ATLANTIC
ENERGY
NOTICE OF 1997
ANNUAL MEETING,
PROXY STATEMENT AND
1996 ANNUAL REPORT TO
SHAREHOLDERS
MARCH 19, 1997
TABLE OF CONTENTS
Proxy Statement Page
- - ------------- ----
Notice of Annual Meeting.......................................... 1
Voting Securities................................................. 2
/ / Nominees for Election..................................... 3
Stock Ownership of Directors and Officers................. 6
Pending Merger............................................ 6
Board and Committee Meetings.............................. 7
Director Compensation..................................... 8
Executive Compensation
o Personnel & Benefits Committee Report............... 10
o Summary Compensation Table.......................... 14
o Performance Graph................................... 17
o Employment Agreements............................... 17
o Pension Plans....................................... 18
/ / Ratification of the Appointment of Independent Auditors... 19
Section 16(a) Compliance.................................. 20
Future Proposals of Shareholders.......................... 20
1996 Annual Report to Shareholders........................ Appendix A
- - ------------
/ / Matters to be voted on at the meeting.
ATLANTIC ENERGY, INC
.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Shareholder:
The Annual Meeting of Shareholders of Atlantic Energy, Inc. (the "Company")
will be held in the Atlantic City Ballroom of Harrah's Casino Hotel, 777
Harrah's Boulevard, Atlantic City, New Jersey, on Wednesday, April 23, 1997, at
3:00 p.m. for the following purposes:
1. To elect a Board of Directors of nine members to hold office for one
year and until their successors have been elected and qualified.
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the year ending December 31, 1997.
3. To transact any other business as may properly come before the
meeting, or any adjournments thereof.
PLEASE NOTE THAT THE 1996 ANNUAL REPORT TO SHAREHOLDERS APPEARS AS
APPENDIX A TO THIS PROXY STATEMENT.
I would like to thank the many shareholders who voted by proxy or in
person at the Special Meeting of Shareholders on January 30, 1997, called for
the purpose of approving an Agreement and Plan of Merger dated August 9, 1996,
as amended December 26, 1996, among Atlantic Energy, Inc., Delmarva Power and
Light Company, Conectiv, Inc. and DS Sub, Inc. (the "Merger Agreement").
Although you may have voted in the Special Meeting, it is necessary for you to
return the enclosed proxy card to have your vote represented at the Annual
Meeting for the election of Directors and appointment of the independent
auditors. Please sign, date and return your proxy card in the enclosed envelope
that requires no postage if mailed in the United States. Directors and officers
will be available to talk individually with shareholders before and after the
meeting.
Harrah's Casino Hotel is fully accessible to disabled persons. Special
seating will be available for shareholders using wheelchairs.
IF YOU ARE UNABLE TO ATTEND, PLEASE PROMPTLY RETURN YOUR PROXY CARD SO
THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
By Order of the Board of Directors,
/s/ James E. Franklin II
-----------------------------------
JAMES E. FRANKLIN II
Secretary
March 19, 1997
PLEASE NOTE: There will be a Shareholders' Help Desk located in the
Atlantic City Ballroom to answer your questions and provide information
regarding share transfer, dividend payments and the Dividend Reinvestment and
Stock Purchase Plan.
PROXIES AND SOLICITATION
This proxy statement and accompanying proxy card were first mailed to
shareholders on or about March 19, 1997.
Your proxy is solicited on behalf of the Board of Directors of the
Company. If your executed proxy card is returned in advance of the meeting and
is not revoked, the shares it represents will be voted in the manner directed.
If no direction is given, your proxy will be voted for items 1 and 2. Your proxy
may be revoked in writing prior to its exercise. Under New Jersey law, the
presence at the meeting of a shareholder who has given a proxy does not revoke
the proxy unless the shareholder files written notice of such revocation with
the Secretary of the meeting prior to the voting of the proxy.
Other than the election of Directors, which requires a plurality of the
votes cast, each matter to be submitted to the shareholders requires the
affirmative vote of the majority of the votes cast at the meeting. For purposes
of determining the number of votes cast with respect to a particular matter,
only votes cast "for" or "against" are included. Abstentions and broker
non-votes are counted only for purposes of determining whether a quorum is
present at the meeting.
The solicitation of proxies will be made at the expense of the Company.
Proxies will be solicited primarily by mail and may be solicited personally and
by telephone. The Company will reimburse banks and brokerage firms for their
expenses in forwarding proxy material. The principal executive offices of
Atlantic Energy, Inc. are located at 6801 Black Horse Pike, Egg Harbor Township,
New Jersey 08234-4130.
VOTING SECURITIES
Record holders of Common Stock at the close of business March 6, 1997
will be entitled to vote at the meeting. At the close of business on March 6,
1997, there were 52,502,479 shares of Common Stock outstanding. Holders of
shares of Common Stock are entitled to one vote per share of Common Stock.
ELECTION OF DIRECTORS
At the meeting, nine Directors are to be elected for a term of one year and
until their successors have been elected and qualified. Each of the nominees,
with the exception of Mr. Chesser, was elected as a Director at the 1996 Annual
Meeting of Shareholders. Mr. Chesser was elected a Director on June 13, 1996 by
a majority vote of the Board of Directors, pursuant to the Company's By-Laws, in
order to fill the vacancy caused by the resignation of Mr. Jos. Michael Galvin,
Jr. on June 6, 1996.
IT IS INTENDED THAT SHARES REPRESENTED BY THE PROXIES SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS WILL BE VOTED IN FAVOR OF THE ELECTION OF THE PERSONS
LISTED. MANAGEMENT KNOWS OF NO REASON WHY ANY NOMINEE FOR DIRECTOR WOULD BE
UNAVAILABLE. IF ANY NOMINEE SHOULD BECOME UNAVAILABLE, THE PROXY MAY BE VOTED
FOR A SUBSTITUTE NOMINEE.
2
NOMINEES FOR ELECTION
DIRECTOR
OF THE COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OR ITS PREDECESSORS
BUSINESS EXPERIENCE PAST FIVE YEARS SINCE
----------------------------------- -------------------
MICHAEL J. CHESSER, 48, Director, President & Chief
Operating Officer of the Company and of Atlantic City
Electric Company and President & Chief Operating Officer of
[PHOTO] Atlantic Energy Enterprises, Inc. Formerly held the title
of Senior Vice President of the Company; Former Vice
President, Marketing & Gas Operations and former Vice
President, Marketing of Baltimore Gas & Electric,
Baltimore,
Maryland................................................... 1996
Other Information: Mr. Chesser is an ex-offico member of all committees of the
Board of Directors except the Audit and Personnel & Benefits Committees. He is
also a Director of Atlantic Energy Enterprises, Inc.
GERALD A. HALE, 69, President of Hale Resources, Inc.,
Summit, NJ, a health care, industrial/natural resource
[PHOTO] investment and management company. General Manager of HHH
Investment Company, LLC. Director of New Jersey
Manufacturers Insurance Company, New Jersey Business and
Industry Association and Hoke,Inc ......................... 1983
Other Information: Mr. Hale is a member of the Personnel & Benefits and Retail
Committees of the Board of Directors. He is also Chairman of Atlantic Energy
Enterprises, Inc.
MATTHEW HOLDEN, JR., 65, Professor of Government & Foreign
[PHOTO] Affairs, University of Virginia, Charlottesville, VA.
Economic and political consultant, arbitrator. .......... 1981
Other Information: Mr. Holden is Chairman of the Audit Committee and a member of
the Personnel & Benefits and Wholesale Committees of the Board of Directors. He
is a member of the Department of Energy's Task Force on Electrical System
Reliability. Prior to 1982, he was a Commissioner with the Federal Energy
Regulatory Commission and Wisconsin Public Service Commission.
3
DIRECTOR
OF THE COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OR ITS PREDECESSORS
BUSINESS EXPERIENCE PAST FIVE YEARS SINCE
----------------------------------- -------------------
CYRUS H. HOLLEY, 60, President of Management Consulting
[PHOTO] Services, Grapevine, TX. Director and Chief Executive
Officer of Oakmont Enterprises, Grapevine, TX. Director of
UGI Corporation and Kerns Oil & Gas Company............... 1990
Other Information: Mr. Holley is Chairman of the Wholesale Committee and a
member of the Personnel & Benefits Committee of the Board of Directors. He is
also a Director of Atlantic Energy Enterprises, Inc.
JERROLD L. JACOBS, 57, Chairman of the Board & Chief
[PHOTO] Executive Officer of the Company and of Atlantic City
Electric Company. Formerly held the title of President of
the Company............................................... 1990
Other Information: Mr. Jacobs is an ex-officio member of all committees of the
Board of Directors except the Audit and Personnel & Benefits Committees. He is
also a Director of Atlantic Energy Enterprises, Inc.
KATHLEEN MacDONNELL, 48, Corporate Vice President of
[PHOTO] Campbell Soup Company, Camden, NJ. President, Frozen Foods
& Speciality Group, of Campbell Soup Company. Former Sector
Vice President, Prepared Foods............................. 1993
Other Information: Ms. MacDonnell is Chairwoman of the Retail Committee and a
member of the Audit and Personnel & Benefits Committees of the Board of
Directors.
4
DIRECTOR
OF THE COMPANY
NAME, AGE, PRINCIPAL OCCUPATION AND OR ITS PREDECESSORS
BUSINESS EXPERIENCE PAST FIVE YEARS SINCE
----------------------------------- -------------------
RICHARD B. McGLYNN, 58, Attorney. Vice President and
[PHOTO] General Counsel of United Water Resources, Inc., Harrington
Park, NJ. Former Partner in the law firm of LeBoeuf, Lamb,
Greene & MacRae............................................ 1986
Other Information: Mr. McGlynn is Chairman of the Personnel & Benefits Committee
and a member of the Finance & Public Policy, Wholesale and Retail Committees of
the Board of Directors.
[PHOTO] BERNARD J. MORGAN, 60, Financial Investor, Southampton, PA.
Director of FormMaker Software, Inc. and CRW Financial. 1988
Other Information: Mr. Morgan is Chairman of the Finance & Public Policy
Committee and a member of the Audit Committee. He is also a Director of Atlantic
Energy Enterprises, Inc. He is a former Vice Chairman of First Fidelity
Bancorporation, NJ/PA; Former Vice Chairman, President, Chief Executive Officer
and Chief Operating Officer of Fidelcor, Inc. Former Chairman, Deputy Chairman,
Chief Executive Officer, President and Chief Operating Officer of Fidelity Bank,
N.A.
[PHOTO] HAROLD J. RAVECHE, 53, President of Stevens Institute of
Technology, Hoboken, NJ., Chair of the Board of the New
Jersey Corporation for Advanced Technology............... 1990
Other Information: Mr. Raveche is a member of the Audit, Finance & Public
Policy, Retail and Wholesale Committees of the Board of Directors. He is the
Former Dean of Science, Rensselaer Polytechnic Institute.
5
STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
The following table sets forth the beneficial ownership of Common Stock
of the Company of all Directors and nominees, three named executive officers,
and all Directors and Officers as a group as of December 31, 1996.
BENEFICIAL OWNERSHIP
(SHARES OF COMMON
NAME STOCK) (1)
---- ---------------
Michael J. Chesser......................................... 26,042
Gerald A. Hale............................................. 6,259
Matthew Holden, Jr......................................... 5,222
Cyrus H. Holley............................................ 5,103
Jerrold L. Jacobs (a)...................................... 48,385
Kathleen MacDonnell........................................ 2,793
Richard B. McGlynn (b)..................................... 3,782
Bernard J. Morgan.......................................... 4,603
Harold J. Raveche.......................................... 3,434
Michael J. Barron ......................................... 16,874
James E. Franklin II ...................................... 17,119
Meredith I. Harlacher, Jr. (c) ............................ 27,571
All Directors and Officers as a Group (18 individuals)..... 222,632
----------
(1) Each of the individuals listed beneficially owned less than 1% of
the Company's outstanding Common Stock.
(a) Share ownership shown for Mr. Jacobs includes 5,027 shares held
jointly with his spouse.
(b) Share ownership shown for Mr. McGlynn includes 200 shares held in
a pension trust of which Mr. McGlynn is the trustee.
(c) Share ownership for Mr. Harlacher includes 6,572 shares held
jointly with his spouse.
PENDING MERGER
As previously announced, the Company has entered into an Agreement and
Plan of Merger, dated as of August 9, 1996 as amended and restated as of
December 26, 1996 (the "Merger Agreement") among the Company, Delmarva Power &
Light Company, a Delaware and Virginia corporation ("Delmarva"), Conectiv, Inc.,
a newly formed Delaware corporation ("Conectiv"), and DS Sub, Inc., a newly
formed Delaware corporation and wholly owned transitory subsidiary of the
Company established solely to effectuate a merger with and into Delmarva ("DS
Sub"). The Merger Agreement provides for the merger of the Company with and into
Conectiv (the "Atlantic Merger") and the merger of DS Sub with and into Delmarva
(the "Delmarva Merger") (the Atlantic and the Delmarva Merger, together the
"Mergers"). The pending Mergers and formation of Conectiv would, if consummated,
effectuate a change in control of the Company.
Upon effectiveness of the Mergers, Conectiv will become the parent of the
Company's subsidiaries and the parent of Delmarva and its subsidiaries and, with
certain limitations, (a) each issued and outstanding share of common stock, no
par value, of the Company (the "Atlantic Common Stock") will be converted into
the right to receive 0.75 of one share of Common Stock, par value $.01 per
share, of Conectiv (the "Conectiv Common Stock"), and 0.125 of one share of the
Class A Common Stock, par value $.01 per share, of Conectiv (the "Conectiv Class
A Common Stock"); (b) each issued and outstanding share of the common stock, par
value $2.25 per share, of Delmarva (the "Delmarva Common Stock") will be
converted into the right to receive one share of Conectiv Common Stock; and (c)
the common stockholders of Delmarva and Atlantic will become common stockholders
of Conectiv, all as more fully described in the Merger Agreement.
Further, the Merger Agreement provides, among other things, that the
Board of Directors of Delmarva ("Delmarva Board") will be entitled to nominate
ten members to the Board of Directors of Conectiv ("Conectiv Board") and the
Board of Directors of the Company will be entitled to nominate eight members to
the Conectiv Board. Each member of the Delmarva Board and the Company's Board
serving in such capacity immediately prior to the effective time of the Mergers
will be given the opportunity to serve on the Conectiv Board.
6
On January 30, 1997, the Merger Agreement was approved by the respective
stockholders of the Company and Delmarva. The consummation of the Merger
Agreement and effectuation of the Mergers remains, among other things, subject
to the receipt of approvals from a number of Federal and state regulatory
agencies. The Company expects the regulatory approval process to be completed
and the Mergers to be consummated in late 1997 or early 1998, however, no
assurance can be given that all such approvals will be obtained and that the
Mergers will be consummated.
MEETINGS OF THE BOARD OF DIRECTORS AND OF COMMITTEES OF THE BOARD
During 1996, 11 regular meetings, five special meetings and two telephone
conferences of the Board of Directors were held as well as one strategic
planning session. During 1996, the committees of the Board of Directors met as
follows:
NO. OF
COMMITTEE MEETINGS
-------- ------
Audit............................................ 5
Retail........................................... 2
Wholesale........................................ 3
Finance & Public Policy.......................... 3
Personnel & Benefits............................. 5
The average director attendance at Board and Committee meetings was 99%.
It is general practice for all Directors to attend meetings of each Committee.
However, only Committee members are compensated for such meetings.
FUNCTIONS OF AUDIT COMMITTEE ARE AS FOLLOWS:
1. Recommends each year to the Board, the appointment of an
independent auditing firm for the Company.
2. Reviews the scope, magnitude and cost of audit and non-audit
services to be performed by independent auditors and makes
recommendations to the Board for approval of such services.
3. Reviews accounting, financial and operating controls with
independent auditors, internal auditors and management.
4. Reviews periodic and annual audit reports of internal auditors
and independent auditors, meets independently with each and with
management, and ascertains whether the recommendations of the
independent auditors have been implemented.
5. Reviews annual financial reports with the independent auditors
prior to release.
6. Reviews and makes recommendations concerning security measures
required to protect vital records of the Company.
7. Inquires about any aspect of the business of the Company,
whenever it deems such desirable, to help ensure employees comply
with local, state and federal laws and regulations and with the
Company's Code of Ethics and Business Conduct Policy.
FUNCTIONS OF PERSONNEL & BENEFITS COMMITTEE ARE AS FOLLOWS:
1. Reviews and makes recommendations to the Board with respect to
selection of officers of the Company, and Atlantic City Electric
Company ("ACE").
2. Reviews the performance of officers of the Company and ACE;
recommends to the Board appropriate compensation levels for
officers of the Company who are also officers of ACE and Atlantic
Energy Enterprises Inc., ("AEE").
3. Reviews the compensation paid to outside Directors of the Board
of Directors of the Company and AEE and makes recommendations for
adjustments.
4. Monitors the Chief Executive Officer's program of executive
development and plans for officer succession at the Company and
ACE; monitors the management plan of organization and makes
recommendations to the Board as required.
7
5. Identifies prospective Director candidates, establishes
procedures for shareholders to recommend director candidates and
recommends to the Board nominees for election.
6. Considers and makes recommendations to the Board regarding all
retirement plans, including the retirement policy for Directors,
and post-employment benefit plans.
7. Reviews and makes recommendations regarding the adequacy of all
forms of insurance coverage for the Company.
8. Reviews the funding status of the nuclear plant decommissioning
trust of ACE.
The Personnel & Benefits Committee (the "Committee") will consider
nominees for Director recommended by shareholders. In the event that the Merger
Agreement is not consummated prior to the holding of the 1998 Annual Meeting of
Shareholders, then to be considered by the Committee, any nomination should be
submitted to the Secretary, Atlantic Energy, Inc., 6801 Black Horse Pike, Egg
Harbor Township, NJ 08234-4130, no later than 90 days prior to the 1998 Annual
Meeting of Shareholders and should include the following information: (a) as to
each nominee whom the shareholder proposes to nominate, (i) the name, age,
business address and residence address of the nominee, (ii) any other
information concerning the nominee that would be required, under the rules of
the Securities and Exchange Commission, in a proxy statement soliciting proxies
for the election of such nominee, (iii) the consent of the nominee to serve as a
director, and (b) as to the shareholder giving the suggestion, (i) the name,
business address and residence address of the shareholder, (ii) a statement that
the shareholder is a shareholder of record, entitled to vote at the meeting, and
intends to nominate each nominee in person or by proxy and (iii) a description
of all arrangements or understandings among shareholder and each nominee and any
other persons (naming such persons) pursuant to which the nomination is made by
the shareholder.
DIRECTOR COMPENSATION
1996 COMPENSATION
During 1996, non-employee Directors received fees in accordance with the
following compensation schedule:
Retainer Fee.........................................................$20,000 Annually
Board Meeting Fee.................................................... 1,000 Per Meeting Attended
Committee Meeting Fee* (if held same day as Board meeting)........... 1,000 Per Meeting Attended
Committee Meeting Fee* (if held other than Board meeting date)....... 1,150 Per Meeting Attended
Committee or Board Meeting Fee via Telephone......................... 150 Per Conference
- - ----------
* Paid to committee members only.
Actual receipt of such amounts may be deferred, with interest, until a time
selected by the non-employee Director.
In 1996, each non-employee Director received a meeting fee of $1,000 for
attendance at a strategic planning session with management and staff of the
Company and its subsidiaries.
In 1996, four non-employee Directors were elected Directors of AEE, a
holding company formed to own the shares of capital stock of all but one of the
Company's nonutility subsidiaries. Non-employee Directors receive a per meeting
fee of $1,000 for attendance at meetings of the Board of Directors of AEE. Nine
AEE Board meetings were held in 1996. Messrs. Hale, Holley and Morgan each
received $9,000 for attendance at such meetings. Prior to his resignation on
June 6, 1996, Mr. Galvin received $4,000 for attendance at four meetings.
RIGHT TO RECEIVE STOCK OPTIONS IN LIEU OF RETAINER
Pursuant to the Equity Incentive Plan ("EIP") no later than June 30 of
each year, a non-employee Director may elect to receive an option to purchase
Common Stock in lieu of all or a portion of the non-employee Director's annual
cash retainer for the following year. The number of shares subject to option is
determined pursuant to the following formula:
number of shares = amount of retainer foregone
----------------------------
50% of fair market value of shares
on first business day of the year
8
Non-employee Directors who elect to receive stock options in lieu of
retainer will pay 100% of the fair market value of the Company's Common Stock
when the foregone compensation is added to the exercise price. In 1997, no
options in lieu of retainer will be issued.
DIRECTOR RETIREMENT PLAN
The Company has established a retirement plan for non-employee Directors
("Director Retirement Plan"). Under the Director Retirement Plan each
non-employee Director now serving who has five years of service is eligible to
receive benefits for the longer of life or the full number of years the
non-employee Director served on the Board. Non-employee Directors who retired
before September 7, 1989 receive benefits for the shorter of life or the full
number of years the non-employee Director served on the Board. Non-employee
Directors who retired between September 7, 1989 and November 14, 1991, receive
benefits for a period equal to the full number of years the non-employee
Director served on the Board. Non-employee Directors who satisfy the service
requirement receive an annual benefit starting in the year they terminate
service. The annual benefit equals 100% of the annual retainer in effect in the
year in which the non-employee Director ended service, less 10% for each year
less than ten years of total service as a non-employee Director. For eligible
non-employee Directors who retire after September 7, 1989, in the event of the
death prior to receiving payments for the number of full years of his or her
service, the designated beneficiary of such non-employee Director shall be
entitled to a lump-sum payment equal to the difference between the amount the
non-employee Director has already received and the amount that would have been
received if payments were made for the full number of years of the non-employee
Director's service. The Director Retirement Plan provides that in the event of a
change of control of the Company (defined to include, among other things, the
acquisition by any person or group of 20% or more of the voting power of the
company's Common Stock or the disposition of substantially all the assets of the
Company), including as contemplated by the Merger Agreement, any non-employee
Director having less than five years of service will be deemed to have served
for five years to satisfy the service requirement; and in such event for all
Directors, the annual benefit will be calculated in accordance with the terms of
the Director Retirement Plan and payable in a lump sum.
In 1996, the Board acting in accordance with the provisions of the
Director Retirement Plan, unanimously voted to distribute to Mr. Galvin a
lump-sum payment of $292,594, representing the present value of retirement
benefits accrued by him for 18 years of eligible service.
RESTRICTED STOCK PLANS
Shares of restricted stock are granted to non-employee Directors to
enhance recruitment and retention of highly qualified individuals and to
strengthen the commonality of interests between non-employee Directors and
shareholders.
The Director Restricted Stock Plan (the "DRSP") was established in 1991
and terminated in 1994. All non-employee Directors now serving have received a
one-time grant of 2,000 shares, subject to certain restrictions. The DRSP
provides that for each year a non-employee Director served prior to 1991, 200
shares of the grant would be available to the non-employee Director free of
restrictions. Based upon their years of service prior to 1991, two non-employee
Directors have fully-vested shares in the DRSP. The grants awarded pursuant to
the DRSP to the remaining five non-employee Directors continue in effect and
vest at the rate of 200 shares per year for the applicable 10-year period. The
restrictions on shares granted under the DRSP are identical to the EIP described
below.
Grants under the EIP commence in the year following a non-employee
Director's full vesting in grants previously received by each non-employee
Director under the DRSP. Under the EIP, approved by shareholders in 1994, each
non-employee Director receives a grant of 1,000 shares every five years, subject
to certain restrictions. Two non-employee Directors whose grants pursuant to the
DRSP have fully vested, have received a grant under the EIP of 1,000 shares
subject to restriction. On December 31 of each year of the five-year period, 200
of the 1,000 shares vest. While a non-employee Director serves as an active
member of the Board of Directors, certificates are held by the Company. If a
non-employee Director terminates service because of death, disability,
retirement from the Board at age 70 or later, or upon failure to be re-elected
after being nominated, all shares (vested and nonvested) are delivered to
him/her or his/her designated beneficiary, free of restrictions. If a
non-employee Director terminates service for any other reason, the Board of
Directors, by majority vote, may grant a waiver of restrictions on shares that
otherwise would be forfeited. Commencing on the date of grant, each non-employee
Director has the right to vote such shares of Common Stock. Dividends paid on
the shares are reinvested in additional shares of Common Stock and subject to
the same restrictions as the initial grant. Under the terms of the EIP, in the
event of a change of control of the Company, including as contemplated by the
Merger Agreement, the restrictions applicable to any restricted stock shall
9
lapse and such shares shall be deemed fully vested. The value of all outstanding
restricted shares, to the extent vested, shall be cashed out, unless otherwise
determined by the Committee, on the basis of a change of control price. In 1996,
the Board acting in accordance with the provisions of the EIP, unanimously voted
to waive all restrictions on 800 nonvested shares and distributed the shares to
Mr. Galvin following his resignation. The market value of those shares as of
December 31, 1996 was $13,600.
The stock ownership reported for each non-employee Director includes
shares granted to them and subject to forfeiture under the DRSP and EIP.
PERSONNEL & BENEFITS COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
KEY COMPENSATION POLICIES
The executive compensation policies adopted by the Committee are designed
to achieve three objectives:
o To create a pay-for-performance linkage that makes a significant
portion of the total compensation opportunity for executive
officers, including the CEO, dependent on achieving key performance
objectives set at the corporate, business unit (for unit executives)
and individual executive levels.
o To structure the total compensation package so that it provides a
median level of pay in comparison to industry practice when results
approximate industry average, while paying significantly above or
below these market levels when performance falls significantly above
or below the industry average, respectively.
o To structure the incentive components of compensation for executive
officers, including the CEO, so that the creation of long-term
shareholder value is the primary focus of incentive opportunity.
To achieve these objectives, the Company follows a total compensation
philosophy in its approach to executive compensation, including compensation
paid to the CEO. Total compensation is comprised of three primary elements: base
salary, an annual incentive award ("bonus") and a long-term equity based
incentive. Executive officers' total compensation is significantly at risk based
upon the financial and operating performance of the Company. If the performance
of the Company fails to meet certain predetermined criteria and specific numeric
goals, the opportunity to earn incentive compensation is significantly reduced.
COMPENSATION PROGRAMS
The Committee approves the compensation paid to all the executive
officers of the Company and ACE including the named executive officers listed in
Table 1 -- Summary Compensation Table on page 14, through a "Utility
Compensation Program" adopted by the Committee in 1994. In addition, the
Committee approves the compensation paid to certain executive officers of the
Company who also serve as officers of AEE through an "Enterprise Compensation
Program" adopted by AEE's Board of Directors in 1995 and approved by the
Committee in 1996. Both compensation programs incorporate the strategic
compensation principles noted above. The relative mix of base salary, bonus and
long-term incentive awards provided in the Enterprise Compensation Program
differs significantly from the mix provided in the Utility Compensation Program,
with the Enterprise Compensation Program placing a greater emphasis on at-risk
compensation.
COMPETITIVE COMPENSATION
Each year, target levels of executive compensation are established for
the executive officers of the Company and ACE, including the CEO, pursuant to
the Utility Compensation Program. These target levels are approved by the
Committee and are equivalent to the median compensation levels for comparable
executive positions among a panel of 14 similar revenue and asset-sized
utilities in the eastern United States. This panel is referred to as the "peer
group" (listed on page 17). The peer group is subject to adjustment as a result
of mergers or acquisitions among or with members of the peer group. Target
levels are established annually for base salaries and for bonus awards based on
median target award levels of the peer group as supplemented by median data from
the Edison Electric Institute's ("EEI") executive compensation survey covering
comparable size utilities in the eastern U.S. as well as median data relating to
the executive compensation practices of various nonutility industries. EEI and
nonutility survey data are used where matches to comparable positions require
supplemental data. Every two years, target award levels are reviewed for new
long-term performance incentive grants based on long-term incentive grant
practices within the peer group.
10
Target levels of executive compensation are also established for
executive officers of AEE whose compensation is established pursuant to the
Enterprise Compensation Program. These target levels are approved by the
Committee and are equivalent to the median and mean compensation and benefits
practices for comparable executive positions within a survey group of companies
in the nonutility energy services industry that have annual revenues and a total
number of employees similar to AEE.
PERFORMANCE BASED COMPENSATION
The Company's compensation strategy places heavy emphasis on rewarding
performance. To this end, the Committee recommends, subject to approval by the
Board of Directors, objective short-term and long-term performance criteria and
specific numeric goals for the Utility Compensation Program and the Enterprise
Compensation Program that are clearly linked to the creation of shareholder
value. Actual results are measured against goals and awards are funded according
to established formulas.
The performance graph on page 17 compares the cumulative total return to
shareholders of the Company to that of the peer group.
BASE SALARIES
HOW BASE SALARIES ARE DETERMINED
Base salary guidelines are developed for the executive officers of the
Company and ACE, whose compensation is established pursuant to the Utility
Compensation Program. These guidelines are based on the salaries paid to
executive officers of other companies in positions having responsibilities
similar to the Company's positions. Using median market data from the peer
group, EEI and nonutility surveys, a competitive salary range is assigned to
each executive position. Within these ranges, a "market" salary level is defined
for each position that approximates the median survey data. Executive officers,
including the CEO, can progress up to a market salary level through demonstrated
full proficiency in their basic position and may progress further in the salary
range through continued growth in critical leadership competencies and success
in contributing to stretch financial and operating goals for the business.
Base salary guidelines for executive officers of AEE whose compensation
is established pursuant to the Enterprise Compensation Program are determined
through a competitive survey of salaries paid to executives having comparable
responsibilities in similar-sized companies in the nonutility energy services
industry.
Adjustments to base salaries of executive officers of the Company, ACE
and AEE, were made December 1995 and became effective January 1, 1996. The size
of any base salary adjustment for each individual executive officer, other than
the CEO, is recommended by the CEO to the Committee on the basis of individual
performance evaluations. Executive officers are assessed on their relative
achievement of objectives assigned to them for the period, their demonstrated
leadership competencies and managerial effectiveness and other applicable
corporate and business unit accomplishments. Beginning in 1997, executive
officers other than the CEO are assessed based on their respective job
accountabilities, their relative achievement of objectives assigned to them for
the period and their demonstrated strengths in defined professional success
factors and corporate cultural characteristics. The CEO's performance evaluation
is conducted by the Committee and reviewed by the Board of Directors. The CEO's
performance is assessed based on demonstrated leadership competencies and
accomplishments in other critical areas including the development of strategies
for corporate success in a competitive energy market, organizational
restructuring, succession planning, communications internal and external to the
Company and the overall financial and operating performance of the Company and
its subsidiaries.
ANNUAL INCENTIVE (BONUS) COMPENSATION
The Executive Annual Incentive Plan is a component of the Utility
Compensation Program and is designed to provide executive officers of the
Company and ACE, including the CEO, with the opportunity to earn annual bonuses
equivalent to median competitive practices when performance matches targeted
goals; and to increase or decrease significantly from target levels when
performance similarly falls above or below the target goals.
The amount of bonus paid to these executive officers, including the CEO,
is based on the achievement of corporate performance indicators. For executive
officers other than the CEO, if the corporate performance indicators are met,
the amount of bonus paid may be further modified by business unit specific goal
achievement and individual performance rating.
11
HOW BONUS AMOUNTS ARE DETERMINED
At the beginning of each year, a target level bonus pool is established.
The bonus pool is determined by applying a predetermined target award percentage
to the annual salary rate of each executive officer, including the CEO. In 1996,
the percentages applied to the applicable annual salary rates ranged from
20%-30%. These predetermined percentages represent the median compensation
practices of the peer group supplemented by EEI and nonutility survey data. The
results are summed and the target bonus pool amount is established. At the end
of the year, a performance-adjusted bonus pool is calculated by adjusting the
target bonus pool upward or downward based on the achievement of corporate
performance indicators. The amount of bonus paid to the CEO is based solely on
the relative achievement of corporate performance indicators. The amount of
bonus paid to executive officers, other than the CEO, is based on the
achievement of corporate performance indicators and may be further modified by
the relative achievement of business unit goals and individual performance
ratings. The total amount of bonuses paid out may, with the approval of the
Committee, exceed the amount of the performance-adjusted bonus pool if business
unit performance and personal performance results are exceptional. In 1996, 100%
of the performance adjusted bonus pool was distributed.
1996 ANNUAL INCENTIVE PERFORMANCE RESULTS
For 1996, the target corporate performance indicators and relative
weights of each indicator at the target level were as follows:
Performance Indicators:
o 45% related to earnings per share of the Company's Common Stock;
o 10% related to ACE lost time accident record;
o 15% related to cash flow per share of the Company's Common Stock;
o 10% related to ACE customer satisfaction.
Milestones for the Future:
o 20% related to attainment of four milestones for the future,
specifically future regulatory, market and structural changes in the
electric utility industry.
In 1996, the Company met 171/2% of its objectives representing partial
achievement of one of the four performance indicators (ACE's lost time accident
record) and two of the four milestones for the future. In 1996, bonuses were
paid to the executive officers of the Company and ACE, including the CEO, under
the Executive Annual Incentive Plan. These bonuses ranged from 2.0% to 6.0% of
the executive officers' base salaries. In 1996, the CEO earned a bonus
equivalent to 5.3% of his base salary. In 1996, three executive officers listed
on the Summary Compensation Table on page 14 received one-time, lump-sum
payments in recognition of their contribution to the successful negotiation and
execution of the Merger Agreement.
The annual incentive portion of the Enterprise Compensation Program
provides for incentive opportunities linked to a combination of AEE business
plan goals, the Company's performance indicators and goals specific to a
subsidiary's financial and operating results. Performance measures and relative
weights are unique to each executive officer of AEE based on this respective job
accountabilities. In 1996, bonuses were paid to the executive officers of AEE
under the Enterprise Executive Compensation Program. These bonuses ranged from
31% to 35% of the executive officers' base salaries.
At the discretion of the Committee, bonus allocations under the Utility
Compensation Program may be paid in any combination of cash and restricted
stock. In 1996, all bonuses were paid in cash.
LONG-TERM INCENTIVE COMPENSATION
The Company uses an equity-based long-term incentive program, the EIP, to
link a major portion of executive compensation directly to the creation of
shareholder value. This linkage is accomplished through the granting of stock
options, where the award value is based solely on share price appreciation, and
the granting of performance-vested restricted stock, where the performance
requirements reflect shareholder value creation. The EIP uses three-year cycles
to measure actual results against targeted performance. In addition, the EIP is
structured to emphasize the accumulation of significant share ownership by
management that the Committee believes is an incentive for executive officers to
make decisions as owners. Pursuant to the EIP, grants of shares subject to
restriction and stock options were made in 1994 and 1996 with subsequent grants
scheduled to occur every two years.
12
STOCK OPTIONS
The value of stock options is entirely dependent on the share price
appreciation of the Company's stock from the date of grant to the exercise of
the option.
PERFORMANCE-VESTED RESTRICTED STOCK
Under the EIP, grants of stock subject to restriction will be earned if
and only if certain long-term performance criteria are met. One half (50%) of
the shares subject to restriction may be earned and vested if, over a three-year
period, (known as a performance cycle), total shareholder return (stock price
appreciation plus reinvested dividends) equals the median or better of the total
shareholder return achieved by the peer group. The other half of shares subject
to restriction may be earned if cumulative return on shareholder equity over the
same performance cycle is at a preapproved standard or better. The earned award
level can increase up to 100% of the total shares granted subject to restriction
if total shareholder return and cumulative return on shareholder equity reach
higher goal levels pre-established by the Committee. Executive officers,
including the CEO, are entitled to vote the stock upon grant. Dividends earned
on the restricted shares are reinvested and subject to the same performance
requirements as the associated grant over the same three-year performance cycle.
On December 31, 1996, the first performance cycle covering the three-year
period 1994 -- 1996, ended. The Company did not achieve the base level of
performance established pursuant to the EIP and all shares of stock subject to
restriction were forfeited and returned to the EIP.
The long-term portion of the Enterprise Compensation Program divides the
incentive opportunity for AEE executive officers between a portion granted under
the Company's EIP and a portion that can be earned under the Enterprise
Compensation Program upon the achievement of long-term goals. Under this
structure, executive officers of AEE whose compensation is established pursuant
to the Enterprise Compensation Program receive a portion of total long-term
incentive opportunity through restricted share grants subject to Company
performance and stock options issued through the EIP. The remaining portion of
total long-term incentive opportunity is provided through grants of AEE phantom
stock. (Phantom stock is a hypothetical share of stock whose value is contingent
on the achievement of strategic performance goals by AEE). The size of the
combined grant opportunity is based on median market practice for comparable
executive positions within a surveyed group of nonutility energy services
companies.
INDEPENDENCE OF THE COMMITTEE
The Committee consists of five outside Directors as defined under Section
162(m) of the Internal Revenue Code.
The Committee is responsible for developing and administering the
policies that govern the total compensation program for executive officers of
the Company, ACE and AEE including the CEO. The Committee also administers the
EIP and the Enterprise Compensation Program for all participants, including the
awards to the executive officers of the Company and its subsidiaries. The
Committee determines the performance criteria and specific numeric goals for
bonus and long-term incentive compensation to be paid to executive officers,
including the CEO.
The Committee utilizes the services of a qualified compensation
consultant in connection with its annual review of the competitiveness and
effectiveness of the executive compensation program.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code ("Section 162(m)") limits the
tax deduction to $1 million for compensation paid to each of the executive
officers listed on the Summary Compensation Table on page 14. The Committee has
carefully reviewed the requirements of Section 162(m) and intends to comply with
its requirements. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. In 1996, all compensation
paid to the executive officers was deductible. For 1997, the Committee
contemplates that compensation income paid pursuant to the plans described
herein will be deductible in accordance with Section 162(m).
PERSONNEL & BENEFITS COMMITTEE
Richard B. McGlynn, Chairman
Gerald A. Hale
Matthew Holden, Jr.
Cyrus H. Holley
Kathleen MacDonnell
13
TABLE 1--SUMMARY COMPENSATION TABLE
- - ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-------------------------------------.
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- ------------------------- --------
OTHER
ANNUAL SECURITIES ALL OTHER
COMPEN- RESTRICTED UNDERLYING COMPEN-
NAME AND PRINCIPAL BONUS SATION STOCK OPTIONS LTIP SATIO
POSITION YEAR SALARY (1) (2) ($) (3) (#) PAYOUTS (4)
- - ------------------------------------------------------------------------------------------------------------------------------------
J. L. Jacobs 1996 $449,167 $ 23,600 $ 13,461 $743,531 38,500 $14,388 $ 16,439
Chairman and Chief 1995 435,000 -- 25,528 -- -- -- 13,050
Executive Officer of 1994 390,583 120,100 19,895 760,500 36,000 -- 11,718
the Company and ACE
- - ------------------------------------------------------------------------------------------------------------------------------------
M.J. Chesser 1996 284,500 17,000 2,777 380,456 19,700 9,714 8,785
President and Chief 1995 262,000 -- 7,039 -- -- -- 7,240
Operating Officer of 1994 200,000 89,500 143,899 482,579 18,300 -- 6,000
the Company, ACE
and AEE
- - -
- - ------------------------------------------------------------------------------------------------------------------------------------
M.I. Harlacher, Jr 1996 215,317 27,500 8,527 305,138 15,800 10,429 7,413
Vice President, 1995 205,133 -- 10,070 -- -- -- 6,154
Power System of the 1994 181,100 58,500 9,167 312,650 14,800 -- 5,433
Company and Senior
Vice President,
Power System of ACE
- - -----------------------------------------------------------------------------------------------------------------------------------
M. J. Barron (5) 1996 199,333 67,600 -- 305,138 15,800 -- 6,373
Vice President, and 1995 40,381 20,000 30,483 134,925 6,387 -- 564
Chief Financial 1994 -- -- -- -- -- -- --
Officer of the
Company and Senior
Vice President and
Chief Financial
Officer of ACE
- - -----------------------------------------------------------------------------------------------------------------------------------
J. E. Franklin II (6) 1996 190,417 41,500 758 305,138 15,800 -- 5,637
Vice President, 1995 183,249 -- -- -- -- -- 4,620
Secretary and General 1994 29,167 41,900 -- 312,650 14,800 -- 875
Counsel of the
Company and Senior
Vice President,
Secretary and
General Counsel of
ACE and Secretary of
AEE
- - -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts reported for Messrs. Harlacher, Barron and Franklin include a
one-time lump-sum payment in recognition of their contribution to the
successful negotiation and execution of the Merger Agreement.
(2) Includes dividends paid on shares of restricted stock under the Long-Term
Incentive Plan ("LTIP") and tax reimbursement payments. The amount
reported for Mr. Barron in 1995 also includes payment of relocation
expenses.
(3) Dollar value of restricted stock awards are based on market price on the
date of the award. The aggregate number of shares of stock held subject
to restriction and its market value based on the per share closing price
of $17.125 on December 31, 1996 are: Mr. Jacobs 38,500 shares/$659,313;
Mr. Chesser 19,700 shares/$337,363; Mr. Harlacher 15,800 shares/$270,575;
Mr. Barron 15,800 shares/$270,575; and Mr. Franklin 15,800
shares/$270,575. Restricted shares awarded to Mr. Barron in 1995 and to
the remaining four executive officers in 1994 were forfeited on December
31,1996.
(4) "ALL OTHER COMPENSATION" consists of contributions by ACE in 1996 under
the Atlantic Electric 401(k) Savings and Investment Plan-A ("401(k)
Plan"), a defined contribution plan; a Company-matching contribution made
pursuant to the Company's Deferred Compensation Plan for Employees
("DCP"), a non-qualified deferred compensation plan; and premiums paid
for the funding of death benefits under certain supplemental executive
retirement plans. The following table details the amounts for 1996.
14
- - ----------------------------------------------------------------------------------------------------------------------------
401(K) PLAN DCP LIFE INSURANCE
CONTRIBUTION CONTRIBUTION PREMIUMS TOTALS
- - ----------------------------------------------------------------------------------------------------------------------------
J. L. Jacobs.......................... $4,750 $8,725 $2,964 $16,439
M. J. Chesser......................... 4,750 2,845 1,190 8,785
M. I. Harlacher, Jr................... 4,750 1,710 953 7,413
M. J. Barron.......................... 4,750 1,230 393 6,373
J. E. Franklin II..................... 4,750 -- 887 5,637
(5) Mr. Barron became an officer of the Company on September 15, 1995. At the
time of his employment, Mr. Barron received a pro-rata award of shares
pursuant to the EIP. In 1995, Mr. Barron received a one-time, lump-sum
payment in recognition of the achievement of personal goals established as
a condition of employment.
(6) Mr. Franklin became an officer of the Company on October 1, 1994.
TABLE 2 - OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS ASSUMED ANNUAL
UNDERLYING GRANTED TO EXERCISE RATES OF STOCK PRICE
OPTIONS EMPLOYEES OR BASE APPRECIATION FOR OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION --------------------------------
INDIVIDUAL GRANTS (1)(2)(3) YEAR ($/SHARE) DATE 5% 10%
- - ---------------------------------------------------------------------------------------------------------------------------------
J. L. Jacobs.................. 38,500 19.10% $19.3125 1/2/2006 $467,602 $1,184,999
M. J. Chesser................. 19,700 9.78 19.3125 1/2/2006 239,266 606,350
M. I. Harlacher, Jr........... 15,800 7.84 19.3125 1/2/2006 191,899 486,311
M. J. Barron.................. 15,800 7.84 19.3125 1/2/2006 191,899 486,311
J. E. Franklin II............. 15,800 7.84 19.3125 1/2/2006 191,899 486,311
(1) Options granted under the EIP on January 2, 1996 are exercisable starting
36 months after the grant date with 100% of the shares covered becoming
exercisable at that time. The options granted in 1996 are for a term of ten
(10) years subject to earlier termination upon events related to
termination of employment. The option price for any options granted under
the EIP will not be less than 100% of the fair market value of the Company
Common Stock as of the date of grant.
(2) Under the terms of the EIP, the Committee retains discretion, subject to
plan limits, to modify the terms of the outstanding options.
(3) Under the terms of the EIP, in the event of a change of control of the
Company, including as contemplated by the Merger Agreement, the Committee
has discretion to cash out the value of the options on the basis of a
change in control price. The consummation of the Merger Agreement is
subject to the approval of certain Federal and state regulatory agencies.
Such approvals are expected to be obtained by late 1997 or early 1998, but
cannot be assured.
15
TABLE 3 - AGGREGATED FISCAL YEAR-END OPTION VALUES
- - --------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY END ($)
- - -----------------------------------------------------------------------------------------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ---------- ----------
J. L. Jacobs.................................... 0 / 74,500 --
M. J. Chesser................................... 0 / 38,000 --
M. I. Harlacher, Jr............................. 0 / 30,600 --
M. J. Barron.................................... 0 / 22,187 --
J. E. Franklin II............................... 0 / 30,600 --
TABLE 4 -- LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
- - ------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE ESTIMATED FUTURE PAYOUTS
PERIOD UNDER NON-STOCK PRICE BASED PLAN
UNTIL -------------------------------------------------
NUMBER OF MATURATION THRESHOLD TARGET MAXIMUM
NAME SHARES (#)(1) OR PAYOUT (#) (#) (#)
- - -------------------------------------------------------------------------------------------------------------------------------
J. L. Jacobs...................... 38,500 3 years 6,429 25,679 38,500
M. J. Chesser..................... 19,700 3 years 3,289 13,139 19,700
M. I. Harlacher, Jr............... 15,800 3 years 2,638 10,538 15,800
M. J. Barron...................... 15,800 3 years 2,638 10,538 15,800
J. E. Franklin II................. 15,800 3 years 2,638 10,538 15,800
(1) Awards listed are in shares of restricted stock granted under the EIP on
January 2, 1996. All awards listed are performance based. Delivery of
shares granted under the EIP depends entirely upon attainment of two
equally weighted financial performance indicators approved by the
Committee and the Board: (1) cumulative return on average shareholder
equity and (2) total shareholder return compared to the peer group. Under
the EIP, regular quarterly dividends are reinvested in additional shares
of restricted stock that are subject to the same restrictions. Pursuant
to the terms of the EIP, in the event of a change of control of the
Company, including as contemplated by the Merger Agreement, the
restrictions applicable to any restricted stock shall lapse and such
shares shall be deemed fully vested. The value of all outstanding
restricted stock to the extent vested, shall be cashed out, unless
otherwise determined by the Committee, on the basis of a change of
control price.
16
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG ATLANTIC ENERGY, INC., THE S&P 500 INDEX AND A PEER GROUP
The following table represents the plot points for graph.
ATLANTIC ENERGY INC. PEER GROUP S&P 500
-------------------- ---------- -------
12/91 .............. 100 100 100
12/92 .............. 121 112 108
12/93 .............. 121 124 118
12/94 .............. 107 106 120
12/95 .............. 127 147 165
12/96 .............. 123 146 203
*$100 invested on 12/31/91 in stock or index--including reinvestment of
dividends. Fiscal year ending December 31.
CUMULATIVE TOTAL RETURN
------------------------------------------------------
1991 1992 1993 1994 1995 1996
--- --- --- --- --- ---
ATLANTIC ENERGY, INC.......... 100 121 121 107 127 123
PEER GROUP.................... 100 112 124 106 147 146
S&P 500....................... 100 108 118 120 165 203
The above graph compares the performance of Atlantic Energy, Inc. with
that of the S&P 500 Index and a peer group of utility companies with the
investment weighted based on market capitalization. The peer group is comprised
of the following companies:
Boston Edison Company, Central Hudson Gas & Electric Corporation, Central
Maine Power Company, Commonwealth Energy System, Delmarva Power & Light Co., DPL
Inc., DQE Inc., New York State Electric & Gas Corporation, Orange & Rockland
Utilities, Incorporated, Potomac Electric Power Company, Rochester Gas &
Electric Corp., SCANA Corporation, UGI Corporation and United Illuminating
Company.
EMPLOYMENT AGREEMENTS
In 1995, the Company entered into employment agreements with each of the
executive officers listed in Table 1--Summary Compensation Table on page 14. The
agreements provide for an initial two-year Employment Period that may be
automatically renewed for two years. Under the terms of the agreements, each
executive officer is entitled to receive 1) a base salary, 2) incentive
compensation at the discretion of the Board of Directors based upon the
recommendation of the Committee, and 3) any other benefits that are available
from time to time to officers of the Company through the Employment Period. The
agreements also provide that if the employment of the executive officer is
terminated by the Company (or, under certain circumstances, by the executive
officer) following a change in control of the Company (defined to include, among
other things, the acquisition by any person of 20% or more of the voting power
of the Company's Common Stock or the disposition of substantially all the assets
of the Company) including as contemplated by the Merger Agreement, the executive
officer will receive (a) the executive officer's full base salary through the
date of termination, (b) a cash amount from the Company equal to three times the
17
sum of (x) the executive officer's annual base salary and (y) the higher of the
bonus paid to the executive for the most recent fiscal year or the target bonus
for the current fiscal year (the "Minimum Bonus Amount"), (c) the prorated
portion of the executive officer's unpaid Minimum Bonus Amount, (d) any other
amounts otherwise payable in respect of the Company's otherwise applicable
long-term incentive compensation and equity plans and programs, and (e) all
vested amounts or benefits owing to the executive officer under the Company's
otherwise applicable employee benefit plans and programs. In addition, the
executive officer will be entitled to continue to participate in the Company's
employee and executive pension, welfare and fringe benefit plans excluding
supplemental retirement benefits. For purposes of calculating the executive
officer's retirement benefit, three years will be added to both the executive
officer's age and service with the Company. The agreements further provide that
if the payments described above constitute "excess parachute payments" under
applicable provisions of the Internal Revenue Code and related regulations, the
Company will pay the executive officer an additional amount sufficient to place
the executive in the same after-tax financial position the executive would have
been in if the executive had not incurred the excise tax imposed under Section
4999 of the Internal Revenue Code in respect of excess parachute payments. The
agreement with J. L. Jacobs establishes an opportunity at the election of J. L.
Jacobs to enter into a consulting arrangement with the Company for a term of two
years with compensation at $130,000 annually to commence on the date following
his retirement.
PENSION PLANS
QUALIFIED AND EXCESS BENEFIT PLANS
The following table describes the combined estimated annual retirement
benefit payable under the Retirement Plan that is qualified under Section 401(a)
of the Internal Revenue Code ("Qualified Plan") and the Excess Benefit
Retirement Income Program ("Excess Plan"). The Internal Revenue Code places
certain limitations on the amount of pension benefits that may be paid under the
Qualified Plan. Any benefits payable in excess of those limitations will be paid
under the Excess Plan to certain eligible employees, including the executive
officers named in Table 1--Summary Compensation Table, on page 14. The Excess
Plan provides for immediate vesting of benefits in the event of a change of
control of the Company including as contemplated by the Merger Agreement. The
estimated retirement benefits paid to an employee assume a straight-life annuity
to the employee, retirement at age 65, the average of the highest earnings in
five (5) consecutive years of the ten (10) years preceding retirement and years
of service specified. Benefits paid pursuant to the Qualified and Excess Plans
are not subject to deduction for other retirement plans including Social
Security.
The credited full years of service at December 31, 1996 under the
Retirement Plan are as follows for the individuals named in the Summary
Compensation Table: Mr. Jacobs--35 years; Mr. Chesser--3 years, Mr. Barron --1
year, Mr. Harlacher--31 years and Mr. Franklin --2 years.
TABLE 5--PENSION PLAN TABLE
YEARS OF SERVICE
----------------------------------------------------------------------------------------
REMUNERATION 25 30 35 40 45
------------- -------- -------- -------- -------- --------
$130,000 $ 52,000 $ 62,000 $ 73,000 $ 83,000 $ 94,000
190,000 76,000 91,000 106,000 122,000 137,000
250,000 100,000 120,000 140,000 160,000 180,000
310,000 124,000 149,000 174,000 198,000 223,000
370,000 148,000 178,000 207,000 237,000 266,000
430,000 172,000 206,000 241,000 275,000 310,000
490,000 196,000 235,000 274,000 314,000 353,000
550,000 220,000 264,000 308,000 352,000 396,000
Compensation covered for the executive officers named in Table 1--Summary
Compensation Table on page 14 is the same as the total salary and bonus shown in
that table. Employees, including executive officers, may elect lump-sum
distributions in lieu of the receipt of annual retirement benefits.
18
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company maintains a Supplemental Executive Retirement Plan ("SERP")
for certain Qualified Executives. The SERP, which has been in effect since
January 1983, provides at age 60 and retirement: 1) the annual payment of 25% of
final compensation for the longer of 15 years or life and 2) the one-time
payment of 75% of final compensation in the year of death. For purposes of the
SERP, "final compensation" is an amount equal to the executive officer's then
annual base salary rate plus the average of the bonuses paid in the two most
recent years. Qualified Executives after five (5) years are fully vested in the
SERP. The Board may commence payout of SERP retirement benefits at any time
after the Qualified Executive has attained age 55 and retired. Qualified
Executives may elect lump-sum distribution in lieu of the receipt of annual
payments. In the event of death while still employed by the Company, the
designated beneficiary of the Qualified Executive shall receive the proceeds of
a life insurance policy. The SERP provides for the Company to gross-up for
federal and state taxes on SERP benefit payments. The SERP also provides for
immediate vesting of benefits in the event of a change of control of the Company
including as contemplated by the Merger Agreement. Approximately twenty-four
(24) former and current officers of Atlantic City Electric Company, including
four (4) of the executive officers named in Table 1--Summary Compensation Table,
participate in the SERP. Participation in the SERP is limited to these
individuals. Annual benefits payable, net of tax reimbursements, to Qualified
Executives who are participants in the SERP, based on current base salary rates
and bonuses paid pursuant to the Annual Executive Incentive Plan in 1995 and
1996 would upon retirement be as follows: Mr. Jacobs $127,513; Mr. Chesser
$86,188, Mr. Harlacher, $61,313 and Mr. Franklin $52,988. These amounts are in
addition to the amounts shown in the Pension Plan Table above.
In 1995, the Board of Directors adopted the Supplemental Executive
Retirement Plan II (the "SERP II"). Qualified Executives who are not
participants in the SERP will receive benefits under the SERP II. Qualified
Executives after five (5) years are 50% vested with vesting increasing each year
until the 10th year of service at which time the Qualified Executive will be
100% vested. At age 55 and older and subject to the vesting provisions,
retirement benefits in an amount equal to 60% of final average compensation will
be available to a Qualified Executive or his/her designated beneficiary for the
longer of 15 years or life. For purposes of SERP II, "final average
compensation" is an amount equal to the average of the Qualified Executive's
annual compensation (salary plus bonus) over the 36 full calendar months
immediately preceding the Qualified Executive's last day of employment.
Retirement benefits paid to a Qualified Executive pursuant to SERP II will be
reduced by any benefits received from Social Security and the Qualified and
Excess Plans, and further reduced if the Qualified Executive retires before age
60. In any event, benefits paid to a Qualified Executive pursuant to SERP II
shall not exceed 25% of the Qualified Executive's final annual compensation
(base salary in year Qualified Executive terminates service plus the average of
any bonuses paid (i) during the year the Qualified Executive terminates service
and (ii) the year immediately preceding termination of service). For Qualified
Executives having less than five years of service, SERP II benefits will vest
immediately at the five year level in the event of a change of control of the
Company including as contemplated by the Merger Agreement. In the event of death
while still employed by the Company, the designated beneficiary of the Qualified
Executive shall receive proceeds of a life insurance policy in an amount equal
to three times the final compensation of the Qualified Executive. SERP II also
provides for benefits in the event a Qualified Executive becomes disabled. One
executive officer named in Table 1--Summary Compensation Table is a participant
in SERP II. Based on 1996 salary plus the average of bonuses paid in 1995 and
1996, and assuming 100% vesting, the annual benefits payable to Mr. Barron upon
retirement would be $59,833.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
Upon the recommendation of the Audit Committee, the Board of Directors
has appointed Deloitte & Touche LLP as independent auditors of the Company for
the year ending December 31, 1997. Representatives of Deloitte & Touche LLP will
be present at the Annual Meeting, will be available to respond to appropriate
questions and will have the opportunity to make a statement if they so desire.
Although not required, the Board of Directors proposes to submit at the
meeting a proposal that the appointment of Deloitte & Touche LLP be ratified. If
the shareholders do not ratify the appointment of Deloitte & Touche LLP, the
selection of independent auditors will be reconsidered and made by the Board of
Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF DELOITTE & TOUCHE LLP.
19
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
The Company believes that during the preceding year its executive
officers and directors have complied with all Section 16(a) filing requirements.
FUTURE PROPOSALS OF SHAREHOLDERS
In the event that the Merger Agreement is not consummated prior to the
holding of the 1998 Annual Meeting of Shareholders, then to be included in the
proxy materials for the 1998 Annual Meeting of Shareholders, any shareholder
proposal intended to be submitted for action at that meeting must be received by
the Secretary, Atlantic Energy, Inc., 6801 Black Horse Pike, Egg Harbor
Township, NJ 08234-4130 on or before November 20, 1997.
Shareholders wishing to nominate directors or bring business before the
meeting must provide written notice to the Secretary of the Company by personal
delivery or U.S. mail not later than ninety (90) days prior to the 1998 Annual
Meeting of Shareholders. Such notice must 1) describe the business matter to be
brought before the meeting and the reasons for conducting such business at the
Annual Meeting; 2) the name and address of the shareholder proposing such
business; 3) the number of shares of Common Stock owned by the shareholder, and
4) any material interest of the shareholder in such business.
OTHER MATTERS
The Company has mailed a 1996 Annual Report to Shareholders and a proxy
card together with this proxy statement to all shareholders of record and
persons who, according to the records of the Company, hold shares of Common
Stock in the Dividend Reinvestment and Stock Purchase Plan or Employee Stock
Ownership Plan but do not own any other shares at the close of business on March
6, 1997.
The Board of Directors does not intend to bring before the meeting any
business other than the matters referred to in this proxy statement, and at the
date of this proxy statement, the Board of Directors is not aware that any other
matters are to be presented for action at the meeting. However, if any other
matters properly come before the meeting, or any adjournments thereof, the
persons named in the accompanying proxy card will vote in accordance with their
discretion on such matters.
UPON RECEIPT OF A WRITTEN REQUEST OF A BENEFICIAL OWNER OF SECURITIES
ENTITLED TO VOTE AT THE MEETING, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A
COPY OF ITS FORM 10-K ANNUAL REPORT AFTER IT IS FILED, ON OR BEFORE MARCH 31,
1997, WITH THE SECURITIES AND EXCHANGE COMMISSION. THE REQUEST SHOULD BE
DIRECTED TO FINANCIAL SERVICES DEPARTMENT, ATLANTIC ENERGY, INC., 6801 BLACK
HORSE PIKE, EGG HARBOR TOWNSHIP, NEW JERSEY 08234-4130.
20
ATLANTIC
ENERGY
1996 ANNUAL REPORT
TO SHAREHOLDERS
APPENDIX A
Table of Contents
1996 Annual Report to Shareholders Page
- - ----------------------------- ----
Report of Management................................................... A-1
Report of the Audit Committee.......................................... A-2
Independent Auditors' Report........................................... A-3
Consolidated Balance Sheet............................................. A-4
Consolidated Statement of Income....................................... A-6
Consolidated Statement of Cash Flows................................... A-7
Consolidated Statement of Changes in Common Shareholders' Equity....... A-8
Notes to Consolidated Financial Statements............................. A-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... A-31
Investor Information................................................... A-41
Selected Financial Data 1996-1992...................................... A-44
Directors of Atlantic Energy, Inc...................................... A-45
Officers of Atlantic Energy, Inc. and Subsidiaries..................... A-46
ATLANTIC ENERGY, INC.
REPORT OF MANAGEMENT
The management of Atlantic Energy, Inc. and its subsidiaries (the
Company) is responsible for the preparation of the consolidated financial
statements presented in this Annual Report. The financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management made informed
judgments and estimates, as necessary, relating to events and transactions
reported.
Management has established a system of internal accounting and financial
controls and procedures designed to provide reasonable assurance as to the
integrity and reliability of financial reporting. In any system of financial
reporting controls, inherent limitations exist. Management continually examines
the effectiveness and efficiency of this system, and actions are taken when
opportunities for improvement are identified. Management believes that, as of
December 31, 1996, the system of internal accounting and financial controls over
financial reporting is effective. Management also recognizes its responsibility
for fostering a strong ethical climate in which the Company's affairs are
conducted according to the highest standards of corporate conduct. This
responsibility is characterized and reflected in the Company's code of ethics
and business conduct policy.
The consolidated financial statements have been audited by Deloitte &
Touche LLP, Certified Public Accountants. Deloitte & Touche LLP, provides
objective, independent audits as to management's discharge of its
responsibilities insofar as they relate to the fairness of the financial
statements. Their audits are based on procedures believed by them to provide
reasonable assurance that the financial statements are free of material
misstatement.
The Company's internal auditing function conducts audits and appraisals
of the Company's operations. It evaluates the system of internal accounting,
financial and operational controls and compliance with established procedures.
Both the external auditors and the internal auditors periodically make
recommendations concerning the Company's internal control structure to
management and the Audit Committee of the Board of Directors. Management
responds to such recommendations as appropriate in the circumstances. None of
the recommendations made for the year ended December 31, 1996 represented
significant deficiencies in the design or operation of the Company's internal
control structure.
/s/ J. L. Jacobs
-----------------------------------------
J. L. JACOBS
Chairman and Chief Executive Officer
/s/ M. J. Barron
-----------------------------------------
M. J. BARRON
Vice President and Chief Financial Officer
February 7, 1997
A-1
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
independent directors. The members of the Committee are: Matthew Holden, Jr.,
Kathleen MacDonnell, Bernard J. Morgan and Harold J. Raveche. The Committee held
5 meetings during 1996.
The Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareholder
ratification, the selection of the Company's independent auditors, Deloitte &
Touche LLP. The Committee discussed with the Company's internal auditors and
Deloitte & Touche LLP, the overall scope of and specific plans for their
respective activities concerning the Company. The Committee meets regularly with
the internal and external auditors, without management present, to discuss the
results of their activities, the adequacy of the Company's system of accounting,
financial and operational controls and the overall quality of the Company's
financial reporting. The meetings are designed to facilitate any private
communication with the Committee desired by the internal and external auditors.
No significant actions by the Committee were required during the year ended
December 31, 1996 as a result of any communications conducted.
/s/ Matthew Holden, Jr.
------------------------------------------
MATTHEW HOLDEN, JR.
Chairman, Audit Committee
February 7, 1997
A-2
Deloitte &
Touche LLP
- - ----------------
[LOGO}
Deloitte & Touche LLP
Certified Public Accountants
Two Hilton Court
Parsippany, New Jersey 07054
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors
of Atlantic Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic
Energy, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in common shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Atlantic Energy, Inc. and
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- - -------------------------
Deloitte & Touche LLP
February 7, 1997
A-3
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
ASSETS
DECEMBER 31,
-------------------------
1996 1995
--------- ---------
Electric Utility Plant:
In Service:
Production....................................... $1,212,380 $1,187,169
Transmission..................................... 373,358 366,242
Distribution..................................... 731,272 691,830
General.......................................... 191,210 183,935
--------- ---------
Total In Service................................... 2,508,220 2,429,176
Less Accumulated Depreciation...................... 871,531 794,479
--------- ---------
Utility Plant in Service-Net....................... 1,636,689 1,634,697
Construction Work in Progress...................... 117,188 119,270
Land Held for Future Use........................... 5,604 6,941
Leased Property-Net................................ 39,914 40,878
--------- ---------
Electric Utility Plant-Net......................... 1,799,395 1,801,786
--------- ---------
Investments and Nonutility Property:
Investment in Leveraged Leases..................... 79,687 78,959
Nuclear Decommissioning Trust Fund................. 71,120 61,802
Nonutility Property and Equipment-Net.............. 46,147 22,743
Other Investments and Funds........................ 53,550 52,780
--------- ---------
Total Investments and Nonutility Property.......... 250,504 216,284
--------- ---------
Current Assets:
Cash and Temporary Investments..................... 15,278 5,691
Accounts Receivable:
Utility Service.................................. 64,432 66,099
Miscellaneous.................................... 32,547 17,477
Allowance for Doubtful Accounts.................. (3,500) (3,300)
Unbilled Revenues.................................. 33,315 41,515
Fuel (at average cost)............................. 29,682 25,459
Materials and Supplies (at average cost)........... 23,815 25,434
Working Funds...................................... 15,517 14,421
Deferred Energy Costs.............................. 33,529 31,434
Prepaid Excise Tax................................. 7,125 10,753
Other.............................................. 11,354 13,339
--------- ---------
Total Current Assets............................... 263,094 248,322
--------- ---------
Deferred Debits:
Unrecovered Purchased Power Costs.................. 83,400 99,817
Recoverable Future Federal Income Taxes............ 85,858 85,858
Unrecovered State Excise Taxes..................... 54,714 64,274
Unamortized Debt Costs............................. 44,423 39,004
Other Regulatory Assets............................ 59,575 54,568
License Fees....................................... 17,733 --
Other.............................................. 12,066 7,975
--------- ---------
Total Deferred Debits.............................. 357,769 351,496
--------- ---------
Total Assets....................................... $2,670,762 $2,617,888
========= =========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
A-4
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
LIABILITIES AND CAPITALIZATION
DECEMBER 31,
------------------------------
1996 1995
--------- ---------
Capitalization:
Common Shareholders' Equity:
Common Stock, no par value; 75,000,000 shares
authorized; issued and outstanding:
1996--52,502,479 ; 1995--52,531,878....................... $ 562,746 $ 563,436
Retained Earnings........................................... 227,630 249,741
Unearned Compensation....................................... (2,982) (3,008)
---------- ----------
Total Common Shareholders' Equity........................... 787,394 810,169
Preferred Securities of Atlantic Electric:
Not Subject to Mandatory Redemption....................... 30,000 40,000
Subject to Mandatory Redemption........................... 43,950 114,750
Cumulative Quarterly Income Preferred Securities.......... 70,000 --
Long Term Debt.............................................. 829,745 829,856
---------- ----------
Total Capitalization (excluding current portion)............ 1,761,089 1,794,775
---------- ----------
Current Liabilities:
Preferred Stock Redemption Requirement...................... 10,000 22,250
Capital Lease Obligation-Current Portion.................... 702 659
Long Term Debt-Current Portion.............................. 98,250 65,247
Short Term Debt............................................. 64,950 30,545
Accounts Payable............................................ 66,508 60,858
Taxes Accrued............................................... 7,504 3,450
Interest Accrued............................................ 20,241 20,315
Dividends Declared.......................................... 21,701 23,490
Deferred Income Taxes....................................... 3,190 2,569
Provision for Rate Refunds.................................. 13,000 --
Other....................................................... 24,696 27,383
---------- ----------
Total Current Liabilities................................... 330,742 256,766
---------- ----------
Deferred Credits and Other Liabilities:
Deferred Income Taxes....................................... 434,108 425,875
Deferred Investment Tax Credits............................. 46,577 49,112
Capital Lease Obligations................................... 39,212 40,227
Other....................................................... 59,034 51,133
---------- ----------
Total Deferred Credits and Other Liabilities................ 578,931 566,347
---------- ----------
Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization........................ $2,670,762 $2,617,888
========== ==========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
A-5
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Operating Revenues-Electric ............ $ 980,255 $ 953,137 $ 913,039
--------- --------- ---------
Operating Expenses:
Energy ................................. 223,091 191,766 210,891
Purchased Capacity ..................... 195,699 190,570 130,929
Operations ............................. 156,799 152,060 156,409
Employee Separation Costs .............. -- -- 26,600
Maintenance ............................ 44,418 34,379 37,568
Depreciation and Amortization .......... 80,845 78,461 73,344
State Excise Taxes ..................... 104,815 102,811 97,072
Federal Income Taxes ................... 32,272 45,876 33,264
Other Taxes ............................ 9,888 8,677 10,757
--------- --------- ---------
Total Operating Expenses ............... 847,827 804,600 776,834
--------- --------- ---------
Operating Income ....................... 132,428 148,537 136,205
--------- --------- ---------
Other Income and Expense:
Allowance for Equity Funds Used
During Construction .................. 879 817 3,634
Other-Net .............................. 663 8,241 8,678
--------- --------- ---------
Total Other Income and Expense ......... 1,542 9,058 12,312
--------- --------- ---------
Income Before Interest Charges ......... 133,970 157,595 148,517
--------- --------- ---------
Interest Charges:
Interest on Long Term Debt ............. 60,029 60,329 57,346
Other Interest Expense ................. 4,818 2,550 1,114
--------- --------- ---------
Total Interest Charges ................. 64,847 62,879 58,460
Allowance for Borrowed Funds
Used During Construction ............. (976) (1,679) (2,772)
--------- --------- ---------
Net Interest Charges ................... 63,871 61,200 55,688
--------- --------- ---------
Less Preferred Securities Dividend
Requirements of Subsidiary ........... 11,332 14,627 16,716
--------- --------- ---------
Net Income ............................. $ 58,767 $ 81,768 $ 76,113
========= ========= =========
Average Number of Shares of Common
Stock Outstanding(in thousands) ........ 52,702 52,815 54,149
========= ========= =========
Per Common Share:
Earnings ............................... $ 1.12 $ 1.55 $ 1.41
========= ========= =========
Dividends Declared ..................... $ 1.54 $ 1.54 $ 1.54
========= ========= =========
Dividends Paid ......................... $ 1.54 $ 1.54 $ 1.54
========= ========= =========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
A-6
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Cash Flows Of Operating Activities:
Net Income .......................................... $ 58,767 $ 81,768 $ 76,113
Unrecovered Purchased Power Costs ................... 16,417 15,721 14,920
Deferred Energy Costs ............................... (2,095) (20,435) (3,819)
Preferred Securities Dividend of ACE ................ 11,332 14,627 16,716
Depreciation and Amortization ....................... 80,845 78,461 73,344
Deferred Income Taxes-Net ........................... 6,192 25,946 17,863
Unrecovered State Excise Taxes ...................... 9,560 9,560 (40,128)
Employee Separation Costs ........................... (7,179) (19,112) 26,600
Net Changes Working Capital Components:
Accounts Receivable&Unbilled Revenues ............. (5,004) (24,400) 1,840
Accounts Payable .................................. 5,651 (5,222) 2,233
Inventory ......................................... (2,602) 4,960 (12,988)
Other ............................................. 26,372 (18,406) (12,557)
Other-Net ........................................... (3,772) 4,893 (2,457)
--------- --------- ---------
Net Cash Provided by Operating Activities ........... 194,484 148,361 157,680
--------- --------- ---------
Cash Flows Of Investing Activities:
Utility Construction Expenditures ................... (86,805) (100,904) (119,961)
Leased Nuclear Fuel Material ........................ (6,833) (10,446) (10,713)
Nonutility Construction Expenditures ................ (25,451) (5,226) (6,807)
Other-Net ........................................... (14,783) (23,794) (10,893)
--------- --------- ---------
Net Cash Used by Investing Activities ............... (133,872) (140,370) (148,374)
--------- --------- ---------
Cash Flows Of Financing Activities:
Proceeds from Long Term Debt ........................ 45,075 168,904 54,572
Retirement/Maturity of Long Term Debt ............... (12,266) (57,489) (42,664)
Issuance of Cumulative Quarterly Income
Preferred Securities .............................. 70,000 -- --
Increase in Short Term Debt ......................... 34,405 21,945 8,600
Proceeds from Common Stock Issued ................... -- -- 10,289
Repurchase of Common Stock .......................... -- (29,626) (3,909)
Redemption of Preferred Stock-ACE ................... (98,876) (24,500) (24,500)
Dividends Declared-ACE Preferred Securities ......... (11,332) (14,627) (16,716)
Dividends Declared on Common Stock .................. (81,163) (81,088) (75,829)
Proceeds-Capital Lease Obligations .................. 6,833 10,466 10,734
Other-Net ........................................... (3,701) (1,399) 1,596
--------- --------- ---------
Net Cash Used by Financing Activities ............... (51,025) (7,414) (77,827)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Temporary Investments ............................. 9,587 577 (68,521)
Cash and Temporary Investments:
Beginning of year ................................. 5,691 5,114 73,635
--------- --------- ---------
End of year ....................................... $ 15,278 $ 5,691 $ 5,114
========= ========= =========
Supplemental Schedule of Payments:
Interest ............................................ $ 68,551 $ 61,160 $ 62,855
Income taxes ........................................ $ 28,101 $ 30,769 $ 23,374
Noncash Financing Activities:
Common Stock (forfeited) issued
under stock plans-net ............................. $ -- $ 120 $ 7,652
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
A-7
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
COMMON SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
COMMON RETAINED UNEARNED
SHARES STOCK EARNINGS COMPENSATION
--------- -------- -------- ----------
Balance, December 31, 1993............... 53,506,786 $ 579,443 $ 256,549 $ --
Net Income............................... 76,113
Dividends on Common Stock................ (83,481)
Common Stock Issued
Equity Incentive Plan.................. 175,712 3,686 (3,170)
Dividend Reinvestment Plan............. 699,493 14,272
ACE Plan............................... (5,046) (111)
Common Stock Expenses.................. 94
Reacquired Shares........................ (221,700) (3,909)
---------- --------- --------- --------
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)
========== ========= ========= ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
A-8
ATLANTIC ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Atlantic Energy, Inc. (the Company, AEI or parent) is the
parent of Atlantic City Electric Company (ACE), Atlantic Energy Enterprises,
Inc. (AEE) and Atlantic Energy International, Inc. (AEII), which are
wholly-owned subsidiaries. ACE is a public utility primarily engaged in the
generation, transmission, distribution and sale of electric energy. ACE's
service territory encompasses approximately 2,700 square miles within the
southern one-third of New Jersey with the majority of customers being
residential and commercial. ACE, with its wholly-owned subsidiary that operates
certain generating facilities, is the principal subsidiary within the
consolidated group. AEE is a holding company which is responsible for the
management of the investments in the nonutility companies consisting of:
Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP), ATE
Investment, Inc. (ATE), Atlantic Thermal Systems, Inc. (ATS), CoastalComm, Inc.
(CCI) and Atlantic Energy Technology, Inc. (AET). AGI and its wholly-owned
subsidiaries are engaged in the development, acquisition, ownership and
operation of cogeneration power projects. AGI's activities, through its
subsidiaries, are represented by partnership interests in cogeneration
facilities located in New Jersey and New York. ASP owns and manages a commercial
office and warehouse facility located in Atlantic County, New Jersey. ATE
provides financing management and financing to affiliates and manages a
portfolio of investments in leveraged leases for equipment used in the airline
and shipping industries. In August 1996, ATE joined with an unaffiliated company
to create EnerTech Capital Partners, L.P., an equity limited partnership that
will invest in a variety of energy-related technology growth companies. ATS and
its wholly-owned subsidiaries are engaged in the development and operation of
thermal heating and cooling systems. CCI manages an investment in
telecommunication technology. AEE also has a 50% equity interest in Enerval, LLC
which provides energy management services, including natural gas supply,
transportation and marketing. In July 1996, AEI formed a new subsidiary, AEII,
to provide utility consulting services and equipment sales to international
markets.
Pending Merger--On August 12, 1996, the Boards of Directors of AEI and
Delmarva Power & Light Company (DP&L) jointly announced an agreement to merge
the companies into a new company named Conectiv, Inc. (Conectiv). Conectiv, a
newly formed Delaware corporation, will become the parent of Atlantic Energy's
subsidiaries and the parent of DP&L and its subsidiaries.
DP&L is predominately a public utility engaged in electric and gas
service. DP&L provides retail and wholesale electric service to customers
located in about a 6,000 square mile territory located in Delaware, eastern
shore counties in Maryland and the eastern shore area of Virginia. DP&L provides
gas service to retail and transportation customers in an area consisting of
about 275 square miles in Northern Delaware, including the City of Wilmington.
The merger is to be a tax-free, stock-for-stock transaction accounted for
as a purchase by Conectiv. Under the terms of the agreement, DP&L shareholders
will receive one share of Conectiv's common stock for each share of DP&L common
stock held. AEI shareholders will receive 0.75 shares of Conectiv's common stock
and 0.125 shares of Conectiv's Class A common stock for each share of AEI common
stock held. On January 30, 1997, the merger was approved by the shareholders of
both companies. In order for the merger to become effective, approvals are still
needed from a number of Federal and state regulatory agencies. The Company
expects the regulatory approval process to be completed in late 1997 or early
1998.
The total consideration to be paid to the Company's common stockholders,
measured by the average daily closing market price of the Company's common stock
for the ten trading days following public announcement of the merger, is $948.6
million. The consideration paid plus estimated acquisition costs and liabilities
assumed in connection with the merger are expected to exceed the net book value
of the Company's net assets by approximately $204.5 million, which will be
recorded as goodwill by Conectiv. The goodwill will be amortized over 40 years.
A-9
Selected information on each company at December 31, 1996 and the year
then ended is shown below (in thousands, except for number of customers):
AEI DP&L
--------- ---------
Operating Revenues................... $ 980,255 $1,094,961
Net Income........................... $ 58,767 $ 116,187
Assets............................... $2,670,762 $2,979,153
Electric Customers................... 477,611 442,116
Gas Customers........................ -- 100,904
Combination of the above amounts would not necessarily be reflective of
the amounts that would result from a consolidation of the companies.
Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ACE and AEE consolidate their respective subsidiaries. Ownership interests in
other entities, between 20% and 50%, where control is not evident, are accounted
for using the equity method of accounting. Certain prior year amounts have been
reclassified to conform to the current year reporting of these items.
Regulation -- ACE--The accounting policies and rates of service for ACE
are subject to the regulations of the New Jersey Board of Public Utilities (BPU)
and in certain respects to the Federal Energy Regulatory Commission (FERC). ACE
follows generally accepted accounting principles (GAAP) and financial reporting
requirements employed by all industries as specified by the Financial Accounting
Standards Board (FASB) and the Securities and Exchange Commission (SEC).
However, accounting for rate regulated industries may depart from GAAP as
permitted by Statement of Financial Accounting Standards No. 71 (SFAS No. 71).
SFAS No. 71 provides guidance on circumstances where the economic effect of a
regulator's decision warrants different applications of GAAP as a result of the
rate making process. In setting rates, a regulator may provide recovery of an
incurred cost in a year or years other than the year the cost was incurred. As
permitted by SFAS No. 71, costs ordered by a regulator to be deferred or
capitalized for future recovery are recorded as a regulatory asset because the
regulator's rate action provides reasonable assurance of future economic
benefits attributable to these costs. In a non-rate regulated industry, such
costs are charged to expense in the year incurred. SFAS No. 71 further specifies
that a regulatory liability is recorded when a regulator orders a refund to
customers of revenues previously collected, or when existing rates provide for
recovery of future costs not yet incurred. Such treatment is not afforded to
non-rate regulated companies. When collection of regulatory assets or relief of
regulatory liabilities is no longer probable, the assets and liabilities are
applied to income in the year that the assessment is made. Specific regulatory
assets and liabilities that have been recorded are discussed in Note 11.
Electric Operating Revenues -- ACE--Revenues are recognized when electric
energy services are rendered, and include estimates for amounts unbilled at the
end of the year for energy used by customers subsequent to the last bill
rendered for the calendar year.
Nuclear Fuel -- ACE--Fuel costs associated with ACE's participation in
jointly-owned nuclear generating stations, including spent nuclear fuel disposal
costs, are charged to Energy expense based on the units of thermal energy
produced.
Electric Utility Plant and Depreciation -- ACE--Property is stated at
original cost. Generally, Utility Plant is subject to a first mortgage lien. The
cost of property additions, including replacement of units of property and
betterments, are capitalized. Included in certain property additions is an
Allowance for Funds Used During Construction (AFDC), which is defined in the
applicable regulatory system of accounts as the cost, during the period of
construction, of borrowed funds used for construction purposes and a reasonable
rate on other funds when so used. AFDC has been calculated using a semi-annually
compounded rate of 8.25% for all periods. ACE provides for straight-line
depreciation based on: transmission and distribution property -- estimated
remaining life; nuclear property -- remaining life of the related plant
operating license in existence at the time of the last base rate case; other
depreciable property -- estimated average service life. The overall composite
rate of depreciation was 3.3% for the last three years. Accumulated depreciation
is charged with the cost of depreciable property retired together with removal
costs less salvage and other recoveries.
A-10
Nonutility Property and Equipment--Nonutility Property and Equipment
includes project development costs and construction work in progress, including
capitalized interest, related to the development and construction of thermal
heating and cooling systems of ATS. Capitalized interest related to Nonutility
expenditures was not material to the financial results of the Company.
ASP's commercial site, including the cost of improvements and certain
preacquisition costs is stated at fair market value. In 1996 and 1994,
management of the Company authorized write-downs of $1.2 million and $2.6
million, respectively, of the carrying value of this commercial site reflecting
diminished value due to excess vacancy and the decline in the local commercial
real estate market.
Nuclear Plant Decommissioning Reserve -- ACE--A reserve for
decommissioning costs is presented as a component of accumulated depreciation
and amounted to $70.2 million and $60.9 million at December 31, 1996 and 1995,
respectively.
The SEC has questioned certain accounting practices employed by the
electric utility industry concerning decommissioning costs for nuclear
generating facilities. In 1996, the FASB issued a Proposed Statement of
Financial Accounting Standard "Accounting for Certain Liabilities Related to
Closure or Removal of Long-lived Assets" which would establish accounting
standards for certain obligations that are incurred for the closure and removal
of long-lived assets. Under the proposed statement, which includes
decommissioning costs for nuclear generating facilities, a regulated utility
would recognize a regulatory asset or liability for differences, if any, in the
timing of recognition of the costs of closure and removal of assets for
financial reporting purposes and rate making treatment. To date, the FASB has
not issued a final accounting standard.
Deferred Energy Costs -- ACE--As approved by the BPU, ACE has a Levelized
Energy Clause (LEC) through which energy and energy-related costs (energy costs)
are charged to customers. LEC rates are based on projected energy costs and
prior period underrecoveries or overrecoveries. Generally, energy costs are
recovered through levelized rates over the period of projection, which is
usually a 12-month period. In any period, the actual amount of LEC revenues
recovered from customers may be greater or less than the recoverable amount of
energy costs incurred in that period. Energy expense is adjusted to match the
associated LEC revenues. Any underrecovery (an asset representing energy costs
incurred that are to be collected from customers) or overrecovery (a liability
representing previously collected energy costs to be returned to customers) of
costs is deferred on the Consolidated Balance Sheet as Deferred Energy Costs.
These deferrals are recognized in the Consolidated Statement of Income as Energy
expense during the period in which they are subsequently included in the LEC.
Income Taxes--Deferred Federal and state income taxes are provided on all
significant temporary differences between book bases and tax bases of assets and
liabilities, transactions that reflect taxable income in a year different than
book income and tax carryforwards. Investment tax credits previously used for
income tax purposes have been deferred on the Consolidated Balance Sheet and are
recognized in book income over the life of the related property. The Company and
its subsidiaries file a consolidated Federal income tax return. Income taxes are
allocated to each of the companies within the consolidated group based on the
separate return method.
Cash & Temporary Investments--AEI and ACE consider all highly liquid
investments and debt securities purchased with a maturity of three months or
less to be cash equivalents.
Earnings Per Common Share--This is computed based upon the weighted
average number of common shares outstanding during the year. Common stock
equivalents exist but are not included in the computation of earnings per share
because they are currently antidilutive.
Use of Estimates--The preparation of financial statements in conformity
with GAAP requires management at times to make certain judgments, estimates and
assumptions that affect amounts and matters reported at the year end dates and
for the annual periods presented. Actual results could differ from those
estimates. Any change in the judgments, estimates and assumptions used, which in
management's opinion would have a significant effect on the financial
statements, will be reported when management becomes aware of such changes.
Other--Debt premium, discount and expense of ACE are amortized over the
life of the related debt. Premiums associated with the 1996 Preferred Stock
redemptions are being deferred and amortized over the life of the related
Cumulative Quarterly Income Preferred Securities in accordance with BPU
approval.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires that
A-11
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. On January 1, 1996, the Company adopted SFAS No. 121 and there was
no material impact on its results of operations.
The FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), effective January 1, 1996. This statement
encourages a fair value method to account for stock-based compensation, as an
alternative to the intrinsic value currently permitted by Accounting Principles
Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees".
The Company is continuing to use the intrinsic value method presented by APB No.
25 to record compensation expense. See Note 4.
NOTE 2. INCOME TAXES
The components of Federal income tax expense for the years ended December
31 are as follows:
(000) 1996 1995 1994
-------- -------- --------
Current ................................. $ 27,061 $ 20,483 $ 19,729
Deferred ................................ 6,587 25,993 17,414
Investment Tax Credits Recognized
on Leveraged Leases ................... (78) (28) --
-------- -------- --------
Total Federal Income Tax Expense 33,570 46,448 37,143
Less Amounts in Other Income ............ 1,298 572 3,879
-------- -------- --------
Federal Income Taxes in
Operating Expenses .................... $ 32,272 $ 45,876 $ 33,264
======== ======== ========
A reconciliation of the expected Federal income taxes compared to the
reported Federal income tax expense computed by applying the statutory rate
for the years ended December 31 follows:
(000) 1996 1995 1994
-------- -------- --------
Statutory Federal Income Tax Rate ....... 35% 35% 35%
Income Tax Computed at the
Statutory Rate ........................ $ 36,058 $ 49,995 $ 45,490
Plant Basis Differences ................. 3,096 1,307 (27)
Amortization of Investment Tax Credits .. (2,612) (2,562) (2,534)
Tax Adjustments ......................... (68) (897) (4,097)
Other-Net ............................... (2,904) (1,395) (1,689)
-------- -------- --------
Total Federal Income Tax Expense ........ $ 33,570 $ 46,448 $ 37,143
======== ======== ========
Effective Federal Income Tax Rate ....... 33% 33% 29%
State income tax expense is not significant.
Items comprising deferred tax balances as of December 31 are as follows:
(000) 1996 1995
-------- --------
Deferred Tax Liabilities:
Plant Basis Differences.................. $ 326,673 $ 316,834
Leveraged Leases......................... 76,671 71,180
Unrecovered Purchased Power Costs........ 22,630 28,209
State Excise Taxes....................... 20,141 22,527
Other.................................... 33,192 32,825
--------- ---------
Total Deferred Tax Liabilities......... 479,307 471,575
--------- ---------
Deferred Tax Assets:
Deferred Investment Tax Credits.......... 25,143 26,511
Employee Separation Costs................ 526 2,621
Other.................................... 16,340 13,999
--------- ---------
Total Deferred Tax Assets.............. 42,009 43,131
--------- ---------
Total Deferred Taxes--Net................ $ 437,298 $ 428,444
========= =========
A-12
At December 31, 1996 and 1995, deferred tax assets exist for cumulative
state income tax net operating loss (NOL's) carryforwards. Valuation allowances
of virtually the same amounts have been recorded. The effects of the state NOL's
and associated valuation allowances are not material to consolidated results of
operations and financial position. At December 31, 1996 unexpired state NOL's
amount to approximately $72 million, with expiration dates from 1997 through
2003.
As of December 31, 1996, AEI used the balance of its Federal Alternative
Minimum Tax credit. This credit was included in the tax effects of the ATE
leveraged leases.
NOTE 3. RATE MATTERS OF ACE
ENERGY CLAUSE PROCEEDINGS
CHANGES IN LEVELIZED ENERGY CLAUSE RATES
1994 -- 1996
AMOUNT AMOUNT
DATE REQUESTED GRANTED DATE
FILED (MILLIONS) (MILLIONS) EFFECTIVE
---- ------- ------- ------
2/94 $63.0 $55.0 7/94
4/95 37.0 37.0 7/95
3/96 49.7 27.6 7/96
ACE's LEC is subject to annual review by the BPU.
In February 1994, ACE filed a petition with the BPU requesting an
increase in LEC revenues of $63 million for the period June 1, 1994 through May
31, 1995. This filing introduced the Southern New Jersey Economic Initiative
(SNJEI), an ACE initiative designed to phase in the impact of nonutility
purchased power contracts by forgoing the recovery of $28 million in energy
costs incurred during the 1994/1995 LEC period. In November 1994, the BPU
approved the continuation of a provisional LEC rate increase of $55 million that
had been in effect since July 1994.
In April 1995, ACE filed a petition with the BPU requesting a $37 million
increase in LEC revenues for the period June 1, 1995 through May 31, 1996. ACE
reduced the amount requested by $10 million under the SNJEI. ACE also reduced
the request by $20.6 million for deferral, without carrying costs, to be
recovered in the next LEC period. In March 1996, the BPU approved the
continuance of the provisional increase of $37 million that had been in effect
since July 1995.
On March 29, 1996, ACE submitted to the BPU a request for a $49.7 million
increase in annual LEC revenues effective June 1, 1996. The request included the
recovery of $20.6 million of LEC costs previously deferred from the 1995 LEC
request as well as a proposal to defer $14.7 million of 1996/1997 LEC costs, to
be recovered without carrying costs in the next LEC period. A stipulation was
reached among ACE, the New Jersey Division of the Ratepayer Advocate (Ratepayer
Advocate) and the Staff of the BPU (collectively the parties) and approved by
the BPU on July 17, 1996, allowing ACE to implement provisional rates resulting
in an increase of annual LEC revenues of $27.6 million. The stipulation provided
for hearings to decide the following LEC rate issues: recovery of $27.8 million
for the estimated replacement power costs related to the Salem Nuclear
Generating Station (Salem) Unit 1 and 2 outages; $1.7 million in deferred
replacement power costs associated with a 1994 Salem Unit 1 outage and $1.7
million in New Jersey emission fees. The provisional LEC rates also included the
deferral of $6.4 million in 1996/97 LEC costs to be recovered without carrying
costs in the next LEC period. On December 19 and December 31, 1996, the BPU
issued Orders approving two stipulations reached on October 22, 1996 among the
parties settling certain issues concerning the LEC petition. The issue of the
$1.7 million in emission fees remains unresolved. See Other Rate Proceedings
below and Note 10 for information relating to the return to service of Salem
Station.
ACE filed a petition with the BPU on February 28, 1997 for a request of
$20 million for the 1997/1998 LEC period.
OTHER RATE PROCEEDINGS
The Ratepayer Advocate has previously alleged that ACE, along with other
New Jersey electric utility companies, were recovering cogeneration capacity
costs concurrently in base rates and LEC rates. ACE and other New Jersey
electric utilities have entered into separate stipulations of settlement with
respect to this matter. ACE's stipulation of settlement specifies that ACE would
provide credits to customers totaling $1.0 million during the months of January
A-13
and February 1997 based on customers usage between January 1, 1996 and October
31, 1996. All issues raised previously with regard to alleged overrecovery of
nonutility capacity costs are deemed closed and resolved.
By an Order dated March 14, 1996 the BPU initiated an investigation of
the ongoing outage at Salem. ACE has a 7.41% ownership in Salem which is
operated by Public Service Electric and Gas Company (PS). By its Order, the BPU
declared the base rates associated with ACE's ownership in Salem Unit 1 interim
and subject to refund pending a hearing as to whether Salem Unit 1 is currently
used and useful. The BPU, in an Order dated June 26, 1996, also declared the
base rates associated with ACE's ownership in Salem Unit 2 interim and subject
to refund. The BPU voted on July 31, 1996 to include Unit 2 in the hearings
originally scheduled for October 1996 to determine if both units were still
considered used and useful. On December 31, 1996, the BPU issued an Order
approving a stipulation of settlement among the parties relating to the ongoing
outage of the Salem Station. Under the terms of the stipulation, ACE provided
credits to customers totaling $12.0 million. The credits were made during
January and February 1997 and were based on customer usage between January 1,
1996 and October 31, 1996. The stipulation also provided that replacement power
costs incurred, up to the agreed upon return-to-service dates (June 30, 1997 for
Unit 1 and December 31, 1996 for Unit 2) will be recoverable in the next annual
LEC revenue proceeding. Should either unit not return to service by its agreed
upon return-to-service date, replacement power costs incurred after such dates
will not be recoverable by ACE. In addition, the stipulation provided that the
performance of the Salem Units will not be included in the calculation of the
BPU Nuclear Performance Standard from the period each unit was taken out of
service to each unit's respective return-to-service date. As such, ACE was not
subject to a penalty or reward under the Nuclear Performance Standard for 1995
or 1996.
Net income reflects a net charge of $7.6 million, net of tax, ACE
recorded in 1996 as a result of the stipulations regarding the Provision for
Rate Refund discussed above. The net charge consists of a $13 million reduction
in revenues, a reduction of $1.3 million in operations expense for amounts
previously recorded for the nuclear performance penalty and a Federal income tax
benefit of $4.1 million.
On January 8, 1997, the BPU approved a stipulation related to its generic
proceeding for methods of implementing FASB Statement of Financial Accounting
Standard No. 106 -- "Employers' Accounting for Post-retirement Benefits Other
Than Pensions" (SFAS No. 106). SFAS No. 106 required publicly held companies to
change from the practice of accounting for post-retirement benefits such as
medical benefits, hospitalization and life insurance (OPEB), on a pay-as-you-go
basis to an accrual basis of accounting. For the transition, SFAS No. 106
required that companies recognize an obligation composed of the present value of
OPEB obligations for retirees and current employees incurred as of the date of
adoption. SFAS No. 71 allowed the recognition of a regulatory asset relating to
costs for which rate recovery has been deferred. By an Order dated August 1,
1996 the BPU initiated a generic proceeding to inquire into methods of
implementing recovery of SFAS No. 106 expenses through utility rates. Under the
terms of a stipulation, ACE will file a petition requesting ratemaking treatment
of OPEB expenses in the second quarter of 1997. See Notes 4 and 11 for further
information regarding OPEB expenses and the corresponding regulatory asset.
NOTE 4. BENEFITS
RETIREMENT BENEFITS -- ACE
Pension
ACE has a noncontributory defined benefit pension plan covering
substantially all of its employees and those of its wholly-owned subsidiary.
Benefits are based on an employee's years of service and average final pay.
ACE's policy is to fund pension costs within the guidelines of the minimum
required by the Employee Retirement Income Security Act and the maximum
allowable as a tax deduction.
Net periodic pension costs include:
(000) 1996 1995 1994
------- ------- -------
Service cost-benefits earned
during the period........................ $ 6,870 $ 6,363 $ 6,871
Interest cost on projected benefit
obligation............................... 14,569 14,794 15,390
Actual return on plan assets............... (36,443) (44,067) (860)
Other-net.................................. 19,123 28,379 (16,885)
------- ------- -------
Net periodic pension costs................. $ 4,119 $ 5,469 $ 4,516
======= ======= =======
A-14
Of these costs, $3.0 million annually was charged to operating expense in
1996, 1995 and 1994. The remaining costs, which are associated with construction
labor, were charged to the cost of new utility plant. Actual return on plan
assets and Other-net for 1996 and 1995 primarily reflect the favorable market
conditions from the investment of plan assets and expected returns compared with
unfavorable market conditions in 1994.
A reconciliation of the funded status of the plan as of December 31 is as
follows:
(000) 1996 1995
-------- --------
Fair value of plan assets......................... $236,000 $212,000
Projected benefit obligation...................... 207,340 213,470
-------- --------
Plan assets in excess of (less
than) projected benefit obligation.............. 28,660 (1,470)
Unrecognized net transition asset................. (1,377) (1,550)
Unrecognized prior service cost................... 259 282
Unrecognized net (gain) loss...................... (18,958) 10,006
-------- --------
Prepaid pension cost.............................. $ 8,584 $ 7,268
======== ========
Accumulated benefit obligation:
Vested benefits................................. $170,751 $169,044
Nonvested benefits.............................. 2,023 3,413
-------- --------
Total................................... $172,774 $172,457
======== ========
At December 31, 1996, approximately 66% of plan assets were invested in
equity securities, 25% in fixed income securities and 9% in other investments.
The assumed rates used in determining the actuarial present value of the
projected benefit obligation at December 31 were as follows:
1996 1995 1994
---- ---- ----
Weighted average discount................ 7.5% 7.0% 8.0%
Anticipated increase in compensation..... 3.5% 3.5% 3.5%
Assumed long term rate of return......... 8.5% 8.5% 8.5%
OTHER POSTRETIREMENT BENEFITS
ACE and its subsidiary provide certain health care and life insurance
benefits for retired employees and their eligible dependents. Substantially all
employees may become eligible for these benefits if they reach retirement age
while working for the companies. Benefits are provided through insurance
companies and other plan providers whose premiums and related plan costs are
based on the benefits paid during the year. ACE has a tax-qualified trust to
fund these benefits.
Net periodic other postretirement benefit costs include:
(000) 1996 1995 1994
------- ------- -------
Service cost-benefits attributed to
service during the period...................... $ 2,688 $ 2,891 $ 3,817
Interest cost on accumulated
postretirement benefits obligation............. 7,482 8,107 8,450
Actual return on plan assets..................... (771) (1,437) 100
Amortization of unrecognized
transition obligation.......................... 2,768 3,893 3,893
Other-net........................................ 215 404 (700)
-------- -------- --------
Net periodic other postretirement
costs.......................................... $ 12,382 $ 13,858 $ 15,560
======== ======== ========
These costs were allocated as follows:
(MILLIONS) 1996 1995 1994
---- ---- ----
Operating expense...................... $3.6 $3.1 $3.8
New utility plant-associated with
construction labor................... 2.4 2.5 2.0
Regulatory asset....................... 6.4 8.3 9.8
A-15
The regulatory asset represents the amount of annual costs in excess of
the amount of cost currently recovered in rates. These excess costs are deferred
as authorized by an accounting order of the BPU pending future recovery through
rates. See Note 3 for additional information.
A reconciliation of the funded status of the plan as of December 31 is as
follows:
(000) 1996 1995
-------- --------
Accumulated benefits obligation:
Retirees...................................................... $ 63,095 $ 64,516
Fully eligible active plan participants....................... 4,038 6,954
Other active plan participants................................ 39,972 33,649
-------- --------
Total accumulated benefits obligation......................... 107,105 105,119
Less fair value of plan assets................................ 18,000 16,500
-------- --------
Accumulated benefits obligation in excess of plan assets...... 89,105 88,619
Unrecognized net loss......................................... (12,207) (15,335)
Unamortized unrecognized transition obligation................ (44,289) (47,057)
-------- --------
Accrued other postretirement benefits cost obligation......... $ 32,609 $ 26,227
======== ========
At December 31, 1996, approximately 75% of plan assets were invested in
fixed income securities and 25% in other investments.
The assumed health care costs trend rate for 1997 is 8% and is assumed to
evenly decline to an ultimate constant rate of 5% in the year 2001 and
thereafter. If the assumed health care costs trend rate was increased by 1% in
each future year, the aggregate service and interest costs of the 1996 net
periodic benefits cost would increase by $1.3 million, and the accumulated
postretirement benefits obligation at December 31, 1996 would increase by $10.8
million. The weighted average discount rate assumed in determining the
accumulated benefits obligation was 7.5%, 7% and 7.5% for 1996, 1995 and 1994,
respectively. The assumed long term return rate on plan assets was 7% for each
of the three year periods.
OTHER
Savings and Investment Plans A and B 401(K)
ACE has two 401(k) plans for union and non-union employees that match
plan contributions up to 6% of a participating employee's base pay. The rate at
which Company contributions are made is 50%. All full and part-time employees
are eligible to participate. The cost of the plans for 1996, 1995 and 1994 was
$1.9 million, $1.9 million and $2.0 million, respectively.
Equity Incentive Plan ( EIP) -- AEI
Eligible participants of the EIP are officers, general managers and
nonemployee directors of the Company and its subsidiaries. Under the EIP,
nonemployee director participants are entitled to receive a grant of 1,000
shares of restricted stock. Restrictions on these grants expire over a five-year
period. Employee participants may be awarded shares of restricted common stock,
stock options and other common stock-based awards. Actual awards of restricted
shares are based on attainment of certain Company performance criteria within a
three-year period. Restrictions lapse upon actual award at the end of the
three-year performance period. Shares not awarded are forfeited. Dividends
earned on restricted stock issued through the EIP are invested in additional
restricted stock under the EIP which is subject to the same award criteria.
A-16
Restricted stock activity of the EIP, initiated in April 1994, was as
follows:
WEIGHTED
AVERAGE
RESTRICTED FAIR VALUE
SHARES GRANT DATE
------- --------
Issued/Granted........................... 175,712 $20.975
-------
Balance, December 31, 1994............... 175,712
Issued/Granted........................... 24,435
Forfeited................................ (7,587)
-------
Balance, December 31, 1995............... 192,560 20.697
-------
Issued/Granted........................... 237,782
Forfeited................................ (207,805)
-------
Balance, December 31, 1996............... 222,537 19.160
=======
The 1996 and 1995 restricted shares granted include 13,786 shares and
7,614 shares, respectively, purchased on the open market from reinvestment of
dividends on EIP shares outstanding. Compensation expense for the restricted
stock has been measured based on the intrinsic value of the stock. The total
compensation expense for the years 1996 through 1994 amounted to less than $.7
million and reflect an adjustment for the restricted shares associated with the
first three-year period that were not awarded and were forfeited.
Stock options granted are nonqualified and are exercisable three years
after but within ten years from the date of grant. Stock options are priced at
an amount at least equal to 100% of the fair market value of the related common
stock at the date of grant.
The Company applied APB No. 25 in accounting for its EIP plan.
Accordingly, no compensation expense has been recognized for its stock option
plan. Fair value compensation cost of the options was determined using the
Black-Scholes model with the following assumptions for 1996: dividend yield of
7.9%, an average expected life of 3-7 years, expected volatility of 17.85% and a
risk-free interest rate of 5.04%. Option information is as follows:
1996 1995
---------------------------- ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE
------ ------- ------ -------
Outstanding beginning of year.............. 166,987 $21.125 167,300 $21.125
Granted.................................... 207,250 19.296 6,387 21.125
Forfeited.................................. (2,800) 21.125 (6,700) 21.125
Outstanding at end of year................. 371,437 20.105 166,987 21.125
Options exercisable at year end............ -- --
Weighted Average Fair Value of
Options Granted.......................... $1.33 N/A
The combined effects of accounting for restricted shares and options
under the EIP plans consistent with the fair value disclosure requirements of
SFAS No. 123 upon the net income of the Company for 1996 is less than $.2
million and as such is not considered material.
A-17
NOTE 5. JOINTLY-OWNED GENERATING STATIONS -- ACE
ACE owns jointly with other utilities several electric production
facilities. ACE is responsible for its pro-rata share of the costs of
construction, operation and maintenance of each facility.
The amounts shown represent ACE's share of each facility at, or for the
year ended, December 31, including AFDC as appropriate.
PEACH HOPE
KEYSTONE CONEMAUGH BOTTOM SALEM CREEK
-------- --------- ------ ----- -----
Energy Source ............................ Coal Coal Nuclear Nuclear Nuclear
Company's Share (%/MWs) .................. 2.47/42.3 3.83/65.4 7.51/164.0 7.41/164.0 5.00/52.0
(000)
Electric Plant in Service:
1996 ................................... $ 13,275 $ 34,489 $ 130,011 $218,603 $ 240,079
1995 ................................... 12,719 35,371 128,398 214,306 239,499
Accumulated Depreciation:
1996 ................................... $ 3,609 $ 7,333 $ 54,854* $ 79,635* $ 68,286*
1995 ................................... 3,277 6,445 50,825* 73,088* 60,998*
Construction Work in Progress:
1996 ................................... $ 300 $ 270 $ 12,992 $ 27,015 $ 1,321
1995 ................................... 442 873 11,056 11,198 655
Operations and Maintenance Expenses
(including fuel):
1996 ................................... $ 5,626 $ 7,507 $ 29,337 $ 34,403 $ 10,899
1995 ................................... 5,143 7,252 29,647 28,306 10,360
1994 ................................... 5,085 7,211 29,530 27,731 10,471
Working Funds:
1996 ................................... $ 44 $ 69 $ 3,833 $ 7,252 $ 3,545
1995 ................................... 44 69 4,505 5,782 1,919
Generation (MWHr):
1996 ................................... 311,934 436,289 1,275,371 -- 336,872
1995 ................................... 285,899 451,211 1,232,921 334,572 352,316
1994 ................................... 257,561 419,313 1,214,776 836,725 355,390
- - ---------------------
* Excludes Nuclear Decommissioning Reserve.
ACE provides financing during the construction period for its share of
the jointly-owned facilities and includes its share of direct operations and
maintenance expenses in the Consolidated Statement of Income. Additionally, ACE
provides an amount of working funds to the operators of the facilities to fund
operational needs.
The decrease in Salem's generation for 1996 and 1995 is due to both Units
1 and 2 being taken out of service in May and June 1995, respectively, by its
operator PS for review and resolution of certain equipment and management
issues. Effective December 31, 1996, ACE entered into an agreement with PS in
its capacity as operator of Salem for the purpose of limiting ACE's exposure to
operation and maintenance expenses to be incurred during calendar year 1997. See
Note 10 for further information concerning Salem Nuclear Generating Station.
A-18
NOTE 6. NONUTILITY COMPANIES
Principal assets of each of the subsidiary companies of AEE at December
31, 1996 were: AGI -- investments of approximately $21.8 million in cogeneration
facilities; ASP -- commercial real estate site with a net book value of $8.5
million; ATE -- leveraged lease investments of $79.7 million and $7.3 million
invested in EnerTech Capital Partners, L.P.; ATS -- construction costs in
thermal heating and cooling projects of $29.3 million. CCI has $0.5 million
invested in telecommunication licenses. Other financial information regarding
the subsidiary companies is as follows:
NET WORTH NET INCOME (LOSS)
----------------------- -------------------------------------
COMPANY 1996 1995 1996 1995 1994
------ ------ ----- ----- -----
(000)
AGI............................... $21,361 $26,082 $ 979 $2,513 $2,959
ASP............................... 561 2,334 (1,773) (841) (1,956)
ATE............................... 11,139 9,399 71 (50) 266
ATS............................... 2,498 2,187 311 (213) (327)
CCI............................... 544 5,258 (18) -- --
AGI's results in each year primarily reflect the equity in earnings of
cogeneration facilities in which AGI has an ownership interest. AGI's 1996
results reflect the contingency of a $1.6 million net of tax loss from the sale
of a cogeneration facility located in New York.
ASP's results in each year reflect the vacancy in its commercial site due
to generally poor market conditions in commercial real estate. Additionally,
1996 and 1994 include net after tax write-downs of the carrying value of the
commercial site of $0.8 million and $1.7 million, respectively.
ATE's 1996 and 1995 results reflect changes in interest expense
associated with its revolving credit and term loan agreement during each year.
ATS's results for the years 1996 and 1995 reflect administrative and
general costs for business development and construction of heating and cooling
systems. Operating expenses were offset in part by revenues generated from the
operation and maintenance of customer heating and cooling facilities in 1996 and
1995. ATS has agreements with three casinos in Atlantic City, New Jersey to
operate their heating and cooling systems. As part of these agreements, ATS has
paid $18.0 million in license fees for the right to operate and service such
systems for a period of 20 years. These fees are recorded on the Consolidated
Balance Sheet as License Fees and are being amortized to expense over the life
of the contracts.
AEI and AEE parent-only operations, excluding equity in the results of
subsidiary companies, generally reflect administrative and general expenses for
management of their respective subsidiaries. AEI incurred losses of $3.6 million
and $1.6 million in 1996 and 1995, respectively. AEI's 1996 results reflect the
impact of merger-related costs. AEI's 1996 and 1995 results also reflect
interest charges associated with a line of credit established to fund
repurchases of common stock and certain affiliate capital needs. AEE incurred
losses of $1.7 million and $2.4 million in 1996 and 1995, respectively. AEE 1996
activity reflects an after tax loss of $1.1 million from its equity investment
in Enerval, LLC, due to a combination of unhedged gas sales agreements and
higher spot market prices for gas.
AEII reflects a net loss of $0.6 million in 1996 due to the consulting
and administrative costs of developing a new line of business.
A-19
NOTE 7. CUMULATIVE PREFERRED SECURITIES OF ACE
ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par
Value, two million shares of No Par Preferred Stock and three million shares of
Preference Stock, No Par Value. Information relating to outstanding shares at
December 31 is shown in the table below.
CURRENT
1996 1995 OPTIONAL
PAR --------------------- ------------------------ REDEMPTION
SERIES VALUE SHARES (000) SHARES (000) PRICE
---- ------ ------ ------ ------ --------
Not Subject to Mandatory
Redemption:
4%.................................... $100 77,000 $ 7,700 77,000 $ 7,700 $105.50
4.10%................................. 100 72,000 7,200 72,000 7,200 101.00
4.35%................................. 100 15,000 1,500 15,000 1,500 101.00
4.35%................................. 100 36,000 3,600 36,000 3,600 101.00
4.75%................................. 100 50,000 5,000 50,000 5,000 101.00
5%.................................... 100 50,000 5,000 50,000 5,000 100.00
7.52%................................. 100 -- -- 100,000 10,000 --
------- --------
Total............................. $30,000 $ 40,000
------- --------
Subject to Mandatory Redemption:
$8.25................................. None -- $ -- 50,000 $5,000 --
$8.53................................. None -- -- 120,000 12,000 --
$8.20................................. None 300,000 30,000 500,000 50,000 --
$7.80................................. None 239,500 23,950 700,000 70,000 --
------- --------
Total............................. 53,950 137,000
Less portion due within
one year................................ 10,000 22,250
------- --------
Total............................. $43,950 $114,750
======= ========
Cumulative Quarterly
Preferred Income Securities:
8.25%................................. None 2,800,000 $70,000 $ -- --
======= ========
Cumulative Preferred Stock Not Subject to Mandatory Redemption is
redeemable solely at the option of ACE. If preferred dividends are in arrears
for at least a full year, preferred stockholders have the right to elect a
majority of directors to the Board of Directors until all dividends in arrears
have been paid.
On February 1, 1996, ACE redeemed the remaining 120,000 shares of its
$8.53 No Par Preferred Stock at a price of $101.00 per share.
On August 1, 1996, ACE redeemed 200,000 shares of its $8.20 No Par
Preferred Stock at a price of $100 per share in accordance with its annual
sinking fund requirement. Sinking fund provisions require 100,000 shares be
redeemed annually on August 1st and, at ACE's option, an additional 100,000
shares may be redeemed on any sinking fund date without premium.
On September 16, 1996, ACE redeemed 100,000 shares of its 7.52% Preferred
Stock $100 Par Value at a price of $101.88 per share and the remaining 50,000
shares of its $8.25 No Par Preferred Stock at a price of $104.45 per share. On
August 29, 1996, a tender offer was initiated for ACE's $7.80 No Par Preferred
Stock. Pursuant to the tender offer and subsequent agreements, ACE purchased a
total of 460,500 shares at a price of $111.00 per share. In accordance with BPU
approval, premiums associated with these redemptions are being deferred and
amortized over the life of the 8.25% Cumulative Quarterly Income Preferred
Securities.
Beginning May 1, 2001, 115,000 shares of the remaining $7.80 No Par
Preferred Stock must be redeemed annually through the operation of a sinking
fund at a redemption price of $100 per share. ACE has the option to redeem up to
an additional 115,000 shares without premium on any annual sinking fund date.
Embedded cost of Preferred Securities as of December 31, 1996, 1995 and
1994 was 7.4%, 7.4% and 7.6%, respectively.
A-20
At December 31, 1996, the minimum annual sinking fund requirements of the
Cumulative Preferred Stock Subject to Mandatory Redemption for the next five
years are $10 million in each of the years 1997 through 1999 and $11.5 million
in 2001.
On October 1, 1996, Atlantic Capital I, a newly formed grantor trust,
issued $70 million of 8.25% Cumulative Quarterly Income Preferred Securities
(CQIPS) with a stated liquidation preference of $25 each. Atlantic Capital I,
established for the sole purpose of issuing the CQIPS, invested the proceeds in
8.25% Junior Subordinated Deferrable Interest Debentures (Junior Debentures) of
ACE. ACE reserves the right to defer payment of interest on the debentures for
up to 20 consecutive quarters. During such a deferral period, certain dividend
restrictions would apply to ACE's Common and Preferred stock. The CQIPS and
Junior Debentures are scheduled to mature on October 1, 2026, but such maturity
may be extended to a date not later than October 1, 2045, if certain conditions
are met. Proceeds from the sale of the Junior Debentures were used to fund the
redemption and purchase of shares of ACE's preferred stock described above.
Atlantic Capital I is a grantor trust of ACE and as such, the transactions of
the trust are consolidated into the financial statements of ACE. The Junior
Debentures are eliminated in consolidation. NOTE 8. DEBT
DECEMBER 31,
MATURITY ----------------------------
SERIES DATE 1996 1995
----- ------- -------- --------
(000)
5-1/8% First Mortgage Bonds...................... 2/1/1996 $ -- $ 9,980
Medium Term Notes Series B (6.28%)............... 1998 56,000 56,000
Medium Term Notes Series A (7.52%)............... 1999 30,000 30,000
Medium Term Notes Series B (6.83%)............... 2000 46,000 46,000
Medium Term Notes Series C (6.86%)............... 2001 40,000 40,000
7-1/2% First Mortgage Bonds...................... 4/1/2002 20,000 20,000
Medium Term Notes Series C (7.02%)............... 2002 30,000 30,000
Medium Term Notes Series B (7.18%)............... 2003 20,000 20,000
7-3/4% First Mortgage Bonds...................... 6/1/2003 29,976 29,976
Medium Term Notes Series A (7.98%)............... 2004 30,000 30,000
Medium Term Notes Series B (7.125%).............. 2004 28,000 28,000
Medium Term Notes Series C (7.15%)............... 2004 9,000 9,000
Medium Term Notes Series B (6.45%)............... 2005 40,000 40,000
6-3/8% Pollution Control......................... 12/1/2006 2,500 2,500
Medium Term Notes Series C (7.15%)............... 2007 1,000 1,000
Medium Term Notes Series B (6.76%)............... 2008 50,000 50,000
Medium Term Notes Series C (7.25%)............... 2010 1,000 1,000
6-5/8% First Mortgage Bonds...................... 8/1/2013 75,000 75,000
7-3/8% Pollution Control Series A................ 4/15/2014 18,200 18,200
Medium Term Notes Series C (7.63%)............... 2014 7,000 7,000
Medium Term Notes Series C (7.68%)............... 2015 15,000 15,000
Medium Term Notes Series C (7.68%)............... 2016 2,000 2,000
8-1/4% Pollution Control Series A................ 7/15/2017 4,400 4,400
6.80% Pollution Control Series A................. 3/1/2021 38,865 38,865
7% First Mortgage Bonds.......................... 9/1/2023 75,000 75,000
5.60% Pollution Control Series A................. 11/1/2025 4,000 4,000
7% First Mortgage Bonds.......................... 8/1/2028 75,000 75,000
6.15% Pollution Control Series A................. 6/1/2029 23,150 23,150
7.20% Pollution Control Series A................. 11/1/2029 25,000 25,000
7% Pollution Control Series B.................... 11/1/2029 6,500 6,500
--------- ---------
Total............................................ 802,591 812,571
--------- ---------
Debentures:
5-1/4%........................................... 2/1/1996 -- 2,267
7-1/4%........................................... 5/1/1998 2,600 2,619
--------- ---------
Total............................................ 2,600 4,886
--------- ---------
Amortized Premium and Discount-Net............... (2,771) (2,854)
--------- ---------
Total Long Term Debt-ACE......................... 802,420 814,603
Less Portion Due within one year-ACE............. 175 12,247
--------- ---------
Long Term Debt-ACE............................... 802,245 802,356
Long Term Debt-AEI............................... 37,575 34,500
Long Term Debt-ATE............................... 33,500 33,500
Long Term Debt-ATS............................... 54,500 12,500
Less Portion Due within One Year................. 98,075 53,000
--------- ---------
$ 829,745 $ 829,856
========= =========
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Medium Term Notes have varying maturity dates and are shown with the
weighted average interest rate of the related issues within the year of
maturity. Substantially all of ACE's utility plant is subject to the lien of the
Mortgage and Deed of Trust dated January 15, 1937, as amended and supplemented,
collateralizing ACE's First Mortgage Bonds.
ACE
ACE had authority to issue $150 million in short term debt, comprised of
$100 million of committed lines of credit and $50 million on a when offered
basis. At December 31, 1996 ACE had $85.1 million of unused short-term borrowing
capacity. ACE's weighted daily average interest rate on short term debt was 5.6%
for 1996 and 6.3% for 1995.
On February 1, 1996, $9.98 million of 5 1/8% First Mortgage Bonds and
$2.267 million of 5 1/4% Debentures of the Company matured. On May 1, 1996, the
Company satisfied the sinking fund requirements of $0.1 million for its 7 1/4%
Debentures.
At December 31, 1996, 1995 and 1994, ACE's embedded cost of long term
debt was 7.5%, 7.5% and 7.6%, respectively.
AEE
Long term debt of ATE includes $15 million of 7.44% Senior Notes due
1999. Also, ATE has a revolving credit and term loan agreement which provides
for borrowings of up to $25 million during successive revolving credit and term
loan periods through June 1997. There were $18.5 million in borrowings
outstanding under this agreement at December 31, 1996 and 1995. Interest rates
on borrowings when outstanding are determined by reference to periodic pricing
options available under the facility. ATE was charged interest rates ranging
from 5.8% to 6.5% on these loans during 1996.
In December 1995, ATS through a partnership arrangement, borrowed $12.5
million of proceeds from the sale of special, limited bonds issued by the New
Jersey Economic Development Authority due December 1, 2009. The bonds paid an
initial rate of 3.7% for the 120 day period ending on April 30, 1996. The bonds
were subject to a mandatory tender and were remarketed at fixed rates ranging
from 3.5% to 3.6% twice within the year. The borrowed funds are currently
restricted in trust and invested in U. S. Treasury Securities. The availability
of the borrowed funds for their intended use and the ultimate term of the
borrowings are subject to certain conditions. The bonds may be remarketed for
additional periods until December 1998, at which time, the bonds must be
redeemed if the escrow release conditions are not satisfied. ATS cannot
estimate, with any certainty, when or if the conditions attached to the escrow
release will be satisfied.
In August 1996, ATS established a $100 million revolving credit and term
loan facility, of which up to $20 million can be used to establish letters of
credit. As of December 31, 1996, $42 million was outstanding under this
facility. Interest rates on borrowings are based on senior debt ratings and on
the borrowing options selected by ATS. Interest rates on the borrowings
outstanding ranged from 5.8% to 6.0% in 1996. This facility will be primarily
used for construction of the Midtown Energy Center in Atlantic City, New Jersey
which began in November 1996. Aggregate commitment fees on unused credit lines
of revolving AEE credit agreements were not significant.
AEI
Under AEI's $75 million revolving credit and term loan facility, AEI had
$37.6 million and $34.5 million outstanding in borrowings at December 31, 1996
and 1995, respectively. Interest rates are based on senior debt ratings and on
the borrowing option selected by AEI. Interest on the borrowings outstanding
ranged from 5.59% to 8.25% for 1996. This facility, established in September
1995, has been used to fund acquisitions of Company common stock and other
general corporate purposes. Commitment fees were not significant.
AEI's weighted daily average interest rate on its short term debt was
6.3% for 1995. AEI had no short term debt in 1996.
A-22
LONG TERM DEBT
MATURITIES AND SINKING FUND REQUIREMENTS
(000) ACE AEI ATS ATE TOTAL
------ ------ ------ ------ ------
1997...................... $ 175 $37,575 $42,000 $18,500 $98,250
1998...................... 58,575 -- 12,500 -- 71,075
1999...................... 30,075 -- -- 15,000 45,075
2000...................... 46,075 -- -- -- 46,075
2001...................... 40,075 -- -- -- 40,075
NOTE 9. COMMON SHAREHOLDERS' EQUITY
In addition to public offerings, Common Stock may be issued through the
Dividend Reinvestment and Stock Purchase Plan (DRP), ACE benefit plans (ACE
plans), the Equity Incentive Plan (EIP) and Employee Stock Purchase Plan (ESPP).
The number of shares of Common Stock issued (forfeited), and the number of
shares reserved for issuance at December 31, 1996, were as follows:
1996 1995 1994 RESERVED
------ ------ ------ --------
DRP.................... -- -- 699,493 723,975
ACE Plans.............. (28,844) (7,601) (5,046) 177,483
EIP.................... (555) 9,234 175,712 615,609
ESPP................... -- -- -- 400,000
------ ------- -------
Total.............. (29,399) 1,633 870,159
====== ======= =======
The Company has a program to reacquire up to three million shares of the
Company's Common Stock outstanding. There is no schedule or specific share price
target associated with the reacquisitions. The authorized number of shares is
not to be affected. During 1995, the Company reacquired and cancelled 1,625,000
shares for a total cost of $29.6 million with prices ranging from $17.625 to
$18.875 per share. At December 31, 1996 and 1995, the Company has reacquired and
cancelled 1,846,700 shares of its common stock at a total cost of $33.5 million.
The Company did not reacquire and cancel any shares under this program during
1996.
In April 1996, the shareholders of AEI approved the ESPP. Under this
plan, eligible employees can purchase shares of common stock at a 15% discount.
The offering periods begin on August 15 in each of the years 1996-1999 and end
August 14 of the following year. The maximum number of shares that shall be
issued under this plan shall be 100,000 in each of the offering periods up to a
total of 400,000 shares.
Pursuant to ACE's certificate of incorporation, ACE is subject to certain
limitations on the payment of dividends to the Company, which is the holder of
all of ACE's common stock. When full dividends have been paid on the Preferred
Stock Securities of ACE for all past quarterly-yearly dividend periods,
dividends may be declared and paid by ACE on its common stock, as determined by
the Board of Directors of ACE, out of funds legally available for the payment of
dividends.
NOTE 10. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM
ACE cash construction expenditures for 1997 are estimated to be
approximately $99 million. Nonutility capital expenditures for 1997 are
estimated to be $67 million.
INSURANCE PROGRAMS -- ACE
Nuclear
ACE is a member of certain insurance programs that provide coverage for
contamination and property damage to members' nuclear generating plants.
Facilities at the Peach Bottom, Salem and Hope Creek stations are insured
against property damage losses up to $2.75 billion per site under these
programs.
In addition, ACE is a member of an insurance program which provides
coverage for the cost of replacement power during prolonged outages of nuclear
units caused by certain specific conditions. The insurer for nuclear extra
expense insurance provides stated value coverage for replacement power costs
incurred in the event of an outage at a nuclear unit resulting from physical
A-23
damage to the nuclear unit. The stated value coverage is subject to a deductible
period of the first 21 weeks of any outage. Limitations of coverage include, but
are not limited to, outages 1) not resulting from physical damage to the unit,
2) resulting from any government mandated shutdown of the unit, 3) resulting
from any gradual deterioration, corrosion, wear and tear, etc. of the unit, 4)
resulting from any intentional acts committed by an insured and 5) resulting
from certain war risk conditions. Under the property and replacement power
insurance programs, ACE could be assessed retrospective premiums in the event
the insurers' losses exceed their reserves. As of December 31, 1996, the maximum
amount of retrospective premiums ACE could be assessed for losses during the
current policy year was $4.9 million under these programs.
The Price-Anderson provisions of the Atomic Energy Act of 1954, as
amended by the Price-Anderson Amendments Act of 1988, govern liability and
indemnification for nuclear incidents. All nuclear facilities could be assessed,
after exhaustion of private insurance, up to $79.275 million each reactor per
incident, payable at $10 million per year. Based on its ownership share of
nuclear facilities, ACE could be assessed up to an aggregate of $27.6 million
per incident. This amount would be payable at an aggregate of $3.48 million per
year, per incident.
OTHER
ACE's comprehensive general liability insurance provides pollution
liability coverage, subject to certain terms and limitations for environmental
costs incurred in the event of bodily injury or property damage resulting from
the discharge or release of pollutants into or upon the land, atmosphere or
water. Limitations of coverage include any pollution liability 1) resulting
subsequent to the disposal of such pollutants, 2) resulting from the operation
of a storage facility of such pollutants, 3) resulting in the formation of acid
rain, 4) caused to property owned by an insured and 5) resulting from any
intentional acts committed by an insured.
NUCLEAR PLANT DECOMMISSIONING -- ACE
ACE has a trust to fund the future costs of decommissioning each of the
five nuclear units in which it has an ownership interest. The current annual
funding amount, as authorized by the BPU, totals $6.4 million and is provided
for in rates charged to customers. The funding amount is based on estimates of
the future cost of decommissioning each of the units, the dates that
decommissioning activities are expected to begin and return to be earned by the
assets of the fund. The present value of ACE's nuclear decommissioning
obligation, based on costs adopted by the BPU in 1991 and restated in 1996
dollars, is $158 million. Decommissioning activities as approved by the BPU were
expected to begin in 2006 and continue through 2032. The total estimated value
of the trust at December 31, 1996, inclusive of the present value of future
funding, based on current annual funding amounts and expected decommissioning
dates approved by the BPU, is approximately $137 million, without earnings on or
appreciation of the fund assets. In accordance with BPU regulations, updated
site-specific studies based on 1995 costs have been performed and submitted to
the BPU for review. Any revisions to the amounts to be recognized and recovered
in rates as a result of the updated studies are subject to the review and
approval of the BPU and cannot be determined at this time. ACE will seek to
adjust these estimates and the level of rates collected from customers in future
BPU proceedings to reflect changes in decommissioning cost estimates and the
expected levels of inflation and interest to be earned by the assets in the
trust.
PURCHASED CAPACITY AND ENERGY ARRANGEMENTS -- ACE
ACE arranges with various providers of bulk energy to obtain sufficient
supplies of energy to satisfy current and future energy requirements of the
company. Arrangements may be for generating capacity and associated energy or
for energy only. Terms of the arrangements vary in length to enable ACE to
optimally manage its supply portfolio in response to changing near and long term
market conditions. At December 31, 1996, ACE has contracted for 707 megawatts
(MWs) of purchased capacity with terms remaining of 2 to 28 years and an
additional 175 MWs commencing in 1999 for 10 years. Information regarding these
arrangements relative to ACE was as follows:
1996 1995 1994
------ ------ ------
As a % of Capacity (year end)............. 30% 30% 29%
As a % of Generation...................... 55% 52% 48%
Capacity charges (millions)............... $195.7 $190.6 $130.9
Energy charges (millions)................. $145.1 $135.4 $128.6
A-24
Amounts for purchased capacity are shown on the Consolidated Statement of
Income as Purchased Capacity. Of these amounts, charges of certain nonutility
providers are recoverable through the LEC, which amounted to $165.3 million,
$162.7 million and $77.0 million in 1996, 1995 and 1994, respectively. Minimum
future payments for purchased capacity and energy under contract for the years
1997 through 2001 are performance driven and cannot be reasonably estimated.
ENVIRONMENTAL MATTERS OF ACE
The provisions of Title IV of the Clean Air Act Amendments of 1990 (CAAA)
require, among other things, phased reductions of sulfur dioxide (SO2) emissions
by 10 million tons per year, a limit on SO2 emissions nationwide by the year
2000 and reductions in emissions of nitrogen oxides (NOx) by approximately 2
million tons per year. ACE's wholly-owned B.L. England Units 1 and 2 and its
jointly-owned Conemaugh Units 1 and 2 are in compliance with Phase I
requirements as the result of installation of scrubbers at each station. All of
ACE's fossil-fuel steam generating units are affected by Phase II (2000) of the
CAAA. A compliance plan for these units currently reflects capital expenditures
of approximately $8.5 million in 1997 through 2001. The jointly-owned Keystone
Station is impacted by the SO2 and NOx provisions of Title IV of the CAAA during
Phase II. The Keystone owners plan to primarily rely on emission allowances to
comply with the CAAA through the year 2000.
SALEM NUCLEAR GENERATING STATION
ACE is an owner of 7.41% of Salem Units 1 and 2, which are operated by
PS. Salem Units 1 and 2 have been out of service since May 16, 1995 and June 7,
1995, respectively. The Salem units represent 164 MWs of ACE's total installed
capacity of 2,385.7 MWs.
During these outages, PS has made significant changes and improvements
related to the people, processes and equipment at Salem to improve the long-term
reliability of the units. Salem Unit 2 is in the final stages of preparation for
restart. The reactor has been refueled and reassembled and the reactor coolant
pumps have been tested and placed in service. Over 90% of the total work
activities have been completed and approximately 80% of the plant systems have
been restored. Salem Unit 2 is currently expected to return to service in the
second quarter of 1997.
Salem Unit 1 is currently expected to return to service in the fall of
1997, after replacement of the unit's four steam generators, which was required
in order to correct a generic problem with certain pressurized water reactors.
Removal of the old steam generators has been completed and installation of the
new steam generators is underway. The estimated cost of purchasing and
installing the steam generators is between $150 million and $170 million, of
which ACE's share is between $11.1 million and $12.6 million. In addition, the
cost of the disposal of the old steam generators could be as much as $20
million, of which ACE's share would be $1.5 million.
Effective December 31, 1996, ACE entered into a Stipulation Agreement
(Agreement) with PS for the purpose of limiting ACE's exposure to Salem's 1997
operation and maintenance (O&M) expenses. Pursuant to the terms of the
Agreement, ACE will pay to PS $10.0 million of O&M expense as a fixed charge
payable in twelve equal installments beginning February 1, 1997. ACE's
obligation for any additional contribution to 1997 Salem O&M expenses, of which
ACE's estimated share would be $21.8 million, is based on performance and
directly related to the timely return and operation of Salem Units 1 and 2. To
the extent ACE derives a savings against 1997 O&M expenditures, those savings
will offset replacement power costs incurred due to the unavailability of the
Salem Units. As a result of this Agreement, ACE has agreed to dismiss the
complaint filed in the Superior Court of New Jersey in March 1996 alleging
negligence and breach of contract.
On February 27, 1996, the Salem co-owners filed a Complaint in United
States District Court for the District of New Jersey against Westinghouse
Electric Corporation, the designer and manufacturer of the Salem steam
generators, under Federal and state statutes alleging fraud, negligent
misrepresentation and breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. On April 30, 1996, Westinghouse filed an
answer and a counterclaim of $2.5 million for unpaid work. The litigation is in
the process of discovery and investigation.
ACE is subject to a performance standard for its five jointly-owned
nuclear units. This standard is used by the BPU in determining recovery of
replacement energy costs when output from the nuclear units is reduced or not
available. Underperformance results in penalties which are not permitted to be
recovered from customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear performance penalty for
1995 and had recorded a provision for such. According to the Salem outage
stipulation agreement as previously discussed in Note 3, the performance of
A-25
Salem Units 1 and 2 shall not be included in the calculation of a nuclear
performance penalty for the period each unit was taken out of service up to each
unit's respective return-to-service date. The parties to the stipulation agreed
that for the years 1995 and 1996, there will be no penalty or reward under the
nuclear performance standard. ACE had recorded a 1995 performance penalty of
$0.8 million, net of tax. This amount has been incorporated into the net amount
recorded for the Salem stipulation discussed in Note 3.
The outage of each Salem unit causes ACE to incur replacement power costs
of approximately $0.7 million per unit per month. ACE's replacement power costs
for the current outage for each unit, up to the agreed upon return-to-service
dates, will be recoverable in rates in ACE's next LEC proceeding. As discussed
above, replacement power costs incurred after the respective agreed upon
return-to-service dates for the Salem units will not be recoverable in rates.
COMPETITION
Competition is expected to increase for electric energy markets
historically served exclusively by regulated utilities. In recent years,
changing laws and governmental regulations permitting competition from other
utilities and nonregulated energy suppliers have prompted some customers to use
self-generation or alternative sources to meet their electric needs. As the
electric utility industry transitions from a regulated to a competitive
industry, utilities may not be able to recover certain costs. These costs, which
are known as "stranded" costs, could result from the shift from cost of service
based pricing to market based pricing and from customers choosing different
energy suppliers than ACE. Potential types of stranded costs include (1)
above-market costs associated with generation facilities or long term power
purchase agreements and (2) regulatory assets, which are expenses deferred and
expected to be recovered from customers in the future.
In April 1996, the Federal Energy Regulatory Commission issued Order No.
888 "Promoting Wholesale Competition Through Open Access Non-Discriminatory
Transmission Service by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities". The Order is designed to remove
impediments to competition in the wholesale bulk power marketplace, to bring
more efficient, lower cost power to electricity consumers, and provide an
equitable means to transition the industry to the new environment. Under this
Order utilities are required to offer transmission services for wholesale energy
transactions to others on a nondiscriminatory basis. Tariffs have been
established by ACE for these services, which ACE must also apply to its own
wholesale energy transactions.
On January 16, 1997, the BPU issued a Draft Phase II of the New Jersey
Energy Master Plan (the Plan). In the Plan, the BPU has recommended that retail
customers in New Jersey have the ability to choose their electric energy
supplier beginning in October 1998 using a phase-in plan that will include all
retail customers by April 2001. Customers would be able to sign an agreement
with a third-party energy supplier and each electric utility, including ACE,
would continue to be responsible for providing distribution service. Price and
service quality for such distribution would continue to be regulated by the BPU.
Beginning October 1998, costs for electric service, which consist of
power generation, transmission, distribution, metering and billing will need to
be unbundled. Transmission service would be provided by an Independent System
Operator which would be responsible for maintaining a regional power grid that
would continue to be regulated by FERC.
The Plan states that the BPU is committed to assuring that a fully
competitive marketplace exists prior to the ending of its economic regulation of
power supply. At a minimum, utility generating assets and functions must be
separated and operate at arms length from the transmission, distribution and
customer service functions of the electric utility. The BPU reserves final
judgment on the issue of requiring divestiture of utility generating assets
until detailed analyses of the potential for market power abuses by utilities
have been performed.
The Plan addresses the issue of "stranded" costs related to the
generating capacity currently in utility rates. High costs of construction and
operations incurred by the jointly-owned nuclear power plants and the long-term
high cost supply contracts with independent power producers are two significant
contributing factors. The report proposes recovery of stranded costs over a four
to eight year period, through a specific market transition charge which will be
a separate component of a customer's bill. Determination of the recoverability
of costs will be on a case by case basis with no guarantee for 100% recovery of
eligible stranded costs.
A-26
The Plan provides that the opportunity for full recovery of such eligible
costs is contingent upon and may be constrained by the utility meeting a number
of conditions, including achievement of a BPU goal of delivering a near term
rate reduction to customers of five to ten percent. The Plan states that the
independent power contracts must be eligible for stranded cost recovery.
The Plan further states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused by the
introduction of retail competition. The Plan further notes that New Jersey is
studying the "securitization" of stranded costs as a means of financing these
costs at interest rates lower than the utility cost of capital, thereby helping
to mitigate the rate impact of stranded cost recovery. Recovery of
securitization may occur over a different period of time. The Plan also suggests
that a cap may be imposed on the level of the charge as a mechanism to achieve
the goal of overall rate reduction.
The BPU intends to issue final findings and recommendations on the
electric utility industry restructuring Plan in April 1997. Each electric
utility in the State is to file a complete restructuring plan, stranded cost
filing and unbundled rate filing no later than July 15, 1997.
ACE has not filed for accelerated depreciation of any capital assets or
special rate plans applicable to particular classes of customers. However, in
1996 ACE entered into BPU approved Off-Tariff Rate Agreements (OTRA's) with
at-risk customers which provide for special rates for customers who may choose
to leave ACE's energy system because they have alternative energy sources
available. To date, the aggregate amount of such reduced rate agreements was
$2.2 million, net of tax.
ACE has significant long term contract commitments to purchase capacity
and energy from nonutility sources at above-market costs. Recovery of amounts
associated with these contracts is through ACE's LEC, for which rates are
subject to approval by the BPU annually.
In connection with the BPU's Plan, ACE is uncertain as to the level of
stranded costs that may arise or the degree to which these costs will be
recovered. If the final restructuring plan requires ACE to recognize amounts as
unrecoverable, ACE may be required to write down asset values, and such
writedowns could be material.
OTHER
The Energy Policy Act of 1992 permits the Federal government to assess
investor-owned electric utilities that have ownership interests in nuclear
generating facilities. The assessment funds the decontamination and
decommissioning of Federally operated nuclear enrichment facilities. Based on
its ownership in five nuclear generating units, ACE has a liability of $5.3
million and $6.0 million at December 31, 1996 and 1995, respectively, for its
obligation to be paid over the next 12 years. ACE has an associated regulatory
asset of $5.7 million and $6.4 million at December 31, 1996 and 1995,
respectively. Amounts are currently being recovered in rates for this liability
and the regulatory asset is concurrently being amortized to expense based on the
annual assessment billed by the Federal government.
In March 1996, the New Jersey Department of Treasury and the BPU jointly
proposed to replace the energy excise tax currently imposed on electric and gas
utilities. Under the proposal, utilities would pay a state corporate business
tax, a state sales tax of six percent collected on all retail sales of energy
services and a state transitional energy facilities assessment tax (TEFA) for a
limited number of years. A gradual phase-out of the TEFA is proposed. At the
completion of the TEFA phase-out, the total energy tax burden would be reduced
by approximately 45%.
A-27
NOTE 11. REGULATORY ASSETS AND LIABILITIES--ACE
Costs incurred by ACE that have been permitted, or are expected to be
permitted, by the BPU to be deferred for recovery in rates in more than one
year, or for which future recovery is probable, are recorded as regulatory
assets. Regulatory assets are amortized to expense over the period of recovery.
Total regulatory assets at December 31 are as follows:
REMAINING
RECOVERY
(000) 1996 1995 PERIOD*
-------- -------- --------
Recoverable Future Federal
Income Taxes.................................. $ 85,858 $ 85,858 (A)
Unrecovered Purchased Power Costs:
Capacity Cost................................. 64,658 80,598 4 years
Contract Renegotiation Costs.................. 18,742 19,219 18 years
Unrecovered State Excise Taxes.................. 54,714 64,274 6 years
Unamortized Debt Costs-Refundings............... 29,878 33,110 1-30 years
Deferred Energy Costs (See Note 1).............. 33,529 31,434 (B)
Other Regulatory Assets:
Postretirement Benefits Other
Than Pensions (See Notes 3&4)............... 32,609 26,227 (A)
Asbestos Removal Costs........................ 9,086 9,356 33 years
Decommissioning/Decontaminating
Federally-owned Nuclear Units
(See Note 10).............................. 5,726 6,404 12 years
Other........................................... 12,154 12,581
--------- ---------
$ 346,954 $ 369,061
========= =========
- - ----------
* From December 31, 1996
(A) Pending future recovery
(B) Recovered over annual LEC period
Recoverable Future Federal Income Taxes is the amount of revenue expected
to be collected from ratepayers for deferred tax costs to be paid in future
years. Unrecovered Purchased Power Capacity Costs represent deferrals of prior
capacity costs then in excess of levelized revenues associated with a certain
long term capacity arrangement. Levelized revenues have since been greater than
costs, permitting the deferred costs to be amortized to expense. Contract
Renegotiation Costs were incurred through renegotiation of a long term capacity
and energy contract with a certain independent power producer. Unrecovered State
Excise Taxes represent additional amounts paid as a result of prior legislative
changes in the computation of state excise taxes. Unamortized Debt Costs
associated with debt reacquired by refundings are amortized over the life of the
related new debt. Asbestos Removal Costs were incurred to remove asbestos
insulation from a wholly-owned generating station. Included in Other are certain
amounts being recovered over a period of one to five years.
At December 31, 1996, ACE had a $13 million liability recorded as a
result of the credits to customers from the October 22, 1996 Stipulation
Agreements (See Note 3). The credits have been made during January and February
1997 and were based on customer usage from January through October 1996.
No regulatory liabilities existed at December 31, 1995.
A-28
NOTE 12. LEASES
ACE leases from others various types of property and equipment for use in
its operations. Certain of these lease agreements are capital leases consisting
of the following at December 31:
(000) 1996 1995
------- -------
Production plant......................... $ 6,642 $ 9,097
Less accumulated amortization............ 5,005 6,810
------- -------
Net...................................... 1,637 2,287
Nuclear fuel............................. 38,277 38,591
-------- --------
Leased property-net...................... $ 39,914 $ 40,878
======== ========
ACE has a contractual obligation to obtain nuclear fuel for the Salem,
Hope Creek and Peach Bottom stations. The asset and related obligation for the
leased fuel are reduced as the fuel is burned and are increased as additional
fuel purchases are made. No commitments for future payments beyond satisfaction
of the outstanding obligation exist. Operating expenses for 1996, 1995 and 1994
include leased nuclear fuel costs of $8.7 million, $11.2 million and $14.1
million, respectively, and rentals and lease payments for all other capital and
operating leases of $2.6 million, $3.9 million and $5.3 million, respectively.
Future minimum rental payments for all noncancellable lease agreements are less
than $2.4 million per year for each of the next 5 years.
ATE is the lessor in five leveraged lease transactions consisting of
three aircraft and two containerships with total respective costs of
approximately $168 million and $76 million. Remaining lease terms for all leases
approximate 14 to 15 years. The Company's equity participation in the leases
range from 22% to 32%. Funding of the investment in the leveraged lease
transactions is comprised of equity participation by ATE and financing provided
by third parties as long term debt without recourse to ATE. The lease
transactions provide collateral for such third parties, including a security
interest in the leased equipment. Net investment in leveraged leases at December
31 was as follows:
(000) 1996 1995
------- -------
Rentals receivable (net of principal
and interest on nonrecourse debt)................. $ 50,898 $ 50,955
Estimated residual values........................... 53,435 53,435
Unearned and deferred income........................ (24,646) (25,431)
------- -------
Investment in leveraged leases...................... 79,687 78,959
Deferred taxes arising from leveraged leases........ (76,671) (71,064)
------- -------
Net investment in leveraged leases.................. $ 3,016 $ 7,895
======= =======
NOTE 13. FINANCIAL INSTRUMENTS
A number of items within Current Assets and Current Liabilities on the
Consolidated Balance Sheet are considered to be financial instruments because
they are cash or are to be settled in cash. Due to their short-term nature, the
carrying values of these items approximate their fair market values. Accounts
Receivable -- Utility Service and Unbilled Revenues are subject to concentration
of credit risk because they pertain to utility service conducted within a fixed
geographic region. Investments in Leveraged Leases are subject to concentration
of credit risk because they are exclusive to a small number of parties within
two industries. The Company has recourse to the affected assets under lease.
These leased assets are of general use within their respective industries.
ACE's long term debt and preferred securities and ATE's long term debt
securities are not widely held and generally trade infrequently. The estimated
aggregate fair market value of debt securities has been determined based on
quoted market prices for the same or similar debt issues or on securities of
companies with similar credit quality, coupon rates and maturities. The
aggregate fair market value of preferred securities has been determined using
market information available from actual trades or of trades of similar
instruments of companies with similar credit quality. At December 31 the amounts
are as follows:
A-29
MARKET VALUE
LONG TERM DEBT AND PREFERRED SECURITIES
(IN MILLIONS)
1996 1995
-------------------------- -------------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
------ ------ ------ ------
ACE Long Term Debt................. $ 802.4 $ 828.8 $ 814.6 $ 851.0
ACE Preferred Stock................ 74.0 77.1 177.0 172.0
CQIPS.............................. 70.0 69.3 -- --
ATE Long Term Debt................. 33.5 34.0 33.5 34.5
ATS Long Term Debt................. 54.5 54.5 12.5 12.5
AEI Long Term Debt................. 37.6 37.6 34.5 34.5
NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial data, reflecting all adjustments necessary in the
opinion of management for a fair presentation of such amounts, are as follows:
DIVIDENDS
OPERATING OPERATING NET EARNINGS PAID
QUARTER REVENUES INCOME INCOME PER SHARE PER SHARE
------- -------- -------- ------- -------- ---------
1996 (000) (000) (000)
1st......................... $ 245,325 $ 32,980 $ 15,535 $ .29 $ .385
2nd......................... 225,678 27,685 10,250 .20 .385
3rd......................... 281,965 51,344 32,567 .62 .385
4th......................... 227,287 20,418 415 .01 .385
Annual...................... $ 980,255 $ 132,428 $ 58,767 $ 1.12 $ 1.54
========= ========= ======== ====== ======
1995
1st......................... $ 218,626 $ 27,584 $ 11,469 $ .21 $ .385
2nd......................... 206,232 27,771 10,568 .20 .385
3rd......................... 302,685 66,482 48,745 .93 .385
4th......................... 225,594 26,700 10,986 .21 .385
Annual...................... $ 953,137 $ 148,537 $ 81,768 $ 1.55 $ 1.54
========= ========= ======== ====== ======
Third quarter results generally exceed those of other quarters due to
increased sales and higher residential rates for ACE.
Individual quarters may not add to the total due to rounding.
The fourth quarter 1996 Net Income reflects an increase in ACE's electric
sales offset in part by the increase in energy expense due to increased sales,
recovery of previously deferred energy costs and an increase in operations and
maintenance expense related to Salem. During the fourth quarter of 1996
nonutility operations recorded a $1.6 million net of tax loss contingency for
the sale of the Binghamton Cogeneration Facility by AGI, $0.8 million net of tax
write-down of the carrying value of ASP's commercial building and $1.1 million
net of tax loss for AEE's investment in Enerval, LLC.
A-30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Consolidated operating revenues for 1996, 1995 and 1994 were $980.3
million, $953.1 million and $913.0 million, respectively. The increase in 1996
revenues over 1995 reflects an increase in sales and an increase in annual
Levelized Energy Clause (LEC) revenues in July 1995 of $37 million and an
increase in July 1996 of $27.6 million. These increases were offset in part by a
$13.0 million revenue credit recorded in September 1996 as a result of
stipulation agreements (See Note 3 to the consolidated financial statements) and
a decrease in unbilled revenues. The increase in 1995 revenue over 1994 largely
reflects the increase in annual LEC revenues granted in July 1995 and an
increase in unbilled revenues.
Consolidated earnings per share for 1996 were $1.12 on net income of
$58.8 million compared to a $1.55 on net income of $81.8 million in 1995 and
$1.41 on net income of $76.1 million in 1994. The 1996 earnings reflect charges
resulting from provisions for rate refunds, write-downs of nonutility property,
losses from nonutility investments and higher operations and maintenance
expenses associated with the continuing outage at the Salem Station. Excluding
the 1994 special charges of $.37 cents per share, 1995 earnings per share
decreased from 1994 primarily due to reduced sales of energy.
The quarterly dividend paid on Common Stock was $.385 per share, or an
annual rate of $1.54 per share. Information with respect to Common Stock is as
follows:
1996 1995 1994
------ ------ ------
Dividends Paid Per Share............... $ 1.54 $ 1.54 $ 1.54
Book Value Per Share................... $15.00 $15.42 $15.50
Annualized Dividend Yield.............. 9.0% 8.0% 8.7%
Return on Average Common Equity........ 7.4% 9.9% 9.1%
Total Return (Dividends paid
plus change in share price).......... (3.0)% 18.0% (11.9)%
Market to Book Value................... 114% 125% 114%
Price/Earnings Ratio................... 15 12 13
Year End Closing Price-NYSE............ $17.13 $19.25 $17.63
LIQUIDITY AND CAPITAL RESOURCES
Atlantic Energy, Inc.
Atlantic Energy, Inc. (AEI, Company or parent) is the parent of Atlantic
City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE) and
Atlantic Energy International, Inc. (AEII) which are wholly-owned subsidiaries.
The Company's cash flows are dependent on the cash flows of its subsidiaries,
primarily ACE.
Principal cash inflows of the Company were as follows:
1996 1995 1994
----- ----- -----
(MILLIONS)
Dividends from ACE............. $82.2 $81.2 $83.5
Credit Facility................ 3.1 34.5 --
Dividend Reinvestment
and Stock Purchase Plan...... -- -- 6.7
AEI has a $75 million revolving credit and term loan facility. The
revolver is comprised of a 364-day senior revolving credit facility in the
amount of $35 million and a three-year senior revolving credit facility in the
amount of $40 million. Interest rates are based on senior debt ratings and on
the borrowing option selected by the Company. As of December 31, 1996 and 1995,
AEI had $37.6 million and $34.5 million outstanding, respectively, from this
credit facility. This facility can be used to fund further reacquisitions of
Company Common Stock and for other general corporate purposes.
A-31
Principal cash outflows of the Company were as follows:
1996 1995 1994
----- ----- -----
(MILLIONS)
Dividends to Shareholders.............. $81.2 $81.2 $83.5
Advances and Capital
Contributions to Subsidiaries*....... (1.4) (6.7) 25.6
Common Stock Reacquisitions............ -- 29.6 3.9
Loans to Subsidiaries.................. (7.5) 7.5 --
----------
* Net of repayments
The Company has a program to reacquire up to three million shares of the
Company's Common Stock outstanding. There is no schedule or specific share price
target associated with the reacquisitions. The authorized number of shares is
not to be affected. During 1995, the Company reacquired and cancelled 1,625,000
shares for a total cost of $29.6 million with prices ranging from $17.625 to
$18.875 per share. At December 31, 1996 and 1995, the Company has reacquired and
cancelled a total of 1,846,700 shares of its Common Stock at a cost of $33.5
million. The Company did not reacquire and cancel any shares under this program
during 1996.
Miscellaneous Receivables on the Consolidated Balance Sheet at December
31, 1996 increased compared to December 31, 1995 primarily due to receivables
from amounts advanced to Enerval, LLC to fund operations in the amount of $10.0
million.
Agreements between the Company and its subsidiaries provide for
allocation of tax liabilities and benefits generated by the respective
subsidiaries. Credit support agreements exist between the Company and ATE and
AGI.
On August 12, 1996, the Boards of Directors of AEI and Delmarva Power &
Light Company (DP&L) jointly announced an agreement to merge the companies into
a new company named Conectiv, Inc. (Conectiv). Conectiv, a newly formed Delaware
corporation, will become the parent of Atlantic Energy's subsidiaries and the
parent of DP&L and its subsidiaries.
The merger is to be a tax-free, stock-for-stock transaction accounted for
as a purchase. Under the terms of the agreement, DP&L shareholders will receive
one share of Conectiv's common stock for each share of DP&L common stock held.
AEI shareholders will receive 0.75 shares of Conectiv's common stock and 0.125
shares of Conectiv's Class A common stock for each share of AEI common stock
held. On January 30, 1997, the merger was approved by the shareholders of both
companies. In order for the merger to become effective, approvals are still
needed from a number of Federal and state regulatory agencies. The Company
expects the regulatory approval process to be completed in late 1997 or early
1998.
The total consideration to be paid to the Company's common stockholders,
measured by the average daily closing market price of the Company's common stock
for the ten trading days following public announcement of the merger, is $948.6
million. The consideration paid plus estimated acquisition costs and liabilities
assumed in connection with the merger are expected to exceed the net book value
of the Company's net assets by approximately $204.5 million, which will be
recorded as goodwill by Conectiv. The goodwill will be amortized over 40 years.
Atlantic City Electric Company
ACE is a public utility primarily engaged in the generation,
transmission, distribution and sale of electric energy. ACE's service territory
encompasses approximately 2,700 square miles within the southern one-third of
New Jersey with the majority of customers being residential and commercial. ACE,
with its wholly-owned subsidiary that operates certain generating facilities, is
the principal subsidiary within the consolidated group. Cash construction
expenditures for 1994-1996 amounted to $307.7 million and included expenditures
for upgrades to existing transmission and distribution facilities and compliance
with provisions of the Clean Air Act Amendments of 1990. ACE's current estimate
of cash construction expenditures for 1997-1999 is $283.5 million. These
estimated expenditures reflect necessary improvements to generation,
transmission and distribution facilities.
On an interim basis, ACE finances construction costs and other capital
requirements in excess of internally generated funds through the issuance of
unsecured short term debt, consisting of commercial paper and notes from banks.
As of December 31, 1996, ACE had authority to issue $150 million of short term
debt, comprised of $100 million of committed lines of credit and $50 million on
a when offered basis. At December 31, 1996, ACE had $85.1 million of unused
A-32
short-term borrowing capacity. Permanent financing by ACE is undertaken through
the issuance of long term debt and preferred stock, and from capital
contributions by AEI. ACE's nuclear fuel requirements associated with its
jointly-owned units have been financed through arrangements with a third party.
ACE also utilizes cash for mandatory redemptions of preferred stock and
maturities and redemption of long term debt. Optional redemptions of securities
are reviewed on an ongoing basis with a view toward reducing the overall cost of
capital. Redemptions of Preferred Stock for the period were as follows:
SHARES
----------------------------------------------- REDEMPTION
1996 1995 1994 PRICE
------- ------- ------- -----------
Preferred Stock (Series)
$8.53.............................. 120,000 $101.00
7.52%............................. 100,000 101.88
$8.20.............................. 200,000 100.00
$8.25.............................. 50,000 104.45
$7.80.............................. 460,500 111.00
$8.53.............................. 240,000 240,000 100.00
$8.25.............................. 5,000 5,000 100.00
Aggregate Amount (000)............... $98,876* $24,500 $24,500
----------
* includes commissions and premiums
Long term debt redeemed, acquired and retired or matured in the period
1994-1996 were as follows:
PRINCIPAL REDEMPTION
DATE SERIES AMOUNT PRICE(%)
---- -------------- --------- ----------
(000)
February 1996.................... 51/8% due 1996 $ 9,980 100.00
February 1996.................... 51/4% due 1996 2,267 100.00
October 1995..................... 91/4% due 2019 53,857 105.15
October 1995..................... 101/2% due 2014 850 101.00
November 1994.................... 75/8% due 2005 6,500 100.00
June 1994........................ 101/2% due 2014 23,150 102.00
Various 1994 Dates............... 91/4% due 2019 11,910 105.38*
----------
* Average price
Scheduled maturities and sinking fund requirements for long term debt and
preferred stock aggregate $216.5 million for 1997-2001.
On or before April 1 of each year, ACE and other New Jersey utilities are
required to pay excise taxes to the State of New Jersey. In March 1996, ACE paid
$91.7 million funded through the issuance of short term debt with repayment of
such debt occurring during the second and third quarters.
During 1996 and 1995, ACE made $7.2 million and $19.1 million,
respectively, in payments related to its workforce reduction program. Payments
in settlement of this obligation are substantially complete.
Short Term Debt at December 31, 1996 increased $34.4 million compared to
December 31, 1996 due to funding of $12.3 million for maturing long term debt
and debentures and other general corporate funding.
A summary of the issue and sale of ACE's long term debt and preferred
securities for 1994-1996 is as follows:
1996 1995 1994
---- ---- ----
(MILLIONS)
Medium Term Notes.............. -- $105 --
Pollution Control Bonds........ -- -- $ 55
Cumulative Quarterly Income
Preferred Securities......... $ 70 -- --
A-33
The proceeds from these financings were used to refund higher cost debt,
preferred stock, and for construction purposes. During 1997-1999, ACE may issue
up to $175 million in long term debt to be used for construction, refundings and
repayment of short term debt. The provisions of ACE's charter, mortgage and
debenture agreements can limit, in certain cases, the amount and type of
additional financing which may be used. At December 31, 1996, ACE estimates
additional funding capacities of $346 million of First Mortgage Bonds, or $333
million of Preferred Stock, or $196 million of unsecured debt. These amounts are
not necessarily additive.
On October 1, 1996, Atlantic Capital I, a newly formed grantor trust,
issued $70 million of 8.25% Cumulative Quarterly Income Preferred Securities
(CQIPS) with a stated liquidation preference of $25 each. Atlantic Capital I,
established for the sole purpose of issuing the CQIPS, invested the proceeds in
8.25% Junior Subordinated Deferrable Interest Debentures (Junior Debentures) of
ACE. ACE reserves the right to defer payment of interest on the debentures for
up to 20 consecutive quarters. During such a deferral period, certain dividend
restrictions would apply to ACE's capital stock. The CQIPS and Junior Debentures
are scheduled to mature on October 1, 2026, but such maturity may be extended to
a date not later than October 1, 2045, if certain conditions are met. Proceeds
from the sale of the Junior Debentures were used to fund the redemption and
purchase of shares of ACE's preferred stock described above. Atlantic Capital I
is a grantor trust of ACE and as such, the transactions of the trust are
consolidated into the financial statements of ACE. The Junior Debentures are
eliminated in consolidation.
Atlantic Energy Enterprises, Inc.
AEE is a holding company which is responsible for the management of the
investments in the nonutility companies consisting of: Atlantic Generation, Inc.
(AGI); Atlantic Southern Properties, Inc. (ASP); ATE Investment, Inc. (ATE);
Atlantic Thermal Systems, Inc. (ATS); CoastalComm, Inc. (CCI) and Atlantic
Energy Technology, Inc. (AET). Also, AEE has a 50% equity interest in Enerval,
LLC, a company which provides energy management services, including natural gas
supply, transportation and marketing. As of December 31, 1996, AEE had an equity
investment of $3.9 million in the partnership. AEE obtains funds for its
investments and operating needs through advances from AEI and notes payable from
ATE. Management has developed a five-year business strategy to expand operations
and improve its financial performance. AEE's business strategy reflects the
potential investment of approximately $307 million over the next five years.
Funds for AEE capital investments will be provided through issuance of long term
debt and equity investments by AEI.
Atlantic Generation, Inc.
AGI and its wholly-owned subsidiaries are engaged in the development,
acquisition, ownership and operation of cogeneration power projects. AGI's
activities through its subsidiaries are primarily represented by partnership
interests in cogeneration facilities located in New Jersey and New York. In
December 1996 AGI recorded a loss contingency in the amount of $1.6 million, net
of tax, for the sale of its cogeneration facility in New York. AGI, through a
support agreement with AEI, has entered into an indemnification agreement
secured by a $6.0 million letter of credit in connection with the sale of this
facility. All conditions of the sale are expected to be complete by the middle
of 1997. At December 31, 1996, total investments in these partnerships amounted
to $21.8 million. Net cash outlays for capital investments by AGI for 1994-1996
totaled $3.2 million. AGI obtained the funds for its investments through capital
contributions from AEI.
Atlantic Southern Properties, Inc.
ASP owns and manages a 280,000 square-foot commercial office and
warehouse facility located in Atlantic County, New Jersey with a net book value
of $8.5 million at December 31, 1996 after a write-down of the carrying value in
1996 of $0.8 million, net of tax. The write-down reflects the recognition of the
diminished value due to the excess vacancy and a decline in the local commercial
real estate market. This investment has been funded by capital contributions
from AEI and borrowings under a loan agreement with ATE.
ATE Investment, Inc.
ATE provides financing to affiliates and manages a portfolio of
investments in leveraged leases. ATE has invested $79.7 million in leveraged
leases of three commercial aircraft and two containerships. In August 1996, ATE
joined with an unaffiliated company to create EnerTech Capital Partners, L.P.,
an equity limited partnership that will invest in and support a variety of
energy related technology growth companies. At December 31, 1996, ATE had
invested $7.3 million in this partnership. ATE obtained funds for its business
A-34
activities and loans to affiliates through capital contributions from AEI and
external borrowings. These borrowings include $15 million principal amount of
7.44% Senior Notes due 1999 and a revolving credit and term loan facility of up
to $25 million. At December 31, 1996, $18.5 million was outstanding under this
facility. ATE's cash flows are provided from lease rental receipts and
realization of tax benefits generated by the leveraged leases. ATE has notes
receivable, including interest, outstanding with ASP which totaled $10.0 million
at December 31, 1996. ATE has established credit arrangements with AEE, of which
$14.1 million was a receivable, including interest, from AEE at December 31,
1996.
Atlantic Thermal Systems, Inc.
ATS and its wholly-owned subsidiaries are engaged in the development and
operation of thermal heating and cooling systems. ATS plans to make $125 million
in capital expenditures related to district heating and cooling systems to serve
the business and casino district in Atlantic City, New Jersey and has invested
$29.3 million as of December 31, 1996. Construction for the Midtown Energy
Center is expected to be completed by mid-1997. ATS has obtained funds for its
project development through a $100 million revolving credit agreement and term
loan facility in August 1996. As of December 31, 1996, $42 million was
outstanding under this facility. Additional funding for the project is expected
from $12.5 million from the proceeds of bonds issued by the New Jersey Economic
Development Authority with a remarketed rate of interest of 3.5%. These funds
are currently restricted in trust and invested in U.S. Treasury Securities
pending resolution of certain conditions. ATS cannot estimate, with any
certainty, when or if the conditions attached to the escrow release will be
satisfied. ATS has a $10 million revolving credit agreement with ATE. There were
no outstanding amounts under the agreement at December 31, 1996.
ATS has agreements with three casinos in Atlantic City, New Jersey to
operate their heating and cooling systems. As part of these agreements, ATS has
paid $18.0 million in license fees for the right to operate and service such
systems for a period of 20 years'. These fees are recorded on the Consolidated
Balance Sheet as License Fees and are being amortized to expense over the life
of the contracts.
Atlantic Energy International, Inc.
In July 1996, AEI formed AEII, to provide utility consulting services and
equipment sales to international markets. AEII funds its operating needs from
advances from AEI.
RESULTS OF OPERATIONS
Operating results of AEI as a consolidated group are dependent upon the
performance of its subsidiaries, primarily ACE. Since ACE is the principal
subsidiary within the consolidated group, the operating results presented in the
Consolidated Statement of Income are those of ACE, after elimination of
transactions among members of the consolidated group. Results of the nonutility
companies are reported in Other Income.
Revenues
Operating Revenues-- Electric increased 2.9% and 4.4% in 1996 and 1995,
respectively. Components of the overall changes are shown as follows:
1996 1995
----- -----
(MILLIONS)
Base Revenues....................... $ (8.9) $ (1.9)
Refund Credits...................... (13.0) --
Levelized Energy Clause............. 29.3 49.2
Kilowatt-hour Sales................. 32.2 (10.0)
Unbilled Revenues................... (17.6) 16.6
Sales for Resale.................... 6.0 (11.9)
Other............................... (0.9) (1.9)
----- -----
Total....................... $ 27.1 $ 40.1
===== =====
A-35
The decrease in Base Revenues for the current year reflect a reduced
average realization per kilowatt-hour sold resulting from less favorable summer
weather conditions relative to last year and the effects of ACE's BPU approved
Off-Tariff Rate Agreements (OTRAs). OTRAs are special reduced rates offered by
ACE to at-risk customers which aggregated $3.5 million, or $2.2 million, net of
tax. At-risk customers are customers who may choose to leave ACE's energy system
because they have alternative energy sources available. The Refund Credits are
the result of the October 22, 1996 stipulations for the $13.0 million settlement
concerning the outages of the Salem Units and the alleged overrecovery of
capacity costs from nonutility generation facilities. See Note 3 of the
consolidated financial statements for further details regarding the
stipulations.
LEC revenues increased in 1996 due to a rate increase of $27.6 million in
July 1996 and a $37 million increase in July 1995. Changes in kilowatt-hour
sales are discussed under "Billed Sales to Ultimate Utility Customers." Overall,
the combined effects of changes in rates charged to customers and kilowatt-hour
sales resulted in increases of 9.4% and 5.9% in revenues per kilowatt-hour in
1996 and 1995, respectively. The changes in Unbilled Revenues are a result of
the amount of kilowatt-hours consumed by, but not yet billed to, ultimate
customers at the end of the respective periods, which are affected by weather
and economic conditions, and the corresponding price per kilowatt-hour.
The changes in Sales for Resale are a function of ACE's energy mix
strategy, which in turn is dependent upon ACE's needs for energy, the energy
needs of other utilities participating in the regional power pool of which ACE
is a member, and the sources and prices of energy available. The increase in the
1996 Sales for Resale reflects an increase in bulk power market sales outside of
the regional power pool. The decline in the 1995 Sales for Resale reflects a
decrease in the demand of the power pool, the decline in market prices and a
reduction in excess energy sources when compared to the previous year.
Billed Sales to Ultimate Utility Customers
Changes in kilowatt-hour sales are generally due to changes in the
average number of customers and average customer use, which is affected by
economic and weather conditions. Energy sales statistics, stated as percentage
changes from the previous year, are shown as follows:
1996 1995
------------------------------ --------------------------------
AVG AVG # AVG AVG #
CUSTOMER CLASS SALES USE OF CUST SALES USE OF CUST
----------- ---- ---- ------ ----- ----- -------
Residential....................... 3.2% 2.4% 0.8% (2.0)% (3.1)% 1.2%
Commercial........................ 3.0 2.0 1.0 1.4 (0.1) 1.5
Industrial........................ 7.1 5.5 1.5 (7.4) (9.0) 1.7
Total......................... 3.6 2.8 0.8 (1.4) (2.6) 1.2
In 1996, the growth rate of actual billed sales increased significantly
from 1995 due to an increase in the number of billing days and more favorable
weather conditions. Unfavorable weather conditions in 1995 reduced sales
significantly, compared to the weather conditions in 1996. Sales growth was
offset by cooler than normal summer weather conditions in 1996. Casino
expansions and construction around Atlantic City, New Jersey were significant
contributors to commercial sales growth in 1996. The increases in 1996
Industrial sales were primarily due to the impact of two customers that had
previously been supplied by an independent power producer.
Costs and Expenses
Total Operating Expenses increased 5.4% and 3.6% in 1996 and 1995,
respectively. Included in these expenses are the costs of energy, purchased
capacity, operations, maintenance, depreciation and taxes.
Energy expense reflects costs incurred for energy needed to meet load
requirements, various energy supply sources used and operation of the LEC.
Changes in costs reflect the varying availability of low-cost generation from
ACE-owned and purchased energy sources, and the corresponding unit prices of the
energy sources used, as well as changes in the needs of other utilities
participating in the Pennsylvania-New Jersey-Maryland Interconnection Power
Pool. The cost of energy is recovered from customers primarily through the
operation of the LEC. Generally, earnings are not affected by energy costs
because these costs are adjusted to match the associated LEC revenues. However,
ACE has voluntarily foregone recovery of certain amounts of otherwise
recoverable fuel costs through its Southern New Jersey Economic Initiative
(SNJEI), thereby reducing earnings through May 1996, as indicated below. Such
A-36
reduced recoveries are discretionary by ACE, and are influenced by competitive
and economic factors. ACE elected not to continue the SNJEI beyond May 1996.
Otherwise, in any period, the actual amount of LEC revenue recovered from
customers may be greater or less than the actual amount of energy cost incurred
in that period. Such respective overrecovery or underrecovery of energy costs is
recorded on the Consolidated Balance Sheet as a liability or an asset as
appropriate. Amounts from the balance sheet are recognized in the Consolidated
Statement of Income within Energy expense during the period in which they are
subsequently recovered through the LEC. ACE was underrecovered by $33.5 million
and by $31.4 million at December 31, 1996 and 1995, respectively.
As a result of implementing the SNJEI, ACE has foregone the recovery of
energy costs in LEC rates in the amount of $10.0 million and $28.0 million for
the 1995 and 1994 LEC periods, respectively. After tax net income has been
reduced by $2.7 million and $12.2 million due to the effects of the initiative
for 1996 and 1995, respectively.
Energy expense increased 16.3% in 1996 primarily due to the changes in
the LEC effective July 17, 1996, permitting ACE to begin recovering over $35.3
million in previously deferred energy costs. Energy expense decreased 9.1% in
1995 primarily due to the increase in underrecovered fuel costs, offset in part
by the effects of the SNJEI referred to above. Production related energy costs
for 1996 increased 5.3% due to increased sales and decreased 1.9% for 1995 due
to reduced generation.
Purchased Capacity expense reflects entitlement to generating capacity
owned by others. Purchased Capacity expense increased 2.7% and 45.6% in 1996 and
1995, respectively. The increases reflect additional contract capacity supplied
by nonutility power producers in each year.
Operations expense increased in 1996 by 3.1% and decreased in 1995 by
2.8%. The 1996 increase reflects additional costs associated with Salem Station
restart activities offset in part by a credit of the estimated 1995 Nuclear
Performance Penalty. The 1995 decrease reflected the benefits of ACE's employee
separation programs, offset in part by the aforementioned costs associated with
Salem Station.
Maintenance expense increased 29.2% in 1996 as a result of additional
costs associated with Salem Station restart activities and increased maintenance
initiatives. The 1995 decrease of 8.5% was due to cost saving measures employed
by ACE.
State Excise Taxes expense increased 5.9% in 1995 due to an increase in
the tax base used to calculate the tax in comparison to the 1994 tax base.
Federal Income Taxes decreased 29.7% in 1996 and increased 37.9% in 1995
as a result of the level of taxable income during those periods.
Other--Net within Other Income (Expense) decreased in 1996 due to the net
after-tax impacts of the write-down of the carrying value of ASP's commercial
property of $0.8 million, the contingency loss for the sale of Binghamton
Cogeneration facility of $1.6 million, reduced non utility earnings and
increased income taxes related to other income. Also included is a loss of $1.1
million after-tax from AEE's investment in Enerval, LLC due to a combination of
unhedged gas sales agreements and higher spot market prices for gas.
Interest on Long Term Debt increased 5.2% in 1995 due to increased
amounts of debt outstanding during the year. Other Interest expense increased
88.9% in 1996 and 128.9% in 1995 due primarily to increased short-term debt
borrowings.
Preferred Securities Dividend Requirements decreased 22.5% and 12.5% in
1996 and 1995, respectively, as a result of mandatory and optional redemptions.
Salem Nuclear Generating Station
ACE is an owner of 7.41% of Salem Units 1 and 2, which are operated by
Public Service Electric and Gas Co. (PS). Salem Units 1 and 2 have been out of
service since May 16, 1995 and June 7, 1995, respectively. The Salem units
represent 164 megawatts (MWs) of ACE's total installed capacity of 2,385.7 MWs.
During these outages, PS has made significant changes and improvements
related to the people, processes and equipment at Salem to improve the long-term
reliability of the units. Salem Unit 2 is in the final stages of preparation for
restart. The reactor has been refueled and reassembled and the reactor coolant
pumps have been tested and placed in service. Over 90% of the total work
activities have been completed and approximately 80% of the plant systems have
been restored. Salem Unit 2 is currently expected to return to service in the
second quarter of 1997.
A-37
Salem Unit 1 is currently expected to return to service in the fall of
1997, after replacement of the unit's four steam generators, which was required
in order to correct a generic problem with certain pressurized water reactors.
Removal of the old steam generators has been completed and installation of the
new steam generators is underway. The estimated cost of purchasing and
installing the steam generators is between $150 million and $170 million, of
which ACE's share is between $11.1 million and $12.6 million. In addition, the
cost of the disposal of the old steam generators could be as much as $20
million, of which ACE's share would be $1.5 million.
Effective December 31, 1996, ACE entered into a Stipulation Agreement
(Agreement) with PS for the purpose of limiting ACE's exposure to Salem's 1997
operation and maintenance (O&M) expenses. Pursuant to the terms of the
Agreement, ACE will pay to PS $10.0 million of O&M expense as a fixed charge
payable in twelve equal installments beginning February 1, 1997. ACE's
obligation for any additional contribution to 1997 Salem O&M expenses, of which
ACE's estimated share would be $21.8 million, is based on performance and
directly related to the timely return and operation of Salem Units 1 and 2. To
the extent ACE derives a savings against 1997 O&M expenditures, those savings
will offset replacement power costs incurred due to the unavailability of the
Salem Units. As a result of this Agreement, ACE has agreed to dismiss the
complaint filed in the Superior Court of New Jersey in March 1996 alleging
negligence and breach of contract.
On February 27, 1996, the Salem co-owners filed a Complaint in United
States District Court for the District of New Jersey against Westinghouse
Electric Corporation, the designer and manufacturer of the Salem steam
generators, under Federal and state statutes alleging fraud, negligent
misrepresentation and breach of contract. The Westinghouse complaint seeks
compensatory and punitive damages. On April 30, 1996, Westinghouse filed an
answer and a counterclaim of $2.5 million for unpaid work. The litigation is in
the process of discovery and investigation.
ACE is subject to a performance standard for its five jointly-owned
nuclear units. This standard is used by the BPU in determining recovery of
replacement energy costs when output from the nuclear units is reduced or not
available. Underperformance results in penalties which are not permitted to be
recovered from customers and are charged against income. In accordance with the
standard, ACE anticipated that it would incur a nuclear performance penalty for
1995 and had recorded a provision for such. According to the Salem outage
stipulation agreement as previously discussed in Note 3, the performances of
Salem Units 1 and 2 are not included in the calculation of a nuclear performance
penalty for the period each unit was taken out of service up to each unit's
respective return-to-service date. The parties to the stipulation agreed that
for the years 1995 and 1996, there will be no penalty or reward under the
nuclear performance standard. ACE had recorded a 1995 performance penalty of
$0.8 million, net of tax. This amount has been incorporated into the net amount
recorded for the Salem stipulation as discussed in Note 3 to the consolidated
financial statements.
The outage of each Salem unit causes ACE to incur replacement power costs
of approximately $0.7 million per unit per month. ACE's replacement power costs
for the current outage for each unit, up to the agreed upon return-to-service
dates, will be recoverable in rates in ACE's next LEC proceeding. As discussed
above, replacement power costs incurred after the respective agreed upon
return-to-service dates for the Salem Units will not be recoverable in rates.
COMPETITION
Competition is expected to increase for electric energy markets
historically served exclusively by regulated utilities. In recent years,
changing laws and governmental regulations permitting competition from other
utilities and nonregulated energy suppliers have prompted some customers to use
self-generation or alternative sources to meet their electric needs. As the
electric utility industry transitions from a regulated to a competitive
industry, utilities may not be able to recover certain costs. These costs, which
are known as "stranded" costs, could result from the shift from cost of service
based pricing to market-based pricing and from customers choosing different
energy suppliers than ACE. Potential types of stranded costs include (1)
above-market costs associated with generation facilities or long term power
purchase agreements and (2) regulatory assets, which are expenses deferred and
expected to be recovered from customers in the future.
In April 1996, the Federal Energy Regulatory Commission issued Order No.
888 "Promoting Wholesale Competition Through Open Access Non-Discriminatory
Transmission Service by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities". The Order is designed to remove
impediments to competition in the wholesale bulk power marketplace, to bring
more efficient, lower cost power to electricity consumers, and provide an
equitable means to transition the industry to the new environment. Under this
A-38
Order, utilities are required to offer transmission services for wholesale
energy transactions to others on a nondiscriminatory basis. Tariffs have been
established by ACE for these services, which ACE must also apply to its own
wholesale energy transactions.
On January 16, 1997, the BPU issued a Draft Phase II of the New Jersey
Energy Master Plan (the Plan). In the Plan, the BPU has recommended that retail
customers in New Jersey have the ability to choose their electric energy
supplier beginning in October 1998 using a phase-in plan that will include all
retail customers by April 2001. Customers would be able to sign an agreement
with a third-party energy supplier and each electric utility, including ACE,
would continue to be responsible for providing distribution service. Price and
service quality for such distribution would continue to be regulated by the BPU.
Beginning October 1998, costs for electric service, which consist of
power generation, transmission, distribution, metering and billing will need to
be unbundled. Transmission service would be provided by an Independent System
Operator which would be responsible for maintaining a regional power grid that
would continue to be regulated by FERC.
The Plan states that the BPU is committed to assuring that a fully
competitive marketplace exists prior to the ending of its economic regulation of
power supply. At a minimum, utility generating assets and functions must be
separated and operate at arms length from the transmission, distribution and
customer service functions of the electric utility. The BPU reserves final
judgment on the issue of requiring divestiture of utility generating assets
until detailed analyses of the potential for market power abuses by utilities
have been performed.
The Plan addresses the issue of "stranded" costs related to the
generating capacity currently in utility rates. High costs of construction and
operations incurred by the jointly-owned nuclear power plants and the long-term
high cost supply contracts with independent power producers are two significant
contributing factors. The report proposes recovery of stranded costs over a four
to eight year period, through a specific market transition charge which will be
a separate component of a customer's bill. Determination of the recoverability
of costs will be on a case by case basis with no guarantee for 100% recovery of
eligible stranded costs.
The Plan provides that the opportunity for full recovery of such eligible
costs is contingent upon and may be constrained by the utility meeting a number
of conditions, including achievement of a BPU goal of delivering a near term
rate reduction to customers of five to ten percent. The Plan states that the
independent power contracts must be eligible for stranded cost recovery.
The Plan further states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused by the
introduction of retail competition. The Plan further notes that New Jersey is
studying the "securitization" of stranded costs as a means of financing these
costs at interest rates lower than the utility cost of capital, thereby helping
to mitigate the rate impact of stranded cost recovery. Recovery of
securitization may occur over a different period of time. The plan also suggest
that a cap may be imposed on the level of the charge as a mechanism to achieve
the goal of overall rate reduction.
The BPU intends to issue final findings and recommendations on the
electric utility industry restructuring plan in April 1997. Each electric
utility in the State is to file a complete restructuring plan, stranded cost
filing and unbundled rate filing no later than July 15, 1997.
ACE has not filed for accelerated depreciation of any capital assets or
special rate plans applicable to particular classes of customers. However, in
1996 ACE has entered into BPU approved Off-Tariff Rate Agreements (OTRA's) with
at-risk customers which provide for special rates for customers who may choose
to leave ACE's energy system because they have alternative energy sources
available. To date, the aggregate amount of such reduced rate agreements was
$2.2 million, net of tax.
ACE has significant long term contract commitments to purchase capacity
and energy from nonutility sources at above-market costs. Recovery of amounts
associated with these contracts is through ACE's LEC, for which rates are
subject to approval by the BPU annually.
In connection with the BPU's Plan, ACE is uncertain as to the level of
stranded costs that may arise or the degree to which these costs will be
recovered. If the final restructuring plan requires ACE to recognize amounts as
unrecoverable, ACE may be required to write down asset values, and such
writedowns could be material.
A-39
In March 1996, the New Jersey Department of Treasury and the BPU jointly
proposed to replace the energy excise tax currently imposed on electric and gas
utilities. Under the proposal, utilities would pay a state corporate business
tax, a state sales tax of six percent collected on all retail sales of energy
services and a state transitional energy facilities assessment tax (TEFA) for a
limited number of years. A gradual phase-out of the TEFA is proposed. At the
completion of the TEFA phase-out, the total energy tax burden would be reduced
by approximately 45%.
Statement of Position of the Accounting Standards Board 96-1
"Environmental Remediation Liabilities" (SOP 96-1) is effective for fiscal years
that begin after December 15, 1996. SOP 96-1 provides guidance where remediation
is required because of the threat of litigation, a claim or an assessment. This
Statement does not provide guidance on accounting for pollution control costs as
it applies to current operations, costs of future site restoration or closure
that are required upon the cessation of operations or sale of facilities or for
remediation obligations undertaken at the sole discretion of management. The
adoption of SOP 96-1 is not expected to have a material impact on the financial
position, results of operations or net cash flows of the Company.
OUTLOOK
The electric utility industry is undergoing fundamental change through
the introduction of competition and customer choice. The timing and scope of
regulatory changes currently being proposed in New Jersey will have a
significant impact on ACE's economic viability and ability to compete in the
energy marketplace. Any legislative initiatives permitting the orderly and
efficient transition to competition, through such means as market transition
charges, tax reallocation or enabling amendments to existing laws, will serve to
insure recovery of prudently incurred investments.
In anticipation of heightened competition in energy markets, ACE is
pursuing a number of initiatives designed to strengthen its position in the
marketplace. The proposed merger and formation of Conectiv provides strategic
and operational opportunities to better meet the coming competitive environment.
Those opportunities are derived from increased financial strength, improved
management, efficiencies of operations, better utilization and coordination of
existing and future facilities. The proposed merger is part of a wider trend in
the utility industry toward consolidation and strategic partnerships in order to
create larger, stronger companies ready for the onset of competition. The
receipt of all requisite regulatory approvals to consummate the merger is
expected to be obtained by late 1997 or early 1998, but cannot be assured.
The cost of ACE's power supply, including the cost of power purchased
from independent power producers, along with its retail prices are expected to
be critical success factors in a competitive marketplace. ACE is focusing on
cost and rate control measures as well as the development of new energy-related
products and services. Alternate pricing mechanisms and rate discounts for key
at-risk customers will be necessary, and while having a long term economic
benefit, will cause detrimental impacts on revenues and income in the near term.
New value-added products and services for the retail energy consumer which
create customer loyalty and satisfaction will be a keystone of the Company's
strategic business focus.
AEI's utility business will continue to be affected by regional economic
trends and social initiatives, as well as the impacts of abnormal weather and
inflation. Such regional economic trends are favorable and include the growth of
the Atlantic City gaming industry which appears poised for a "second wave" of
development. Ongoing requirements for service reliability, and compliance with
existing and new environmental regulations, will cause additional capital
investments to be made by ACE. ACE's planned construction budget is $417 million
for the five year period beginning in 1997 with an expected reduction in its
external cash requirements. ACE's ability to generate cash flows or access the
capital markets may be affected by competitive pressures on revenues and income.
The operational performance of ACE's jointly-owned nuclear units, as well
as significant changes in the costs to decommission those facilities at the end
of their useful lives, will continue to be a factor in ACE's financial results.
ACE will attempt to mitigate such factors whenever possible. ACE has entered
into a performance-based agreement with PS, the operator of the Salem Station to
limit its exposure for operations and maintenance expenses in 1997. To the
extent that ACE derives a savings in 1997 O&M expenditures, those savings will
offset unrecovered replacement power costs incurred as a result of the
unavailability of the Salem units.
AEI's utility business will continue to be the primary factor influencing
the Company's overall financial performance. However, growth in new business
ventures such as ATS and enabling strategic alliances like Enerval, LLC, will
require the efficient development of entrepreneurial expertise and financial
resources to be successful.
A-40
INFLATION
Inflation affects the level of operating expenses and also the cost of
new utility plant placed in service. Traditionally, the rate making practices
that have applied to ACE have involved the use of historical test years and the
actual cost of utility plant. However, the ability to recover increased costs
through rates, whether resulting from inflation or otherwise, depends upon both
market circumstances and the frequency, timing and results of rate case
decisions.
OTHER
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been and will be made in written documents and oral presentation of AEI and
its subsidiaries. Such statements are based on managements beliefs as well as
assumptions made by and information currently available to management. When used
in AEI and subsidiary documents or oral presentation, the words "anticipate",
"estimate", "expect", "objective" and similar expressions are intended to
identify such forward-looking statements. In addition to any assumptions and
other factors referred to specifically in connection with such forward-looking
statements, factors that could cause actual results to differ materially from
those contemplated in any forward-looking statements include, among others, the
following: deregulation, and the unbundling of energy supplies and services; an
increasingly competitive energy marketplace; sales retention and growth
potential in a mature service territory and a need to contain costs; ability to
obtain adequate and timely rate relief, cost recovery, including the potential
impact of stranded costs, and other necessary regulatory approvals; federal and
state regulatory actions; costs of construction; operating restrictions,
increased cost and construction delays attributable to environmental
regulations; controversies regarding electric and magnetic fields; nuclear
decommissioning and the availability of reprocessing and storage facilities for
spent nuclear fuel; licensing and regulatory approval necessary for nuclear and
other operating station; and credit market concerns with these issues. AEI and
its subsidiaries undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive or as any admission regarding the adequacy of
disclosures made by AEI and its subsidiaries prior to the effective date of the
Act.
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
WHERE SHOULD I SEND INQUIRIES CONCERNING MY INVESTMENT IN ATLANTIC ENERGY OR
ATLANTIC ELECTRIC?
The Company serves as recordkeeping agent, dividend disbursing agent and
also as transfer agent for common stock and Atlantic Electric's preferred stock.
Correspondence concerning such matters as the replacement of dividend checks or
stock certificates, address changes, dividend reinvestment and stock purchase
plan inquiries or any general information about the company should be addressed
to:
Atlantic Energy, Inc.
Investor Records
6801 Black Horse Pike
P.O. Box 1334
Pleasantville, New Jersey 08232
Telephone (609) 645-4506 or (609) 645-4507
Requests for the transfer of common stock certificates should be
forwarded to:
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, NY 10004
Telephone (212) 509-4000
Preferred stockholders should continue to contact Atlantic Energy with
regard to the transfer of their stock.
A-41
WHEN ARE DIVIDENDS PAID?
The proposed record dates and payable dates are as follows:
RECORD DATES PAYABLE DATES
------------ -------------
March 24, 1997 April 15, 1997
June 16, 1997 July 15, 1997
September 22, 1997 OctobeR 5, 1997
December 22, 1997 January 15, 1998
The following table indicates dividends paid per share in 1996 and 1995
on common stock:
1996 1995
---- ----
First Quarter........................ $.385 $.385
Second Quarter....................... .385 .385
Third Quarter........................ .385 .385
Fourth Quarter....................... .385 .385
----- -----
Annual Total......................... $1.54 $1.54
===== =====
Dividend checks are mailed to reach shareholders approximately on the
payment date. If a dividend check is not received within 10 days of the payment
date, or if one is lost or stolen, contact Investor Records.
Dividends paid on common stock in 1996 and 1995 were fully taxable. Some
state and local governments may impose personal property taxes on shares held in
certain corporations. Shareholders residing in those states should consult their
tax advisors with regard to personal property tax liability.
WHO IS THE TRUSTEE AND INTEREST PAYING AGENT FOR ATLANTIC ELECTRIC'S
BONDS AND DEBENTURES?
First mortgage bond recordkeeping and interest disbursing are performed
by The Bank of New York, 101 Barclay Street, New York, New York 10286.
Recordkeeping and interest disbursing for pollution control bonds are performed
by Summit Bank, 210 Main St., 1st Floor, Hackensack, New Jersey 07602.
DOES THE COMPANY HAVE A DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
("PLAN")?
Yes. The Plan allows shareholders of record and interested investors to
automatically invest their cash dividend and/or optional cash payments in shares
of the Company's common stock. Other services available to Plan participants
include certificate safekeeping and automatic investment. Holders of record of
common stock or interested investors wishing to enroll in the Plan should
contact Investor Records at the address listed. In addition, shareholders whose
stock is held in a brokerage account may be able to participate in the Plan.
These shareholders should contact their broker or Investor Records for more
information.
WHERE IS THE COMPANY'S STOCK LISTED?
Common stock of Atlantic Energy and the preferred securities of Atlantic
Capital I are listed on the New York Stock Exchange. The trading symbol of the
Company's common stock is ATE; however, newspaper listings generally use AtlEnrg
or AtlanEngy. The trading symbol of the preferred securities is ATEPr and is
generally listed in the newspaper as AtlaCap QUIPS.
The high and low sale prices of the common stock reported in the Wall
Street Journal as New York Stock Exchange--Composite Transactions for the
periods indicated were as follows:
1996 1995
---------------------- -----------------------
HIGH LOW HIGH LOW
First Quarter.................. $20.000 $16.625 $19.000 $17.750
Second Quarter................. 18.750 16.000 19.625 17.875
Third Quarter.................. 18.500 17.000 19.875 18.125
Fourth Quarter................. 18.875 17.000 20.125 19.000
A-42
IS ADDITIONAL INFORMATION ABOUT THE COMPANY AVAILABLE?
The annual report to the Securities and Exchange Commission on Form 10-K
and other reports containing financial data are available to shareholders.
Specific requests should be addressed to:
Atlantic Energy
Financial Services Department
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
Telephone (609) 645-4483 or (609) 645-4518
FAX (609) 645-4132
A-43
SELECTED FINANCIAL DATA 1996-1992
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Thousands of Dollars except per share data)
Operating Revenues................. $ 980,255 $ 953,137 $ 913,039 $ 865,675 $ 816,825
Net Income......................... $ 58,767 $ 81,768 $ 76,113 $ 95,297 $ 86,210
Earnings per Average
Common Share................... $ 1.12 $ 1.55 $ 1.41 $ 1.80 $ 1.67
Total Assets (Year-end)............ $2,670,762 $2,617,888 $2,542,385 $2,487,508 $2,219,338
Long Term Debt and Redeemable
Preferred Securities
(Year-end)(a).................. $1,051,945 $1,032,103 $ 940,788 $ 952,101 $ 842,236
Capital Lease Obligations
(Year-end)(a).................. $ 39,914 $ 40,886 $ 42,030 $ 45,268 $ 49,303
Common Dividends Declared.......... $ 1.54 $ 1.54 $ 1.54 $ 1.535 $ 1.515
- - ------------------
(a) Includes current portion.
A-44
DIRECTORS OF ATLANTIC ENERGY, INC.
As of December 31, 1996
MICHAEL J. CHESSER
Director, President & Chief Operating Officer of Atlantic Energy, Atlantic City
Electric Company and Atlantic Energy Enterprises. Formerly held the title of
Senior Vice President of Atlantic Energy.
GERALD A. HALE
President of Hale Resources, Inc., Summit, NJ, a health care, industrial/natural
resource investment and management company. General Manager of HHH Investment
Company, LLC. Director of New Jersey Manufacturers Insurance Company, New Jersey
Business and Industry Association and Hoke, Inc.
MATTHEW HOLDEN, JR.
Professor of Government & Foreign Affairs, University of Virginia,
Charlottesville, VA. Economic and political consultant, arbitrator. Prior to
1982, Commissioner, Federal Energy Regulatory Commission and Wisconsin Public
Service Commission.
CYRUS H. HOLLEY
President of Management Consulting Services, Grapevine, TX. Director and Chief
Executive Officer of Oakmont Enterprises, Grapevine, TX. Director of UGI
Corporation and Kerns Oil & Gas Company.
JERROLD L. JACOBS
Chairman of the Board and Chief Executive Officer of Atlantic Energy and
Atlantic City Electric Company. Formerly held the title of President of Atlantic
Energy.
KATHLEEN MACDONNELL
Corporate Vice President of Campbell Soup Company, Camden, NJ. President, Frozen
Foods & Specialty Group, of Campbell Soup Company. Former Sector Vice President,
Prepared Foods, and Sector Vice President, Grocery, of Campbell Soup Company.
RICHARD B. MCGLYNN
Attorney. Vice President and General Counsel of United Water Resources, Inc.,
Harrington Park, NJ. Former Partner in the law firm of LeBoeuf, Lamb, Greene &
MacRae and former Partner in the law firm of Stryker, Tams & Dill.
BERNARD J. MORGAN
Financial Investor, Southampton, PA. Director of FormMaker Software, Inc., and
CRW Financial. Former Vice Chairman of First Fidelity Bancorporation, NJ/PA,
Former Vice Chairman, President, Chief Executive Officer and Chief Operating
Officer of Fidelcor, Inc. Former Chairman, Deputy Chairman, Chief Executive
Officer, President and Chief Operating Officer of Fidelity Bank, N.A.
HAROLD J. RAVECHE
President of Stevens Institute of Technology, Hoboken, NJ., Chair of the Board
of the New Jersey Corporation for Advanced Technology. Former Dean of Science,
Rensselaer Polytechnic Institute.
A-45
OFFICERS OF ATLANTIC ENERGY, INC. AND SUBSIDIARIES
(Age/Years of Service) As of December 31, 1996
JERROLD L. JACOBS (57/35)
Chairman and Chief Executive Officer of Atlantic Energy, Atlantic Electric and
director of Atlantic Energy Enterprises.
MICHAEL J. CHESSER (48/3)
Director, President and Chief Operating Officer of Atlantic Energy, Atlantic
Electric and Atlantic Energy Enterprises.
MICHAEL J. BARRON (47/2)
Vice President and Chief Financial Officer of Atlantic Energy
Director, Senior Vice President and Chief Financial Officer of Atlantic Electric
JAMES E. FRANKLIN II (50/3)
Vice President, Secretary and General Counsel of Atlantic Energy Director,
Senior Vice President, Secretary and General Counsel of Atlantic Electric
Secretary of Atlantic Energy Enterprises
MEREDITH I. HARLACHER, JR. (54/31)
Vice President of Atlantic Energy
Director and Senior Vice President-Power System of Atlantic Electric
HENRY K. LEVARI, JR. (48/25)
Vice President of Atlantic Energy
Director and Senior Vice President-External Affairs of Atlantic Electric
MARILYN T. POWELL (49/3)
Vice President of Atlantic Energy
Director and Senior Vice President-Marketing/Distribution of Atlantic Electric
SCOTT B. UNGERER (37/15)
Vice President of Atlantic Energy
Senior Vice President of Atlantic Energy Enterprises
LOUIS M. WALTERS (44/18)
Treasurer of Atlantic Energy
Vice President, Treasurer and Assistant Secretary of Atlantic Electric
FRANK E. DICOLA (49/3)
Vice President of Atlantic Energy
Senior Vice President and Treasurer of Atlantic Energy Enterprises
ERNEST L. JOLLY (44/16)
Vice President of Atlantic Energy
Acting Senior Vice President-Energy Supply of Atlantic Electric
J. DAVID MCCANN (45/24)
Vice President-Strategic Customer Support of Atlantic Electric
JAMES C. WELLER (47/3)
Vice President and Assistant Secretary of Atlantic Energy Enterprises
ROBERT H. FIELDER (51/27)
Acting Vice President, Distribution of Atlantic Electric
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE LISTED PROPOSALS
Signature(s) -------------------------------------------------------------------
/ / I plan to attend the meeting on April 23, 1997
/ / Check box to eliminate sending future
Summary Annual Reports for this account.
Date -------------------------, 1997
Please sign exactly as your name appears on the right. Each joint
owner must sign. When signing as trustee, guardian, executor,
administrator or corporate officer, please give full title.
Account No.
- - -------------------------------------------------------------------------------
TEAR HERE TEAR HERE
ATLANTIC ENERGY LOGO
- - -------------
[PHOTO]
March 19, 1997
J. L. Jacobs
- - ------------- Chairman and Chief Executive Officer
You are cordially invited to join us at the 1997 Annual Meeting of Shareholders
of Atlantic Energy, Inc. This year the meeting will be held in the Atlantic City
Ballroom of Harrah's Casino Hotel, 777 Harrah's Boulevard, in Atlantic City, New
Jersey, on Wednesday, April 23, 1997, starting at 3:00 p.m. I hope you will be
able to attend. At the meeting, in addition to considering and acting on the
matters described in the attached proxy statement, a current report on the
business operations of the Company and its subsidiaries will be given.
It is important that your shares be voted whether or not you plan to be present
at the meeting. You should specify your choices by marking the appropriate boxes
on the proxy form above and date, sign and return your proxy form in the
enclosed, postpaid return envelope as promptly as possible. If you date, sign
and return your proxy form without specifying your choices, your shares will be
voted in accordance with the recommendations of your directors.
I welcome your comments and suggestions. Time will be provided during the
meeting for your questions. For your convenience, directions to the meeting site
have been printed on the reverse side of this letter. I look forward to seeing
you.
Sincerely,
/s/ J L Jacobs
DIRECTIONS TO HARRAH'S CASINO HOTEL
FROM NEW YORK: Take the New Jersey Turnpike to Exit 11 (Garden State Parkway).
Take the Garden State Parkway South to Exit 40 (White Horse Pike - Route 30).
Take Route 30 East and follow the signs for Brigantine. Exit Route 30 at Dr.
Martin Luther King Blvd. (Illinois Ave.). Follow the signs to Harrah's.
(approximately 2 hours 20 minutes)
FROM PHILADELPHIA: Take the Ben Franklin or the Walt Whitman Bridge to the North
South Freeway (Route 42). Take the North South Freeway to the Atlantic City
Expressway. Take the Atlantic City Expressway to Exit 9 (Brigantine). Follow
Delilah Road (646) to Route 30 East. Exit Route 30 East at Dr. Martin Luther
King Blvd. (Illinois Ave.). Follow the signs to Harrah's. (approximately 65
minutes)
FROM BALTIMORE/WASHINGTON, D.C.: Take I-95 North to the Walt Whitman Bridge to
the North South Freeway (Route 42). Take the North South Freeway to the Atlantic
City Expressway. Take the Atlantic City Expressway to Exit 9 (Brigantine).
Follow Delilah Road (646) to Route 30 East. Exit Route 30 East at Dr. Martin
Luther King Blvd. (Illinois Ave.). Follow the signs to Harrah's. (approximately
3 hours 45 minutes from Washington, D.C.)
FROM THE SOUTH: Take the Garden State Parkway North to Exit 38 (Atlantic City
Expressway). Take the Atlantic City Expressway straight into Atlantic City. At
the end of the Expressway, turn left onto Arctic Avenue and drive to Dr. Martin
Luther King Blvd. (Illinois Ave.) where you will turn left again. Follow the
signs to Harrah's.
- - --------------------------------------------------------------------------------
The undersigned appoint(s) R. B. McGlynn, J. L. Jacobs and M. J. Chesser or
any of them, proxies with full power of substitution to vote all of the shares
of Atlantic Energy, Inc. Common Stock, which the undersigned is entitled to vote
at the Annual Meeting of Shareholders to be held on April 23, 1997 or any
adjournments thereof.
1. ELECTION OF DIRECTORS nominees below:
Michael J. Chesser; Gerald A. Hale; Matthew Holden, Jr.; Cyrus H. Holley;
Jerrold L. Jacobs; Kathleen MacDonnell; Richard B. McGlynn; Bernard J. Morgan
and Harold J. Raveche
/ / FOR / / AGAINST / / FOR ALL NOMINEES EXCEPT:-------------------
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the year ending December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ABOVE PROPOSALS.
3. To transact any other business as may properly come before the meeting,
or any adjournments thereof.
PLEASE DATE AND SIGN THE REVERSE SIDE
06895
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE LISTED PROPOSALS
Account No.
Signature(s)
- - --------------------------------------------------------------------------------
/ / I plan to attend the meeting on April 23, 1997.
Date ------------------------, 1997
Please sign exactly as your name
appears on the left. Each joint
owner must sign. When signing as
trustee, guardian, executor,
administrator or corporate officer,
please give full title.
The undersigned appoint(s) R. B. McGlynn, J. L. Jacobs and M. J. Chesser or
any of them, proxies with full power of substitution to vote all of the shares
of Atlantic Energy, Inc. Common Stock, which the undersigned is entitled to vote
at the Annual Meeting of Shareholders to be held on April 23, 1997 or any
adjournments thereof.
1. ELECTION OF DIRECTORS nominees below:
Michael J. Chesser; Gerald A. Hale; Matthew Holden, Jr.; Cyrus H. Holley;
Jerrold L. Jacobs; Kathleen MacDonnell; Richard B. McGlynn; Bernard J. Morgan
and Harold J. Raveche.
/ / FOR / / AGAINST / / FOR ALL NOMINEES EXCEPT:--------------------
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the year ending December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ABOVE PROPOSALS.
3. To transact any other business as may properly come before the meeting,
or any adjournments thereof.
PLEASE DATE AND SIGN THE REVERSE SIDE