-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OeseFM+d3jcg/Cgy68vTtA8oMxzsjXT/c4jLB2Pzn7RBv87bYqW8eV7yUsEoExLj VSAKR8P6W0ffgjBwJFHpYw== 0000008192-97-000023.txt : 19970514 0000008192-97-000023.hdr.sgml : 19970514 ACCESSION NUMBER: 0000008192-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC CITY ELECTRIC CO CENTRAL INDEX KEY: 0000008192 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210398280 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03559 FILM NUMBER: 97602572 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08232 BUSINESS PHONE: 6096454100 MAIL ADDRESS: STREET 1: PO BOX 1264 CITY: PLEASANTVILLE STATE: NJ ZIP: 08232 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC ENERGY INC CENTRAL INDEX KEY: 0000806393 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 222871471 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09760 FILM NUMBER: 97602573 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08234 BUSINESS PHONE: 6096454518 MAIL ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: EGG HARBOR TOWNSHIP STATE: NJ ZIP: 08234 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (x) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For Quarter ended March 31, 1997 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission Registrant; State of Incorporation; IRS Employer File No. Address; and Telephone No. Identification No. 1-9760 Atlantic Energy, Inc. 22-2871471 (New Jersey) 6801 Black Horse Pike Egg Harbor Township, NJ 08234 (609) 645-4500 1-3559 Atlantic City Electric Company 21-0398280 (New Jersey) 6801 Black Horse Pike Egg Harbor Township, NJ 08234 (609) 645-4100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: Atlantic Energy, Inc. 52,502,479 shares (as of May 8, 1997) All of the outstanding shares of Common Stock of Atlantic City Electric Company are owned by Atlantic Energy, Inc. Atlantic Energy, Inc. and Atlantic City Electric Company Form 10-Q For the Quarter Ended March 31, 1997 INDEX Page No. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Atlantic Energy, Inc. Consolidated Statement of Income and Retained Earnings 1 Consolidated Statement of Cash Flows 2 Consolidated Balance Sheet 3 Atlantic City Electric Company Consolidated Statement of Income and Retained Earnings 5 Consolidated Statement of Cash Flows 6 Consolidated Balance Sheet 7 Notes to Financial Statements Atlantic Energy, Inc. and Atlantic City Electric Company 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Atlantic Energy, Inc. and Atlantic City Electric Company 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 31 Atlantic Energy, Inc. and Subsidiaries PART I. Financial Information ITEM I. Financial Statements CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (Thousands of Dollars, except per share data) Quarter/Year-to-Date Ended March 31, 1997 1996 (unaudited) Operating Revenues-Electric $235,399 $245,325 Operating Expenses: Energy 56,740 58,782 Purchased Capacity 48,255 49,330 Operations 29,456 35,714 Maintenance 6,395 10,714 Depreciation and Amortization 20,562 20,251 State Excise Taxes 24,742 26,805 Federal Income Taxes 11,747 7,806 Other Taxes 2,919 2,943 Total Operating Expenses 200,816 212,345 Operating Income 34,583 32,980 Other Income: Allowance for Equity Funds Used During Construction 264 221 Other-Net 2,190 905 Total Other Income 2,454 1,126 Interest Charges: Interest on Long Term Debt 14,707 15,095 Other Interest Expense 1,107 798 Total Interest Charges 15,814 15,893 Allowance for Borrowed Funds Used During Construction (262) (331) Net Interest Charges 15,552 15,562 Less Preferred Securities Dividend Requirements of Subsidiary 2,854 3,009 Net Income 18,631 15,535 Retained Earnings at Beginning of Period 227,630 249,741 Dividends Declared on Common Stock (20,214) (20,290) Retained Earnings at End of Period $226,047 $244,986 Average Number of Shares of Common 52,502 52,702 Stock Outstanding (in thousands) Per Common Share: Earnings $ .35 $ .29 Dividends Declared $ .385 $ .385 Dividends Paid $ .385 $ .385 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic Energy Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) Quarter/Year-to-Date Ended March 31, 1997 1996 Cash Flows Of Operating Activities: (unaudited) Net Income $ 18,631 $ 15,535 Unrecovered Purchased Power Costs 4,280 4,104 Deferred Energy Costs 3,182 (432) Preferred Securities Dividends of ACE 1,410 3,009 Depreciation and Amortization 20,562 20,251 Deferred Income Taxes-Net (1,672) (234) Prepaid State Excise Taxes (68,758) (67,212) Unrecovered State Excise Taxes 2,390 2,390 Changes - Net Working Capital Components: Accounts Receivable & Unbilled Revenues 2,130 (1,712) Accounts Payable (15,800) (5,988) Inventory 1,992 2,877 Other (4,083) 10,647 Other-Net (6,021) (5,248) Net Cash Used in Operating Activities (41,757) (22,013) Cash Flows Of Investing Activities: Utility Cash Construction Expenditures (19,313) (20,260) Nonutility Construction Expenditures (8,952) (2,012) Partnership Distribution 3,445 6,504 Nonutility Investment in Affiliates - (4,800) Nuclear Decommissioning Trust Fund Deposits (1,606) (1,606) Other-Net (2,591) (1,695) Net Cash Used in Investing Activities (29,017) (23,869) Cash Flows Of Financing Activities: Retirement and Maturity of Long Term Debt - (15,247) Proceeds from Long Term Debt 29,425 - Proceeds from Short Term Debt 62,550 97,150 Redemption of Preferred Stock - (12,120) Dividends Declared-ACE Preferred Securities (1,410) (3,009) Dividends Declared on Common Stock (20,214) (20,290) Other-Net 216 2,819 Net Cash Provided by Financing Activities 70,567 49,303 Net (Decrease) Increase in Cash and Temporary Investments (207) 3,421 Cash and Temporary Investments: beginning of period 15,278 5,691 end of period $ 15,071 $ 9,112 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET March 31, December 31, (Thousands of Dollars) 1997 1996 (unaudited) Assets Electric Utility Plant In Service $2,512,100 $2,508,220 Less Accumulated Depreciation 876,107 871,531 Utility Plant in Service-Net 1,635,993 1,636,689 Construction Work in Progress 114,940 117,188 Land Held for Future Use 5,604 5,604 Leased Property-Net 38,254 39,914 Electric Utility Plant-Net 1,794,791 1,799,395 Investments and Nonutility Property: Investment in Leveraged Leases 79,887 79,687 Nuclear Decommissioning Trust Fund 73,935 71,120 Nonutility Property and Equipment-Net 54,931 46,147 Other Investments and Funds 51,247 53,550 Total Investments and Nonutility Property 260,000 250,504 Current Assets: Cash and Temporary Investments 15,071 15,278 Accounts Receivable: Utility Service 61,843 64,432 Miscellaneous 34,845 32,547 Allowance for Doubtful Accounts (3,500) (3,500) Unbilled Revenues 31,476 33,315 Fuel (at average cost) 28,058 29,682 Materials and Supplies (at average cost) 23,447 23,815 Working Funds 15,527 15,517 Deferred Energy Costs 30,347 33,529 Prepaid Excise Tax 75,883 7,125 Other 15,313 11,354 Total Current Assets 328,310 263,094 Deferred Debits: Unrecovered Purchased Power Costs 79,120 83,400 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 52,324 54,714 Unamortized Debt Costs 43,896 44,423 Other Regulatory Assets 60,482 59,575 License Fees 23,008 17,733 Other 15,868 12,066 Total Deferred Debits 360,556 357,769 Total Assets $2,743,657 $2,670,762 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) March 31, December 31, 1997 1996 (unaudited) Liabilities and Capitalization Capitalization: Common Shareholders' Equity: Common Stock $ 562,656 $ 562,746 Retained Earnings 226,047 227,630 Unearned Compensation (2,799) (2,982) Total Common Shareholders' Equity 785,904 787,394 Preferred Securities of Atlantic Electric: Not Subject to Mandatory Redemption 30,000 30,000 Subject to Mandatory Redemption 43,950 43,950 Cumulative Quarterly Income Preferred Securities 70,000 70,000 Long Term Debt 844,585 829,745 Total Capitalization (excluding current portion) 1,774,439 1,761,089 Current Liabilities: Preferred Stock Redemption Requirement 10,000 10,000 Capital Lease Obligation-Current Portion 715 702 Long Term Debt-Current Portion 112,675 98,250 Short Term Debt 127,500 64,950 Accounts Payable 50,708 66,508 Taxes Accrued 19,577 7,504 Interest Accrued 17,905 20,241 Dividends Declared 21,624 21,701 Deferred Income Taxes 1,560 3,190 Provision for Rate Refunds - 13,000 Other 27,945 24,696 Total Current Liabilities 390,209 330,742 Deferred Credits and Other Liabilities: Deferred Income Taxes 434,067 434,108 Deferred Investment Tax Credits 45,944 46,577 Capital Lease Obligations 37,538 39,212 Other 61,460 59,034 Total Deferred Credits and Other Liabilities 579,009 578,931 Total Liabilities and Capitalization $2,743,657 $2,670,762 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic City Electric Company and Subsidiary CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (Thousands of Dollars) Quarter/Year-to-Date Ended March 31, 1997 1996 (unaudited) Operating Revenues-Electric $236,126 $245,472 Operating Expenses: Energy 56,740 58,782 Purchased Capacity 48,255 49,330 Operations 29,418 35,760 Maintenance 6,395 10,720 Depreciation and Amortization 20,562 20,251 State Excise Taxes 24,742 26,805 Federal Income Taxes 11,747 7,806 Other Taxes 2,919 2,943 Total Operating Expenses 200,778 212,397 Operating Income 35,348 33,075 Other Income: Allowance for Equity Funds Used During Construction 264 221 Miscellaneous Income-Net 1,755 1,582 Total Other Income 2,019 1,803 Interest Charges: Interest on Long Term Debt 14,707 15,095 Other Interest Expense 1,107 798 Total Interest Charges 15,814 15,893 Allowance for Borrowed Funds Used During Construction (262) (331) Net Interest Charges 15,552 15,562 Less Cumulative Quarterly Income Preferred Securities Dividend of Trust 1,444 - Net Income 20,371 19,316 Retained Earnings at Beginning of Period 234,948 252,484 Dividends Declared: Cumulative Preferred Stock (1,410) (3,009) Common Stock (20,214) (20,290) Total Dividends Declared (21,624) (23,299) Capital Stock Expense and Other - (83) Retained Earnings at End of Period $233,695 $248,418 Earnings for Common Stock: Net Income $ 20,371 $ 19,316 Less Preferred Dividend Requirements 1,410 3,009 Balance Available for Common Shareholder $ 18,961 $ 16,307 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic City Electric Company and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) Quarter/Year-to-Date Ended March 31, 1997 1996 Cash Flows Of Operating Activities: (unaudited) Net Income $ 20,371 $ 19,316 Unrecovered Purchased Power Costs 4,280 4,104 Deferred Energy Costs 3,182 (432) Cumulative Quarterly Income Preferred Securities Dividends of Trust 1,444 - Depreciation and Amortization 20,562 20,251 Deferred Federal Income Taxes-Net (1,569) (604) Prepaid State Excise Taxes (68,758) (67,212) Unrecovered State Excise Taxes 2,390 2,390 Changes - Net Working Capital Components: Accounts Receivable & Unbilled Revenues 4,209 903 Accounts Payable (13,208) (5,964) Inventory 2,003 2,889 Other (7,626) (5,734) Other-Net (480) 525 Net Cash Used in Operating Activities (33,200) (29,568) Cash Flows Of Investing Activities: Cash Construction Expenditures (19,313) (20,260) Leased Property (662) (778) Nuclear Decommissioning Trust Fund Deposits (1,606) (1,606) Other-Net (1,312) (65) Net Cash Used in Investing Activities (22,893) (22,709) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 15,000 - Retirement and Maturity of Long Term Debt - (12,247) Proceeds from Short Term Debt 62,550 97,150 Redemption of Preferred Stock - (12,120) Capital Contributions 733 2,131 Dividends Declared on Preferred Stock (1,410) (3,009) Dividends on Cumulative Quarterly Income Preferred Securities of Trust (1,444) - Dividends Declared on Common Stock (20,214) (20,290) Other-Net 306 632 Net Cash Provided by Financing Activities 55,521 52,247 Net Decrease in Cash and Temporary Investments (572) (30) Cash and Temporary Investments: beginning of period 7,927 3,987 end of period $ 7,355 $ 3,957 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic City Electric Company and Subsidiary CONSOLIDATED BALANCE SHEET (Thousands of Dollars) March 31, December 31, 1997 1996 (unaudited) Assets Electric Utility Plant In Service $2,512,100 $2,508,220 Less Accumulated Depreciation 876,107 871,531 Utility Plant in Service-Net 1,635,993 1,636,689 Construction Work in Progress 114,940 117,188 Land Held for Future Use 5,604 5,604 Leased Property-Net 38,254 39,914 Electric Utility Plant-Net 1,794,791 1,799,395 Investments and Nonutility Property: Nuclear Decommissioning Trust Fund 73,935 71,120 Other 9,735 9,750 Total Investments and Nonutility Property 83,670 80,870 Current Assets: Cash and Temporary Investments 7,355 7,927 Accounts Receivable: Utility Service 61,843 64,432 Miscellaneous 21,869 21,650 Allowance for Doubtful Accounts (3,500) (3,500) Unbilled Revenues 31,476 33,315 Fuel (at average cost) 27,968 29,603 Materials and Supplies (at average cost) 23,447 23,815 Working Funds 15,525 15,517 Deferred Energy Costs 30,347 33,529 Prepaid Excise Tax 75,883 7,125 Other Prepayments 11,515 10,089 Total Current Assets 303,728 243,502 Deferred Debits: Unrecovered Purchased Power Costs 79,120 83,400 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 52,324 54,714 Unamortized Debt Costs 43,074 43,579 Other Regulatory Assets 60,482 59,575 Other 13,169 9,848 Total Deferred Debits 334,027 336,974 Total Assets $2,516,216 $2,460,741 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Atlantic City Electric Company and Subsidiary CONSOLIDATED BALANCE SHEET (Thousands of Dollars) March 31, December 31, 1997 1996 (unaudited) Liabilities and Capitalization Capitalization: Common Shareholder's Equity: Common Stock $ 54,963 $ 54,963 Premium on Capital Stock 231,081 231,081 Contributed Capital 259,811 259,078 Capital Stock Expense (1,645) (1,645) Retained Earnings 233,695 234,948 Total Common Shareholder's Equity 777,905 778,425 Preferred Securities: Not Subject to Mandatory Redemption 30,000 30,000 Subject to Mandatory Redemption 43,950 43,950 Cumulative Quarterly Income Preferred Securities of Trust 70,000 70,000 Long Term Debt 817,084 802,245 Total Capitalization (excluding current portion) 1,738,939 1,724,620 Current Liabilities: Preferred Stock Redemption Requirement 10,000 10,000 Capital Lease Obligations-Current 715 702 Long Term Debt-Current 175 175 Short Term Debt 127,500 64,950 Accounts Payable 50,436 63,644 Federal Income Taxes Payable-Affiliate 12,725 7,398 Other Taxes Accrued 7,863 7,494 Interest Accrued 16,920 19,619 Dividends Declared 21,624 21,701 Deferred Income Taxes 1,560 3,190 Provision for Rate Refunds - 13,000 Other 26,301 22,980 Total Current Liabilities 275,819 234,853 Deferred Credits and Other Liabilities: Deferred Income Taxes 357,641 357,580 Deferred Investment Tax Credits 45,944 46,577 Capital Lease Obligations 37,538 39,212 Other 60,335 57,899 Total Deferred Credits and Other Liabilities 501,458 501,268 Total Liabilities and Capitalization $2,516,216 $2,460,741 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Organizational and Other Matters of AEI and Subsidiaries Atlantic Energy, Inc. (AEI or the Company) is the parent of Atlantic City Electric Company (ACE), Atlantic Energy Enterprises, Inc. (AEE) and Atlantic Energy International, Inc. (AEII) which are wholly-owned subsidiaries. ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. AEE is a holding company which is responsible for the management of the investments in nonutility companies consisting of: Atlantic Generation, Inc. (AGI), ATE Investment, Inc. (ATE), Atlantic Southern Properties, Inc. (ASP), Atlantic Thermal Systems, Inc. (ATS), CoastalComm, Inc. (CCI) and Atlantic Energy Technology, Inc. (AET). AEE also has a 50% equity interest in Enerval, LLC. ATE also has a 94% equity interest in Enertech Capital Partners, L.P. AEII provides utility consulting services and equipment sales to international markets. AEII is winding down its business. ACE is the principal subsidiary of AEI. The consolidated financial information of AEI is principally the financial information of ACE unless indicated otherwise. Certain prior year amounts have been reclassified to conform to the current year reporting. On August 12, 1996, the Boards of Directors of AEI and Delmarva Power & Light Company (DP&L) jointly announced an agreement to merge the companies into Conectiv, Inc. The merger is expected to be a tax-free, stock-for-stock transaction accounted for as a purchase. Under the terms of the agreement, DP&L shareholders will receive one share of the Conectiv common stock for each share of DP&L common stock held. AEI shareholders will receive 0.75 shares of the Conectiv common stock and 0.125 shares of the Conectiv Class A common stock for each share of AEI common stock held. On January 30, 1997, the merger was approved by the shareholders of both companies. 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 complete in late 1997 or early 1998. New Accounting Standards - The Financial Accounting Standards Board (FASB) issued two new Statement of Financial Accounting Standards in 1997 - Statement No. 128 (SFAS 128) "Earnings Per Share" and Statement No. 129 (SFAS 129) "Disclosure of Information about Capital Structure". SFAS 128 specifies the computation, presentation and disclosure requirements of earnings per share for entities with publicly held common stock and potential common stock. The Company has not fully assessed the impacts of the requirements of this standard on its financial statements. SFAS 129 relates to disclosures of the Company's capital structure and is not expected to change current disclosure practices of the Company with regard to capital structure. NOTE 2. RATE MATTERS OF ACE On March 29, 1996, ACE filed with the New Jersey Board of Public Utilities (BPU) a petition requesting a $49.7 million increase in annual Levelized Energy Clause (LEC) revenues to be effective June 1, 1996. A stipulation was reached by 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 the continuation of BPU hearings to decide on the following LEC rate issues: $27.8 million for the estimated replacement power costs related to the Salem Units 1 and 2 ongoing 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, 1996 and December 31, 1996 the BPU issued Orders approving two stipulations reached on October 22, 1996 settling the outstanding issues regarding the replacement power costs related to the current Salem outage and the 1994 Salem Unit 1 outage. The stipulations provided that ACE's replacement power costs for the current Salem outage, up to each Salem Unit's agreed-upon return-to-service date (June 30, 1997 for Unit 1 and December 31, 1996 for Unit 2), and the 1994 Salem Unit 1 outage will be recoverable in LEC rates implemented in ACE's next LEC filing. As a result of these BPU approved stipulations, only the issue of $1.7 million in emission fees remained unresolved. On April 23, 1997, the Administrative Law Judge submitted his decision on this issue and found that emission fees are fuel related and should be recovered through ACE's LEC. The final decision on the matter is now pending before the BPU. ACE cannot predict the outcome of this matter. On February 28, 1997, ACE filed a petition with the BPU requesting an increase in annual LEC revenues of $20.0 million to be made effective for service rendered on and after June 1, 1997. The $20.0 million proposed increase includes recovery of Salem replacement power costs up to the agreed-upon return-to-service date for each Salem unit, in accordance with the Stipulation settling the BPU's investigation into the continuing outage of the Salem Nuclear Generating Station. The proposed increase also permits recovery of $1.7 million in replacement power costs related to a 1994 outage at Salem Unit 1. ACE agreed to forego recovery of this amount in the 1996 LEC period in order to implement the provisional 1996 LEC rates. The Stipulation of Partial Settlement of ACE's 1996 LEC permits recovery of the $1.7 million. In April 1997, ACE's filing was transferred to the Office of Administrative Law. At this date, hearings have not been scheduled. On January 8, 1997, the BPU approved a stipulation related to its generic proceeding for methods of implementing Statement of Financial Accounting Standard No. 106 - "Employers' Accounting for Post-retirement Benefits Other Than Pensions" (SFAS 106). SFAS 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. SFAS 106 required that companies recognize a transition obligation composed of the present value of OPEB obligations for retirees and current employees incurred as of the date of adoption. Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) allows for the recognition of a regulatory asset relating to costs for which rate recovery has been deferred. In December 1992, the BPU approved ACE's request for the application of deferred accounting to OPEB costs. These deferred costs are recorded as a regulatory asset consistent with SFAS 71. Under the terms of a stipulation, ACE will file a petition in the second quarter of 1997 requesting ratemaking treatment of OPEB expenses including an amortized recovery of the regulatory asset. NOTE 3. DEBT AND PREFERRED SECURITIES AEI At March 31, 1997 and December 31, 1996, AEI had $50.0 million and $37.6 million, respectively, outstanding under its $75.0 million revolving credit and term loan facility. Proceeds have been used for general corporate purposes. ACE ACE's Cumulative Preferred Securities and long term debt securities are not widely held and generally trade infrequently. Their estimated aggregate fair market values at March 31, 1997 and December 31, 1996 are approximately $943.5 million and $975.2 million, respectively. With regard to short term debt, ACE had outstanding $127.5 million at March 31, 1997 and $65.0 million at December 31, 1996. On March 26, 1997, ACE issued and sold $15.0 million principal amount of unsecured Medium Term Notes in the following increments: $10.0 million at 7.5% and $5.0 million at 7.52%, both due April, 2007. AEE At March 31, 1997 and December 31, 1996, ATE had outstanding $7.0 million and $18.5 million, respectively, under its $25.0 million revolving credit and term loan facility. The estimated aggregate fair market value of ATE's $15 million in 7.44% Senior Notes at March 31, 1997 and December 31, 1996 was approximately $15.1 million and $15.5 million, respectively. At March 31, 1997, and December 31, 1996, ATS had outstanding $55.5 million and $42.0 million, respectively, under its $100.0 million revolving credit and term loan facility. Commitment fees on the unused credit line were not significant. This facility will be used to satisfy certain associated company payables and for other general corporate purposes, including construction of the Midtown Energy Center in Atlantic City, New Jersey which began in November 1996. In December 1995, ATS, through a partnership arrangement, borrowed from the New Jersey Economic Development Authority (NJEDA) $12.5 million from the proceeds of the sale of special, limited obligation bonds issued by the NJEDA. Proceeds from the bond issuance remain restricted in trust pending resolution of certain release conditions. The bonds paid an initial rate of 3.7% for the 120 day period ending on April 30, 1996. The bonds have been remarketed four times at fixed rates ranging from 3.5% to 3.8%. They may be remarketed for one or more additional periods not to exceed 120 days, but in no event later than December 1, 1998 at which time the bonds must be redeemed if the escrow conditions are not satisfied. ATS expects to satisfy all the escrow release conditions in the second quarter of 1997. NOTE 4. COMMON STOCK OF AEI As of both March 31, 1997, and December 31, 1996, 52,502,479 shares of common stock were outstanding. NOTE 5. CONTINGENCIES On February 28, 1997, ACE filed its comments on the BPU's Draft Phase II of the New Jersey Energy Master Plan (the Plan) concerning the restructuring of the electric utility industry. The BPU issued final findings and recommendations on the electric industry restructuring in New Jersey to the Governor and the State Legislature for their consideration on April 30, 1997. The final findings and revisions differed from the draft relative to the proposed timetable for the phase-in of retail choice for electric customers in the State. The recommendation for phase-in was accelerated, calling for choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. The Plan requires each electric utility to file, no later than July 15, 1997, complete restructuring plans, stranded cost filings and unbundled rate filings. ACE currently accounts for the economic effects of regulation as specified by SFAS 71. ACE believes it continues to meet the criteria set forth in SFAS 71 and has presented these financial statements in accordance with SFAS 71. However, if future changes in ratemaking regulation preclude ACE from meeting the criteria of SFAS 71, ACE would be required to apply Statement of Financial Accounting Standards No. 101 "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" and write down certain assets if they are impaired. The result of this application may be an extraordinary, noncash charge to operations that could be material to the financial position and results of operations of the Company. On April 1, 1997, the Pennsylvania-New Jersey-Maryland Interconnections Association (PJM) began implementing interim guidelines approved by FERC on February 28, 1997. The guidelines created, among other things, an independent system operator (ISO), an open access tariff, a spot energy market open to utilities, nonutilities, power generators and wholesale energy brokers with comparable pool-wide transmission service and new rules governing generation and transmission activities. A final proposal is to be submitted to the FERC by May 31, 1997 which will address the remaining ISO issues and congestive pricing. In mid-March, 1997, the New Jersey Legislature introduced a bill proposing to eliminate the Gross Receipts and Franchise Tax (GR&FT) paid by electric, natural gas and telecommunication public utilities. In its place, utilities will be subject to the State's corporate business tax. The State's existing sales and use tax will be expanded to include retail sales of electric power and natural gas, and a transitional energy facility assessment tax (TEFA) will be applied for a limited time on electric and natural gas utilities and will be phased-out over a five year period. It is intended that the legislation will take effect on January 1, 1998 and that on January 1, of each of the years thereafter, the TEFA will be reduced by 20%. ACE currently cannot predict the outcome of this matter. ACE is a 7.41% owner of the Salem Nuclear Generating Station operated by Public Service Electric and Gas Company (PS). Salem Units 1 and 2 were taken out of service on May 16, 1995 and June 7, 1995, respectively. 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 third quarter of 1997. Salem Unit 1 is currently expected to return to service in late 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. 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 for unpaid work. PS has advised ACE that the amount being claimed by Westinghouse in the counterclaim approximates $2.5 million. An answer to the counterclaim will be filed on behalf of the co-owners. 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 falls below a level set by the performance standard. Underperformance results in penalties which are not permitted to be recovered from customers and are charged against income. According to the Salem outage stipulation agreement as previously discussed in the 1996 AEI Annual Report on Form 10-K, the performance of Salem Unit 1 and Unit 2 shall not be included in the calculation of the nuclear performance penalty or award for the period each unit was taken out of service up to each unit's respective return-to-service date. The outage of each Salem unit causes ACE to incur replacement power costs of approximately $700 thousand per unit per month. As previously discussed, ACE's replacement power costs for the current outage for each unit, 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 rates in ACE's 1997 LEC proceeding. Replacement power costs incurred after the respective agreed-upon return-to-service dates for the Salem Units will not be recoverable in rates. 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 million of O&M expense, as a fixed charged payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any contributions, above the $10 million, to Salem 1997 O&M expenses up to ACE's estimated share of $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. 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 agreed to dismiss the complaint filed against PS in the Superior Court of New Jersey in March 1996 alleging negligence and breach of contract. ACE has a trust to fund the future costs of decommissioning each of the five jointly-owned nuclear units. The current annual funding amount of this trust is based on estimates of the future costs of decommissioning each unit derived from studies performed in 1987. In accordance with BPU requirements, updated site specific studies were completed as of September 1996. ACE is currently evaluating the results of the studies and has not fully assessed the impacts upon amounts to be recognized and recovered in rates based on these updated studies. ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements Information pertaining specifically to ACE and its subsidiary is included in Note 1, Note 2, Note 3 and Note 5 of the Consolidated Financial Statements of AEI and is incorporated by reference. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited) The following is management's discussion and analysis of significant factors which affected Atlantic Energy, Inc. (AEI or the Company) interim financial condition and results of operations. Atlantic City Electric Company (ACE) is the principal subsidiary of AEI and the following discussion focuses on ACE unless indicated otherwise. To properly assess and evaluate the Company's performance one should read, in conjunction with this report, the Management's Discussion and Analysis of Financial Condition and Results of Operations included in AEI's 1997 proxy statement for the annual meeting of shareholders and the 1996 AEI Annual Report on Form 10-K. LIQUIDITY AND CAPITAL RESOURCES AEI The operating needs of AEI, representing those of the consolidated group, are dependent upon the results of its subsidiaries, principally ACE. At March 31, 1997 and December 31, 1996, AEI had $50.0 million and $37.6 million outstanding, respectively, under its revolving credit and term loan facility. ACE At March 31, 1997 ACE had $127.5 million outstanding in short term debt, compared to $65.0 million outstanding at December 31, 1996. Short term debt consisted of notes payable to banks. Proceeds were used for general corporate purposes and to fund the annual remittance of the state excise tax payment as discussed below. In March 1997, ACE made its annual payment to the State of New Jersey in the amount of $91.1 million for state excise tax. The current asset, Prepaid Excise Taxes reflects this current year payment which has caused a net cash usage in operating activities for the current and prior year quarter ended period as presented on the Consolidated Statement of Cash Flows. Atlantic Energy Enterprises, Inc. (AEE) At March 31, 1997 and December 31, 1996, ATE Investment, Inc. (ATE) had outstanding $7.0 million and $18.5 million, respectively, under its revolving credit and term loan facility. At March 31, 1997 and December 31, 1996, Atlantic Thermal Systems, Inc. (ATS) had outstanding $55.5 million and $42.0 million, respectively, under its revolving credit and term loan facility. Commitment fees on the unused credit line were not significant. This facility will be used to satisfy certain associated company payables and for other general corporate purposes including construction of the Midtown Energy Center in Atlantic City, New Jersey which began in November 1996 and is expected to be completed by mid-1997. ATS's capital expenditures have been approximately $38.1 million for this project to date. In December 1995, ATS, through a partnership arrangement, borrowed from the New Jersey Economic Development Authority (NJEDA) $12.5 million from the proceeds of the sale of special, limited obligation bonds issued by the NJEDA. Proceeds from the bond issuance remain restricted in trust pending resolution of certain release conditions. The bonds paid an initial rate of 3.7% for the 120 day period ending on April 30, 1996. The bonds have been remarketed four times at fixed rates ranging from 3.5% to 3.8%. They may be remarketed for one or more additional periods not to exceed 120 days, but in no event later than December 1, 1998 at which time the bonds must be redeemed if the escrow conditions are not satisfied. ATS expects to satisfy all the escrow release conditions in the second quarter of 1997. RESULTS OF OPERATIONS Changes in net income and earnings per share for the period ended March 31, 1997 versus the corresponding period of the previous year are as follows: Period Ended March 31, 1997 Quarter/Year-to-Date Net Income 19.9% Earnings Per Share 20.7% The change in net income and earnings per share primarily reflect decreased operating expenses and increased nonutility income. Utility Revenues of ACE Changes in Operating Revenues-Electric, exclusive of inter- company sales, are disclosed in the following table: Quarter/Year-to-Date Ended March 31, 1997 (Thousands of Dollars) Base Revenues $ (377) Levelized Energy Clause 6,777 Kilowatt-hour Sales (17,581) Unbilled Revenues 3,564 Sales for Resale (1,345) Other Revenues (383) Total $ (9,345) The decrease in Base Revenues reflects ACE's BPU approved Off- Tariff Rate Agreements (OTRAs). OTRAs are special reduced rates that are being offered by ACE to at-risk customers which reduced base revenues by an estimated $1.8 million, or $1.2 million, net of tax, for the current period. LEC revenues for the period increased due to an annual rate increase in July 1996 of $27.6 million. Changes in Kilowatt-hour Sales are explained in the 'Billed Sales to Ultimate Utility Customers' section. The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by, but not yet billed to, ultimate customers at the end of the respective periods, which are affected by weather, economic conditions and the corresponding price per kilowatt-hour. The changes in Sales for Resale to wholesale customers are a function of ACE's energy mix strategy, which in turn is dependent upon ACE's needs for energy, the energy needs of other utilities participating in the regional power pool of which ACE is a member, and the sources and prices of energy available. In addition, changes in Sales for Resale are dependent on adjacent power pool resources and prices of energy available. Billed Sales to Ultimate Utility Customers of ACE Changes in billed kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions. Energy sales statistics, stated as percentage changes from the corresponding periods of the prior year, are shown below. Quarter/Year-To-Date Ended March 31, 1997 Average Sales Use Cust Residential (11.4%) (12.1%) 0.8% Commercial (3.4) (4.7) 1.3 Industrial (3.9) (4.3) 0.4 Total (7.3) (8.1) 0.9 The decrease in the current period sales was due primarily to reduced electric heating usage, as a result of milder weather in 1997 compared to 1996. Another factor in the decreased sales was fewer billing days in the current period when compared to the same period of the previous year. Operating Expenses Total Operating Expenses decreased by 5.4%. Excluding depreciation and taxes, Total Operating Expenses decreased by 8.9% largely due to decreases in operations and maintenance costs of ACE. Energy expense reflects the amount of energy needed to meet load requirements, as well as the various fuel and purchased energy sources used and the operation of the LEC. Changes in costs reflect the availability of low-cost generation from ACE-owned and purchased energy sources, the unit prices of the energy sources used and changes in the needs of other utilities participating in the regional power pool. The cost of energy is recovered from customers primarily through the operation of the LEC. Generally, earnings are not affected by energy costs because these costs are adjusted to match the associated LEC revenues. However, ACE had voluntarily foregone recovery of certain amounts of otherwise recoverable fuel costs through its Southern New Jersey Economic Initiative (SNJEI), thereby reducing earnings through May 1996, as indicated below. Such reduced recoveries are discretionary by ACE, and are influenced by competitive and economic factors. ACE elected not to continue the SNJEI beyond May 1996. Otherwise, in any period the actual amount of LEC revenue recovered from customers will be greater or less than the actual amount of energy cost incurred and eligible for recovery in that period. Such respective overrecovery or underrecovery of energy costs is deferred on the Consolidated Balance Sheet as a liability or asset as appropriate. Amounts on the balance sheet are recognized in the Consolidated Statement of Income within Energy expense during the period in which they are subsequently recovered through the LEC. ACE was underrecovered by $30.3 million at March 31, 1997 as compared to underrecovered by $33.5 million at December 31, 1996. Energy expense decreased by 3.5%. Excluding deferred energy costs, Energy expense decreased by 9.7%, when compared to the prior year largely due to the milder weather. Sources of ACE's energy for the current period are as follows: Quarter\Year-to-Date Ended March 31, 1997 Coal 26% Nuclear 17 Interchanged and Purchased 37 Nonutility Purchased 19 Oil and Natural Gas 1 Total 100% Operations expense decreased by 17.5% which was the result of reduced expenses resulting from the operations and maintenance stipulation agreement with PS regarding the Salem Units, as discussed in Note 5, and cost saving measures instituted by ACE. Maintenance expense decreased by 40.3% as a result of reduced expenses associated with the Salem Station operations and maintenance stipulation. State Excise Tax expense decreased 7.7%, reflecting a decreased energy sales tax base for the quarter compared to the same period last year. Federal Income Tax expense increased by 50.5% and Taxes Accrued on the Consolidated Balance Sheet increased significantly due to an increase of taxable income for the current quarter when compared to the same period last year. Accounts Payable decreased significantly due to reduced operating costs which have resulted in a reduction to current period end accruals. Other Matters On February 28, 1997, ACE filed its comments on the BPU's Draft Phase II of the New Jersey Energy Master Plan (the Plan) concerning the restructuring of the electric utility industry. The BPU issued final findings and recommendations on the electric industry restructuring in New Jersey to the Governor and the State Legislature for their consideration on April 30, 1997. The final findings and revisions differed from the draft relative to the proposed timetable for the phase-in of retail choice for electric customers in the State. The recommendation for phase-in was accelerated, calling for choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. The Plan requires each electric utility to file, no later than July 15, 1997, complete restructuring plans, stranded cost filings and unbundled rate filings. ACE currently accounts for the economic effects of regulation as specified by SFAS 71. ACE believes it continues to meet the criteria set forth in SFAS 71 and has presented these financial statements in accordance with SFAS 71. However, if future changes in ratemaking regulation preclude ACE from meeting the criteria of SFAS 71, ACE would be required to apply Statement of Financial Accounting Standards No. 101 "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" and write down certain assets if they are impaired. The result of this application may be an extraordinary, noncash charge to operations that could be material to the financial position and results of operations of the Company. On April 1, 1997, the Pennsylvania-New Jersey-Maryland Interconnections Association (PJM) began implementing interim guidelines approved by FERC on February 28, 1997. The guidelines created, among other things, an independent system operator (ISO), an open access tariff, a spot energy market open to utilities, nonutilities, power generators and wholesale energy brokers with comparable pool-wide transmission service and new rules governing generation and transmission activities. A final proposal is to be submitted to the FERC by May 31, 1997 which will address the remaining ISO issues and congestive pricing. In mid-March, 1997, the New Jersey Legislature introduced a bill proposing to eliminate the Gross Receipts and Franchise Tax (GR&FT) paid by electric, natural gas and telecommunication public utilities. In its place, utilities will be subject to the State's corporate business tax. The State's existing sales and use tax will be expanded to include retail sales of electric power and natural gas, and a transitional energy facility assessment tax (TEFA) will be applied for a limited time on electric and natural gas utilities and will be phased-out over a five year period. It is intended that the legislation will take effect on January 1, 1998 and that on January 1, of each of the years thereafter, the TEFA will be reduced by 20%. ACE currently cannot predict the outcome of this matter. ACE is a 7.41% owner of the Salem Nuclear Generating Station operated by Public Service Electric and Gas Company (PS). Salem Units 1 and 2 were taken out of service on May 16, 1995 and June 7, 1995, respectively. 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 third quarter of 1997. Salem Unit 1 is currently expected to return to service in late 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. 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 for unpaid work. PS has advised ACE that the amount being claimed by Westinghouse in the counterclaim approximates $2.5 million. An answer to the counterclaim will be filed on behalf of the co-owners. 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 falls below a level set by the performance standard. Underperformance results in penalties which are not permitted to be recovered from customers and are charged against income. According to the Salem outage stipulation agreement as previously discussed in the 1996 AEI Annual Report on Form 10-K, the performance of Salem Unit 1 and Unit 2 shall not be included in the calculation of the nuclear performance penalty or award for the period each unit was taken out of service up to each unit's respective return-to-service date. The outage of each Salem unit causes ACE to incur replacement power costs of approximately $700 thousand per unit per month. As previously discussed, ACE's replacement power costs for the current outage for each unit, 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 rates in ACE's 1997 LEC proceeding. Replacement power costs incurred after the respective agreed-upon return-to-service dates for the Salem Units will not be recoverable in rates. 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 million of O&M expense, as a fixed charged payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any contributions, above the $10 million, to Salem 1997 O&M expenses up to ACE's estimated share of $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. 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 agreed to dismiss the complaint filed against PS in the Superior Court of New Jersey in March 1996 alleging negligence and breach of contract. ACE has a trust to fund the future costs of decommissioning each of the five jointly-owned nuclear units. The current annual funding amount of this trust is based on estimates of the future costs of decommissioning each unit derived from studies performed in 1987. In accordance with BPU requirements, updated site specific studies were completed as of September 1996. ACE is currently evaluating the results of the studies and has not fully assessed the impacts upon amounts to be recognized and recovered in rates based on these updated studies. Nonutility Activities-AEI and AEE Nonutility operations, which include AEI parent and AEII, resulted in net losses of $0.3 million compared to losses of $0.7 million for the prior period. Of these amounts, operations of AEE and subsidiaries resulted in net income of $0.5 million compared to net losses of $0.3 million for the same period of the prior year. The current net income is primarily due to the ATS's casino heating and cooling service contracts. ATS has signed agreements with two additional casinos in Atlantic City, New Jersey to operate their heating and cooling systems, bringing the total number of agreements to five. As part of these new agreements, ATS has agreed to pay $8.5 million in license fees for the right to operate and service these systems for a period of 20 years, of which, $5.5 million has been paid to date. These license fees are recorded on the Consolidated Balance Sheet as License Fees and are amortized to expense over the life of the contracts. Also contributing to the income was a reduction of ATE's interest expenses. AEI parent only resulted in net losses of $0.6 million compared to net losses of $0.5 million for the corresponding period of the prior year. The 1997 and 1996 losses are largely due to interest expense associated with the borrowings from AEI's revolving credit and term loan facility. AEI's credit facility is used to support general corporate purposes. ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY The information required by this item is incorporated herein by reference from the following portions of AEI's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to ACE and its subsidiary: Liquidity and Capital Resources-ACE; Results of Operations and Other Matters of ACE. Part II. OTHER INFORMATION Item 1. Legal Proceedings The following information updates certain matters previously reported under Part I, Item 1 - Business of the Annual Report on Form 10-K for 1996 of Atlantic Energy, Inc. and Atlantic City Electric Company (ACE). In addition, certain new information is contained herein. Rate Matters On March 12, 1997, ACE filed with the Superior Court of New Jersey, Appellate Division, information statements as part of the appeal filed on February 27, 1997 by the Coalition for Competitive Energy. The appeal was based on the Board of Public Utilities' (BPU) Summary Decision and Order dated December 31, 1996 approving settlements regarding the rate treatment of the Salem Nuclear Generating Station. The appeal alleges, among other things, that the settlement violates the BPU's previously announced policy of requiring an "up-front" market test for all utility supply side construction, including repowering, and that the BPU's use of a "Summary Order" process is illegal under the Administrative Procedure Act. ACE is unable to predict the outcome of this appeal. On April 11, 1997, the Rate Intervention Steering Committee (RISC) submitted a brief of its appeal with the Superior Court of New Jersey pertaining to the BPU's Decision and Order on ACE's Levelized Energy Clause filing dated April 24, 1996. In the brief, RISC argues that the BPU did not follow the rules of the Federal Energy Regulatory Commission (FERC) or the Public Utility Regulatory Act in its approval of nonutility generation contracts and the stipulation approving these contracts were without public notice or the opportunity for public hearings. RISC argues that the BPU should order a hearing to reconsider the contracts, recalculate the contract prices and give the public the opportunity to participate in the hearings. RISC further argues that ACE's customers should not pay for above current market costs and that ACE should not be permitted to recover costs relating to the maintenance of excess capacity. ACE and other parties to the proceeding have 30 days to respond. On April 24, 1997, the BPU issued a generic order in the matter of its investigation regarding the policy issues relating to whether customers who cease to take electric service from a utility, going to on-site generation as an alternative supply choice, should be charged an exit fee. In its order, the BPU determined that a further examination of the policy issue of whether electric utilities should have the ability to collect stranded costs from customers in the form of an exit fee is necessary, in conjunction with the Energy Master Plan, with a view towards applying any decision: 1) on an interim basis, if necessary; and 2) during any proposed stranded cost recovery period, commencing with the start of retail competition. A hearing is scheduled for June 19, 1997. ACE is unable to predict the outcome of this matter. Item 4. Submission of Matters to a Vote of Security Holders On January 30, 1997, Atlantic Energy, Inc. held a special meeting of Atlantic Energy, Inc. shareholders to approve the Agreement and Plan of Merger between Atlantic Energy, Inc. and Delmarva Power & Light Company (DP&L). Shareholders were also asked to approve the Conectiv, Inc. Incentive Compensation Plan. The Agreement and Plan of Merger and the Incentive Compensation Plan were approved by the required majority of shareholders. The details of the shareholder vote were reported under Item 5 - Other Events - on Form 8-K dated January 31, 1997, which is incorporated herein by reference. On April 23, 1997, Atlantic Energy, Inc. held its annual meeting of shareholders. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to the management's nominees as listed in the proxy statement and all of the nominees were elected. Details of other matters voted upon at the meeting are as follows: Proposal #2 - To ratify the appointment of Deloitte & Touche LLP as independent auditors for the year ending December 31, 1997. Votes For 40,488,869 Shares Votes Against 274,093 Shares Votes Abstained 362,646 Shares Item 5. Other Information Pending Merger As previously reported, the proposed merger between the Company and DP&L requires the approval of a number of Federal and state regulatory agencies. In addition to having filed for approval of the merger with the FERC under the Federal Power Act, filings for the approval of the Delaware, Virginia, Maryland, New Jersey and Pennsylvania utility commissions have been made and are being reviewed by each of the states. As required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, certain information relative to the merger has been submitted to the Antitrust Division of the Department of Justice and the Federal Trade Commission. Approval has also been requested in a filing made with the Nuclear Regulatory Commission (NRC) under the Atomic Energy Act of 1954. Orders from the respective state and Federal commissions or agencies are expected to be obtained by year-end. Nuclear Generating Station Developments ACE has been advised that in 1990, General Electric Company (GE) reported that crack indications were discovered near the seam welds in the core shroud assembly in a GE boiling water reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions. Both Peach Bottom Units 2 and 3 and Hope Creek are affected by this issue and both PECO Energy Company (PE) and Public Service Electric and Gas Company (PS) are participating in the GE BWR Owners Group to evaluate this issue and develop long-term corrective actions. PS advised ACE that during the spring 1994 refueling outage, PS inspected the shroud of Hope Creek in accordance with GE's recommendations and found no cracks. In June 1994, an industry group was formed and subsequently established generic inspection guidelines which were approved by the NRC. Hope Creek was initially placed in the lowest susceptibility category under these guidelines. PS has advised ACE that due to Hope Creek's operating time, it now falls into the intermediate susceptibility category. Hope Creek will perform another shroud inspection during its next refueling outage in September 1997. In a separate matter, PS advised that as a result of several BWRs experiencing clogging in some emergency core cooling system suction strainers, which supply water from the suppression pool for emergency cooling of the core and related structures, the NRC issued a Bulletin in May 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC has proposed three resolution options, with a request that actions be completed by the end of the unit's first refueling outage after January 1997. Alternative resolution options will be subject to NRC approval. ACE has been advised that PS has responded to the NRC, indicating its intention to comply with the Bulletin. The Bulletin requires all BWRs to resolve this issue at their first refueling after January 1, 1997. Therefore, PS will be installing large capacity passive strainers during Hope Creek's next refueling outage in September 1997. PE has advised that large capacity passive strainers will also be installed at Peach Bottom Units 2 and 3 during their next refueling outages in September 1998 and September 1997, respectively. ACE cannot predict what other actions, if any, the NRC may take in this matter. Salem Nuclear Generating Station ACE is a 7.41% owner of the Salem Nuclear Generating Station (Salem) operated by PS. Salem consists of two 1,106 megawatt (MW) pressurized water nuclear reactors representing 164 MWs of ACE's total installed capacity of 2,385.7 MWs. As previously reported, Salem Units 1 and 2 were taken out of service in the second quarter of 1995. ACE has been advised by PS that Salem Unit 2 is in the final stage of preparation for restart and is expected to return to service early in the third quarter of 1997. In an April 11, 1997 letter to the NRC, PS stated that Unit 2 restart activities are approaching conclusion, and requested that the NRC commence its Readiness Team Inspection (a requirement for unit restart). PS has advised ACE that PS expects the inspection to commence in early-June 1997. Salem Unit 1 is expected to return to service in late 1997, following the installation of new steam generators. Restart of each Salem unit is subject to NRC approval. Item 6. Exhibits and Reports on 8-K Exhibits: See Exhibit Index Attached Reports on Form 8-K: Current Reports on Form 8-K were filed dated January 6, 1997, January 27, 1997 and January 31, 1997 describing the agreement between ACE and PS, the Draft Phase II of the BPU's Energy Master Plan and events at the Salem Nuclear Generating Station. A Current Report on Form 8-K was also filed dated March 24, 1997 which included, as exhibits, certain documents associated with the registration under the Securities Act of 1933 of $150 million of the long-term debt of Atlantic City Electric Company. *************************************************** SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Atlantic Energy, Inc. Atlantic City Electric Company (Registrant) Date: May 13, 1997 By: /s/ M. J. Barron M. J. Barron Vice President and Chief Financial Officer of Atlantic Energy, Inc. and Senior Vice President and Chief Financial Officer of Atlantic City Electric Company Date: May 13, 1997 By: /s/ L. M. Walters L. M. Walters Treasurer of Atlantic Energy, Inc. and Vice President, Treasurer and Assistant Secretary of Atlantic City Electric Company EXHIBIT INDEX 27 Financial Data Schedules for Atlantic Energy, Inc. and Atlantic City Electric Company for periods ended March 31, 1997. EX-27 2
UT 0000008192 ATLANTIC CITY ELECTRIC COMPANY 3-MOS DEC-31-1997 MAR-31-1997 PER-BOOK 1,794,791 83,670 303,728 334,027 0 2,516,216 54,963 489,247 233,695 777,905 43,950 100,000 817,084 127,500 0 0 175 10,000 37,538 715 601,349 2,516,216 236,126 11,747 189,031 200,778 35,348 2,019 37,367 15,552 20,371 1,410 18,961 20,213 0 (33,200) 0 0
EX-27 3
UT 0000806393 ATLANTIC ENERGY, INC. 3-MOS DEC-31-1997 MAR-31-1997 PER-BOOK 1,794,791 260,000 328,310 360,556 0 2,743,657 562,656 0 223,248 785,904 43,950 100,000 844,585 127,500 0 0 112,675 10,000 37,538 715 680,790 2,743,657 235,399 11,747 189,069 200,816 34,583 2,454 37,037 15,552 18,631 0 18,631 20,213 0 (41,757) 0.35 0.35
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