. Aggregate
commitment fees on unused credit lines of revolving AEE credit
agreements were not significant. This credit facility will be
available up until the effective date of the merger.
AEI
Under AEI's $75 million revolving credit and term loan facility,
AEI had $53.5 million and $37.6 million outstanding in borrowings
at December 31, 1997 and 1996, respectively. Interest rates are
based on periodic pricing options selected by AEI. Interest on
the borrowings outstanding during 1997 ranged from 5.79% to 8.62%.
This facility, has been used to fund acquisitions of Company
common stock and other general corporate purposes and will
continue to be used for corporate purposes up until the effective
date of the merger.
Long Term Debt
Maturities and Sinking Fund Requirements
ACE ATE AEI ATS TOTAL
(000)
1998 - * $ 5,000 $53,500 $89,066 $147,566
1999 $30,075 15,000 - - 45,075
2000 46,075 - - - 46,075
2001 40,075 - - - 40,075
2002 50,075 - - - 50,075
* Excludes amounts refinanced in 1998.
NOTE 10. 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 EIP and the Employee Stock
Purchase Plan (ESPP). The number of shares of Common Stock issued
(forfeited) during the year ended December 31, and the number of
shares reserved for issuance at December 31, 1997, were as
follows:
1997 1996 1995 Reserved
ACE Plans - (28,844) (7,601) 177,483
EIP 2,000 (555) 9,234 -
ESPP 51,133 - - 348,867
Total 53,133 (29,399) 1,633
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
PAGE
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 plus
unissued shares from the prior offering period up to a total of
400,000 shares. On August 14, 1997 in lieu of issuing shares the
Company bought 51,133 shares at a market price ranging from
$17.625 to $18.00 per share, for $.9 million. This plan will
terminate at the effective date of the merger.
The Company's program to reacquire up to three million shares of
it's common stock outstanding will expire with the merger. 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. As of December 31, 1997, 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 1997 or 1996.
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 11. COMMITMENTS AND CONTINGENCIES
Construction Program
ACE cash construction expenditures for 1998 are estimated to be
approximately $68 million. Nonutility capital expenditures for
1998 are estimated to be $49 million.
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 market conditions. At
December 31, 1997, ACE has contracted for 2,416 megawatts (MWs) of
purchased capacity with terms remaining of 1 to 27 years and
additionally, 125 MWs commencing in 1998 for 2 years and 175 MWs
commencing in 1999 for 10 years. Information regarding these
arrangements relative to ACE was as follows:
1997 1996 1995
As a % of Capacity (year end) 29% 30% 30%
As a % of Generation 54% 55% 52%
Capacity charges (millions) $197.4 $195.7 $190.6
Energy charges (millions) $136.8 $145.1 $135.4
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 million, $165.3 million and $162.7
million in 1997, 1996 and 1995, respectively. Minimum future
payments for purchased capacity and energy under contract for the
years 1998 through 2002 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 1998 through 2002. 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.
On August 1, 1997, the New Jersey Department of Environmental
Protection (NJDEP) announced that it intended to introduce rules
to reduce NOx emissions by 90% from the 1990 levels by the year
2003. On September 15, 1997 the NJDEP filed its proposal with the
Office of Administrative Law. In its proposal, entitled "NOx
Budget Program", the NJDEP prescribed participation of New
Jersey's large combustion sources in a regional cap and trade
program designed to significantly reduce emissions of NOx. In
effect, the proposed regulation would require New Jersey to become
the first northeastern state to require NOx reductions of 90% from
the 1990 levels, by the year 2003. Both ACE's B.L. England and
Deepwater generating stations will be affected by the NJDEP's
proposal. On October 24, 1997 ACE testified in opposition to the
proposal. ACE cannot predict the ultimate outcome of this matter
or the costs of compliance.
Other
AEE provides payment guarantees to certain natural gas suppliers
and transporters of Enerval. These payment guarantee
notifications provide that if Enerval does not make timely payment
as specified in an agreement with the supplier or transporter, the
Guarantor (AEE) will pay the amount due. The amounts due vary
PAGE
from month to month with respect to purchases from and payments to
these suppliers and transporters. The exposure to AEE at December
31, 1997 was approximately $5.5 million.
The Company is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In
management's opinion, the ultimate disposition of these matters
will not have a material adverse effect on its financial condition
or results of operations.
Nuclear - ACE
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 1997 dollars, is $164.8 million.
Decommissioning activities as approved by the BPU are expected to
begin in 2006 and continue through 2032. The total estimated
value of the trust at December 31, 1997, inclusive of the present
value of future funding, based on current annual funding amounts
and expected decommissioning dates approved by the BPU, is
approximately $147 million, without earnings on or appreciation of
the fund assets. In accordance with BPU regulations, updated
site-specific studies based on 1995 costs were completed in
September 1996 and submitted to the BPU for review by the Staff of
the BPU and the Ratepayer Advocate. The updated site specific
studies support that the current level of funding is sufficient.
As such, ACE will not seek to increase the recovery of
decommissioning in its rates.
Salem Nuclear Generating Station
ACE is an owner of 7.41% of Salem Units 1 and 2, which are
operated by PS. The Salem units represent 164 MWs of ACE's total
installed capacity of 2,415.7 MWs. Salem Unit 1 has been out of
service since May 16, 1995. Salem Unit 2, out of service since
June 7, 1995 returned to service on August 30, 1997 and reached
100% power on September 23, 1997.
PS has advised ACE that the installation of Salem Unit 1 steam
generators has been completed. The cost of purchasing and
installing the steam generators, as well as the disposal of the
old generators is $186 million, of which ACE's share is $13.8
million. The unit is currently expected to return to service near
the end of the first quarter of 1998. Restart of Salem Unit 1 is
also subject to NRC approval.
The Salem Station outages has caused ACE to incur replacement
power costs of approximately $700 thousand per month per unit. As
previously discussed, ACE's replacement power costs for the
current and recent outage, up to the agreed-upon return-to-service
date of June 30, 1997 for Salem Unit 1 and December 31, 1996 for
Salem Unit 2, will be recoverable in rates in ACE's 1997 LEC
proceeding. Replacement power costs incurred after the agreed-
upon return-to-service date for the Salem Station will not be
recoverable in rates. ACE has incurred $10.2 million in non-
recoverable replacement power costs to date related to Salem.
ACE entered into an agreement with PS for the purpose of limiting
ACE's exposure to Salem's 1997 operation and maintenance (O&M)
expenses. Pursuant to the terms of the agreement, ACE was
obligated to pay to PS $10 million of O&M expense, as a fixed
charge payable in twelve equal installments beginning February 1,
1997. ACE's obligation for any contributions, above the $10
million, to Salem 1997 O&M expenses up to ACE's estimated share of
$21.8 million, is based on performance and directly related to the
timely return and operation of the units. As a result of this
Agreement, ACE 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 litigation is continuing in accordance
with the schedule established by the court.
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 for the decontamination
and decommissioning of Federally operated nuclear enrichment
facilities. Based on its ownership in five nuclear generating
units, ACE has a liability of $4.6 million and $5.3 million at
December 31, 1997 and 1996, respectively, for its obligation to be
paid over the next 12 years. ACE has an associated regulatory
asset of $5.0 million and $5.7 million at December 31, 1997 and
1996, 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.
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. According to a December
PAGE
1996 stipulation agreement, 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 under the nuclear performance standard. Additionally,
ACE will not incur a nuclear performance penalty for 1997.
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, 1997, the maximum amount of retrospective premiums ACE could
be assessed for losses during the current policy year was $4.4
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
PAGE
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.
NOTE 12. ACE's ELECTRIC UTILITY INDUSTRY RESTRUCTURING AND
STRANDED COSTS
In April 1997, the BPU issued its Final Report containing findings
and recommendations on the electric utility industry restructuring
in New Jersey to the Governor and the State Legislature for their
consideration. The recommendation for phase-in of retail choice
to electric consumers calls for choice to 10% of all customers
beginning October 1, 1998 and to 100% by July 1, 2000. The Report
required each electric utility in the state to file complete
restructuring plans, stranded cost filings and unbundled rate
filings by July 15, 1997. The Report would allow utilities the
opportunity to recover stranded costs on a case-by-case basis,
with no guarantee of 100 percent recovery of eligible stranded
costs.
ACE filed its response to the BPU on July 15, 1997. ACE's
restructuring plan met the BPU's recommendations for phase-in of
retail electric access based on a first-come, first-served basis,
proposing choice to 10% of all customers beginning October 1, 1998
and to 100% by July 1, 2000. Customers remaining with ACE will be
charged a market-based electricity price beginning October 1,
1998. The restructuring plan included a two-phased approach to
future rate reductions.
In an October 31, 1997 letter to the BPU, ACE added specificity to
the framework set out in the restructuring plan with regard to
steps ACE anticipates taking to meet the BPU's rate reduction and
restructuring goals. First, specific, definable cost reductions
of approximately 4% after 1998 were outlined. Further, ACE
offered that an appropriate resolution of the merger proceedings
will allow ACE to reduce its rates, due to the merger,
approximately 1.25% upon consummation of the change in control.
In addition, ACE's current estimate showed that, through the use
of securitized debt for the full amount of stranded costs
associated with its own generation assets, a further rate decrease
of up to 2% was possible based on appropriate legislation and
orders of the BPU with respect to securitization. Finally, ACE
estimates that the results of good-faith negotiations with the
nonutility generators could provide a reduction of up to an
additional 1.75%. In summary, ACE outlined a total rate reduction
of 9% by the end of the transition. On January 28, 1998, the BPU
issued its Order establishing the procedural schedule regarding
the restructuring plan. Under that order, hearings on the
PAGE
restructuring plan are to be completed by mid-May 1998. It is
anticipated that the BPU will issue its final order during the
summer of 1998.
Under the stranded cost filing, ACE specified its total stranded
cost estimated to be approximately $1.3 billion, of which $911
million is attributable to above-market nonutility generation
(NUG) contracts. The remaining amount, approximately $415
million, is related to wholly- and jointly-owned generation
investments. The stranded cost filing supports full recovery of
stranded costs, which ACE believes is necessary to move to a
competitive environment. On February 5, 1998, the Company filed
rebuttal testimony in the stranded cost filing. As part of the
filing, the Company updated its stranded cost estimates for the
effects of tax law changes in the State of New Jersey and to
modify certain assumptions made in estimating the stranded costs.
The total stranded costs in the rebuttal filing are approximately
$1.2 billion with $812 million attributable to NUG contracts and
$397 million related to wholly- and jointly-owned generation
investments. Determination of the stranded cost filing will be
heard by the Office of Administrative Law. The ALJ is expected to
render a decision in May 1998. If ACE is required to recognize
amounts as unrecoverable, ACE may be required to write down asset
values, and such writedowns could be material.
ACE continues to meet the criteria set forth in SFAS 71 and has
presented these financial statements in accordance therewith.
(See Note 1 - Regulation - ACE). The FASB, through the Emerging
Issue Task Force (EITF), has recently set forth guidance intended
to clarify the accounting treatment of specific issues associated
with the restructuring of the electric utility industry through
EITF Issue No. 97-4, "Deregulation of the Pricing of Electricity -
Issues Related to the Application of FASB Statements No. 71,
Accounting for the Effects of Certain Types of Regulation, and No.
101, Regulated Enterprises-Accounting for the Discontinuation of
application of FASB Statement No. 71" (EITF No. 97-4)". The
consensus reached in EITF No. 97-4 as to when an enterprise should
stop applying SFAS 71 to a separable portion of its business whose
pricing is being deregulated, is defined as "when deregulatory
legislation or a rate order (whichever is necessary to effect
change in the jurisdiction) is issued that contains sufficient
detail for the enterprise to reasonably determine how the
transition plan will effect the separable portion of its business"
(e.g. generation).
Consensus was also reached "that the regulatory assets and
regulatory liabilities that originated in the separable portion of
an enterprise to which Statement 101 (SFAS 101, "Regulatory
Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71") is being applied should be evaluated on
the basis of where (that is, the portion of the business in which)
the regulated cash flows to realize and settle them, respectively,
will be derived." Additionally, the "source of the cash flow
approach adopted in the consensus should be used for recoveries of
all costs and settlements of all obligation (not just for
regulatory assets and regulatory liabilities that are recorded at
the date Statement 101 is applied) for which regulated cash flows
are specifically provided in the deregulatory legislation or rate
order".
At this time ACE cannot predict, with certainty when it will stop
applying SFAS 71 for its generation business. ACE also cannot
predict the impacts for its generation business nor can it predict
the impacts on its financial condition as a result of applying
SFAS 101. The outcome will be dependent upon when a plan is
approved and the level of recovery of stranded costs allowed by
the BPU. If assets require a write-down as a result of the
application of SFAS 101, ACE may need to record an extraordinary
noncash charge to operations that could have a material impact on
the financial position and results of operations of ACE.
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. The aggregate
amount of such reduced rate agreements has been a reduction to
revenues of $10.5 million for 1997 and $3.5 million for 1996.
PAGE
NOTE 13. 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) 1997 1996 Period*
Recoverable Future Federal
Income Taxes $85,858 $85,858 (A)
Unrecovered Purchased Power Costs:
Capacity Cost 48,038 64,658 3
years
Contract Renegotiation Costs 18,226 18,742 17
years
Unrecovered State Excise Taxes 45,154 54,714 5 years
Unamortized Debt Costs-Refundings 30,002 29,878 1-29 years
Deferred Energy Costs(See Note 1) 27,424 33,529 (B)
Other Regulatory Assets:
Postretirement Benefits Other
Than Pensions (See Notes 3&5) 37,476 32,609 15 years
Asbestos Removal Costs 8,816 9,086 32 years
Decommissioning/Decontaminating
Federally-owned Nuclear Units
(See Note 11) 5,032 5,726 11 years
Other 10,789 12,154
$316,815 $346,954
*From December 31, 1997
(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. FASB Statement of Financial Accounting Standard No. 106 -
"Employers Accounting for Post-retirement Benefits Other Than
Pensions" (SFAS 106) required companies to recognize an obligation
composed of the present value of OPEB obligations for retirees and
current employees incurred as of the date of adoption. In December
1992, ACE adopted SFAS 106, applied deferred accounting to these OPEB
PAGE
costs and began to record a regulatory asset consistent with SFAS 71.
In December 1997, the BPU approved an increase in annual base rate
revenues of $5.0 million for recovery of expenses associated with OPEB
costs. This amount included recovery of the regulatory asset over a
15 year period beginning in January 1998. 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.
NOTE 14. 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) 1997 1996
Production plant $ 6,642 $ 6,642
Less accumulated amortization 5,707 5,005
Net 935 1,637
Nuclear fuel 38,795 38,277
Leased property-net $39,730 $39,914
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 1997, 1996 and 1995 include leased
nuclear fuel costs of $9.8 million, $8.7 million and $11.2 million,
respectively, and rentals and lease payments for all other capital and
operating leases of $2.7 million, $2.6 million and $3.9 million,
respectively. Future minimum rental payments for all noncancellable
lease agreements are less than $2.5 million per year for each of the
next 5 years.
PAGE
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 13 to 14 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) 1997 1996
Rentals receivable (net of principal
and interest on nonrecourse debt) $50,841 $50,898
Estimated residual values 53,435 53,435
Unearned and deferred income (23,828) (24,646)
Investment in leveraged leases 80,448 79,687
Deferred taxes arising from leveraged
leases (76,362) (76,671)
Net investment in leveraged leases $ 4,086 $ 3,016
NOTE 15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company does not use derivative financial instruments in its
investment portfolio or for trading purposes. ACE and AEE are exposed
to market changes in certain energy commodity prices (natural gas and
electricity). To minimize the risk of market fluctuations associated
with the purchase and sale of energy commodities both ACE and Enerval
enter into various transactions involving derivative financial
instruments for hedging purposes.
ACE enters into agreements to buy and sell electricity at a
predetermined price for future periods. ACE utilizes purchased and
written options to purchase or sell a predetermined amount of
electricity at a predetermined price in an effort to limit ACE's risk
related to those agreements. Gains or losses associated with
derivative transactions are recognized in operations in the period the
derivative instrument is terminated or extinguished or ceases to be
qualified as a hedge. ACE has established risk management policies
and procedures to minimize the level of risk associated with electric
marketing transactions. At December 31, 1997, ACE's unhedged
outstanding commitments to sell energy were immaterial.
AEE through Enerval enters into fixed-priced contracts which commit
the company to sell, up to a predetermined volume, natural gas at a
fixed price. To meet the physical gas supply delivery requirements
under these gas sales contracts, Enerval enters into natural gas
physical purchase contracts based on market price. In order to hedge
its price risk relative to its fixed price sales commitments, Enerval
utilizes natural gas futures contracts to reduce its exposure relative
to the volatility of market prices. Enerval records the gain or loss
PAGE
resulting from changes in the market value of the futures contract as
an increase or decrease to fuel costs when the corresponding sale is
made.
As a service to Enerval, the other 50% owner enters into futures
contracts on Enerval's behalf. As of December 31, 1997, this owner
entered into natural gas futures contracts on behalf of Enerval for
9.3 million DTH at a price range of $1.90 to $3.20, through March 2000
in the notional amount of $21.2 million. The original contract terms
range from one month to two years. Enerval's futures contracts hedge
$21.7 million in anticipated natural gas sales. The counterparties to
the futures contracts are the New York Mercantile Exchange and major
over the counter market traders. The Company believes the risk of
nonperformance by these counterparties is not significant. If the
contracts had been terminated at December 31, 1997, $0.6 million would
have been payable by Enerval for the natural gas price fluctuations.
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 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 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:
Long Term Debt and Preferred Securities
(in millions)
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
ACE Long Term Debt $833.7 $859.5 $802.4 $828.8
ACE Preferred Stock 64.0 60.1 74.0 77.1
Preferred Securities* 70.0 72.3 70.0 69.3
AEI Long Term Debt 53.5 53.5 37.6 37.6
ATS Long Term Debt 120.1 120.1 54.5 54.5
ATE Long Term Debt 20.0 20.3 33.5 34.0
* ACE Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of ACE
NOTE 16. 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:
Basic Diluted Dividends
Operating Operating Net Earnings Earnings Paid
Quarter Revenues Income Income Per Share Per Share Per Share
1997 (000) (000) (000)
1st $ 245,529 $ 47,172 $18,631 .35 $ .35 $.385
2nd 244,338 44,659 16,845 .32 .32 .385
3rd 340,623 89,456 46,466 .89 .88 .385
4th 271 870 7,916 (7,537) (.14) (.14) .385
Annual $1,102,360 $189,203 $74,405 $1.42 $1.42 $1.54
1996
1st $246,911 $ 39,853 $15,535 .30 $ .30 $.385
2nd 228,321 32,476 10,250 .20 .20 .385
3rd 286,273 67,631 32,567 .62 .62 .385
4th 235,533 18,717 415 .01 .01 .385
Annual $997,038 $158,677 $58,767 $1.12 $1.12 $1.54
Certain prior year amounts have been reclassified to conform to the
current year reporting of these items. The most notable
reclassification, with no effect on net income, pertains to the
Company's nonutility activities previously reported in the Other
Income line on the Consolidated Statement of Income. The revenues,
operating expenses and income taxes from those operations are now
reflected on the appropriate line items.
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 1997 Net Income reflects a charge of $16.5 million,
after tax of $7.1 million recorded in December 1997 for the
termination of various pension and compensation plans in anticipation
of the merger. (See Note 4. - Merger). These expenses are included
in operations expense and are classified as Termination of Employee
Benefit Plans on the consolidated income statement.
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.
PAGE
REPORT OF MANAGEMENT-Atlantic City Electric Company
The management of Atlantic City Electric Company 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, 1997, 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, 1997 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 2, 1998
PAGE
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, 1997
and 1996 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, 1997. 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, 1997 and 1996 and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 2, 1998 (March 1, 1998 as to Note 4)
Parsippany, New Jersey
PAGE
Atlantic City Electric Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Dollars, in Thousands)
December 31,
1997 1996
ASSETS
ELECTRIC UTILITY PLANT
In Service:
Production $1,242,049 $1,212,380
Transmission 383,577 373,358
Distribution 763,915 731,272
General 195,745 191,210
Total In Service 2,585,286 2,508,220
Less Accumulated Depreciation 934,235 871,531
Utility Plant in Service-Net 1,651,051 1,636,689
Construction Work in Progress 95,120 117,188
Land Held for Future Use 5,604 5,604
Leased Property-Net 39,730 39,914
1,791,505 1,799,395
INVESTMENTS AND NONUTILITY PROPERTY
Nuclear Decommissioning Trust Fund 81,650 71,120
Other 10,853 9,750
92,503 80,870
CURRENT ASSETS
Cash and Temporary Investments 5,640 7,927
Accounts Receivable:
Utility Service 64,511 64,432
Miscellaneous 23,507 21,650
Allowance for Doubtful Accounts (3,500) (3,500)
Unbilled Revenues 36,915 33,315
Fuel (at average cost) 29,159 29,603
Materials and Supplies (at average cost) 20,893 23,815
Working Funds 15,125 15,517
Deferred Energy Costs 27,424 33,529
Prepaid Excise Tax 3,804 7,125
Other Prepayments 16,273 10,089
239,751 243,502
DEFERRED DEBITS
Unrecovered Purchased Power Costs 66,264 83,400
Recoverable Future Federal Income Taxes 85,858 85,858
Unrecovered State Excise Taxes 45,154 54,714
Unamortized Debt Costs 43,418 43,579
Deferred Other Post Retirement Employee
Benefit Costs 37,476 32,609
Other Regulatory Assets 24,637 26,966
Other 10,189 9,848
312,996 336,974
TOTAL ASSETS $2,436,755 $2,460,741
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Dollars, in Thousands)
December 31,
1997 1996
LIABILITIES AND CAPITALIZATION
CAPITALIZATION
Common Shareholder's Equity:
Common Stock $ 54,963 $ 54,963
Premium on Capital Stock 231,081 231,081
Contributed Capital 263,617 259,078
Capital Stock Expense (1,537) (1,645)
Retained Earnings 234,909 234,948
Total Common Shareholder's Equity 783,033 778,425
Preferred Securities:
Not Subject to Mandatory Redemption 30,000 30,000
Subject to Mandatory Redemption 33,950 43,950
Company-Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Junior Subordinated Debentures of
the Company 70,000 70,000
Long Term Debt 833,744 802,245
1,750,727 1,724,620
CURRENT LIABILITIES
Preferred Stock Redemption Requirement - 10,000
Capital Lease Obligations-Current 653 702
Long Term Debt-Current - 175
Short Term Debt 55,675 64,950
Accounts Payable 56,672 63,644
Federal Income Taxes Payable-Affiliate - 7,398
Other Taxes Accrued 5,922 7,494
Interest Accrued 19,562 19,619
Dividends Declared 21,215 21,701
Deferred Income Taxes 1,888 3,190
Provision for Rate Refunds - 13,000
Other 20,293 19,137
181,880 231,010
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 362,213 357,580
Deferred Investment Tax Credits 44,043 46,577
Capital Lease Obligations 39,077 39,212
Accrued Other Post Retirement Employee
Benefit Costs 37,476 32,609
Other 21,339 29,133
504,148 505,111
Commitments and Contingencies (Note 11)
TOTAL LIABILITIES AND CAPITALIZATION $2,436,755 $2,460,741
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, in Thousands)
For the Years Ended December 31,
1997 1996 1995
OPERATING REVENUES
Electric $1,068,534 $984,360 $953,779
Other Services 16,356 5,287 1,004
1,084,890 989,647 954,783
OPERATING EXPENSES
Energy 293,457 225,185 191,766
Purchased Capacity 197,386 195,699 190,570
Operations 154,556 163,633 153,397
Maintenance 32,634 44,462 34,414
Termination of Employee Benefit
Plans 22,246 - -
Depreciation and Amortization 83,276 80,845 78,461
State Excise Taxes 103,991 104,815 102,811
Taxes Other Than Income 7,292 9,888 8,677
894,838 824,527 760,096
OPERATING INCOME 190,052 165,120 194,687
OTHER INCOME
Allowance for Equity Funds Used
During Construction 815 879 817
Other-Net 14,595 11,275 12,725
15,410 12,154 13,542
INTEREST CHARGES
Interest Expense 64,501 64,847 62,879
Allowance for Borrowed Funds Used
During Construction (1,003) (976) (1,679)
63,498 63,871 61,200
LESS PREFERRED SECURITIES DIVIDEND
OF TRUST 5,775 1,428 -
INCOME BEFORE INCOME TAXES 136,189 111,975 147,029
FEDERAL INCOME TAXES 50,442 36,958 48,277
NET INCOME 85,747 75,017 98,752
LESS PREFERRED STOCK DIVIDEND
REQUIREMENTS 4,821 9,904 14,627
INCOME AVAILABLE FOR COMMON STOCK $ 80,926 $ 65,113 $ 84,125
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Atlantic City Electric Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars, in Thousands) For the Years Ended December 31,
1997 1996 1995
CASH FLOWS OF OPERATING ACTIVITIES
Net Income $ 85,747 $ 75,017 $ 98,752
Unrecovered Purchased Power Costs 17,136 16,417 15,721
Deferred Energy Costs 6,105 (2,095) (20,435)
Preferred Securities Dividends of Trust 5,775 1,428 -
Depreciation and Amortization 83,276 80,845 78,461
Deferred Income Taxes-Net 796 1,448 15,694
Unrecovered State Excise Taxes 9,560 9,560 9,560
Changes-Net Working Capital Components:
Accounts Receivable and Unbilled
Revenues (5,536) 5,795 (22,565)
Accounts Payable & Federal Income
Taxes Payable - Affiliate (14,370) 2,814 (4,801)
Inventory 3,365 (2,523) 4,960
Other (6,532) 6 (9,838)
Rate Refunds (13,000) 13,000 -
Employee Separation Costs (308) (7,179) (19,112)
Other-Net (1,744) 18,139 11,266
Net Cash Provided by Operating
Activities 170,270 212,672 157,663
CASH FLOWS OF INVESTING ACTIVITIES
Construction Expenditures (80,849) (86,805) (100,904)
Leased Nuclear Fuel Material (9,105) (6,833) (10,446)
Plant Removal Costs (47) (2,109) (4,525)
Other-Net (3,508) (15,707) 892
Net Cash Used by Investing Activities (93,509) (111,454) (114,983)
CASH FLOWS OF FINANCING ACTIVITIES
Issuance of Preferred Securities - 70,000 -
Proceeds from Long Term Debt 87,600 - 104,404
Retirement and Maturity of
Long Term Debt (74,066) (12,266) (57,489)
Increase in Short Term Debt 7,150 34,405 21,945
Proceeds from Nuclear Fuel Capital
Lease Obligations 9,105 6,833 10,446
Redemption of Preferred Stock (20,000) (98,876) (24,500)
Capital Stock Dividends Declared (85,678) (92,066) (95,866)
Preferred Securities of Trust (5,775) (1,428) -
Capital Contributions from Parent(net) 4,539 (567) (223)
Other-Net (1,923) (3,313) (869)
Net Cash Used by Financing Activities (79,048) (97,278) (42,152)
Net Increase in Cash and
Temporary Investments (2,287) 3,940 528
Cash and Temporary Investments:
Beginning of Year 7,927 3,987 3,459
End of Year $ 5,640 $ 7,927 $ 3,987
Supplemental Schedule of Payments:
Interest $ 64,966 $ 65,269 $ 58,274
Federal Income Taxes $ 48,400 $ 36,937 $ 31,999
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
PAGE
Atlantic City Electric Company and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON SHAREHOLDER'S EQUITY
(Dollars, in Thousands)
Premium Capital
Common On Capital Contrib. Stock Retained
Stock Stock Capital Expense Earnings
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 Contrib.
from Parent (net) (567)
Less Dividends
Declared:
Preferred (9,904)
Common (82,163)
Balance,
December 31, 1996 54,963 231,081 259,078 (1,645) 234,948
Net Income 85,747
Capital Stock Expense 108 (108)
Capital Contrib.
from Parent (net) 4,539
Less Dividends
Declared:
Preferred (4,821)
Common (80,857)
Balance,
December 31, 1997 $54,963 $231,081 $263,617 $(1,537) $234,909
As of December 31, 1997, the Company had 25 million authorized shares
of Common Stock at $3 par value. Shares outstanding at December 31,
1997, 1996 and 1995 were 18,320,937.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
PAGE
ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
Except as modified below, Notes 1 through 16, excluding Note 7
and Note 10, 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 Deepwater Operating Company (Deepwater) its wholly-owned
subsidiary. On January 1, 1998, Deepwater was merged into ACE
with no financial effect on financial position or results of
operations of ACE. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts have been reclassified to conform to
the current year reporting of these items. The most notable
reclassification, with no effect on net income, pertains to the
Company's nonutility activities previously reported in the Other
Income line on the Consolidated Statement of Income. The
revenues, operating expenses and income taxes from those
operations are now reflected on the appropriate line 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
$28.6 million in 1997, $27.8 million in 1996 and $23.8 million
in 1995. ACE sells electricity to subsidiaries of AEE. The
electric sales totaled $6.5 million for 1997, $2.2 million for
1996 and $0.6 million for 1995. ACE also rents office space
from a wholly-owned subsidiary of AEE which amounts are not
significant. The amounts receivable from and payable to
affiliates were not significant at December 31, 1997 and 1996.
PAGE
Note 2. Income Taxes
The components of Federal income tax expense for the years ended
December 31 are as follows:
(000) 1997 1996 1995
Current $49,646 $35,510 $32,457
Deferred 796 1,448 15,820
Total Federal Income Tax Expense $50,442 $36,958 $48,277
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:
1997 1996 1995
Statutory Federal Income Tax Rate 35% 35% 35%
(000)
Income Tax Computed at the
Statutory Rate $47,666 $39,191 $51,417
Plant Basis Differences 4,952 3,096 1,307
Amortization of Investment Tax
Credits (2,534) (2,534) (2,534)
Other-Net 358 (2,795) (1,913)
Total Federal Income Tax Expense $50,442 $36,958 $48,277
Effective Federal Income Tax Rate 37% 33% 33%
The increase in the effective Federal income tax expense rate is
due primarily to permanently non-deductible merger and merger
related expenses. State income tax expense is not significant.
Items comprising deferred tax balances as of December 31 are as
follows:
(000) 1997 1996
Deferred Tax Liabilities:
Plant Basis Differences $332,288 $326,673
Unrecovered Purchased
Power Costs 16,813 22,630
State Excise Taxes 16,326 20,141
Other 34,190 29,344
Total Deferred Tax
Liabilities 399,617 398,788
Deferred Tax Assets:
Deferred Investment
Tax Credits 23,775 25,143
Other 11,741 12,875
Total Deferred Tax Assets 35,516 38,018
Total Deferred Taxes-Net $364,101 $360,770
PAGE
On July 14, 1997 the Governor signed a bill into law eliminating
the Gross Receipts and Franchise Tax (GR & FT) paid by the
electric, natural gas and telecommunication public utilities. In
its place, utilities will be subject to the state's corporate
business tax. In addition, the state's existing sales and use
tax will be expanded to include retail sales of electric power
and natural gas, and a transitional energy facility assessment
tax (TEFA) will be applied for a limited time on electric and
natural gas utilities and will be phased-out over a five year
period. The law took effect January 1, 1998 and on January 1 of
each of the years thereafter, the TEFA will be reduced by 20%.
By the year 2003, the TEFA will be fully phased-out and the
savings will be passed through to ACE's Customers. As a result
of this law, ACE will record deferred state taxes beginning in
1998 for state tax basis versus book basis differences.
Note 16. Quarterly Financial Results (Unaudited).
Quarterly financial data of ACE, reflecting all adjustments
necessary in the opinion of management for a fair presentation of
such amounts, are as follows:
Operating Operating Net Earnings for
Quarter Revenues Income Income Common Stock
1997 (000) (000) (000) (000)
1st $ 243,443 $ 47,350 $20,371 $18,961
2nd 242,567 45,028 18,676 17,266
3rd 338,070 89,123 47,541 46,541
4th 260,810 8,551 (841) (1,842)
Annual $1,084,890 $190,052 $85,747 $80,926
1996
1st $245,656 $ 40,716 $19,316 $16,307
2nd 226,858 33,658 13,464 10,455
3rd 284,506 68,766 35,611 33,154
4th 232,627 21,980 6,627 5,197
Annual $989,647 $165,120 $75,017 $65,113
Individual quarters may not add to the total due to rounding.
Certain prior year amounts have been reclassified to conform to
the current year reporting of these items. The most notable
reclassification, with no effect on net income, pertains to the
Company's nonutility activities previously reported in the Other
Income line on the Consolidated Statement of Income. The
revenues, operating expenses and income taxes from those
operations are now reflected on the appropriate line items.
Third quarter results generally exceed those of other quarters due
to increased sales and higher residential rates for ACE.
The fourth quarter 1997 Net Income reflects a charge of $15.6
million, after tax of $6.6 million recorded in December 1997 for
the termination of various pension and compensation plans in
anticipation of the merger. (See AEI Note 4. - Merger). These
expenses are included in operations expense and are classified as
Termination of Employee Benefit Plans on the consolidated income
statement.
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.
PAGE
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
See Exhibit Index Attached.
***********************************
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
Atlantic Energy, Inc.
Atlantic City Electric Company
(Registrant)
By: /s/J. E. Franklin II
J. E. Franklin II
Vice President, Secretary and
General Counsel of Atlantic Energy, Inc.
Senior Vice President, Secretary and
General Counsel of Atlantic City
Electric Company
Date: March 3, 1998
PAGE
EXHIBIT INDEX
23 Independent Auditors' Consent
27 Financial Data Schedules for Atlantic Energy, Inc. and
Atlantic City Electric Company for periods ended December 31,
1997.