-----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, V8896Mhp6nVRvZxDWtaduxhek+TfvSIBIydWYI59SJam7ud2qEleRF/YjJ/us1ry 0k4tPNCKEQLYcIelAtQ7/w== 0000008192-97-000035.txt : 19971113 0000008192-97-000035.hdr.sgml : 19971113 ACCESSION NUMBER: 0000008192-97-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-03559 FILM NUMBER: 97716617 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: SEC FILE NUMBER: 001-09760 FILM NUMBER: 97716618 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 September 30, 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. 52,504,479 shares (as of November 10, 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 September 30, 1997 INDEX Page No. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Atlantic Energy, Inc. Consolidated Statement of Income 1 Consolidated Statement of Cash Flows 3 Consolidated Balance Sheet 4 Atlantic City Electric Company Consolidated Statement of Income 6 Consolidated Statement of Cash Flows 8 Consolidated Balance Sheet 9 Notes to Financial Statements Atlantic Energy, Inc. and Atlantic City Electric Company 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Atlantic Energy, Inc. and Atlantic City Electric Company 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 35 Signatures 36 ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars,except per share data) Quarter Ended September 30, 1997 1996 (unaudited) Operating Revenues-Electric $297,367 $281,965 Operating Expenses: Energy 63,800 66,371 Purchased Capacity 52,812 49,645 Operations 37,864 34,882 Maintenance 7,814 10,555 Depreciation and Amortization 21,034 20,265 State Excise Taxes 30,106 29,392 Federal Income Taxes 25,454 17,227 Other Taxes 1,542 2,284 Total Operating Expenses 240,426 230,621 Operating Income 56,941 51,344 Other Income and (Expense): Allowance for Equity Funds Used During Construction 182 205 Other-Net 7,897 (182) Total Other Income 8,079 23 Interest Charges: Interest on Long Term Debt 15,040 15,042 Other Interest Expense 1,300 1,494 Total Interest Charges 16,340 16,536 Allowance for Borrowed Funds Used During Construction (230) (193) Net Interest Charges 16,110 16,343 Less Preferred Securities Dividend Requirements of Subsidiary 2,444 2,457 Net Income $ 46,466 $ 32,567 Average Number of Shares of Common 52,504 52,702 Stock Outstanding (000's) Per Common Share: Earnings $.89 $.62 Dividends Declared $.385 $.385 Dividends Paid $.385 $.385 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (Thousands of Dollars, except per share data) Year-to-Date September 30, 1997 1996 (unaudited) Operating Revenues-Electric $758,322 $752,968 Operating Expenses: Energy 166,296 171,648 Purchased Capacity 150,133 146,877 Operations 100,200 110,050 Maintenance 21,692 33,004 Depreciation and Amortization 62,333 60,490 State Excise Taxes 79,131 80,391 Federal Income Taxes 47,392 30,842 Other Taxes 6,770 7,656 Total Operating Expenses 633,947 640,958 Operating Income 124,375 112,010 Other Income: Allowance for Equity Funds Used During Construction 726 697 Other-Net 13,038 2,603 Total Other Income 13,764 3,300 Interest Charges: Interest on Long Term Debt 44,690 45,179 Other Interest Expense 4,133 4,124 Total Interest Charges 48,823 49,303 Allowance for Borrowed Funds Used During Construction (777) (820) Net Interest Charges 48,046 48,483 Less Preferred Securities Dividend Requirements of Subsidiary 8,152 8,475 Net Income 81,941 58,352 Retained Earnings at Beginning of Period 227,630 249,741 309,571 308,093 Dividends Declared on Common Stock (60,642) (60,871) Capital Stock Expense and Other (144) - Retained Earnings at End of Period $248,785 $247,222 Average Number of Shares of Common Stock Outstanding (000's) 52,503 52,702 Per Common Share: Earnings $1.56 $1.11 Dividends Declared $1.155 $1.155 Dividends Paid $1.155 $1.155 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) Year-to-Date September 30, 1997 1996 (unaudited) Cash Flows Of Operating Activities: Net Income $ 81,941 $ 58,352 Unrecovered Purchased Power Costs 12,848 12,310 Deferred Energy Costs 4,308 (2,134) Preferred Securities Dividends of ACE 8,152 8,475 Depreciation and Amortization 62,333 60,490 Deferred Income Taxes-Net (3,078) 2,289 Unrecovered State Excise Taxes 7,170 7,170 Changes-Net Working Capital Components: Accounts Receivable & Unbilled Revenues (22,363) (12,864) Accounts Payable (16,551) (5,499) Inventory 5,161 2,092 Prepaid Excise Tax (19,380) (18,407) Taxes Accrued 42,008 36,709 Other (6,450) 9,488 Other-Net 2,339 (4,999) Net Cash Provided by Operating Activities 158,438 153,472 Cash Flows Of Investing Activities: Utility Cash Construction Expenditures (58,774) (69,947) Nonutility Construction Expenditures (42,935) (9,281) License Fees (9,500) (18,000) Partnership Distribution 4,420 10,729 Nuclear Decommissioning Trust Fund Deposits (4,818) (4,818) Other-Net (13,806) (6,370) Net Cash Used in Investing Activities (125,413) (97,687) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 92,525 20,500 Retirement and Maturity of Long Term Debt (23,334) (12,266) (Repayments) Proceeds from Short Term Debt (19,050) 57,655 Redemption of Preferred Stock (20,000) (47,531) Dividends Declared-ACE Preferred Securities (8,152) (8,475) Dividends Declared on Common Stock (60,642) (60,871) Other-Net 3,228 4,139 Net Cash Used in Financing Activities (35,425) (46,849) Net (Decrease) Increase in Cash and Temporary Investments (2,400) 8,936 Cash and Temporary Investments: Beginning of period 15,278 5,691 End of period $ 12,878 $ 14,627 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) September 30 December 31, 1997 1996 (unaudited) Assets: Electric Utility Plant In Service $2,567,444 $2,508,220 Less Accumulated Depreciation 913,592 871,531 Utility Plant in Service-Net 1,653,852 1,636,689 Construction Work in Progress 91,370 117,188 Land Held for Future Use 5,604 5,604 Leased Property-Net 37,403 39,914 Electric Utility Plant-Net 1,788,229 1,799,395 Investments and Nonutility Property: Investment in Leveraged Leases 80,251 79,687 Nuclear Decommissioning Trust Fund 79,073 71,120 Nonutility Property and Equipment-Net 90,254 46,147 Other Investments and Funds 56,945 53,550 Total Investments and Nonutility Property 306,523 250,504 Current Assets: Cash and Temporary Investments 12,878 15,278 Accounts Receivable: Utility Service 73,463 64,432 Miscellaneous 40,123 32,547 Allowance for Doubtful Accounts (3,500) (3,500) Unbilled Revenues 39,071 33,315 Fuel (at average cost) 24,327 29,682 Materials and Supplies (at average cost) 24,009 23,815 Working Funds 15,063 15,517 Deferred Energy Costs 29,221 33,529 Prepaid Excise Tax 26,505 7,125 Other 12,616 11,354 Total Current Assets 293,776 263,094 Deferred Debits: Unrecovered Purchased Power Costs 70,552 83,400 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 47,313 54,714 Unamortized Debt Costs 44,089 44,423 Other Regulatory Assets 62,031 59,575 License Fees 27,722 17,733 Other 13,792 12,066 Total Deferred Debits 351,357 357,769 Total Assets $2,739,885 $2,670,762 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic Energy, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) September 30, December 31, 1997 1996 (unaudited) Liabilities and Capitalization: Capitalization: Common Shareholders' Equity: Common Stock $ 562,684 $ 562,746 Retained Earnings 248,784 227,630 Unearned Compensation (2,526) (2,982) Total Common Shareholders' Equity 808,942 787,394 Preferred Securities of Atlantic Electric: Preferred Stock: Not Subject to Mandatory Redemption 30,000 30,000 Subject to Mandatory Redemption 23,950 43,950 Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company 70,000 70,000 Long Term Debt 786,308 829,745 Total Capitalization (excluding current portion) 1,719,200 1,761,089 Current Liabilities: Preferred Stock Redemption Requirement 10,000 10,000 Capital Lease Obligation-Current Portion 743 702 Long Term Debt-Current Portion 211,575 98,250 Short Term Debt 45,900 64,950 Accounts Payable 49,957 66,508 Taxes Accrued 49,512 7,504 Interest Accrued 16,913 20,241 Dividends Declared 21,214 21,701 Deferred Income Taxes - 3,190 Provision for Rate Refunds - 13,000 Other 35,444 24,696 Total Current Liabilities 441,258 330,742 Deferred Credits and Other Liabilities: Deferred Income Taxes 434,363 434,108 Deferred Investment Tax Credits 44,677 46,577 Capital Lease Obligations 36,660 39,212 Other Post-Retirement Benefits 36,829 32,608 Other 26,898 26,426 Total Deferred Credits and Other Liabilities 579,427 578,931 Total Liabilities and Capitalization $2,739,885 $2,670,762 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic City Electric Company and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) Quarter Ended September 30, 1997 1996 (unaudited) Operating Revenues-Electric $300,338 $282,577 Operating Expenses: Energy 63,800 66,371 Purchased Capacity 52,812 49,645 Operations 37,867 34,896 Maintenance 7,815 10,568 Depreciation and Amortization 21,034 20,265 State Excise Taxes 30,106 29,392 Federal Income Taxes 25,454 17,227 Other Taxes 1,542 2,284 Total Operating Expenses 240,430 230,648 Operating Income 59,908 51,929 Other Income: Allowance for Equity Funds Used During Construction 182 205 Miscellaneous Income-Net 5,005 (180) Total Other Income 5,187 25 Interest Charges: Interest on Long Term Debt 15,040 15,042 Other Interest Expense 1,300 1,494 Total Interest Charges 16,340 16,536 Allowance for Borrowed Funds Used During Construction (230) (193) Net Interest Charges 16,110 16,343 Less Company-Obligated Mandatorily Redeemable Preferred Securities Dividends of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company 1,444 - Net Income 47,541 35,611 Less Preferred Dividend Requirements 1,000 2,457 Balance Available for Common Shareholder $ 46,541 $ 33,154 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic City Electric Company and Subsidiaries CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (Thousands of Dollars) Year-to-Date September 30, 1997 1996 (unaudited) Operating Revenues-Electric $763,701 $754,084 Operating Expenses: Energy 166,296 171,648 Purchased Capacity 150,133 146,877 Operations 100,171 110,135 Maintenance 21,702 33,034 Depreciation and Amortization 62,333 60,490 State Excise Taxes 79,131 80,391 Federal Income Taxes 47,392 30,842 Other Taxes 6,770 7,656 Total Operating Expenses 633,928 641,073 Operating Income 129,773 113,011 Other Income: Allowance for Equity Funds Used During Construction 726 697 Miscellaneous Income-Net 8,467 3,165 Total Other Income 9,193 3,862 Interest Charges: Interest on Long Term Debt 44,690 45,179 Other Interest Expense 4,133 4,124 Total Interest Charges 48,823 49,303 Allowance for Borrowed Funds Used During Construction (777) (820) Net Interest Charges 48,046 48,483 Less Company-Obligated Mandatorily Redeemable Preferred Securities Dividends of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company 4,332 - Net Income 86,588 68,390 Retained Earnings at Beginning of Period 234,948 252,484 321,536 320,874 Dividends Declared: Cumulative Preferred Stock (3,820) (8,475) Common Stock (60,642) (61,871) Total Dividends Declared (64,462) (70,346) Capital Stock Expense and Other (108) (251) Retained Earnings at End of Period $256,966 $250,277 Earnings for Common Stock: Net Income $ 86,588 $ 68,390 Less Preferred Dividend Requirements 3,820 8,475 Balance Available for Common Shareholder $ 82,768 $ 59,915 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic City Electric Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) Year-to-Date September 30, 1997 1996 (unaudited) Cash Flows Of Operating Activities: Net Income $ 86,588 $ 68,390 Unrecovered Purchased Power Costs 12,848 12,310 Deferred Energy Costs 4,308 (2,134) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company 4,332 - Depreciation and Amortization 62,333 60,490 Deferred Federal Income Taxes-Net (3,313) 995 Unrecovered State Excise Taxes 7,170 7,170 Changes-Net Working Capital Components: Accounts Receivable & Unbilled Revenues (18,366) (15,548) Accounts Payable (13,687) (5,472) Inventory 5,171 2,105 Prepaid Excise Tax (19,380) (18,407) Federal Income Taxes Payable-Affiliate 38,489 22,242 Other (9,795) 20,898 Other-Net 6,307 (769) Net Cash Provided by Operating Activities 163,005 152,270 Cash Flows of Investing Activities: Cash Construction Expenditures (58,774) (69,947) Leased Property (4,364) (2,385) Nuclear Decommissioning Trust Fund Deposits (4,818) (4,818) Other-Net (1,448) (1,266) Net Cash Used in Investing Activities (69,404) (78,416) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 37,600 - Retirement and Maturity of Long Term Debt (23,334) (12,266) (Repayments)Proceeds - Short Term Debt (19,050) 57,155 Redemption of Preferred Stock (20,000) (47,531) Dividends Declared on Preferred Stock (3,820) (8,475) Dividends on Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company (4,332) - Dividends Declared on Common Stock (60,642) (61,871) Other-Net 748 4,095 Net Cash Used in Financing Activities (92,830) (68,893) Net Increase in Cash and Temporary Investments 771 4,961 Cash and Temporary Investments Beginning of period 7,927 3,987 End of period $ 8,698 $ 8,948 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic City Electric Company and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) September 30, December 31, 1997 1996 (unaudited) Assets: Electric Utility Plant: In Service $2,567,444 $2,508,220 Less Accumulated Depreciation 913,592 871,531 Utility Plant in Service-Net 1,653,852 1,636,689 Construction Work in Progress 91,370 117,188 Land Held for Future Use 5,604 5,604 Leased Property-Net 37,403 39,914 Electric Utility Plant-Net 1,788,229 1,799,395 Investments and Nonutility Property: Nuclear Decommissioning Trust Fund 79,073 71,120 Other 9,713 9,750 Total Investments and Nonutility Property 88,786 80,870 Current Assets: Cash and Temporary Investments 8,698 7,927 Accounts Receivable: Utility Service 73,463 64,432 Miscellaneous 25,230 21,650 Allowance for Doubtful Accounts (3,500) (3,500) Unbilled Revenues 39,071 33,315 Fuel (at average cost) 24,238 29,603 Materials and Supplies (at average cost) 24,009 23,815 Working Funds 15,062 15,517 Deferred Energy Costs 29,221 33,529 Prepaid Excise Tax 26,505 7,125 Other 11,900 10,089 Total Current Assets 273,897 243,502 Deferred Debits: Unrecovered Purchased Power Costs 70,552 83,400 Recoverable Future Federal Income Taxes 85,858 85,858 Unrecovered State Excise Taxes 47,313 54,714 Unamortized Debt Costs 43,008 43,579 Other Regulatory Assets 62,031 59,575 Other 12,571 9,848 Total Deferred Debits 321,333 336,974 Total Assets $2,472,245 $2,460,741 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ATLANTIC ENERGY, INC. AND SUBSIDIARIES 3rd Quarter, 1997 Atlantic City Electric Company and Subsidiaries CONSOLIDATED BALANCE SHEET (Thousands of Dollars) September 30, 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 260,103 259,078 Capital Stock Expense (1,537) (1,645) Retained Earnings 256,966 234,948 Total Common Shareholder's Equity 801,576 778,425 Preferred Securities: Preferred Stock: Not Subject to Mandatory Redemption 30,000 30,000 Subject to Mandatory Redemption 23,950 43,950 Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company 70,000 70,000 Long Term Debt 758,808 802,245 Total Capitalization (excluding current portion) 1,684,334 1,724,620 Current Liabilities: Preferred Stock Redemption Requirement 10,000 10,000 Capital Lease Obligations-Current 743 702 Long Term Debt-Current 58,575 175 Short Term Debt 45,900 64,950 Accounts Payable 49,957 63,644 Federal Income Taxes Payable-Affiliate 45,887 7,398 Other Taxes Accrued 4,595 7,494 Interest Accrued 15,850 19,619 Dividends Declared 21,214 21,701 Deferred Income Taxes - 3,190 Provision for Rate Refunds - 13,000 Other 33,658 22,980 Total Current Liabilities 286,379 234,853 Deferred Credits and Other Liabilities: Deferred Income Taxes 357,600 357,580 Deferred Investment Tax Credits 44,677 46,577 Capital Lease Obligations 36,660 39,212 Other Post-Retirement Benefits 36,829 32,608 Other 25,766 25,291 Total Deferred Credits and Other Liabilities 501,532 501,268 Total Liabilities and Capitalization $2,472,245 $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 provided utility consulting services and equipment sales to international markets and is in the process of winding down its operations. ACE is the principal subsidiary of AEI. The consolidated financial information of AEI is principally the financial information of ACE unless indicated otherwise. In July, 1996 the Company began making nonregulated wholesale electric market transactions. Effective July 1997, ACE established policies and procedures for the operating activity for the nonregulated wholesale electric market transactions. ACE records the revenues and expenses of these transactions as part of "Other Income" on the Consolidated Statement of Income. 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. The Delaware Public Service Commission approved the merger on September 23, 1997, and the Pennsylvania Public Utilities Commission approved the merger on October 6, 1997. As previously reported, the Maryland Public Service Commission, the Federal Energy Regulatory Commission and the Virginia State Corporation Commission have approved the merger. In order for the merger to become effective, approval is required from the New Jersey Board of Public Utilities(BPU), the Nuclear Regulatory Commission, and the Securities and Exchange Commission. 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 Statements 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", which are effective for financial statements presented for periods ending after December 15, 1997. 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 does not expect SFAS 128 to have a significant impact upon the calculation and disclosures requirements of earnings per share. 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. In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosure About Segments of an Enterprise and Related Information". These statements are effective for fiscal years beginning after December 15, 1997. Since these statements are primarily disclosure related, the Company currently believes that they will not have a significant effect on the Consolidated Financial Statements. NOTE 2. RATE MATTERS OF ACE As previously reported, 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 which was transferred to the Office of Administrative Law. Hearings were held on September 18, 1997. Briefing to the ALJ began in October, 1997. ACE cannot predict the outcome of this matter. Also previously reported, in ACE's August 1, 1997 filing, ACE requested a $6.8 million increase in annual base rate revenues for the recovery of other post-retirement benefits (OPEB) expenses. In October, 1997 ACE amended its filing to request an increase in annual base rate revenues of $8.4 million for the recovery of OPEB expenses. This amendment reflects a correction of the Company's filing, as well as a modification resulting from the changes to the 1997 Gross Receipts and Franchise Tax legislation. The BPU is expected to take action with regard to ACE's filing before year end 1997. However, if no order for ratemaking treatment is received, ACE may be required to recognize through expense its deferred costs which are estimated to be $37.5 million by year end 1997. On July 15, 1997 ACE filed its electric industry restructuring plan with the BPU, as required by Energy Master Plan, proposing how ACE plans to move to retail access and the possible effect on rates. (See Note 5) NOTE 3. DEBT AND PREFERRED SECURITIES AEI At September 30, 1997 and December 31, 1996, AEI had $52.0 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 September 30, 1997 and December 31, 1996 are approximately $959 million and $975 million, respectively. With regard to short term debt, ACE had outstanding $45.9 million at September 30, 1997 and $65.0 million at December 31, 1996. On July 30, 1997, ACE issued $22.6 million aggregate amount of variable rate, tax-exempt pollution control bonds. The principal amount of $22.6 million represents two separate series of bonds: $18.2 million Pollution Control Revenue Refunding Bonds, 1997 Series A due April 15, 2014 (Series A) and $4.4 million Pollution Control Revenue Refunding Bonds, 1997 Series B due July 15, 2017 (Series B). The Series A and the Series B bonds paid an initial weekly rate of 3.4% and 3.5%, respectively. Each subsequent rate will be determined by a remarketing agent. The rates of interest of each series may be changed from time to time to a daily mode, a flexible mode for periods of any duration up to 270 days or a multi-annual mode for periods of not less than 365 days. The proceeds from the sale of the Series A and Series B bonds have been applied to the September 2, 1997 redemption of $18.2 million aggregate principal amount of 7 3/8% Pollution Control Revenue Bonds of 1984, Series A and $4.4 million aggregate principal amount of 8 1/4% Pollution Control Revenue Bonds of 1987, Series B for a total of $23.9 million. On August 1, 1997 ACE redeemed 200,000 shares, at par, of its $8.20 Series No Par Preferred Stock. Under a mandatory sinking fund requirement 100,000 shares were required to be redeemed and ACE elected to redeem an optional 100,000 additional shares for a total of $20.0 million using short term debt. AEE At September 30, 1997 and December 31, 1996, ATE had outstanding $6.0 million and $18.5 million, respectively, under its $25 million revolving credit and term loan facility. The estimated aggregate fair market value of ATE's $15 million in 7.44% Senior Notes at September 30, 1997 and December 31, 1996 was approximately $15 million. At September 30, 1997 and December 31, 1996, ATS had outstanding $95.0 million and $42.0 million, respectively, under its $175 million revolving credit and term loan facility. This facility has been used for funding the construction of the Midtown Energy Center in Atlantic City, New Jersey which began start-up operation in October 1997. This facility has also been used to satisfy certain associated company payables and for other general corporate purposes. 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 five 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. In October, 1997 the NJEDA approved a final bond resolution authorizing the issuance of an additional $18.5 million in limited obligation bonds. ATS will borrow from the NJEDA the proceeds of this issuance for certain qualifying costs of the Midtown Energy Center, subject to BPU approval. The bonds will be supported by a back-up letter of credit for $31 million. ATS expects to satisfy all the escrow release conditions and obtain BPU approval in mid- November 1997, at which point, the $31 million will be applied to certain qualifying costs incurred during construction of the Midtown Energy Center. ATS, in its pursuit of potential business opportunities throughout the United States, has a potential funding commitment of a $35 million stand-by letter of credit. The funds would be provided from ATS's existing revolving credit and term loan facility. NOTE 4. COMMON STOCK OF AEI As of September 30, 1997, and December 31, 1996, 52,504,479 and 52,502,479 shares of common stock were outstanding, respectively. NOTE 5. CONTINGENCIES New Jersey Energy Master Plan 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 recommendation for the implementation of a phase-in plan for retail competition would span a twenty-one month period providing choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. The plan required each electric utility in the state to file complete restructuring plans, stranded cost filings and unbundled rate filings by July 15, 1997. The plan would allow utilities the opportunity to recover stranded costs on a case-by- case basis, with no guarantee of 100 percent recovery of eligible stranded costs. ACE filed its response to the BPU on July 15, 1997. ACE's restructuring filing met the BPU's recommendations for phase-in of retail electric access based on a first-come, first-served basis, proposing choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. Customers remaining with ACE will be charged a market-based electricity price beginning October 1, 1998. The restructuring filing included a two-phased approach to future rate reductions of approximately 5%. In an October 31, 1997 letter to the BPU, ACE added specificity to the framework set out in the restructuring filing with regard to steps ACE plans to take to meet the BPU's rate reduction and restructuring goals. First, specific, definable cost reductions of approximately 4% after 1998 were outlined. Further, ACE offered that an appropriate resolution of the merger proceedings will allow ACE to reduce its rates, due to the merger, of approximately 1.25% upon consummation of the change in control. In addition, ACE's current estimate showed that, through the use of securitized debt for the full amount of stranded costs associated with its own generation assets, a further rate decrease of up to 2% was possible based on appropriate legislation and orders of the BPU. Finally, ACE estimates that the results of good-faith negotiations with the nonutility generators could provide a reduction of up to an additional 1.75%. In summary, ACE outlined a total rate reduction of 9% by the end of the transition. Under the restructuring filing ACE specified its total stranded cost estimated to be approximately $1.3 billion, of which $965 million is attributable to above-market Nonutility Generation (NUG) Contracts. The remaining amount, approximately $340 million, is related to wholly and jointly-owned generation investments. The restructuring filing supports full recovery of stranded costs, which ACE believes are necessary to move to a competitive environment. The restructuring filing is currently in the discovery phase. During this phase, ACE revised the estimated stranded cost amounts to be approximately $911 million attributable to NUG contracts and approximately $415 million related to wholly and jointly-owned generation investments. The Administrative Law Judge is expected to render a decision in May 1998. Pending Merger On June 26, 1997, the Company and DP&L jointly announced an enhanced retirement offer and separation program that will be utilized to achieve workforce reductions as a result of the merger. (Refer to Note 1 for merger discussion.) The total cost to the Company for these programs, as well as, the cost of executive severance, employee relocation and facilities integration is estimated to range from $38 million to $48 million. These costs are contingent upon the consummation of the merger. ACE will be required to recognize these costs through expense in accordance with generally accepted accounting principles (GAAP). The actual cost to the Company and ACE will depend on a number of factors related to the employee mix as well as the actual number of employees who will be separated. Accounting For Deregulation ACE currently accounts for the economic effects of regulation as specified by Statement of Financial Accounting Standards No. 71 (SFAS 71) which provides guidance on circumstances when the economic effect of a regulator's decision warrants different application of GAAP as a result of the ratemaking process. At this time, ACE continues to meet the criteria set forth in SFAS 71 and has presented these financial statements in accordance therewith. The Financial Accounting Standards Board (FASB), through the Emerging Issue Task Force (EITF), has recently set forth guidance intended to clarify the accounting treatment of specific issues associated with the restructuring of the electric utility industry through EITF Issue No. 97-4, "Deregulation of the Pricing of Electricity-Issues Related to the Application of FASB Statements No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101, Regulated Enterprises-Accounting for the Discontinuation of application of FASB Statement No. 71" (EITF No. 97-4)". The consensus reached in EITF No. 97-4 as to when an enterprise should stop applying SFAS 71 to a separable portion of its business whose pricing is being deregulated, is defined as "when deregulatory legislation or a rate order (whichever is necessary to effect change in the jurisdiction)is issued that contains sufficient detail for the enterprise to reasonably determine how the transition plan will effect the separable portion of its business" (e.g. generation). Consensus was also reached "that the regulatory assets and regulatory liabilities that originated in the separable portion of an enterprise to which Statement 101 is being applied should be evaluated on the basis of where (that is, the portion of the business in which) the regulated cash flows to realize and settle them, respectively, will be derived." Additionally, the "source of the cash flow approach adopted in the consensus should be used for recoveries of all costs and settlements of all obligations (not just for regulatory assets and regulatory liabilities that are recorded at the date Statement 101 is applied) for which regulated cash flows are specifically provided in the deregulatory legislation or rate order". At this time ACE cannot predict, with certainty when it will stop applying SFAS 71 for its generation business. ACE also cannot predict the impacts on its financial condition as a result of applying SFAS 101. The outcome will be dependent upon when a plan is approved and the level of recovery of stranded costs allowed by the BPU. If assets require a write-down as a result of the application of SFAS 101, ACE may need to record an extraordinary noncash charge to operations that could have a material impact on the financial position and results of operations of ACE. Salem Nuclear Generating Station 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. PS advised ACE that the Salem restart plan, which encompassed a comprehensive review and improvement of personnel, process and equipment issues has been completed for Salem Unit 2. On August 6, 1997, the NRC authorized the restart of Salem 2 and stated that it would continue to closely monitor activities at Salem. Salem Unit 2 returned to service on August 30, 1997. The unit reached 100% power on September 23, 1997. PS has advised ACE that the installation of Salem Unit 1 steam generators has been completed and the unit is currently expected to return to service during the first quarter of 1998. Restart of Salem Unit 1 is also subject to NRC approval. The outage of Salem Station causes ACE to incur replacement power costs of approximately $700 thousand per month per unit. As previously discussed, ACE's replacement power costs for the current outage, up to the agreed-upon return-to-service date of June 30, 1997 for Salem Unit 1 and December 31, 1996 for Salem Unit 2, will be recoverable in rates in ACE's 1997 LEC proceeding. Replacement power costs incurred after the agreed-upon return-to-service date for the Salem Station will not be recoverable in rates. ACE has incurred $8.1 million in non-recoverable replacement power costs to date related to Salem. Effective December 31, 1996, ACE entered into an agreement with PS for the purpose of limiting ACE's exposure to Salem's 1997 operation and maintenance (O&M) expenses. Pursuant to the terms of the agreement, ACE will pay to PS $10 million of O&M expense, as a fixed charge payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any contributions, above the $10 million, to Salem 1997 O&M expenses up to ACE's estimated share of $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. With return of Unit 2 to full power in September 1997, total O&M expenses related to the Salem Units are expected to be $12.6 million for 1997. Nuclear Plant Decommissioning 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. In a joint filing with PS, the site specific studies were submitted to the BPU and reviewed by the Ratepayer Advocate and Staff of the BPU. As a result of these studies the Company will not request an increase in the annual funding of the decommissioning trust. ATLANTIC CITY ELECTRIC COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements Information pertaining specifically to ACE and its subsidiaries 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 September 30, 1997 and December 31, 1996, AEI had $52.0 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 At September 30, 1997 ACE had $45.9 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 in the amount of $91.1 million paid in March 1997. 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 September 30, 1997 and December 31, 1996 are approximately $959 million and $975 million, respectively. On July 30, 1997, ACE issued $22.6 million aggregate amount of variable rate, tax-exempt pollution control bonds. The principal amount of $22.6 million represents two separate series of bonds: $18.2 million Pollution Control Revenue Refunding Bonds, 1997 Series A due April 15, 2014 (Series A) and $4.4 million Pollution Control Revenue Refunding Bonds, 1997 Series B due July 15, 2017 (Series B). The Series A and the Series B bonds paid an initial weekly rate of 3.4% and 3.5%, respectively. Each subsequent rate will be determined by a remarketing agent. The rates of interest of each series may be changed from time to time to a daily mode, a flexible mode for periods of any duration up to 270 days or a multi-annual mode for periods of not less than 365 days. The proceeds from the sale of the Series A and Series B bonds have been applied,together with other funds, to the September 2, 1997 redemption of $18.2 million aggregate principal amount of 7 3/8% Pollution Control Revenue Bonds of 1984, Series A and $4.4 million aggregate principal amount of 8 1/4% Pollution Control Revenue Bonds of 1987, Series B for a total of $23.9 million. On August 1, 1997 ACE redeemed 200,000 shares, at par, of its $8.20 Series No Par Preferred Stock. Under a mandatory sinking fund requirement 100,000 shares were required to be redeemed and ACE elected to redeem an optional 100,000 additional shares for a total of $20.0 million using short term debt. Atlantic Energy Enterprises, Inc. (AEE) At September 30, 1997 and December 31, 1996, ATE Investments, Inc.(ATE) had outstanding $6.0 million and $18.5 million, respectively, under its $25 million revolving credit and term loan facility. The estimated aggregate fair market value of ATE's $15 million in 7.44% Senior Notes at September 30, 1997 and December 31, 1996 was approximately $15 million. At September 30, 1997 and December 31, 1996, Atlantic Thermal Systems, Inc.(ATS) had outstanding $95.0 million and $42.0 million, respectively, under its revolving credit and term loan facility. This facility has been used for funding the construction of the Midtown Energy Center in Atlantic City, New Jersey which began start-up operation in October 1997. ATS's capital expenditures have been approximately $68.4 million for this project to date. This facility has also been used to satisfy certain associated company payables and for other general corporate purposes, including operating and servicing License Fees as described in the 1996 AEI Annual Report on Form 10-K. The increase in Nonutility Property and Equipment-Net on the Consolidated Balance Sheet is mainly due to the construction of the Midtown Energy Center. 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 five 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. In October, 1997 the NJEDA approved a final bond resolution authorizing the issuance of an additional $18.5 million in limited obligation bonds. ATS will borrow from the NJEDA the proceeds of this issuance for qualifying costs of the Midtown Energy Center, this resolution is subject to New Jersey Board of Public Utilities (BPU) approval. ATS expects to satisfy all the escrow release conditions and obtain BPU approval in mid-November 1997, at which point, the $31 million will be applied to certain qualifying costs incurred during construction of the Midtown Energy Center. ATS, in its pursuit of potential business opportunities throughout the United States, has a potential funding commitment of a $35 million stand-by letter of credit. The funds would be provided from ATS's existing revolving credit and term loan facility. Results of Operations Changes in net income and earnings per share for the periods ended September 30, 1997 versus the corresponding periods of the previous year are as follows: Periods Ended September 30, 1997 Quarter Year-to-Date Net Income 42.7% 40.4% Earnings Per Share 43.5% 40.5% The increases in net income and earnings per share primarily reflect decreased operations and maintenance expenses related to the 1996 Salem Stipulation and increased nonutility income, primarily ATS, for the periods. Utility Revenues of ACE Changes in Operating Revenues-Electric, exclusive of inter-company sales, are disclosed in the following table: Periods Ended September 30, 1997 Quarter Year-to-Date (Thousands of Dollars) Base Revenues $10,466 $ 7,035 Levelized Energy Clause 2,314 15,250 Kilowatt-hour Sales 15,855 (6,995) Unbilled Revenues (2,263) 9,067 Sales for Resale (9,758) (15,881) Other Revenues 1,147 1,141 Total $17,761 $ 9,617 The increase in Base Revenues is primarily due to the $13 million adjustment related to the 1996 Salem Stipulation. This increase was offset in part by Off-Tariff Rate Adjustments (OTRAs). OTRAs are special reduced rates that are being offered, for periods ranging from 5 to 7 years, by ACE to at-risk customers which reduced Base Revenues $3.1 million for the current quarter ended period and $7.5 million for the year-to-date period. Levelized Energy Clause(LEC) revenues for the periods 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 available energy. 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. Periods Ended September 30, 1997 Quarter Year-To-Date Average Average Customer Class Sales Use Cust Sales Use Cust Residential 5.8% 4.7% 1.1% (4.2%) (5.1%) 1.0% Commercial 5.0 2.9 2.0 0.6 (1.1) 1.7 Industrial 6.7 6.5 0.2 2.9 2.3 0.6 Total 5.5 4.3 1.2 (1.2) (2.2) 1.1 The increases in the current quarter residential sales were due primarily to more favorable weather in the summer of 1997 compared to 1996, resulting in higher air conditioner usage. Industrial and commercial sales increases were due to overall economic growth in the region. The year-to-date decrease in residential sales were due primarily to milder winter weather during the first quarter of 1997, resulting in low heating usage. Operating Expenses Total Operating Expenses increased by 4.3% for the current quarter and decreased by 1.1% for the year-to-date when compared to the same periods of the prior year. Excluding depreciation and taxes, Total Operating Expenses decreased by 5.0% for the year-to-date, when compared to the same period of the prior year, 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 lower-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. 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 $29.2 million at September 30, 1997 and by $33.5 million at December 31, 1996. Energy expense decreased by 3.9% for the current quarter and 3.1% for the year-to-date, when compared to the same periods of the prior year. Excluding deferred energy costs, Energy expense decreased by 10.6%, for the current quarter and 6.9% for the year-to-date, when compared to the same periods of the prior year primarily due to reduced market purchases of energy. Sources of ACE's energy for the current period are as follows: Periods Ended September 30, 1997 Quarter Year-to-Date Coal 24% 26% Nuclear 15% 17% Interchanged and Purchased 30% 31% Nonutility Purchased 25% 23% Oil and Natural Gas 6% 3% Total 100% 100% Operations expense increased by 8.5% for the quarter ended and decreased by 9.0% for the year-to-date, when compared to the same periods of the previous year. The increase for the current quarter period reflects the adjustments made during the same period of the prior year as a result of the Salem Station Stipulation. The year- to-date decrease was the result of reduced expenses resulting from the operations and maintenance agreement with Public Service Electric & Gas Company(PS) regarding the Salem Units, as discussed in Note 5, and other cost saving measures instituted by ACE. Maintenance expense decreased by 26.0% for the quarter ended and 34.3% for the year-to-date, when compared to the same periods of the previous year, as a result of reduced expenses associated with the Salem Station agreement with PS, as discussed in Note 5. Federal Income Tax expense increased by 47.8% for the current quarter and 53.7% for the year-to-date, when compared to the same periods of the previous year, and Taxes Accrued on the Consolidated Balance Sheet increased significantly due to the decrease in operations and maintenance expense, as well as, increases in other income as discussed below, which resulted in an increase of taxable income for the quarter and year-to-date periods. Other Income Other Income increased significantly for the current quarter and year-to-date periods when compared to the same periods of the previous year, due primarily to an increase in nonutility earnings as discussed in Nonutility Activities. New Jersey Energy Master Plan 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 recommendation for the implementation of a phase-in plan for retail competition would span a twenty-one month period providing choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. The plan required each electric utility in the state to file complete restructuring plans, stranded cost filings and unbundled rate filings by July 15, 1997. The plan would allow utilities the opportunity to recover stranded costs on a case-by- case basis, with no guarantee of 100 percent recovery of eligible stranded costs. ACE filed its response to the BPU on July 15, 1997. ACE's restructuring filing met the BPU's recommendations for phase-in of retail electric access based on a first-come, first-served basis, proposing choice to 10% of all customers beginning October 1, 1998 and to 100% by July 1, 2000. Customers remaining with ACE will be charged a market-based electricity price beginning October 1, 1998. The restructuring filing included a two-phased approach to future rate reductions of approximately 5%. In an October 31, 1997 letter to the BPU, ACE added specificity to the framework set out in the restructuring filing with regard to steps ACE plans to take to meet the BPU's rate reduction and restructuring goals. First, specific, definable cost reductions of approximately 4% after 1998 were outlined. Further, ACE offered that an appropriate resolution of the merger proceedings will allow ACE to reduce its rates, due to the merger, of approximately 1.25% upon consummation of the change in control. In addition, ACE's current estimate showed that, through the use of securitized debt for the full amount of stranded costs associated with its own generation assets, a further rate decrease of up to 2% was possible based on appropriate legislation and orders of the BPU. Finally, ACE estimates that the results of good-faith negotiations with the nonutility generators could provide a reduction of up to an additional of 1.75%. In summary, ACE outlined a total rate reduction of 9% by the end of the transition. Under the restructuring filing ACE specified its total stranded cost estimated to be approximately $1.3 billion, of which $965 million is attributable to above-market Nonutility Generation (NUG) Contracts. The remaining amount, approximately $340 million, is related to wholly and jointly-owned generation investments. The restructuring filing supports full recovery of stranded costs, which ACE believes are necessary to move to a competitive environment. The restructuring filing is currently in the discovery phase. During this phase, ACE revised the estimated stranded cost amounts to be approximately $911 million attributable to NUG contracts and approximately $415 million related to wholly and jointly-owned generation investments. The Administrative Law Judge is expected to render a decision in May 1998. Pending Merger On June 26, 1997, the Company and Delmarva Power & Light (DP&L) jointly announced an enhanced retirement offer (ERO) and separation program that will be utilized to achieve workforce reductions as a result of the merger. (Refer to Note 1 for merger discussion.) The total cost to the Company for these programs, as well as, the cost of executive severance, employee relocation and facilities integration is estimated to range from $38 million to $48 million. These costs are contingent upon the consummation of the merger. ACE will be required to recognize these costs through expense in accordance with generally accepted accounting principles (GAAP). The actual cost to the Company and ACE will depend on a number of factors related to the employee mix as well as the actual number of employees who will be separated. Accounting For Deregulation ACE currently accounts for the economic effects of regulation as specified by Statements of Financial Accounting Standards No. 71 (SFAS 71) which provides guidance on circumstances when the economic effect of a regulator's decision warrants different application of GAAP as a result of the ratemaking process. At this time, ACE continues to meet the criteria set forth in SFAS 71 and has presented these financial statements in accordance therewith. The Financial Accounting Standards Board (FASB), through the Emerging Issue Task Force (EITF), has recently set forth guidance intended to clarify the accounting treatment of specific issues associated with the restructuring of the electric utility industry through EITF Issue No. 97-4, "Deregulation of the Pricing of Electricity-Issues Related to the Application of FASB Statements No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101, Regulated Enterprises-Accounting for the Discontinuation of application of FASB Statement No. 71" (EITF No. 97-4). The consensus reached in EITF No. 97-4 as to when an enterprise should stop applying SFAS 71 to a separable portion of its business whose pricing is being deregulated, is defined as "when deregulatory legislation or a rate order (whichever is necessary to effect change in the jurisdiction)is issued that contains sufficient detail for the enterprise to reasonably determine how the transition plan will effect the separable portion of its business" (e.g. generation). Consensus was also reached "that the regulatory assets and regulatory liabilities that originated in the separable portion of an enterprise to which SFAS 101 is being applied should be evaluated on the basis of where (that is, the portion of the business in which) the regulated cash flows to realize and settle them, respectively, will be derived." Additionally, the "source of the cash flow approach adopted in the consensus should be used for recoveries of all costs and settlements of all obligations (not just for regulatory assets and regulatory liabilities that are recorded at the date Statement 101 is applied) for which regulated cash flows are specifically provided in the deregulatory legislation or rate order". At this time ACE cannot predict with certainty when it will stop applying SFAS 71 for its generation business. ACE also cannot predict the impacts on its financial condition as a result of applying SFAS 101. The outcome will be dependent upon when a plan is approved and the level of recovery of stranded costs allowed by the BPU. If assets require a write-down as a result of the application of SFAS 101, ACE may need to record an extraordinary noncash charge to operations that could have a material impact on the financial position and results of operations of ACE. Salem Nuclear Generating Station ACE is a 7.41% owner of the Salem operated by PS. Salem Units 1 and 2 were taken out of service on May 16, 1995 and June 7, 1995, respectively. PS advised ACE that the Salem restart plan, which encompassed a comprehensive review and improvement of personnel, process and equipment issues has been completed for Salem Unit 2. On August 6, 1997, the Nuclear Regulatory Commission (NRC) authorized the restart of Salem 2 and stated that it would continue to closely monitor activities at Salem. Salem Unit 2 returned to service on August 30, 1997. The unit reached 100% power on September 23, 1997. PS has advised ACE that the installation of Salem Unit 1 steam generators has been completed and the unit is expected to return to service during the first quarter of 1998. Restart of Salem Unit 1 is also subject to NRC approval. The outage of Salem Unit 1 causes ACE to incur replacement power costs of approximately $700 thousand per month. As previously discussed, ACE's replacement power costs for the current outage, up to the agreed-upon return-to-service date of June 30, 1997, will be recoverable in rates in ACE's 1997 LEC proceeding. Replacement power costs incurred after the agreed-upon return-to-service date for Salem Unit 1 will not be recoverable in rates. ACE has incurred $8.1 million in non-recoverable replacement power costs to date related to Salem. Effective December 31, 1996, ACE entered into an agreement with PS for the purpose of limiting ACE's exposure to Salem's 1997 operation and maintenance (O&M) expenses. Pursuant to the terms of the agreement, ACE will pay to PS $10 million of O&M expense, as a fixed charge payable in twelve equal installments beginning February 1, 1997. ACE's obligation for any contributions, above the $10 million, to Salem 1997 O&M expenses up to ACE's estimated share of $21.8 million, is based on performance and directly related to the timely return and operation of Salem Units 1 and 2. With return of Unit 2 to full power in September 1997, total O&M expenses related to the Salem Units are expected to be $12.6 million for 1997. Nuclear Plant Decommissioning 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. In a joint filing with PS, the site specific studies were submitted to the BPU and reviewed by the Ratepayer Advocate and Staff of the BPU. As a result of these studies the Company will not request an increase in the annual funding of the decommissioning trust. Year 2000 The Company's Information Technology (IT) Department, through the development of a project team, has developed a strategy to address and correct the year 2000 problem (Y2K). An inventory of the Company's computer applications, hardware and system software and infrastructure has been completed. An initial assessment of these systems has been made as they relate to the Y2K. The Company believes that is it taking the necessary steps to minimize the risk of an interruption of service to it's operations and customers. Nonutility Activities-AEI Nonutility activities are reflected in AEI's Other Income and Expense line item on the Consolidated Statement of Income. AEI AEI parent only resulted in net losses of $2.0 million and $2.1 million for the year-to-date periods of the current year and the prior year, respectively. 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. ACE ACE's new nonutility activities primarily include nonregulated wholesale electric market transactions, special lighting and other energy services programs. These current nonutility activities resulted in $4.3 million net income for the current year-to-date ended period. AEE Operations of AEE and subsidiaries resulted in net income of $1.6 million for the year-to-date compared to net income of $0.5 million for the same period of the prior year. The current net income is primarily due to ATS's casino heating and cooling service contracts. Also contributing to the nonutility net income was a reduction of ATE's interest expense. 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. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation, provided 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 made in this report. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "will", "anticipate," "estimate," "expect", "objective", and similar expressions are intended to identify 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; and increasingly competitive energy marketplace; sales retention and growth; federal and state regulatory actions; costs of construction; operating restrictions; increased costs and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; and credit market concerns. The Company undertakes 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 Litigation Reform Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Litigation Reform Act. 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 and Part II, Item 5-Other Information on Form 10- Q for the quarter ended June 30, 1997 for Atlantic Energy, Inc.(AEI) and Atlantic City Electric Company (ACE). In addition, certain new information is contained herein. As previously reported in the 1996 Form 10-K, the Salem Nuclear Generating Station (Salem) co-owners filed a Complaint in February 1996 in the United States District Court for the District of New Jersey against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators, seeking damages to recover the cost of replacing the steam generators at Salem. In accordance with the court's schedule, Westinghouse filed a motion for summary judgment on October 1, 1997. Also in accordance with the court's schedule, ACE and the three co-owners of Salem will file their opposition to that motion for summary judgement. The litigation is continuing in accordance with the schedule established by the court. Item 5. Other Information Environmental Matters As previously reported, the New Jersey Department of Environmental Protection (NJDEP) announced that it intended to introduce rules to reduce nitrogen oxide (NOx) emissions by 90% from the 1990 levels by the year 2003. On September 15, 1997 the NJDEP filed its proposal with the Office of Administrative Law. In its proposal, entitled "NOx Budget Program", N.J.A.C. 7:27-31, the NJDEP prescribed participation of New Jersey's large combustion sources in a regional cap and trade program designed to significantly reduce emissions of NOx. In effect, the proposed regulation would require New Jersey to become the first northeastern state to require NOx reductions of 90% from the 1990 levels, by the year 2003. On October 24, 1997 ACE testified in opposition to the proposal. ACE cannot predict the ultimate outcome of this matter. Pending Merger As previously reported, regulatory approvals of the planned merger between AEI and Delmarva Power and Light (DP&L) have been obtained from the Federal Energy Regulatory Commission (FERC), the Maryland Public Service Commission (MPSC) and the Virginia State Corporation Commission (VSCC). On September 23, 1997, the Delaware Public Service Commission (DPSC) also approved the merger. The settlement agreement with the DPSC will result in a rate decrease of approximately $7.5 million or 1.5% of Delaware electric revenues beginning with the closing of the merger. This represents an approximate 50/50 sharing of the merger savings between customers and shareholders in the first year. Additional rate decreases for electric and natural gas customers will be phased-in over the second and third years following the close of the merger. On October 6, 1997, the Pennsylvania Public Utilities Commission also approved the merger. The merger still requires the approval of the New Jersey Board of Public Utilities, the Nuclear Regulatory Commission, and the Securities and Exchange Commission (SEC). The Company expects the regulatory approval process to be completed by year-end or early 1998. On October 27, 1997 South Jersey Gas Company (SJG) filed a motion to intervene in the merger application with the SEC, seeking a formal hearing and additional time for filing further comments. The SJG motion contends that Conectiv, in acquiring the gas properties of DP&L and operating as a combination utility, is in violation of Section 10(c)(1) and Section 11 of the Public Utility Holding Company Act of 1935 ("Act"). ACE can not predict the outcome of this matter but strongly believes that the SJG motion is without merit. Nuclear Generating Station Developments Salem Nuclear Generating Station ACE is a 7.41% owner of Salem operated by Public Service Electric and Gas (PS). Salem consists of two 1,106 megawatt (MW) pressurized water nuclear reactors representing 164 MWs of ACE's total installed capacity of 2,386 MWs. (Refer to Note 5 for additional information) As previously reported, a predecisional enforcement conference was held on July 8, 1997, with the NRC to discuss apparent violations at Salem. These apparent violations were identified in May and June, 1997, and concern emergency core cooling system switchover and related residual heat removal system (RHR) flow issues, and Appendix R (fire protection) issues. PS has advised ACE that, in a letter dated October 8, 1997, the NRC informed PS that a Level III violation was cited for the issues surrounding the RHR system and Level IV violations were cited for the two Appendix R issues. There was no civil penalty issued by the NRC. Hope Creek Station As previously reported on Form 10-K for 1996, in 1990 General Electric (GE) reported that crack indications were discovered near the seam welds in the core shroud assembly in a GE boiling water reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions, including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. PS, the operator of the Hope Creek Nuclear Generating Station (Hope Creek), is participating in the GE BWR Owners Group to evaluate this issue and develop long-term corrective action. During its 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. ACE has been advised that due to Hope Creek's operating time, it now falls into the intermediate susceptibility category. PS also advised ACE that another inspection has been performed by PS during Hope Creek's current refueling outage in September 1997, and preliminary results from that inspection have been deemed to be satisfactory. ACE has also been advised that a predecisional enforcement conference was held with the NRC on August 12, 1997, to discuss apparent violations at Hope Creek relating to the installation of cross-tie valves in the residual heat removal system at Hope Creek in 1994. On October 20th, the NRC issued a severity level III violation for this matter. There was no civil penalty issued by the NRC. ACE has also been advised that modifications to Hope Creek's emergency core cooling systems (ECCS) suction strainers are also required per NRC Bulletin 96-03. PS has advised ACE that they have installed a portion of the required large capacity passive strainers during the current Hope Creek refueling outage which began in September 1997. PS is currently seeking NRC approval for deferral of the installation of the remaining strainers until the next refueling outage scheduled for February 1999. It is unknown what further actions the NRC may take in this matter. PS has also advised ACE that a predecisional enforcement conference has been scheduled for December 9, 1997 to discuss two allegations concerning security program issues which occurred at Salem and Hope Creek in 1996. ACE cannot predict what other actions, if any, the NRC may take in this matter. Item 6. Exhibits and Reports on 8-K Exhibits: See Exhibit Index Attached Reports on Form 8-K: Current Report on Form 8-K was filed dated July 15, 1997 describing the Company's restructuring filing as required by the BPU's Energy Master Plan. *************************************************** 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: November 12, 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: November 12, 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 September 30, 1997. EX-27 2
UT 0000008192 ATLANTIC CITY ELECTRIC COMPANY 3-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 1,788,229 88,786 273,897 321,333 0 2,472,245 54,963 489,647 256,966 801,576 23,950 100,000 758,808 45,900 0 0 58,575 10,000 36,660 743 636,033 2,472,245 300,338 25,454 214,976 240,430 59,908 5,187 65,095 16,110 47,541 1,000 46,541 20,214 0 0 0 0
EX-27 3
UT 0000806393 ATLANTIC ENERGY, INC. 3-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 1,788,229 306,523 293,776 351,357 0 2,739,885 562,684 0 246,258 808,942 23,950 100,000 786,308 45,900 0 0 211,575 10,000 36,660 743 715,807 2,739,885 297,367 25,454 214,972 240,426 56,941 8,079 65,020 16,110 48,910 2,444 46,466 20,214 0 0 0.89 0.89
-----END PRIVACY-ENHANCED MESSAGE-----