ML18094B391
| ML18094B391 | |
| Person / Time | |
|---|---|
| Site: | Salem, Hope Creek  |
| Issue date: | 12/31/1989 |
| From: | Huggard E ATLANTIC ENERGY, INC. |
| To: | |
| Shared Package | |
| ML18094B389 | List: |
| References | |
| NUDOCS 9004160160 | |
| Download: ML18094B391 (52) | |
Text
-NOTICE-THE A TI ACHED FILES ARE OFFICIAL RE-CORDS OF THE RECORDS & REPORTS MANAGEMENT BRANCH. THEY HAVE BEEN CHARGED TO YOU jFOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS & ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.
PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.
REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.
-NOtlCE-ATLANTIC ENERGY
~
F I ANCIAL HIGHLIGHTS
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Results of Operations 1989-1987 Earnings Per Common Share Dividends Paid Per Common Share Book Value Per Common Share Return on Average Common Equity Electric Operating Revenues ($000)
Operating Expenses ($000)
Net Income ($000)
Utility Cash Construction Expenditures ($000)
Total Assets ($000)
Sales of Electricity (KWH) (000)
Price Paid Per KWH-(All Customers)
Total Electric Customer Accounts (Year End)
Number of Shareholders-Common Stock (Year End)
Number of Atlantic Electric Employees (Year End)
Atlantic Energy Earnings & Dividends Paid Per Share of Common Stock 4.03
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3 68
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'85 I *1 Earnings I I Dividends
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'86 3.00 2.60 2.65
'87 2.82 2.77
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'88
'89 1989 3.74 2.82 28.54 13.640/o
$ 705,020
$ 570,275 80,964
$ 145,081
$1,864,461 7,617,784 9.161e 444,018 43,383 2,021 4 ---
3 2
In Dollars
% Change
% Change 1989-1988 1988 1988-1987 1987 1.6 3.68 (8.7) 4.03 1.8 2.77 4.5 2.65 5.1 27.16 5.6 25.71 (4.1) 14.22%
(11.6) 16.09%
4.3
$ 675,859 4.3
$ 648,173 3.1
$ 553,080 3.7
$ 533,500 12.2 72,171 (2.2) 73,765 14.l
$ 127,099 24.2
$ 102,324 12.3
$1,660,286 10.7
$1,499,381 3.6 7,350,280 4.8 7,014,400 1.2 9.0551t 2.5 8.8331t 2.2 434,262 3.1 421,251 (2.5) 44,473 (2.4) 45,586 (3.4) 2,092 (2.6) 2,148 Atlantic Energy Market Price Per Share of Common Stock 37.37 28.50
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'85
'86 32.75 30.62
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'87
'88
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38.50
'89 40 30 ----
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10 Year-End Dollars 4
Contents Letter to Shareholders......... 1 A Personal Note......... 3 Highlights of the Year......... 4 The Marks of Success......... 5 Atlantic Electric's Service Territory......... 14 Atlantic Electric's Customers At-A-Glance......... 15 Financial Information:
Management's Discussion and Analysis of Financial Condition and Results of Operation......... 16 Report of Management......... 22 Independent Auditor's Report......... 23 Report of the Audit Committee......... 23 Consolidated Statement of Income......... 24 Consolidated Statement of Cash Flows......... 25 Consolidated Balance Sheet......... 26 Consolidated Statement of Changes in Common Shareholders' Equity......... 28 Notes to Consolidated Financial Statements......... 29 Statistical Review 1989-1984......... 42 Investor Information......... 43 Corporate Officers......... 44 Board of Directors......... 46
TO OUR SHAREHOLDERS
]. L. Jacobs E. D. Huggard 1111111111 We are very proud to report that 1989 was another outstanding year for your Company! Earnings per share were
$3.74, representing our second best earnings level ever, and comparing favorably with the 1988 per share earnings of
$3.68. In June, your Board of Directors increased the regular quarterly dividend to 72 cents, an increase of three cents per share. This brings the annual dividend rate to $2.88 and, for 37 consecutive years, dividends paid per share have increased.
Our utility subsidiary, Atlantic Electric, deserves the credit.
New records were set for sales, peak load and the number of customers served. In 1989, kilowatt-hour sales surpassed the 7.6 billion level, a 3.6% increase over 1988. Peak demand reached 1,700 megawatts, a 3.9% increase over 1988. Almost 11,000 new customers were added to the utility's system, representing an increase of 2.6%.
Our utility customers continue to enjoy relatively stable rates. Contributing to this success has been our diversity of low-cost sources of energy: In each of the last eight years, more than three-quarters of our customers' energy requirements have been provided from coal and nuclear sources.
The jointly-owned Peach Bottom nuclear generating units are now back on-line. Philadelphia Electric Company, the operator, has been successful in demonstrating to the Nuclear Regulatory Commission its ability to safely manage, restart and operate the units. With the Peach Bottom outages con-tinuing in 1989, stipulated revenue credits to our utility customers for the year totaled $9. 7 million. As a result, earnings per share were reduced by about 30 cents. The litigation against Philadelphia Electric seeking to recover damages associated with the NRC's March 1987 shutdown of the Peach Bottom units is continuing.
The growth in our service territory over the past few years has made full use of our utility system's resources. We now must build additional generating, transmission and distribution capacity. Our construction program over the next three years will involve expenditures totaling more than $500 million.
This reflects Atlantic Electric's commitment to serve and its role in supporting the continuing economic progress of Southern New Jersey. In turn, we look toward that economic progress as the opportunity for future success as a utility.
As we embark on a new decade, we recognize and are pre-pared to manage the challenges confronting the electric utility business. We believe that, in the years ahead, society will be placing heightened emphasis on the preservation of the environment. That has been, and will continue to be, a major priority of ours. Conservation of valuable non-renewable resources will be fostered by programs to encourage the wise use of electricity by customers and by shifting usage from peak load periods. Intending our utility to be a model for the 1990s, we will demonstrate that resolution of environmental concerns while providing for our customers' energy require-ments is possible and is, in fact, the key to future success.
There will be challenges associated with providing additional generating capacity to meet the needs of a growing service
area. In recent years, the planning process has been significantly affected by increasing layers of regulation and the emergence of nonutility sources of power generation. Along with other utilities in the State, we began preliminary discussions with public officials to review the regulatory and utility planning procedures with the intent of ensuring sufficient, affordable power in the future. We will continue with our efforts to develop a coherent planning framework with the governmental officials who recently have been elected and appointed.
Over the next few years, Atlantic Electric expects several major cogeneration projects to come on-line within its service area. These projects, while providing important additional generating capacity, have given rise to new strategic issues. We have taken steps to refine our planning procedures to allow for contingencies affecting projects controlled by others. In addition, we have determined that efficient, customer-centered marketing programs will be important in replacing kilowatt-hour sales displaced by the cogeneration projects.
The future well-being of our utility will depend on the ability to effectively manage growth, enhance productivity and control costs. Keeping rates to customers stable will be receiving added emphasis. Right now, we are working with the regulators on a plan which is intended to recover costs of a purchased power arrangement with Philadelphia Electric Company, while moderating the rate impact over the next few years.
As you can imagine, these challenges at the utility will be keeping us busy, and our talents and energies are going to be concentrated on making Atlantic Electric successful in the new decade. We anticipate that the nonutility subsidiaries of Atlantic Energy will represent a small part of our total business picture over the foreseeable future.
In 1989, ATE Investment, Inc. showed a modest profit through its activities in leveraged lease transactions. Its lease portfolio now includes three commercial aircraft and two containerships. Atlantic Southern Properties, Inc. com-pleted improvements to its commercial office and warehouse complex and, for the time being, will devote its efforts to the further development of that property. Atlantic Generation, Inc. has partnership interests in various cogeneration projects.
One such project is a promising industrial cogeneration facility in Atlantic Electric's service territory. Financing arrange-ments have been completed and this investment should prove beneficial to our utility customers and our shareholders.
However, development costs associated with AGI during 1989 principally are responsible for the loss of nine cents per share associated with the nonutility subsidiaries.
The active involvement of an outstanding team of Directors continued in 1989. We'd like to take this occasion to note the forthcoming retirement of Irving Kessler this April. Irv has been a Director since 1980 and has never missed a meeting!
With his unique vision and good humor, he has shared with us his extensive experience in business and technology. Carole St. Mark, who became a Director of the Company in 1989, 2
will not be standing for re-election this April in view of her added professional responsibilities. We have quickly come to value her expertise and strategic insight. This month, Cyrus Holley joined the Board of Directors. He brings to the Board a wealth of executive and engineering experience.
To Irv and Carole we offer our best wishes, and to Cyrus we extend a warm welcome.
We want to take this opportunity to honor John Feehan as he plans for retirement from the Board this April. John joined Atlantic City Electric Company in 1952, and became President in 1973. He became Chairman of the Board of Atlantic Electric in 1983, and has served as Chairman of the Board of Atlantic Energy from its creation in 1987 until the beginning of this year. In keeping with his transition plans, John will continue as a Director of the Company until April.
The success of Atlantic Electric in responding to the energy crises of the 1970s and the changes in the utility industry during the 1980s reflects John Feehan's integrity, vision and untiring dedication. He has earned the respect and admiration of executives throughout the utility industry, and he achieved national recognition for Atlantic Electric as Utility of the Year during his presidency. His many civic activities and well-deserved awards have brought added Company recognition and pride. John has been an inspired and inspiring leader. We are very mindful that the strong Company he established for us will be equal to the challenges ahead, and that our success will continue to bear his signature.
For the Board of Directors, z I/
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E.D. Huggard C hairman and Chief Executive Officer J.L.Jacobs President January 24, 1990
A P E R S 0 N A L
N 0 T E JD. Feehan 3
Ill.Ill As I look forward with anticipation to my April retirement from the Board of Atlantic Energy, the domi-nant thought that comes to my mind is "The Company is in good hands!' From the Company's earliest existence as an independent utility in the 1950s, it has had a tradition of developing the management of the future. We have capitalized on our size by developing people with broad backgrounds who have grown with varied responsibilities and new challenges. This, combined with a dedicated, involved Board of Directors and the greatest employees a company could ever hope for, enables me to assure you, our shareholders, that the Company truly is in good hands!
It is well that we have this fine team in place, because the challenges and changes will be as great in the future as they were in the past. We had our Ayatollah's and our Arab Oil Embargoes-they will have their challenges with cogenera-tion, regulation and meeting the future needs of our customers in a timely and environmentally caring way.
Surely there will be other unforeseen challenges out there in the future, all of them very tough problems. Will they be up to them? You can bet they will!
My father always said that a person spends the greatest part of his waking hours with his job, and so it is important to do work that is meaningful, and to be involved with good people whom you could respect and enjoy. Well, my work with Atlantic Electric certainly fulfilled that objective.
Providing life-sustaining and life-enhancing electricity to over a million people is clearly a meaningful activity! And the people could not have been nicer.
We have been blessed with supportive shareholders who have turned many an Annual Meeting into a "love-in!' Our customers have been through the rocky times of the energy crises with us; and when we took the time to explain to them what was happening, they were understanding.
Naturally, they didn't stage too many "love-ins;" but they were understanding because we cared enough to explain those dramatic changes to their energy supply, and because we worked with them to mitigate the effects.
But my fondest thoughts are for the people of Atlantic Energy: the officers, managers and employees who keep this Company alive and well in Southern New Jersey. It has been wonderful working with them and for them. They very kindly allowed me to lead them for a few years, and they made every day over these 37 years a joy. I salute them and I thank them.
J. D. Feehan
HI G HLI G HT S O F THE YE A R UTILITY OPERATIONS A new utility system peak demand of 1, 700 megawatts was recorded on August 4, 1989, a 3.9% increase over the 1988 peak demand.
Capacity reserve margin at time of peak was 9.6%.
Atlantic Electric's five jointly-owned nuclear units operated at a combined ca-pacity factor of 51.9% in 1989.
The three jointly-owned nuclear units located in New Jersey operated at a combined capacity factor of 71.5%.
Coal and nuclear sources of energy together provided over 80% of customers' total energy requirements in 1989 saving Atlantic Electric's customers about $93 million compared to the use of oil.
Cash construction expen-ditures in 1989 totalled $145.1 million, plus $2.8 million Allowance for Funds Used During Construction (AFDC).
In 1989, construction was on-schedule for a new 76-megawatt combustion turbine peaking unit that is expected to serve the peak demand in the summer of 1990. The cost to build the unit is approximately $36.5 million, plus $2.4 million in AFDC.
An arrangement with Baltimore Gas & Electric that makes use of a portion of their transmission capability saved Atlantic Electric's customers approximately $3.7 million in 1989 by allowing Atlantic Electric to import low-cost energy from the Midwest.
OTHER POWER SUPPLY Atlantic Electric has entered into five contracts for the pur-chase of 569 megawatts of capacity and energy from nonutility sources. Cogen-erators, primarily chemical plants and petrochemical refineries located in Atlantic Electric's service territory and a municipal trash burner located outside the service territory, are expected to supply capacity and energy, some of which is expected to be available in 1991.
In 1989, almost 4,000 residen-tial households participated in Atlantic Electric's load management program that reduced the demand on the utility system at the time of peak by about four megawatts.
It is expected that in 1990, about 15,500 residential households will participate and reduce demand for elec-tricity by about 15 megawatts.
In 1989, several business customers participated in load reduction programs that reduced demand at time of peak by 39 megawatts.
4 REGULATORY AND FINANCIAL EVENTS In March 1989, a stipulation relating to the Peach Bottom outage was approved by the BPU that provided for revenue credits to Atlantic Electric's customers during 1989 of $9.7 milllion. This reduced net income after taxes by $6.4 million or approximately 30 cents per share.
In January 1990, Atlantic Electric and several parties to its onging Levelized Energy Clause (LEC) pro-ceeding, including the BPU staff, submitted to the BPU a Joint Position that, if approved, would provide rate treatment for the four-year purchase of capacity and energy from Philadelphia Electric Co. Under the terms of the Joint Position, base rate revenues would increase by $41.6 million effective June 1, 1990.
Simultaneously, LEC revenues would be decreased by an identical amount. Atlantic Electric also agreed that it would not, except in certain circumstances, further increase base rates before October 1, 1992.
In October, Moody's Investors Service lowered the ratings on Atlantic Electric's First Mortgage Bonds and secured Pollution Control Bonds to A 2 from A 1 and its ratings on Atlantic Electric's debentures to A 3 from A 2.
In May, Atlantic Energy sold 2.2 million new shares of additional Common Stock through an underwriter at a price to the public of $32.75 per share. Proceeds from the sale were used to help with the financing of Atlantic Electric's construction pro-gram. In addition, $11.7 and
$.3 million of common equity was raised through the opera-tion of the Dividend Reinvest-ment and Stock Purchase Plan and Atlantic Electric's Employee Stock Ownership Plan, respectively.
In September, Atlantic Electric sold $135 million of First Mortgage Bonds 9V4 %
Series due 2019 at a price of 97.631% plus accrued interest. Proceeds from the sale were applied towards its ongoing construction pro-gram, to the repayment or retirement of outstanding indebtedness and for other general corporate purposes.
On December 20, 1989, Atlantic Electric called for redemption of all its out-standing First Mortgage Bonds 11Va% Series due 1993 at a price of 101.52% of the principal amount outstand-ing, plus accrued interest.
THE MARKS OF SUCCESS The future success of Atlantic Energy is linked directly to how well its utility sub, sidiary, Atlantic Electric, performs in an evolving business environment. The profound changes that have occurred in the utility industry in recent years have been driven by a desire to make the price of electricity competitive. From these changes, there has begun to emerge a new, competitive energy marketplace.
Atlantic Electric knows that to be successful in this market, customers must receive value and service. By offering a product that is com, petitively priced and reliable, we support the businesses and workers in Southern New Jersey in their efforts to gain a competitive advantage in national and international markets.
The changes in the utility industry are still underway. Our fortunes are tied to how well we deal with these changes and how effective we are in controlling costs. Customers deserve high quality, reliable service and shareholders' investments must be managed prudently.
These are the tasks at hand. And, they are made more challenging by the uncertainties of regulation. We are equal to the work ahead of us.
In the sections that follow, we share Atlantic Electric's philosophy of what it takes to be successful. The marks of success are many-to provide ample energy at competitive prices, to be our customers' choice for energy services, and to give customers the best possible service from dedicated, talented employees. Accomplish, ments in each of these areas will bring the ultimate mark of success-rewarding share, holders with a fair and profitable return for their faith in the Company.
Our ability to manage diverse energy sources and to provide ample, reliable energy at competitive prices will "keep the lights on" for customers.
7 We know from experience how to provide customers with ample electricity at competitive prices. Our plan is a straightforward one: By creating a diverse mix of generating sources and by using different types of fuels, we promote the reliability and affordability of electricity. We call this strategy-strength through planned diversity. It will continue to serve us well in the future.
Central to our strategy is the knowledge that Atlantic Electric is solely responsible for assuring an electric supply to its service territory in Southern New Jersey. We have demon-strated our commitment to that responsibility with the construction of a 76-megawatt combustion turbine unit that will be ready to serve the peak summer demand of 1990. And, if the forecast for customers' energy demands indicates that additional peaking capacity is needed, we are preparing to meet that need with utility-supplied generation. The con-struction of large, new generating facilities in New Jersey now involves some untested and complex regulatory pro-cedures. In 1989, Atlantic Electric was the first utility to start the regulatory approval process, requesting a contingent Certificate of Need that would permit the construction of a 220-megawatt combined cycle combustion turbine unit in Cumberland County, New Jersey. The unit could be put into service as early as 1994. It would be built in the event that some nonutility power projects under contract are not com-pleted as planned or the demand for electricity grows faster than expected. These plans have been made with the realization that, even with aggressive conservation and load management efforts, new generating sources will be essential to support the growing economy of Southern New Jersey.
The new, competitive energy marketplace is evolving.
Atlantic Electric participates as a buyer of energy generated by independent power producers and cogenerators when cus-tomers can benefit from the standpoint of reliability and cost.
Our plans for future sources of energy include the purchase of over 500 megawatts of capacity and energy from five potential nonutility sources by 1994 and participation in an annual, statewide competitive bidding procedure for energy supplied by nonutilities. An affiliate of Atlantic Electric, Atlantic Generation, Inc., also participates in the competitive energy marketplace as a developer of energy projects with other experienced partners. One such project is a large cogen-eration facility in Atlantic Electric's service territory. At completion, it would supply capacity and energy to Atlantic Electric.
The emergence of facilities developed and operated by nonutilities has added to the complexity and diversity of capacity planning. We regularly evaluate all future energy supply options, including an assessment of the progress of nonutility project development. We monitor the expected energy needs of our customers as well as any changes in their patterns of energy consumption. This process allows Atlantic Electric to develop contingency plans and to make changes to its capacity plan in a timely, efficient manner.
To address the complexities of today's energy planning process, Atlantic Electric has joined with other utilities in New Jersey and is working with the Governor's office to assure that New Jersey gets needed additional sources of environ-mentally acceptable energy. We believe that the State's elec-tric utilities must be given the leeway to make the decisions and commitments necessary for secure power supply in the years to come.
Our long history of planning diversity into our energy sources has equipped us to manage the uncertainties of the energy marketplace. Our fundamentals remain the same-providing reliable energy at competitive prices. We have in place flexible, creative planning methods that enable us to deal with the changes in regulation and the marketplace of energy supply.
In 1989, Atlantic Electric developed and refined its commitment to become the customers' choice for energy services. We have set our plan in motion by committing financial and staffing resources to create a new marketing group. This organization is a consolidation of recent and new marketing efforts and carries important responsibilities:
- to learn more about our customers and their needs
- to find ways to help customers control their energy costs
- to find ways to help customers use energy wisely To learn more about our customers, marketing representa-tives are developing expertise in specific industries so that they can become more knowledgeable energy consultants.
Their efforts are supported by Atlantic Electric's officers who are meeting with large industrial and commercial customers to better understand their business and technical needs and future plans. We're helping these same customers keep informed about energy developments and ways to control their energy costs by sponsoring conferences that feature developments in thermal storage, energy management, lighting, environment conditioning and power generation.
Under a program now being introduced, some of our residential customers have a choice in the price they pay for energy. Time of Use rates enable these customers to cut their energy costs by choosing to use electricity at off-peak times.
In a test run during 1989, one family reduced their electricity bill by one-third by using energy at off-peak times. We are extending this choice to a broader base of customers. Other commercial and industrial customers have chosen to partici-pate in load reduction programs to control their energy costs.
These programs give price incentives to customers who allow us to suspend their electricity usage or who generate their own power during periods of peak demand. In 1989, market-ing representatives worked together with customers and were successful in getting enough participation to result in a 39-megawatt reduction to peak load. Not only did they exceed the corporation's goal for 1989, but they almost doubled the amount of load reduction from 1988!
8 By offering customers ways to conserve and to save on their energy costs, Atlantic Electric will become the customers' choice for energy services.
Efficient, well-trained employees set things in motion to provide quality service to customers.
11 Programs such as off-peak lighting and certain energy efficient appliances are already available to customers. Other programs, including high efficiency electric water heating, space conditioning service and energy efficient homes may someday give customers added choices to save money and use energy more efficiently. Over the years, Atlantic Electric has developed a good reputation and earned credibility with our customers. We're building on that strength for the benefit of all.
_,,,. Our commitment to providing quality service to customers has been a guiding principle for over 100 years.
As our customer base has grown and customers' needs have changed, we have made use of new technologies, changed the organizational structure and realigned responsibilities to give more meaningful, effective service. Providing the kind of quality service that we've set as our standard requires all of us to "wear a lot of hats" to get the job done.
In 1989, staff members handled over one-half million telephone calls, completed over five million meter readings and responded to thousands of written requests. During the year, they connected almost 11,000 new customers to our system, about the same number of new customers added in each of the last five years. What is notable about 1989 is that all of these services were performed with a smaller, better-trained workforce who worked together to improve the quality of service offered.
We measure the quality of service to customers in many ways. In 1989, the average number of times customers were without electricity-called an outage-declined from 1988.
And, the average time of each outage decreased. Customers' satisfaction with our service has improved: The number of complaints filed with the state regulators declined in 1989 and was below the average of other electric utilities in New Jersey.
Customers may never see another side of our service, the side that deals with the way we plan for future growth. We recently have developed long-range, comprehensive trans-mission and distribution master plans. These plans will require several years to implement and are intended to improve reliabil-ity for our existing customers. These plans also will help us accommodate future growth in a more cost-effective manner.
In our experience, high quality customer service comes from employees who have a say in the way they handle their jobs. Their hands-on, problem-solving skills have made the reorganization and consolidation of the customer service section a success. For example, employees combined their knowledge and skills to research, evaluate and select a com-puterized meter reading system in 1989. The system they recommended is now being installed.
We believe that our success, both now and in the future, is the result of being attentive to customers and planning for their needs. With the active, coordinated involvement of office and field personnel, customer service is in good hands.
Looking to the future, it will be the exceptional utility that prospers in an environment of competition, changing regulation and emerging technologies. We are confident of Atlantic Electric's success because of the special men and women who make up the utility. Our people have stream-lined the organization, developed an awareness of critical issues and demonstrated a sincere concern for one another and the communities they serve.
During 1989, costs were reduced through changes in targeted staffing levels and the expanded use of workforce management systems. From the top to the bottom of the organization, the management of costs has been given added emphasis. Annual corporate and departmental goals, which affect employee compensation, place a high priority on cost control and performance within strategic guidelines. These efforts are paying off. During the year, controllable costs were held to a growth rate less than that of inflation. Also during 1989, department heads set up a special task force to find additional means of reducing corporate expenses. This group took a no-holds-barred approach and found opportunities to realize savings in a number of large and small areas throughout the utility.
The new, competitive energy marketplace has required changes in the way planning is done. At Atlantic Electric, planning responsibilities are distributed throughout the organization. This enables many talented individuals to work together to develop approaches to utility system growth, business development and the management of strategic issues.
The employees of Atlantic Electric have brought success to their company in many ways. In 1989, two departments received special commendation from the Governor for having worked 13 years without an accident. Employees with exceptional safety records, some having worked more than 40 years without an accident, received gold hardhats as recognition for their efforts. Atlantic Electric's "Linemen for Safety" program teaches children safe practices with electricity. In 1989, Atlantic Electric also took a leadership role in developing the statewide "Give Us A Brake" program, designed to improve safety for roadside work crews.
The respect enjoyed by Atlantic Electric in its service area is enhanced by the significant community involvement of employees. Examples of such involvement are found in record levels of personal and financial support of the United Way programs and in the Volunteer Initiative Program. Men and women participating in the VIP have provided more than 60,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> of service since the program began in 1988.
To understand the key to success, one just has to look at the family of men and women who make up Atlantic Electric.
Their enthusiasm, creativity and sense of personal involve-ment are the natural resources that will continue to make the utility strong and able to realize the most from the opportunities that lie ahead.
12 Our employees' personal involvement and dedication produce lasting benefits for both the workplace and the community.
ATLANTIC ELECTRIC'S SERVICE TERRITORY Atlantic Electric serves the southern one-third of the State of New Jersey, a 2,700 square-mile area with a population of about one million people.
It is located near such major cities as New York, Philadelphia, Baltimore and Washington, D.C.
The majority of its cus-tomers are residential and commercial. Tourism and its related commer-cial activities are a major part of the economy on the eastern side of the service territory. In the western and central areas, farming, agricul-tural and light industrial customers provide a sig-nificant economic base.
14
ATLANTIC ELECTRIC'S CUSTOMERS AT-A-GLANCE RESIDENTIAL Kilowatt-hour sales to residential customers increased 1.6% in 1989 In B1llums of primarily as a result of almost 10,000 new customers added to Kilowatt* Hour1 the system. A residential load management program in 1989 helped 4
3.8 to reduce demand at the time of peak by about four megawatts.
3.2 3.3 Through 1994, sales to residential customers are expected to 2.8 3.0 3
2.6 increase at an average annual rate of 3.1 %. By 1994, residential load management programs are estimated to help reduce demand at 2
the time of peak by about 40 megawatts.
Est. 1989-1994 Annual Growth 1989 1994 Rate
'85
'86
'87
'88
'89 1994*
Energy (billion kwhrs) 3.266 3.812 3.14%
~~{il&J l~Nmer 7.6 8.0 8.3 8.5 8.4 8.7 Peak (Mw) 942 1,046 2.12%
%of 43 43 43 44 43 45 total sales
- estimated COMMERCIAL Kilowatt-hour sales to commercial customers increased 6. 4% in 1989 In Billions of reflecting an increase in average use per customer and the addition Kilowact~Hours of over 1,100 new customers. Sales to the hotel/casinos increased 4
2.1 % in 1989 and accounted for 5.8% of total sales. Commercial 3.4 load reduction programs helped to reduce demand at the time of 3
2.7 2.9 peak by 21 megawatts.
2.6
- C"
2.3 2.4 Through 1994, sales to commercial customers are expected to i'
);*
\\);
2
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1.l-increase at an average annual rate of 3.3%. Commercial load management programs in 1994 are expected to help reduce demand i
at the time of peak by 37 megawatts.
Est. 1989-1994 Annual Growth 1989 1994 Rate
'85
'86
'87
'88
'89 1994*
Energy (billion kwhrs) 2.917 3.432 3.31%
~~{il&J l~Nmer 51.9 52.9 55.4 56.7 58.9 65.3 Peak(Mw) 573 669 3.15%
%of 37 37 37 37 38 40 total sales
- estimated INDUSTRIAL AND OTHER Kilowatt-hour sales to industrial and other customers increased In Billions of 2.8% in 1989 due to increased average use per customer. Industrial Kilowatt*Hours load management programs helped to reduce demand at the time of peak by 18 megawatts.
4 Through 1994, sales to industrial and other customers are 3
expected to decline at an average annual rate of 2. 7% reflecting the displacement of sales by industrial customers who expect 2
to become self-generators. Industrial load management programs 1.3 1.3 1.4 1.4 1.4 1.3 in 1994 are expected to help reduce demand at the time of PIS:'
x I""!-
peak by 57 megawatts.
Est. 1989-1994 I ~
- ~
Annual Growth
~
1989 1994 Rate
'85
'86
'87
'88
'89 1994*
Energy (billion kwhrs) 1.435 1.252 (2.69)%
~~{O&J l";Nter 1181.3 1196.7 1304.0 1320.S 1369.9 1242.1 Peak(Mw) 185 163 (2.50)%
%of 20 20 20 19 19 15 total sales
- estimated tindustrial customers only 15
Management's Discussion and Analysis of Financial Condition and Results of Operation Atl*ntlc En* rgy, Inc.
- nd Subsld1.. 1..
Atlantic Energy, Inc. (the Company) is the parent of a con-solidated group consisting of the following wholly-owned subsidiaries: Atlantic City Electric Company (ACE), Atlantic Southern Properties, Inc. (ASP), Atlantic Generation, Inc.
(AGI) and ATE Investment, Inc. (ATE). ACE, the primary subsidiary, is a regulated electric utility which has a wholly-owned subsidiary that operates certain generating facilities.
ASP owns, develops and manages commercial real estate property. AGI is engaged in the development of cogeneration power projects through various partnership arrangements.
ATE manages capital investments for the Company.
Consolidated earnings per share for 1989 were $3.74 on net income of$81.0 million, compared with $3.68 on net income of $72.2 million in 1988 and $4.03 on net income of $73.8 million in 1987. The increase in earnings per share in 1989 from 1988 is primarily due to higher revenues resulting from higher sales of energy, offset in part by changes in operations expenses and an increase in the average number of shares of Common Stock outstanding. The decline in 1988 earnings from 1987 reflects revenue credits to customers associated with the Peach Bottom nuclear station outages and increases in maintenance costs.
In June 1989, the quarterly dividend on Common Stock was increased by 3 cents to 72 cents per share, equating to an annual rate of $2.88 per share. This represents the 37th consecutive year in which cash dividends paid were increased.
Information with respect to Common Stock for the period 1987-1989 is as follows:
1989 1988 1987 Dividends Paid Per Share
$ 2.82
$ 2.77
$ 2.65 Book Value Per Share
$28.54
$27.16
$25.71 Annualized Dividend Yield 7.5 8.4%
8.8%
Return on Average Common Equity 13.60/o 14.2%
16.l %
Total Return (Dividends paid plus change in share price) 26.2%
16.0%
(11.0)%
Market to Book Value 135%
121%
119%
Price/ Earnings Ratio 10 9
8 LIQUIDITY AND CAPITAL RESOURCES Overview The Company commenced its business under a holding company structure on November 1, 1987. Since inception, the Company's cash flows have been dependent on the cash flows of its subsidiaries, primarily ACE. Principal cash inflows of the Company include the payment of dividends to it by ACE and the issuance of new Common Stock. Principal cash outflows of the Company include investments (capital con-tributions and advances) in its subsidiaries and the payment of dividends to common shareholders. Cash invested in ACE 16 is utilized primarily for the construction of utility generating, transmission and distribution facilities, redemption and maturity of long and short term debt, and redemptions of Preferred Stock. Cash invested in the nonutility subsidiaries is utilized primarily for the development of commercial real estate, development of nonutility power generation projects and investments in financial assets.
To facilitate the activities and operations of the subsidiaries, certain credit support agreements exist between the Com-pany and ATE and between the Company and ASP. In addition, agreements between the Company and each of its subsidiaries provide for allocation of tax liabilities and benefits generated by the respective subsidiaries.
In 1989 and 1988, the Company received $62.4 million and
$54.5 million, respectively, in dividends from ACE. In 1987, subsequent to the November 1 restructuring, the Company received $14.0 million in dividends from ACE. Other sources of funds available to the Company include the issuance of common equity through public offerings, the operation of the Dividend Reinvestment Plan (DRP) and ACE's employee benefit plans. During 1989, the Company issued 2.2 million shares of Common Stock through a public offer-ing and approximately 348,000 shares through the DRP and the benefit plans. New equity capital raised amounted to
$81.9 million, before transaction expenses. In 1988 and 1987, a total of 1.3 million and approximately 401,000 shares of Common Stock were issued through public offerings and the stock plans, with proceeds before transaction expenses of
$42.6 million and $13.3 million, respectively.
The Company's current financing plans for 1990-1992 con-template the issuance of approximately $80 million in additional common equity.
Prior to November 1, 1987, payments of dividends to common shareholders were made by ACE. Subsequent to November 1, 1987, payments of dividends to common shareholders have been made by the Company. In 1989, the Company paid $62.4 million in dividends to its common shareholders. In 1988 and 1987, respectively, $54.5 million and $49.7 million in dividends were paid. In 1989 the Com-pany made $83.7 million in advances and capital contribu-tions to its subsidiaries. In 1988 and 1987, $51.4 million and
$906,000, respectively, in advances and capital contributions were made to subsidiaries.
ACE Cash construction expenditures for the 1987-1989 period amounted to $374.5 million and included expenditures for a new combustion turbine unit and transmission and distribu-tion facilities. ACE's current estimate of cash construction
expenditures for the 1990-1992 period is $523.5 million, an increase of 39.8%. These estimated expenditures reflect the addition of new generating equipment and major improvements to transmission and distribution facilities.
ACE also utilizes cash for mandatory redemptions of Preferred Stock and maturities of long term debt. Optional redemp-tions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of funds. Redemptions and maturities for the period 1987-1989 are shown below:
1 89 1988 1987 Preferred Stock Shares Redeemed 40,5 50,500 63,975 Amount ($000)
$ 4,0 0 $ 5,050 $ 6,399 First Mortgage Bonds Principal Amount Retired ($000) 15,80
$10,000 $10,300 In December 1989, $13.025 million principal amount of 11 7/a % Series First Mortgage Bonds due 1993 were redeemed at a price of 101.52%. During 1989, 2,500 shares of $8.25 No Par Preferred Stock, 8,000 shares of 9.96% Preferred Stock and the remaining 30,000 shares of $9.45 No Par Preferred Stock were redeemed pursuant to their respective sinking fund requirements.
Scheduled debt maturities and mandatory preferred stock sinking fund requirements aggregate $23.5 million for the years 1990-1992.
ACE's cash flows from operating activities after the payment of preferred dividends and dividends paid to the Company
("internal generation") amounted to $58.8 million, or 40.5%
of 1989 construction expenditures. In 1988, ACE's internal generation was $63.9 million and represented 50.3% of construction expenditures. In 1987, $61.9 million resulted from internal generation, representing 60.4% of 1987 con-struction expenditures.
For the three year period 1990-1992, ACE's internal genera-tion is expected to average 37% of currently estimated con-struction expenditures. However, actual levels may vary within the period based upon specific amounts of construc-tion expenditures and internally generated funds in the individual years.
On an interim basis, ACE finances that portion of its con-struction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short term debt consisting of commercial paper and borrow-ings from banks. Permanent financing by ACE is under-taken by the issuance of its long term debt and Preferred Stock and by capital contributions from the Company.
17 Atlantic Electric Total Energy Sales 7.4 7.0 6.5 6.2 r I t 1
'85
'86
'87
'88 7.6
, 1
'89 8 ----
7 ----
6 --
5 ___ _
In Billions of Kilowatt-Hours Atlantic Electric Pre-Tax Interest Coverage Ratio 4
3.68 3.06 2.99 3.06
- ~
I';*
t*
fr I *.
- ~{;
~:
'85
'86
'87
'88
'89 Atlantic Energy Year-End Capitalization 48 49 8
7 44 43
'85
'86 Common Equity J Preferred Stock
'87 6
45 6
43 5
41 10 44
'88
'89 Long-term Debt l J hort-term Debt 3.19 3
2 Times Coverage 46 100 80 8
60 46 40 ----
20 ----
In Percent
Management's Discussion and Analysis of Financial Condition and Results of Operation (continued)
Atlantic Energy, Inc. and Subsidiaries Atlantic Electric Average Booked Revenue Per Kilowatt-Hour 9.2 8.8 9 1 9.0 9.0 I~
- ~
- ')'.
8 "i!
6
- e*.,
4
(
- /~
>r I"*
2 f
.,~ *
/.
./
In Cents
'85
'86
'87
'88
'89 Atlantic Energy AFDC As a Percent of Net Income 31
.... J.4.
'85
'86
'87
'88 Atlantic Energy Cash Requirements and Internal Generation of Funds 15.1 60.3 21.9 16.7
.*'; 187.6 104.7
.... 104.8 191.4
/76.0 71.2 62.3
'85
'86*
'87
'88 4
19.9 253.5 60.2
'89 Construction and Other I I Internal Cash generation L I Maturities, Retirements and Sinking Funds
- Excludes certain opcional retirements 30 ----
20 - ---
IO----
As a Percent 300 ----
250 200 150 100 50 In Millions of Dollars 18 ACE's nuclear fuel requirements associated with its jointly-owned units have been financed through arrangements with nonaffiliated corporations.
During 1989, ACE's external financing consisted of the issuance in October of $135 million principal amount of First Mortgage Bonds, 9114% Series due 2019. ACE also received $69.3 million in capital contributions from the Company during 1989. In 1988, ACE received proceeds of $60.0 million from the issuance of 600,000 shares of
$8.53 No Par Preferred Stock, and received $40 million in capital contributions from the Company. In 1987, $4.4 million principal amount of First Mortgage Bonds, 8114% Pollution Control Series A were issued to repay short term notes issued in a like amount.
During the three year period 1990-1992, ACE expects to issue
$220 million in First Mortgage Bonds and Preferred Stock, and to receive $80 million in capital contributions from the Company.
Provisions of ACE's charter, mortgage and debenture agree-ments can limit, in certain cases, the amount and types of additional financing which may be used. At December 31, 1989, ACE estimates additional funding capacities of $201.2 million of First Mortgage Bonds, or $394.6 million of Preferred Stock, or $202.2 million of unsecured debt. These amounts are not necessarily additive.
ASP ASP's real estate investment to date has been the purchase and improvement of a 275,000 square foot commercial office and storage facility in Atlantic County, New Jersey, of which approximately 56% of office space is leased to ACE. As of December 31, 1989, ASP's investment has been funded by capital contributions from the Company and borrowings under a loan agreement with ATE. ASP's current agreement with ATE provides for borrowings of up to $8 million. Such agreement currently requires the repayment of loans on or before June 30, 1990. ASP is currently evaluating the possibility of extending this agreement or the placement of permanent financing. ASP estimates that its business activities in the 1990-1992 period will be directed towards the development of the existing property and that additional investments will not be significant. ASP's cash flows from operating activities are principally affected by rental income and financing expenses.
ATE ATE's operations commenced in 1988 and to date it has investments in leveraged leases relating to three commercial airplanes and two container ships, and loans to ASP. To date ATE has invested approximately $60.9 million in leveraged leases and has made loans to ASP totaling $7.0 million.
Additional capital requirements associated with the existing
lease investments include deferred equity payments sub-sequent to 1989 of $10.7 million. As of December 31, 1989, ATE obtained funds for its business activities and loans to ASP through capital contributions and advances of $16.2 million from the Company. Funds also have been provided by a revolving credit and term loan facility. At year end 1989, borrowings under the $70 million facility totaled $44.5 million.
ATE's current estimate of additional leveraged lease invest-ments for the 1990-1992 period is $90 million. ATE's cash flow from operations is expected to be provided from lease rental receipts, realization of tax benefits and loan repay-ments from ASP.
AGI Investments by AGI for the period 1987-1989 totaled $13.8 million. AGI's activities are represented by partnership interests in cogeneration development projects. Such activities have been funded by a combination of capital contributions, loans and advances. At December 31, 1989, $7.5 million has been invested in AGI by the Company. AGI's current business plan for the period 1990-1992 is to invest an addi-tional $3.0 million in cogeneration, generation and alternate power projects. AGI's business activities are still in the developmental stage and therefore it does not generate cash from operations.
RESULTS OF OPERATION Operating results, representing those of the consolidated group, are dependent upon the performance of the sub-sidiaries, principally ACE.
Since ACE is the principal company within the consolidated group, the operating results presented in the Consolidated Statement of Income are those of ACE, after elimination of transactions between ACE and other members of the consolidated group. Results of the nonutility companies are reported in Other Income.
Revenues Operating Revenues-Electric increased $29.l million or 4.3% in 1989 to $705.0 million compared to $675.9 million in 1988. The 1988 level of revenues increased $27.7 million or 4.3% over 1987. Components of the overall changes are shown below:
(millions) 1989 1988 Base and Unbilled Revenues
$(15.8)
$ (9.5)
Levelized Energy Clauses 20.5 7.8 Kilowatt-hour Sales 24.4 29.4 Total
$ 29.1
$ 27.7 19 Base revenues have decreased in response to a $21.8 million rate reduction ordered in April 1988 primarily reflecting the effects in 1988 of the Tax Reform Act of 1986 (TRA-86). Base revenues also have been affected by revenue credits to customers of $5.3 million and $9.7 million in 1988 and 1989, respec-tively, resulting from the regulatory treatment of the Peach Bottom outages. Levelized Energy Clause (LEC) revenues increased in response to a $62.l million rate increase ordered effective in April 1988. Kilowatt-hour sales growth continues to be the major factor in increased revenues for both years.
Overall, the combined effects of changes in rates charged to customers, kilowatt-hour sales and the impacts in 1987 of recognizing revenues associated with previously over recovered fuel costs resulted in an increase in revenues per kilowatt-hour of 0.5% in 1989, and a decrease of 1.3% in 1988 from 1987. These matters are discussed in further detail below.
Future changes in operating revenues will result from changes in customer rates and general economic conditions in the service area, as well as the impacts of load management and conservation programs instituted by ACE and cogeneration projects established within the service territory.
Sales Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions.
Energy sales statistics, stated as percentage changes from the previous year, are shown below:
Customer Class 1989 1988 Average#
Average#
Average of Average of Sales Use Customers Sales Use Customers Residential 1.60/o (.9)0/o 2.60/o 5.7% 2.2%
3.4%
Commercial 6.4 4.0 2.3 5.8 2.2 3.5 Industrial 3.1 3.7
(.6) 1.2 1.3
(.1)
Other (4.3) (3.8)
(.5)
(3.3)
(2.9)
(.4)
Total 3.6 1.1 2.6 4.8 1.3 3.4 Increases in total kilowatt-hour sales in 1989 and 1988 are largely attributable to the number of new residential and commercial customers added to the system, and increased commercial and industrial use in 1989. In the residential class, increased 1988 sales and average use were influenced by the warmer weather conditions experienced in that year. Ad-ditionally, 1989 residential customer growth and, con-sequently, sales growth slowed from 1988 due in part to a
Management's Discussion and Analysis of Financial Condition and Results of Operation (continued)
Atlantlc Energy, Inc. and Subsidiaries housing construction slowdown experienced in the first half of the year. The commercial sector continues with strong growth. This is attributable to several large hotel/ casino projects recently underway and continued establishment of retail and service businesses. Industrial sales and average use increases in 1989 are due to certain customer-specific activity and not broad-based growth in industry activity.
Costs and Expenses Total Operating Expenses increased 3.1% in 1989 from 1988.
The 1988 Total Operating Expenses represented an increase of 3.7% compared to 1987. Excluding depreciation and taxes, operating expenses increased by $14.8 million in 1989, an increase of 3.9% from 1988, which had increased 8.0%
from 1987.
Net Energy Costs reflect the amount of energy needed to meet load requirements, as well as the various fuel and purchased power sources used and the operation of the LECs.
Annual fuel, interchange and purchased power costs reflect changes in availability of low-cost generation from both owned and purchased sources and in the unit prices of the fuel sources used, as well as changes in the needs of other utilities participating in energy interchange. The cost of energy is recovered through base rates and by the operation of LECs. LECs utilize projected energy costs and include provisions for prior period under or over recovery of these costs. The recovery of energy costs is made through levelized rates over the period of projection. Any under or over recovery of costs is deferred on the Consolidated Balance Sheet as an asset or liability as appropriate. These deferrals are recognized in the Consolidated Statement of Income during the period in which they are subsequently recovered through the LECs. Fuel expenses increased in 1989 and 1988 because of increased kilowatt-hour sales. Interchange expenses in 1989, 1988 and 1987 reflect the effects of the Peach Bottom outages. In 1987, Interchange expenses reflect the effects of the loss of a major transmission line. However, overall 1989 fuel cost per kilowatt-hour generated was 1.96¢ compared to 1.99¢ in 1988 and 1.92¢ in 1987. The 1989 average fuel cost per kilowatt-hour was lower due to the net effects of increased nuclear generation and lower cost energy from nuclear, interchange and natural gas sources, offset in part by modest increases in coal and oil energy costs. A 12. 7% increase in 1989 nuclear generation displaced the more expensive generating sources relied on in 1988. Additionally, purchases of economical imported power have resulted in savings of
$4.l million in fuel costs in 1989. The 1988 average fuel cost per kilowatt-hour reflects increased generation from higher cost coal sources. (Detailed information on sources and costs of energy is provided in the graph and table to the right.)
20 With respect to the LECs, ACE has been in an under recovered position since 1987. At December 31, 1989, $19.l million is shown on the Consolidated Balance Sheet as Deferred Energy Costs compared to $27.6 million at December 31, 1988.
Operations and Maintenance costs include costs associated with jointly-owned generating units and purchased power sources. Costs of purchased power, exclusive of fuel, principally reflect purchases of capacity and energy under long term arrangements. Operations expenses increased by 3.1% in 1989 over 1988 primarily from the increased cost of employee benefits and additional purchase capacity costs incurred.
Operations expenses remained virtually unchanged in 1988 compared to 1987. Maintenance expenses decreased 7.5% in 1989 as a result of decreased expenses at jointly-owned nuclear facilities. Maintenance expenses increased 14.9% in 1988 compared to 1987 primarily as a result of costs associated with planned nuclear unit overhauls.
Management has implemented various cost containment programs that have been useful in controlling the growth of certain expenses.
Costs associated with certain long term purchase power arrangements are deferred on the Consolidated Balance Sheet since rates are levelized to collect these costs over the term of the arrangements. The balance of such Unrecovered Purchased Power Costs at December 31, 1989 was $103.0 million, compared to $83.4 million at December 31, 1988.
Depreciation and Amortization expense reflects variances in depreciation expense resulting from the cost and mix of electric utility plant in service and the respective in-service dates. Increases in Gross Receipts and Franchise Taxes result from increased levels of revenues subject to the tax. Changes in Federal Income Taxes in 1988 and 1989 reflect the con-tinuing favorable effects of TRA-86. Changes in Federal Income Taxes are detailed in Note 2 of the Notes to Con-solidated Financial Statements.
Interest Charges before the Allowance for Borrowed Funds Used During Construction rose to $53.3 million in 1989 compared to $52.2 million in 1988 and $47.9 million in 1987.
Interest on Long Term Debt in 1989 increased as a result of the issuance in October 1989 of First Mortgage Bonds, 914 % Series due 2019. At December 31, 1989, ACE's embedded cost of Long Term Debt was 9.2% compared with 9.1% and 9.0% at year end 1988 and 1987, respectively. Interest on Short Term Debt increased in 1989 as the result of substantially higher average interest rates. The increase in short term interest expense in 1988 over 1987 reflects significantly higher average balances and higher average rates. Increased Other Interest Expense in 1988 is attributed to interest on deposits from third parties for cogeneration projects and interest associated with the LECs.
The Allowance for Funds Used During Construction including both the Borrowed Funds portion, which reduces interest expense, and the Equity Funds portion, shown under Other Income, was $2.8 million in 1989 and $3.2 million in each of the years 1988 and 1987. The apportionment is a function, among other factors, of the amount of construc-tion in progress.
Increased 1989 Preferred Stock Dividend Requirements reflect the issuance in September 1988 of 600,000 shares of $8.53 No Par Preferred Stock, reduced in part by the effects of sinking fund payments for the 9.96%, $8.25 and $9.45 No Par Pre-ferred Stock. Embedded cost of Preferred Stock was 7.5%
at December 31, 1989 and 1988, and 6.7% at year end 1987.
Operations of the nonutility companies have begun modestly and are following a strategy of making prudent investments where the potential for future returns is promising. Non-utility operations for 1989, 1988 and 1987 resulted in losses amounting to $1.9 million, $2.0 million and $549,000, net of income tax credits, or losses of $.09, $.10 and $.03 per share, respectively.
ATE has provided positive results to consolidated earnings from its investments in leveraged leases. Due to a general slowdown in real estate activity and a current oversupply of local rental office space, ASP's results continue to show losses.
AG! continues to experience operating losses due to higher than expected costs incurred in connection with certain cogeneration projects.
Atlantic Electric Total Sources and Costs of Energy 7%
.. *2%
./... JO%
-32%
.. -49%
'85 1.95~ kwh 1.00 5.20 5.50 3.65 2.17 11 %
2%
10%
..-35%
.. 42%
'86 1.80~ kwh 0.89 4.09 3.80 2.48 1.81
'ff1 10%
.... *3%
.*.* 11%
/3 1%
..45%
1.85~ kwh 0.93 3.47 3.55 3.07 1.92 21 INFLATION Inflation affects the level of operating expenses and also the cost of new utility plant placed in service. Traditionally, the ratemaking practices that have applied to ACE have involved the use of historical test years and the actual cost of utility plant. However, the ability to recover through rates increased costs, whether resulting from inflation or otherwise, depends upon the frequency, timing and decisions of rate cases.
OUTLOOK Paramount among the Company's corporate objectives is long term earnings growth and commensurate dividend increases. The ability to achieve such objectives is dependent upon ACE, and to a lesser extent, the unregulated sub-sidiaries. The nature of the electric utility business is capital intensive. ACE's ability to generate cash flows from operating activities and its continued access to the capital markets is affected by the timing and adequacy of rate relief, competi-tion and the economic vitality of its service territory. Income of ACE has been and may continue to be affected by the operational performance of nuclear generating facilities. The financial performance of ACE also will be affected in the future by the level of sales of energy and the impacts of regu-lation. The amount earned on capital investment by the utility is subject to general business conditions and regulation.
Other issues which may impact the electric utility business
'88 6%
1%
10%
56%
2.05~ kwh 0.89 3.43 4.77 3.40 1.99
'89 7%
3%
10%
29%
8 6
4 2
/n 811/ions of Kilowau-Hours 2.86 INTERCHANGE 1.96 YEARLY AVERAGE
Management's Discussion and Analysis of Financial Condition and Results of Operation (continued)
Atlantic Energy, Inc. and Subsidiaries include public health, safety and environmental legislation.
Legislation relating to air quality recently has been proposed which, if adopted, could result in additional capital and operating expenditures by ACE.
Recent Federal legislation has served to encourage the development of electric generating facilities by nonutilities.
Development of several such projects is currently underway in ACE's service territory. It is estimated that, if all such projects were to be completed, by 1994 these projects could displace the equivalent of 5.4% and 3.6% of 1989 kilowatt-hour sales and revenues, respectively. That effect could be mitigated by natural growth in the service territory and addi-tional efforts by ACE to reduce the impact of the potential loss of kilowatt-hour sales and revenues. The projected rate of growth of ACE's overall sales of energy will differ from recent rates of growth, the extent of which presently is not Report of Management The management of Atlantic Energy, Inc. and its subsidiaries is responsible for the preparation of the financial statements presented in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported.
Management is also responsible for the preparation of other financial information included elsewhere in this Annual Report.
Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting. This system is examined by management on a continuing basis for effectiveness and efficiency. Manage-ment believes that, as of December 31, 1989, the system of internal accounting controls is adequate to accomplish its objectives. Management also recognizes its responsibility for fostering a strong ethical climate in which the corporation's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy.
The financial statements have been audited by Deloitte &
Touche, Certified Public Accountants. The auditors provide an objective, independent review as to management's dis-charge of its responsibilities insofar as they relate to the fair-ness of reported operating results and financial condition.
22 determinable. Several other proposed regulatory changes have been suggested on the Federal level, for example access by independent producers to transmission facilities which, if enacted, could have operating and financial implications for ACE.
The amount and timing of ACE's projected construction program is premised on the availability of generating capacity from nonutility sources described above. If for any reason these projects are delayed or do not materialize, or, if load growth is greater than estimated, it may become necessary for ACE to increase its construction program. Such an increase would put additional burdens on ACE to generate cash from operations and on ACE's financing programs.
Their examination is based on procedures believed by them to provide reasonable assurance that the financial statements are not misleading and includes a review of the system of internal accounting and financial controls and a test of transactions.
The Internal Auditing function conducts audits and appraisals of the Company's accounting and other operations, and evaluates the financial and operational control procedures which have been established, and compliance with those procedures. Both Deloitte & Touche and the internal auditors periodically make recommendations concerning the system of internal accounting controls, and management responds to such recommendations as appropriate in the circumstances.
None of the recommendations made for the year ended December 31, 1989 represented significant deficiencies in the design or operation of the Company's internal control structure.
ZI//~.::;
E. D. Huggard
~
Chairman and Chief Executive Officer J. G. Salomone Vice President and Treasurer
Independent Auditors' Report Deloitte &
Touche Certified Public Accountants One World Trade Center New York, New York 10048 To the Shareholders and the Board of Directors of Atlantic Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic Energy, Inc. and subsidiaries as of December 31, 1989 and 1988 and the related consolidated statements of income, changes in common shareholders' equity, and of cash flows for each of the three years in the period ended December 31, 1989. These financial statements are the responsibility of the Company's management. Our responsi-bility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
~
\\'~~:~:~ :
Report of the Audit Committee The Audit Committee of the Board of Directors is composed of five independent directors. The members of the Audit Committee are: Richard B. McGlynn, Chairman, Jos. Michael Galvin, Jr., Matthew Holden, Jr., Irving K. Kessler and Bernard
]. Morgan. The Committee held 4 meetings during fiscal year 1989.
The Audit Committee oversees the Company's financial reporting process on behalf of the Board of Directors. In ful-filling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Company's independent public accountant.
The Audit Committee discussed with the internal auditor and the independent public accountant the overall scope and specific plans for their respective audits. The Committee also discussed the Company's consolidated financial state-ments and the adequacy of the Company's internal control 23 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic Energy, Inc. and its subsidiaries at December 31, 1989 and 1988 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1989 in conformity with generally accepted accounting principles.
January 31, 1990 structure with the independent public accountant. The Committee met regularly with the Company's internal auditor and independent public accountant, without management present, to discuss the results of their exami-nations, their evaluations of the Company's internal control structure and the overall quality of the Company's financial reporting. The meetings also were designed to facilitate any private communication with the Committee desired by the internal auditor or independent public accountant.
Richard B. MCGiynn Chairman, Audit Committee
Consolidated Statement of Income Atlentlc Energy, Inc. end Subsldlerles liY For the Years Ended December 31 (Thousands of Dollars) 1989 1988 1987 Operating Revenues-Electric
$705,020
$675,859
$648,173 Operating Expenses:
Energy:
Fuel 149,808 145,225 125,271 Interchange 17,312 18,138 23,990 Deferred Costs 6,604 (3,838)
(11,628)
Net Energy Costs 173,724 159,525 137,633 Operations 167,435 162,362 163,842 Maintenance 55,203 59,649 51,899 Depreciation and Amortization 58,485 54,799 51,080 Gross Receipts and Franchise Taxes 83,396 80,556 70,323 Federal Income Taxes 22,865 26,471 48,916 Other Taxes 9,167 9,718 9,807 Total Operating Expenses 570,275 553,080 533,500 Operating Income 134,745 122,779 114,673 Other Income:
Allowance for Equity Funds Used During Construction 359 1,436 Miscellaneous Income-Net 5,450 4,362 8,470 Total Other Income 5,450 4,721 9,906 Income Before Interest Charges 140,195 127,500 124,579 Interest Charges:
Interest on Long Term Debt 47,131 44,506 44,547 Interest on Short Term Debt 5,231 4,958 2,070 Other Interest Expense 909 2,723 1,291 Total Interest Charges 53,271 52,187 47,908 Allowance for Borrowed Funds Used During Construction (2,805)
(2,823)
(1,761)
Net Interest Charges 50,466 49,364 46,147 Preferred Stock Dividend Requirements of Subsidiary (8,765)
(5,965)
(4,667)
Net Income
$ 80,964
$ 72,171
$ 73,765 Average Number of Shares of Common Stock Outstanding (in thousands) 21,634 19,593 18,311 Per Common Share:
Earnings 3.74 3.68 4.03 Dividends Declared 2.85 2.74 2.715 Dividends Paid 2.82 2.77 2.65 The accompanying Notes to Consolidated Financial Statements are an integral part o( these statemems.
Consolidated Statement of Cash Flows Atlentlc Energy, Inc. end Subsidiaries For the Years Ended December 31 (Thousands of Dalian) 1989 1988 1987 Cash Flows From Operating Activities:
Net Income
$ 80,964
$ 72, 171
$ 73,765 Deferred Purchased Power Costs (19,660)
(18,110)
(16,910)
Deferred Energy Costs and Revenues 8,560 (3,838)
(36,984)
Preferred Stock Dividend Requirements of Subsidiary 8,765 5,965 4,667 Noncash items affecting operating activities:
Depreciation and Amortization 58,485 54,799 51,080 Allowance for Funds Used During Construction (2,805)
(3,182)
(3,197)
Investment Tax Credit Adjustments-Net (2,449)
(217)
(1,552)
Deferred Income Taxes-Net 17,616 14,642 19,807 Net (Increase) Decrease in Other Working Capital (18,880)
(2,591) 19,865 Other-Net 902 4,939 6,137 Net Cash Provided by Operating Activities 131,498 124,578 116,678 Cash Flows From Investing Activities:
Utility Cash Construction Expenditures (145,081)
(127,099)
(102,324)
Investment in Leveraged Leases (27,777)
(32,615)
Leased Property (9,229)
(5, 144)
(10,261)
Nuclear Decommissioning Trust Fund Deposits (3,263)
(5,561)
Nonutility Property and Equipment (3,536)
(4,214)
(558)
Investment in Partnership (1,825)
(2,100)
(3,001)
Other-Net (7,009)
(6,155)
(5,909)
Net Cash Used by Investing Activities (197,720)
(182,888)
(122,053)
Cash Flows From Financing Activities:
Proceeds from Long Term Debt 150,183 26,500 4,400 Retirement and Maturity of Long Term Debt (15,998)
(10,000)
(10,337)
Pollution Control Funds Released by Trustee 5,022 Increase (Decrease) in Short Term Debt (61,000)
(2, 700) 50,800 Proceeds from Capital Lease Obligations 9,229 5,144 10,261 Common Stock Issued 81,244 54,563 2,376 Preferred Stock Issued 60,000 Redemption and Conversion of Preferred Stock (4,050)
(5,050)
(7,510)
Dividends on Preferred Stock (8,765)
(5,965)
(4,667)
Dividends on Common Stock (62,395)
(54,455)
(49,741)
Debt Costs and Other (4,044) 90 6,435 Net Cash Provided by Financing Activities 84,404 68,127 7,039 Net Increase in Cash and Temporary Investments 18,182 9,817 1,664 Cash and Temporary Investments, beginning of year 19,357 9,540 7,876 Cash and Temporary Investments, end of year
$ 37,539
$ 19,357 9,540 Supplemental Schedule of Payments:
Interest
$ 52,817
$ 48,922
$ 44,506 Federal income taxes
$ 14,284
$ 10,822
$ 34,800 The accompanying Notes to Consolidated Financial Statements are an integral pare of these statements.
25
Consolidated Balance Sheet Atlantlc Energy, Inc. and Subsidiaries (fhousands of Dollars)
Assets Electric Utility Plant:
In Service:
Production Transmission Distribution General Total In Service Less Accumulated Depreciation Net Construction Work in Progress Land Held for Future Use Leased Property-Net Electric Utility Plant-Net Nonutility Property and Investments:
Investment in Leveraged Leases Nuclear Decommissioning Trust Fund Nonutility Property and Equipment-Net Other Investments and Funds Total Nonutility Property and Investments Current Assets:
Cash and Working Funds Temporary Cash Investments Accounts Receivable:
Utility Service Miscellaneous Allowance for Doubtful Accounts Unbilled Revenues Fuel (at average cost)
Materials and Supplies (at average cost)
Prepayments Deferred Energy Costs Total Current Assets Deferred Debits:
Property Abandonment Costs Unrecovered Purchased Power Costs Deferred Energy Costs Unamortized Debt Costs Other Total Deferred Debits Total Assets The accompanying Notes co Consolidated Financial Statements are an integral part of these statements.
26 December 31 1989 1988
$ 897,238
$ 863,429 268,258 233,408 454,819 415,056 104,962 91,299 1,725,277 1,603,192 459,223 419,183 1,266,054 1,184,009 81,240 67,257 6,459 9,285 33,146 32,880 1,386,899 1,293,431 73,217 27,400 9,235 5,612 15,336 12,711 7,463 6,126 105,251 51,849 15,189 13,089 22,350 6,268 53,062 50,400 13,067 11,578 (1,800)
(1,693) 38,904 31,689 21,776 17,453 31,404 23,788 13,694 9,381 8,725 15,466 216,371 177,419 10,287 11,066 103,040 83,380 10,360 12,179 22,537 23,608 9,716 7,354 155,940 137,587
$1,864,461
$1,660,286
(fhousands of Dollars)
Liabilities and Capitalization Capitalization:
Common Shareholders' Equity:
Common Stock, no par value; 50,000,000 shares authorized Retained Earnings Total Common Shareholders' Equity Preferred Stock of Atlantic Electric:
Not Subject to Mandatory Redemption Subject to Mandatory Redemption Long Term Debt Total Capitalization Current Liabilities:
1989
$ 421,237 222,163 643,400 40,000 73,400 606,379 1,363,179 December 31 1988
$ 339,993 203,594 543,587 40,000 74,450 513,186 1,171,223 Preferred Stock Redemption Requirement 1,050 4,050 Long Term Debt due within one year 44,500 2,775 Capital Lease Obligations due within one year 636 590 Short Term Debt 61,000 Accounts Payable 46,877 44,836 Taxes Accrued 10,224 11,847 Interest Accrued 13,399 10,168 Dividends Declared 18,357 16,028 Customer Deposits 2,773 3,124 Deferred Taxes 4,948 10,366 Other 27,813 22,704
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Total Current Liabilities 170,577 187,488 Deferred Credits and Other Liabilities:
Deferred Investment Tax Credits Deferred Income Taxes Obligations under Capital Leases Other Total Deferred Credits and Other Liabilities Commitments and Contingent Liabilities (Note 10)
Total Liabilities and Capitalization 27 63,946 208,467 32,510 25,782 330,705
$1,864,461 66,395 185,433 32,290 17,457 301,575
$1,660,286
Consolidated Statement of Changes in Common Shareholders' Equity Allanllc Energy, Inc. *nd Subsidiaries (fhousands of Dollars)
Balance, December 31, 1986 Common stock issued:
Public offerings Other Net income Common stock dividends Balance, December 31, 1987 Common stock issued:
Public offerings Other Net income Capital stock expense of subsidiary Common stock dividends Balance, December 31, 1988 Common stock issued:
Public offerings Other Net income Common stock dividends Balance, December 31, 1989 As of December 31, 1989 there were 50 million shares authorized of no par value Common Stock. Other issu-ances of Common Stock were for the Dividend Reinvest-ment and Stock Purchase Plan (DRP), ACE employee benefit Common Retained Shares Srock Earnings 18,273,655
$283,054
$162,270 72,864 2,376 73,765 (49,741) 18,346,519 285,430 186,294 1,300,000 42,551 365,042 12,012 72,171 (416)
(54,455) 20,011,561 339,993 203,594 2,200,000 69,730 334,156 11,514 80,964 (62,395) 22,545,71 7
$421,237
$222,163 plans and conversion of Preferred Stock in 1987. At December 31, 1989, 205,350 and 107,056 shares were reserved for issuance under the DRP and ACE employee benefit plans, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
28
Notes to Consolidated Financial Statements Atlantlc Energy, Inc. and Subsidiaries NITTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization Effective November 1, 1987, Atlantic Energy, Inc. (the Company) became the parent company of Atlantic City Electric Company (ACE) pursuant to an Agreement and Plan of Merger (Plan) approved by shareholders on April 22, 1987. Under the Plan, each common share of ACE was converted on a share-for-share basis into common shares of the Company. On the effective date, a corporate restruc-turing occurred under which Atlantic Generation, Inc.
(AGI), Atlantic Southern Properties, Inc. (ASP) and ATE Investment, Inc. (ATE), previously subsidiaries of ACE, became subsidiaries of the Company. Deepwater Operating Company, which operates certain generating facilities, remains a wholly-owned subsidiary of ACE.
Prlnclples of Consolldatlon The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and trans-actions have been eliminated in consolidation. AGI is engaged in various partnerships, and accounts for such investments by recognizing its distributive share of the results of opera-tions of the partnerships. The results of operations of the nonutility companies are not significant and are classified under Other Income in the Consolidated Statement of Income.
Regulatlon The accounting policies and rates of ACE are subject to the regulations of the New Jersey Board of Public Utilities (BPU) and in certain respects to the Federal Energy Regulatory Commission. All significant accounting policies and practices used in the determination of rates are also used for financial reporting purposes.
Electrlc Operating Revenues Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the period for energy used subsequent to the last billing cycle.
Electrlc Utlllty Plant Property is stated at original cost. Generally, the plant is subject to a first mortgage lien. The cost of property addi-tions, including replacement of units of property and better-ments, is capitalized. Included in certain property additions is an Allowance for Funds Used During Construction 29 (AFDC) which is defined in the applicable regulatory system of accounts as the cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rnte of 8.95%, as approved by the BPU, for the years presented.
Deferred Energy Costs and Revenues As approved by the BPU, ACE has Levelized Energy Clauses which are based on projected energy costs and include pro-visions for prior period under or over recoveries. The recovery of energy costs is made through levelized charges over the period of projection. Any under or over recovery of costs is deferred in balance sheet accounts as an asset or liability as appropriate. These deferrals are recognized in the Consolidated Statement oflncome during the period in which they are subsequently recovered through the clauses.
Depreciation ACE provides for straight-line depreciation based on the estimated remaining life of transmission and distribution property, and based on the estimated average service life for all other depreciable property. Depreciation applicable to certain nuclear plant includes amounts provided for decom-missioning. The overall composite rate of depreciation was approximately 3.6% for 1989 and 1988, and 3.8% for 1987.
Accumulated depreciation is charged with the cost of depre-ciable property retired together with removal costs less salvage and other recoveries. Depreciable property of the nonutility companies is insignificant.
Nuclear Fuel Fuel costs associated with ACE's participation in jointly-owned nuclear generating stations, including a provision for estimated spent fuel disposal costs, are charged to fuel expense based on the units of thermal energy produced.
Notes to Consolidated Financial Statements (continued)
Atlantic Energy, Inc. and Subsidiaries Income Taxes Deferred Federal and State income taxes are provided on all significant current transactions for which the riming of report-ing differs for book and tax purposes. Investment tax credits from utility property, which are used to reduce current Federal income taxes, are deferred on the Consolidated Balance Sheet and recognized in book income over the life of the related property. The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to each of the companies within the consolidated group based on the separate return method.
Property Abandonments and Dlsallowances of Plant Costs A loss is recognized if the carrying amounts of abandoned utility assets exceed the present value of future revenues to be generated by those assets. Any disallowance of the cost of a newly completed utility plant, including an indirect dis-allowance which provides no return on investment of any portion of the plant, is recognized as a loss.
Property Abandonment Costs, stated at their net present value in the Consolidated Balance Sheet, consist of ACE's investment in the following:
Remaining Recovery Unamortized Investment Period (years)
Cost ($000)
Offshore Nuclear Generating Units 91/z
$1,932 Nuclear Generating Unit 8
7,155 Unrecovered Nuclear Fuel Advances 11 1/4 3,906 Proposed Plant Site Costs 61/4 3,705 Since no return on these costs was granted by the BPU, the excess of the carrying value of the assets over their discounted present value was recognized as a loss at the date of abandon-ment. Such discount is being restored to income by accretion over the amortization period allowed for ratemaking.
30 Unrecovered Purchased Power Costs ACE has agreements for the purchase of 125 megawatts of capacity and related energy from Pennsylvania Power and Light Company (PP&L) under two Capacity and Energy Sales Agreements (the PP&L Agreements). The PP&L Agree-ments provide for the purchase of capacity and energy from PP&I..:s Susquehanna nuclear Unit 1 and Unit 2 through September 30, 1991, and then from certain PP&L coal-fired units through September 30, 2000. Through September 30, 1991, the estimated costs to be incurred for purchases of capacity and associated energy from the Susquehanna units will exceed the levelized costs to be recovered from customers.
Such unrecovered costs are being accumulated and deferred as Unrecovered Purchased Power Costs. Related deferred taxes have been provided. The level of rates approved by the BPU is designed to recover these deferred costs and associated carrying charges during the balance of the contract period.
Nuclear Decommissioning 1\\'ust ACE established a trust to fund the future decommissioning costs related to the nuclear units in which it has an owner-ship interest. Funding, which began in 1988, is based upon studies and forecasts of decommissioning costs. ACE has received favorable Internal Revenue Service rulings that the current fundings of the trust are deductible for Federal income tax purposes. As of December 31, 1989, ACE has deposited $8.8 million into the trust.
In 1988, the BPU approved a stipulation among ACE, the BPU Staff and the Public Advocate which provides that, within five years, ACE will deposit approximately an addi-tional $9.l million. This represents the amounts previously collected from customers and provided for, but not yet funded.
Other Debt premium, discount and expenses of ACE are amortized over the life of the related debt. Costs associated with debt reacquired by refundings are amortized over the life of the newly issued debt as permitted by the BPU. Temporary investments considered as cash equivalents for Con-solidated Statement of Cash Flows purposes represent purchases of highly liquid debt instruments maturing in three months or less.
Certain prior year amounts have been reclassified to conform to the current year reporting.
NOTE 2. FEDERAL INCOME TAXES Years Ended December 31
($000) 1989 1988 1987 The components of Federal income tax expense are as follows:
Current 9,711
$ 11,483
$ 30,076 Deferred 14,554 14,677 19,353 Investment Tax Credits Recognized on Leveraged Leases (1,000)
(727)
Total Federal Income Tax Expense 23,265 25,433 49,429 Less Amounts Included in Other Income 400 (1,038) 513 Federal Income Taxes Included in Operating Expenses
$ 22,865
$ 26,471
$ 48,916 Deferred Federal income taxes result from the following:
Liberalized Depreciation 9,564
$ 12,096
$ 14,422 Unbilled Revenues (2,848)
(2,848)
(2,766)
Unrecovered Purchased Power Costs 5,104 4,577 6,268 Deferred Energy Costs (2,750)
(36) 4,523 Costs Associated with Reacquired Debt (1,089)
(1,195)
(949)
Leveraged Leases 10,279 3,582 Deferred Investment Tax Credits (2,449)
(217)
(1,552)
Other-Net (1,257)
(1,282)
(593)
Total Deferred Federal Income Tax Expense
$ 14,554
$ 14,677
$ 19,353 A reconciliation of the reported Federal income tax expense compared to the expected Federal income taxes computed by applying the statutory rate follows:
Net Income
$ 80,964
$ 72,171
$ 73,765 Preferred Stock Dividend Requirements of Subsidiary 8,765 5,965 4,667 Federal Income Tax Expense (as below) 23,265 25,433 49,429 Book Income Subject to Tax
$112,994
$103,569
$127,861 Statutory Federal Income Tax Rate 34%
34%
39.95%
Income Tax Computed at the Statutory Rate
$ 38,418
$ 35,213
$ 51,080 Items for which deferred taxes are not provided:
Difference Between Tax and Book Depreciation 2,437 591 1,521 Reversal of Excess Deferred Taxes (5,934)
(5,578)
(2,080)
Removal Costs (2,659)
(3,874)
(2,291)
Investment Tax Credits (3,519)
(3,257)
(2,409)
Other-Net (5,478) 2,338 3,608 Total Federal Income Tax Expense
$ 23,265
$ 25,433
$ 49,429 Effective Federal Income Tax Rate 21%
25%
39%
31
Notes to Consolidated Financial Statements (continued)
Atlantic Energy, Inc. and Subsidiaries On a consolidated basis, the Company was subject to the alternative minimum tax (AM1) in 1989. The AMT exceeded regular tax by $5.9 million, resulting in an AMT credit of $5.9 million. The AMT credit is available for indefinite carryforward against future tax payable, to the extent that the regular tax payable exceeds future AMT payable.
At December 31, 1989, the cumulative amount of deferred Federal income taxes which have not been provided on timing differences, principally depreciation, amounted to approximately $57 million.
Federal income tax returns for 1983 and prior years have been examined by the Internal Revenue Service (IRS) and Federal income tax liabilities for all years through 1979 have been determined and settled. The IRS has proposed certain deficiencies in taxes for 1980 through 1983. The Company has protested the proposed deficiencies and is of the opinion NOTE 3. RATE MATTERS OF ACE Base Rate Case Proceedings The BPU issued an order in February 1987, related to ACE's 5% ownership in the Hope Creek Generating Sta-tion, which granted a net increase in base rate revenues of
$31.4 million. The order consisted of an increase of
$38.8 million primarily associated with the costs of owning and operating Hope Creek, and a decrease of $7.4 million associated with the changes in corporate Federal income taxes resulting from the Tax Reform Act of 1986. In its deci-sion, the BPU disallowed $22.4 million of costs associated with the construction of Hope Creek and fixed a level of investment for ratemaking purposes at $217.4 million, 32 that the final settlement of its Federal income tax liabilities for these years will not have a material adverse effect on its results of operations or financial position.
The Financial Accounting Standards Board (FASB) issued a statement entitled "Accounting for Income Taxes" which was originally effective for years after 1989. The statement changes the recording methodology relating to deferred income taxes to a liability approach. The principal impact of this change to the Company relates to the recording on a current basis of changes in tax rates, and the recording of deferred tax liabilities not previously recorded by ACE. The FASB currently is reexamining certain provisions contained in the original statement and in so doing has delayed its application until 1992. The Company expects the impacts of this change to be lessened due to rate regulation. In the opinion of management, such impacts will not have a material effect on results of operations or financial position.
compared to a target cost of $200.3 million. Although ACE is allowed to recover the $217.4 million cost, 20%
of the excess over the target amount, or $3.4 million, has been excluded from rate base for purposes of computing a return on the investment.
In April 1988, the BPU ordered a decrease in base rates of
$21.8 million primarily to reflect the lower corporate Federal income tax rates effective in 1988 resulting from the Tax Reform Act of 1986.
Energy Clause Proceedings ACE's energy clauses are reviewed annually by the BPU.
The BPU ordered a net decrease in annual energy clause revenues of $47.3 million effective February 1987. The Order includes $7.0 million of fuel savings associated with Hope Creek and $7.2 million due to the effects of compres-sion, which allowed for the distribution of the reduction
over the remaining months of 1987. In this decision, the BPU also established a performance standard for the five nuclear units in which ACE has minority ownership interests. The performance standard sets an annual overall target capacity factor of 70% with incentives for perform-ance in excess of 80% and penalties for performance below 60%. Under the penalty provisions, a portion of ACE's replacement power costs would not be recoverable through customer rates.
In April 1987, the BPU ruled that energy clause revenues be decreased by an additional $2.4 million, to reflect interest on 1986 over recoveries of fuel expenses and the disallow-ance of certain replacement power costs associated with 1985 Peach Bottom outages. This reduction was compressed into the remainder of 1987. These issues originally had been deferred in the February 1987 decision.
In March 1988, the BPU authorized an increase in annual energy clause revenues, effective April 1988, of $62.l million.
This increase is net of a reduction of $5.4 million in revenue resulting from the disallowance of $4.8 million of replace-ment energy costs due to the application of the BPU mandated nuclear performance standard for 1987. This net increase was compressed into the remainder of 1988.
In September 1988, ACE filed petitions with the BPU seek-ing to continue its existing energy clauses through 1989.
Although ACE's petitions supported alternative rates that would increase energy clause revenues by $9.3 million, the petitions requested deferral of a sufficient level of prior period under recovered fuel costs to maintain existing rates.
ACE requested that such deferrals be considered in connec-tion with the next change in energy clause rates but not later than January 1, 1990. In January 1989, ACE amended its petitions to request a net increase in energy revenues of
$9.3 million. Contained in these amended petitions was an alternative for energy clause rates to utilize a cost basis of 18 months rather than the usual 12 months. This alternative 33 would produce a net increase of $4.5 million in annual energy clause revenues. The petitions also provided for a reduction in revenue of $5.3 million for the application of the nuclear performance standard regarding 1988 nuclear operations which disallows the recovery of $4.6 million of replacement energy costs from customers. 1988 earnings were reduced by a provision in the amount of such disallowance. An initial decision of the Administrative Law Judge rendered in June 1989 approved the 18-month period but recommended that certain capacity costs requested to be collected in energy clause revenues are more appropriately recovered through base rates. This decision also recom-mended a five year amortization of unrecovered deferred energy costs related to certain generator outages at the Salem Nuclear Generating Station (see Note 10).
The BPU originally was scheduled to rule on this case in early August 1989. On August 9, 1989, the BPU approved its staff's request for a 45-day extension of time to render its decision.
This request was premised upon on-going discussions in set-tlement of the issues. Extensions again were granted on September 20, November 8 and December 20, 1989, and January 10, 1990, based on continued settlement discus-sions. On January 23, 1990, ACE and most of the other parties to this proceeding, including the BPU Staff, signed a joint position which provides recommendations to settle the contested issues of this proceeding. The joint position recommends rate treatment for the four-year purchase of capacity and energy from Philadelphia Electric Company (PE). Under the terms of the joint position, base rate revenues would increase by $41.6 million effective June 1, 1990. Simultaneously, energy clause revenues would be
~ates to Consolidated Financial Statements (continued)
~
- .nllc Energy, Inc. and SubsldlarlH decreased by an identical amount. A level of the capacity costs in excess of that to be recovered through base rates are to be deferred for recovery through the Levelized Energy Clauses (LECs) over a three-year period beginning June 1, 1991. ACE also agreed that it would not, except in certain circumstances, further increase base rates before October 1, 1992. On January 24, 1990, the BPU approved a motion by ACE to reopen the record in this proceeding in order to accept additional evidence as offered by the joint position.
Hearings were ordered to be held within 30 days. ACE can-not predict, at this time, when the BPU will render a final decision in this case nor the outcome of its findings.
Other Rate Proceedings ACE is a 7.51% owner of the Peach Bottom Atomic Power Station, which is operated by PE. The units were ordered shutdown by the Nuclear Regulatory Commission (NRC) on March 31, 1987 and could not be restarted without their approval. Proceedings were initiated before the BPU to determine whether the base rate revenues stemming from the investment in the station should be made interim and subject to refund to customers while the units are out of operation under the NRC order. In February 1988, the BPU ruled that base rate revenues of $27.6 million associated with the Peach Bottom facilities were interim and subject to refund pending the outcome of further investigations. In April 1988, the BPU approved a stipulation among ACE and other affected parties resolving all matters related to the Peach Bottom NRC outages from March 31, 1987 through December 31, 1988. The stipulation provided, among other things, for a revenue credit to ACE's customers of $5.3 million, which was given in June 1988, and that the nuclear performance standard would continue to be in effect during 1988 for all nuclear units in which ACE has an ownership interest but limiting the impact during 1988 of any penalty provisions of the standard to 25% of the estimated replace-ment energy costs, except in certain instances. Provision for the revenue credit was made in March 1988. The stipula-tion also stated that if it appears that either of the Peach Bottom units may not be back in service by December 31, 1988, the BPU may conduct hearings with respect to Peach Bottom. In that event, ACE agreed not to object to the issuance of an order, after an appropriate hearing, making base rates for either Peach Bottom unit interim and subject to refund.
34 The Peach Bottom units were not in operation at December 31, 1988. In March 1989, the BPU approved a stipulation which resolved rate treatment for Peach Bottom for 1989.
This stipulation provided for an initial revenue credit to ACE's customers of $5.7 million that was applied in April 1989 and covers 12 unit-months of nonoperation. One unit-month of nonoperation is equivalent to one unit having an average capacity factor of less than 50% in a given calendar month. Each additional unit-month of non-operation would result in an additional revenue credit of
$750,000 and would be applied to customers' future bills.
The stipulation also provided that neither Peach Bottom unit would be included in the 1989 nuclear performance standard calculation until it reached a 50% capacity factor for a calendar month. However, during any month when a Peach Bottom unit generates electricity but does not achieve a 50% capacity factor, the effect on ACE of the revenue credits will be offset by ACE retaining 60% of the fuel savings generated by the unit's operation. A provision for the $5. 7 million revenue credit was made in the first quarter of 1989.
PE received approval from the NRC in April 1989 to restart Peach Bottom Unit 2. In July 1989, Unit 2 achieved a 50%
capacity factor, and according to the provisions of the stipulation, the unit was considered to have returned to commercial operation and is again subject to the nuclear performance standard. In October 1989, the NRC lifted its March 1987 shutdown order permitting PE to operate the units under normal NRC regulations and review. In December 1989, Unit 3 was connected to the Pennsylvania-New Jersey-Maryland Interconnection. In January 1990, Unit 3 achieved a 50% capacity factor and the unit was considered to have returned to commercial operation and is again subject to the nuclear performance standard.
Under the terms of the stipulation, in November 1989, ACE's customers received revenue credits of $2.0 million, net of fuel savings, for the nonoperation of Unit 3 during July, August and September. In February 1990, ACE will provide customers with additional revenue credits of $1.8 million, net of fuel savings, for the nonoperation of Unit 3 during October, November and December 1989. The terms of the stipulation now have been satisfied. Provisions have been made against 1989 earnings for these revenue credits.
NITTE 4. RETIREMENT BENEFITS ACE and its subsidiary have a noncontributory defined benefit retirement plan covering substantially all their employees. Benefits are based on an employee's years of service and average final pay. The companies' policy is to fund pension costs within the guidelines of the minimum required by the Employee Retirement Income Security Act, and the maximum allowable as a tax deduction. Pension costs for 1989, 1988 and 1987 were $6.8 million, $4.l million and $4.2 million, respectively. Approximately 70% of these costs were charged to operating expense and the remainder, which was associated with construction labor, was charged to the cost of new utility plant.
Net pension costs for 1989, 1988 and 1987 included the following components:
($000) 1989 1988 1987 Service cost-benefits earned during the period
$ 6,094
$ 5,045
$ 5,579 Interest cost on projected benefit obligation 14,294 12,053 11,664 Actual return on plan assets (34,648)
(16,217)
(3,399)
Deferred gain (loss) 21,249 3,390 (9,462)
Expected return on plan assets (13,399)
(12,827)
(12,861)
Amortization of unrecognized net transitional asset (172)
(172)
(172)
Net periodic pension cost
$ 6,817
$ 4,099
$ 4,210 A reconciliation of the funded status of the plan as of December 31, 1989 and 1988 is as follows:
($000) 1989 1988 Fair value of plan assets
$198,348
$174,700 Projected benefit obligation 186,610 158, 794 Excess of plan assets over projected benefit obligation 11,738 15,906 Unrecognized net transitional asset (2,583)
(2,755)
Unrecognized net gain (8,246)
(12,050)
Prepaid pension cost 909
$ 1,101 Accumulated benefit obligation:
Vested benefits
$141,273
$112,935 Non-vested benefits 3,000 4,690 Total
$144,273
$117,625 35 At December 31, 1989 approximately 64% of plan assets were invested in equity securities, 23% in fixed income securities and 13% in other investments.
The assumed rates used in determining the actuarial present value of the projected benefit obligation at year end were as follows:
Weighted average discount Anticipated rate of increase in compensation 1989 8.250/o 6.000/o The assumed long term rate of return on plan assets was 8.00% for 1989, 1988 and 1987.
1988 8.25%
6.00%
In addition to pension benefits, the companies provide cer-tain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the companies. Benefits are provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. ACE and its subsidiary established a qualified tax exempt trusteed plan to fund these other postretirement benefits. Funding on behalf of active employees is based on the aggregate cost method over their service lives and is equivalent to normal cost. For current retirees, funding is based on current actual experience and amortization of expected benefits over the remaining life expectancy of the retiree group. The actuarial present value of accumulated other postretirement benefits under the plan was $41.9 million and $38.7 million at January 1, 1989 and 1988, respectively. The cost of these benefits was $3.4 million for 1989 and $3.2 million in 1988 and 1987. The net asset value of the trust fund was approximately $8.0 million at Decem-ber 31, 1989 and $6.7 million at December 31, 1988.
The FASB has issued a proposed statement of financial accounting standards entitled "Employers' Accounting for Postretirement Benefits Other Than Pensions". This proposed statement would require employers to accrue the expected obligation for the costs of providing other post-retirement benefits to employees and associated covered groups over the employees' service periods. The financial impacts of this proposal depend upon many factors yet to be decided. However, ACE believes that the annual costs recognized for other postretirement benefits will increase significantly over current levels. Management further believes that the impacts may be lessened by continued contributions to the trusteed plan as well as through rate regulation.
Notes to Consolidated Financial Statements (continued)
Atlantlc Energy, Inc. and Subsidiaries NOTE 5. JOINTLY-OWNED GENERATING STATIONS ACE participates with other utilities in the construction and The amounts shown represent ACE's share of each plant at operation of several electric production facilities.
December 31, including AFDC as appropriate.
Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Company's Share (%)
2.47 Electric Plant in Service ($000):
1989 8,951 1988 8, 709 Accumulated Depreciation ($000):
1989 2,652 1988 2,441 Construction Work in Progress ($000):
1989 401 1988 311 Operation and Maintenance Expenses (including fuel) ($000):
1989 4,768 1988 5,017 1987 4,629 Generation (MWH):
1989 292,627 1988 298,785 1987 292,801 The operating companies of the nuclear stations entered into contracts with the United States Department of Energy for spent nuclear fuel disposal, requiring the payment of fees related to ACE's ownership interests in the stations. Current recovery of these spent nuclear fuel disposal costs is provided as part of ACE's energy clauses.
NOTE 6. NONUTILITY COMPANIES ASP owns, develops and operates commercial real estate property. Its assets consist primarily of a commercial site with a current carrying value of approximately $14.0 million.
AGI is engaged in the development of cogeneration power projects through various partnership arrangements. Its assets are represented by contributions, loans and advances to the partnerships amounting to approximately $13.8 million.
36 Coal Nuclear Nuclear Nuclear 3.83 7.51 7.41 5.00 15,168 106,695 176,150 229,068 14,468 104,927 171,720 225,183 4,590 38,071 55,293 19,193 4,344 36,340 49,676 12,417 374 7,007 3,913 1,368 625 4,728 3,546 1,457 7,740 25,871 19,851 8,772 8,421 25,697 21,966 8,668 7,565 19,928 20,424 7,881 433,660 302,310 1,035,718 329,426 469,092 991,322 347,570 395,456 225,446 914,095 323,521 ACE provides its own financing during the construction period for its share of the jointly-owned plants and includes its share of direct operations and maintenance expenses in the Consolidated Statement of Income.
Generation in 1988 for Peach Bottom is zero because the station was shutdown under order of the NRC (see Note 3).
A TE manages capital investments for the Company. Its assets primarily are in leveraged leases which amount to approximately $73.2 million.
The results of operations of the companies for 1989, 1988 and 1987 were losses of $1.9 million, $2.0 million and
$549,000, respectively, net of income tax benefits of
$738,000, $1.7 million and $670,000, respectively.
NOTE 7. CUMULATIVE PREFERRED S'IDCK OF ACE ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, 2 million shares of No Par Preferred Stock and 3 million shares of Preference Stock, No Par Series Par Value Shares Not Subject to Mandatory Redemption:
4%
$100 77,000 4.10%
100 72,000 4.35%
100 15,000 4.35%
100 36,000 4.75%
100 50,000 5%
100 50,000 7.52%
100 100,000 Total Subject to Mandatory Redemption:
9.96%
$100 72,000
$8.25 None 72,500
$9.45 None
$8.53 None 600,000 Total Less portion due within one year Total Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of ACE.
On August 1 of each year, 8,000 shares of the 9.96% Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. ACE redeemed 8,000 shares in 1989, 1988 and 1987.
On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. ACE may redeem not more than an additional 2,500 shares on any sinking fund date without premium.
ACE redeemed 2,500 shares in 1989 and 1988, and 5,000 shares in 1987.
On November 1, 1989, ACE redeemed the remaining 30,000 shares of the $9.45 No Par Preferred Stock Series at Value. Information relating to outstanding shares at December 31 is shown in the table below.
1989 1988 Current Redemption 37 Amount Shares Amount Price
($000)
($000)
$ 7,700 77,000
$ 7,700
$105.50 7,200 72,000 7,200 101.00 1,500 15,000 1,500 101.00 3,600 36,000 3,600 101.00 5,000 50,000 5,000 101.00 5,000 50,000 5,000 100.00 10,000 100,000 10,000 103.01
$40,000
$40,000
$ 7,200 80,000
$ 8,000
$104.62 7,250 75,000 7,500 105.72 30,000 3,000 60,000 600,000 60,000 107.43 74,450 78,500 1,050 4,050
$73,400
$74,450
$100 per share through the regular operation of the sinking fund. ACE redeemed 40,000 shares in 1988 and 50,000 shares in 1987.
Beginning November 1, 1994 and annually thereafter, 120,000 shares of the $8.53 No Par Preferred Stock Series must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of ACE, not more than an additional 120,000 shares may be redeemed on any sinking fund date without premium.
Refunding of this series is restricted prior to November 1, 1993 if the effective cost to ACE of any refunding issue is less than a specified rate.
The annual minimum sinking fund provisions of the above series aggregate $1.05 million for 1990 through 1993, and
$13.05 million in 1994.
Notes to Consolidated Financial Statements (continued)
Atlantic Energy, Inc. and Subsidiaries NOTE 8. LONG TERM DEBT Maturity Series Date Long term debt of ACE consists of the following:
First Mortgage Bonds:
41/2%
April 1, 1989 41/2%
March 1, 1991 41/2%
July 1, 1992 43/s%
March 1, 1993 11%%
November 1, 1993 5Ys%
February l, 1996 8%
November 1, 1996 8%%
September 1, 2000 8%
May 1, 2001 71/2%
April 1, 2002 7314%
June 1, 2003 7% % Pollution Control January 1, 2005 6% % Pollution Control December 1, 2006 11 % % Pollution Control May 1, 2011 101/2% Pollution Control Series B July 15, 2012 7% % Pollution Control Series A April 15, 2014 101/2% Pollution Control Series C July 15, 2014 111/2%
October 1, 2015 8%%
May 1, 2016 8114% Pollution Control July 15, 2017 9114%
October 1, 2019 Total Debentures:
51/4%
February 1, 1996 7114%
May 1, 1998 Total Unamortized Premium and Discount-Net Total Long Term Debt of ACE Revolving Credit and Term Loan of ATE June 1, 1990 Less portion due within one year Total Long Term Debt Deposits in sinking funds for retirement of debentures are required on February 1 of each year through 1995 for the 51/4 % Debentures, and on May 1 of each year through 1997 for the 7i4% Debentures in amounts in each case sufficient to redeem $100,000 principal amount plus, at the election of 38 December 31 1989 1988
($000)
$ 2,775 10,000 10,000 10,350 10,350 9,540 9,540 13,025 9,980 9,980 95,000 95,000 19,000 19,000 27,000 27,000 20,000 20,000 29,976 29,976 6,500 6,500 2,500 2,500 39,000 39,000 850 850 18,200 18,200 23,150 23,150 21,215 21,215 125,000 125,000 4,400 4,400 135,000 606,661 487,461 2,267 2,267 2,619 2,619 4,886 4,886 (5,168)
(2,886) 606,379 489,461 44,500 26,500 44,500 2,775
$606,379
$513,186 ACE, up to an additional $100,000 principal amount in each year. By December 31, 1989, ACE had reacquired and cancelled $833,000 and $681,000 principal amount of the 51,4% and 7i4% Debentures, respectively, towards its require-ments for 1990 and subsequent periods.
Regular redemption prices currently are in effect for each series of first mortgage bonds, except for certain pollution control series for which redemption is restricted prior to specified dates. Also, certain pollution control series contain future sinking fund requirements. Redemption of certain series of the first mortgage bonds are restricted prior to specified dates if the redemption is for the purpose of refund-ing at effective interest costs to ACE ofless than specified rates.
Current sinking fund requirements of $500,000 in connec-tion with certain first mortgage bonds outstanding may be satisfied by certification of property additions as provided for in the related mortgage indentures.
NITTE 9. SHORT TERM DEBT AND COMPENSATING BALANCES As of December 31, 1989, ACE had bank lines of credit of
$144 million, all of which were available for use. ACE is required, with respect to $21 million of these credit lines, to maintain average compensating balances in demand deposits which are not significant or legally restricted. ACE is in Short term debt outstanding at December 31 consisted of:
($000)
Commercial Paper Notes Payable to Banks Total Additional information regarding short term debt (exclud-ing pollution control obligations outstanding during 1987) follows:
($000)
For the year ended:
Maximum amount of total short term debt at any month end:
Commercial Paper Notes Payable to Banks Average amount of short term debt (based on daily outstanding balances):
Commercial Paper Notes Payable to Banks Weighted daily average interest rates on short term debt:
Commercial Paper Notes Payable to Banks 39 The revolving credit and term loan facility of A TE provides up to $70 million. Interest rates on borrowings are deter-mined with reference to periodic pricing options available under the facility. Interest rates on borrowings in 1989 ranged from approximately 8. 7% to 10. 7%.
The aggregate amount of debt maturities, in addition to sinking fund requirements, of all long term debt outstanding at December 31, 1989 are $44.5 million in 1990, $10.0 million in 1991, $10.35 million in 1992 and $9.54 million in 1993.
No outstanding long term debt matures in 1994.
compliance with such compensating balance arrangements.
With respect to the remaining available credit lines, ACE paid commitment fees (generally Ys % ) for which charges were not significant.
1989 1989
$76,550
$10,000
$50,015
$ 3,351 9.4%
9.6%
1988
$51,000 10,000
$61,000 1988
$84,000
$10,000
$59,514
$ 2,803 7.6%
7.8%
1987
$46,700 17,000
$63,700 1987
$46,700
$17,000
$22,497
$ 3,327 6.9%
7.1%
Notes to Consolidated Financial Statements (continued)
Atlantic Energy, Inc. and Subsidiaries NOTE 10. COMMITMENTS AND CONTINGENCIES Construction Program ACE's cash construction expenditures for 1990 are estimated at approximately $176 million. Current commitments for the construction of major production and transmission facilities amount to approximately $159 million of which it is estimated approximately $41 million will be expended in 1990. These amounts exclude the allowance for funds used during construction and customer contributions.
Insurance Programs ACE is a member of certain insurance programs which provide coverage for decontamination and property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek Stations are insured against property damage losses up to $1.875 billion per site under these programs.
In addition, ACE is a member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specific conditions. Under the property and replacement power insurance programs, ACE could be assessed retro-spective premiums in the event the insurers' losses exceed their reserves. As of December 31, 1989, the maximum amount of retrospective premiums ACE could be assessed for losses during the current policy year was $8.46 million under these programs.
The Price-Anderson provisions of the Atomic Energy Act of 1984, as amended by the Price-Anderson Amendments Act of 1988, govern liability and indemnification for nuclear incidents. All nuclear facilities could be assessed, after exhaustion of private insurance, up to $66.15 million each, payable at $10 million per year, per reactor and per incident.
Based on its ownership share of nuclear facilities, ACE could be assessed up to $30.9 million per incident. This amount would be payable at $4.67 million per year, per incident.
Purchased Energy and Capacity Arrangements ACE has an arrangement for a limited term purchase of energy and capacity from Allegheny Power System (APS) which is subject to annual extensions. ACE participates in a monthly competitive bidding process with the other members of the local power pool to obtain additional power imported from APS. On a short term basis, ACE can procure from selling members their available transmission capability entitlements.
40 Agreements with Pennsylvania Power and Light Company provide for the purchase of 125 megawatts of certain capacity and energy output. The BPU order approving rates for the PP&L agreements prescribes a revenue reduction formula effective through September 30, 1991 pertaining only to the nuclear segment of the agreements. In the event that a defined combined minimum performance standard is not met, ACE could be subject, under the most adverse circum-stances, to a revenue reduction not to exceed $15 million per unit per year. An agreement with Public Service Electric and Gas Company provides for the purchase of 227 mega-watts of capacity, expiring on May 31, 1990. ACE has an agreement, subject to the approval of the Federal Energy Regulatory Commission, with Philadelphia Electric Com-pany for the purchase of 200 megawatts of capacity and energy for a four-year period to begin June 1, 1990. Buy and sell arrangements for available energy exist with two other utilities.
Nuclear Plant Outages The BPU had deferred consideration in proceedings since 1985 of $12.2 million of replacement power costs stemming from certain nuclear outages that occurred in 1984 at Salem Station. BPU consideration has awaited the resolution of litigation instituted by the co-owners of the station against the manufacturer of the equipment responsible for the outages. In March 1989, settlement was reached and the suit was terminated. Recovery of the remaining balance of such deferred energy costs of $10.4 million has been requested by ACE in its most recent energy clause filings discussed in Note 3.
Other In connection with the extended outage of the Peach Bottom Atomic Power Station under the 1987 NRC order, ACE has filed suit along with another co-owner against Philadelphia Electric Company. ACE is seeking com-pensatory and punitive damages resulting from the outage of the station, including the costs incurred for replacement energy necessitated by the outage. ACE is unable to pre-dict the outcome of this litigation or its effect at this time.
ACE has signed contracts with third parties for the purchase of power from cogeneration facilities with a combined capacity of 569 megawatts. The contracts would become effective upon receipt of the appropriate regulatory approvals, and ultimate construction of the facilities. ACE would be obligated under the contracts to construct interconnec-tion and transmission facilities and to purchase certain specified minimum amounts of electric power annually in accordance with specified formula pricing. ACE currently forecasts the first of such facilities to be operational in 1991, with the remaining projects to be in operation by 1994.
NITTE 11. LEASES ACE leases various types of property and equipment for use in its operations. Certain of these lease agreements are capital leases consisting of the following at December 31:
($000) 1989 1988 Production plant
$13,521
$13,521 Less accumulated amortization 5,986 5,396 Net 7,535 8,125 Nuclear Fuel 25,611 24,755 Leased property-net
$33,146
$32,880 ACE has a contractual obligation to purchase nuclear fuel for the Salem and Hope Creek Generating Stations from Pearl Fuel Corporation. The asset and related obli-gation are reduced as the fuel is burned, and are increased as additional purchases are made. No commitments for future payments beyond satisfaction of the outstanding obligation exist. Nuclear fuel requirements for Peach Bottom Atomic Power Station are currently provided by the operating company through a fuel purchase contract, for which ACE is responsible for payment of its share of fuel consumed and related operating costs and interest expense. Operating expenses for 1989, 1988 and 1987 include leased nuclear fuel costs of approximately $8.6 million,
$9.9 million and $10.8 million, respectively, and rentals and lease payments for all other capital and operating leases of $4.5 million, $5.5 million and $5.1 million, respectively. Future minimum rental payments for all noncancellable lease agreements are not significant to ACE's operations.
NOTE 12. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows:
Operating Operating Net Earnings Quarter Revenues Income Income Per Share 1989
($000)
($000)
($000) 1st
$160,773
$ 25,627
$12,624
$.63 2nd 162,920 30,105 16,200
.76 3rd 207,333 51,628 38,971 1.74 4th 173,991 27,384 13,168
.58 Annual
$705,020
$134,745
$80,964
$3.74 1988 1st
$145,435
$ 25,686
$11,915
$.64 2nd 154,756 22,715 11,068
.56 3rd 213,225 51,099 39,329 1.98 4th 162,443 23,279 9,859
.49 Annual
$675,859
$122,779
$72,171
$3.68 Individual quarters may not add to the total due to round-ing, as well as the effect on earnings per share of increasing average number of common shares outstanding.
The revenues of ACE are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months.
41
Summary Financial and Statistical Review 1989-1984 Atlantic Energy, Inc. and Subsidiaries 1989 1988 1987 1986 1985 1984 Atlantic Energy, Inc.
Investor Information Operating Revenues ($000)
$ 705,020 $ 675,859 $ 648,173
$ 582,961
$ 579,733 $ 549,531 Net Income ($000) 80,964 $
72,171 73,765 $
54,946 $
46,150 $
56,433 Average Number of Shares Outstanding (Thousands) 21,634 19,593 18,311 18,266 18,069 17,581 Earnings per Average Common Share 3.74 $
3.68 $
4.03 $
3.00 $
2.55 $
3.21 Total Assets {Year End) ($000)
$1,864,461
$1,660,286
$1,499,381
$1,401,064
$1,319,027
$1,253,083 Long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption (Year End) ($000)
$ 725,329 $ 594,461
$ 522,815 $ 534,822 $ 521,612 $ 473,462 Capital Lease Obligations {Year End) ($000) 33,146 $
32,880 $
37,694 $
37,603 $
38,857 $
41,722 Dividends Declared on Common Stock 2.85 $
2.74 $
2.715 $
2.61 2.555 $
2.45 Dividend Payout Ratio 750/o 75%
66%
87%
99%
75%
Book Value per Share {Year End) 28.54 $
27.16 $
25.71 24.37 $
23.96 $
23.90 Price Earnings Ratio (Year End) 10 9
8 12 11 8
Times Fixed Charges Earned (pre-tax, Atlantic Electric) 3.19 3.06 3.68 2.99 3.06 3.62 Shareholders and Employees (Year End)
Common Shareholders 43,383 44,473 45,586 47,133 48,635 47,446 Employees (Atlantic Electric) 2,021 2,092 2,148 2,168 2,099 2,012 Atlantic City Electric Company (Principal Subsidiary)
Facilities for Service Total Utility Plant ($000)
$1,846,122 $1,712,614
$1,602,801
$1,503,010
$1,438,643
$1,351,392 Additions to Utility Plant ($000) 147,886 $ 130,281
$ 105,521
$ 109,303 $ 105,213 $
95,388 Generating Capacity (Kilowatts) (a) (b) 1,879,700 1,807,700 1,660,700 1,660,700 1,605,700 1,594,200 Maximum Utility System Demand (Kilowatts) 1,700,000 1,636,000 1,609,000 1,459,000 1,432,000 1,298,800 Capacity Reserve at Time of Peak (% of Instal. Gen.)
9.60/o 9.5%
3.1%
9.1%
10.8%
18.5%
Energy Supply {Thousands of kwh):
Net Generation 6,260,942 5,863,119 6,157,938 5,966,600 5,817,254 6,237,724 Purchased and Interchanged-Net 2,110,554 2,209,777 1,483,685 1,131,900 1,049,393 393,175 Total System Load 8,371,496 8,072,896 7,641,623 7,098,500 6,866,647 6,630,899 Electric Sales {Thousands of kwh)
Residential 3,265,918 3,213,010 3,040,410 2,839,114 2,638,121 2,646,813 Commercial 2,917,162 2,741,976 2,592,232 2,401,199 2,298,895 2,150,464 Industrial 1,380,832 1,339,005 1,323,567 1,222,981 1,204,971 1,197,392 All Others 53,872 56,289 58,191 58,120 57,685 59,122 Total (c) 7,617,784 7,350,280 7,014,400 6,521,414 6,199,672 6,053,791 Residential Electric Service (Average per Customer)
Amount of Electricity Used During the Year (kwh) 8,382 8,460 8,281 7,982 7,643 7,866 Revenue for a Year's Service 840.34 $
838.70 $
838.08 $
780.43 778.77 $
783.47 Revenue per Kilowatt-hour 10.03¢ 9.9lr;_
10.12r;_
9.78r;_
10.19r;_
9.96r;_
Customer Data (Average)
Residential With Electric Heating 80,409 78,805 75,900 72,640 68,871 65,261 Residential Without Electric Heating 309,245 300,974 291,253 283,062 276,305 271,207 Total Residential 389,654 379,779 367,153 355,702 345,176 336,468 Commercial 49,509 48,398 46,775 45,359 44,256 43,615 Industrial 1,008 1,014 1,015 1,022 1,020 1,015 Other 549 552 554 554 554 544 Total Customers (c) 440,720 429,743 415,497 402,637 391,006 381,642 Operating Revenues ($000)
Energy Revenues:
Residential
$ 327,443 $ 318,520 $ 307,704 $ 277,601
$ 268,814 $ 263,612 Commercial 256,199 240,890 231,498 211,023 209,880 190,435 Industrial 94,634 91,661 89,261 78,404 80,392 79,123 All Others 9,901 9,935 10,409 10,152 10,315 10,405 Total Energy Revenues 688,177 661,006 638,872 577,180 569,401 543,575 Unbilled Revenues-Net 7,215 6,716 385 (1,813) 3,076 (1,340)
Other Electric Revenues 9,765 8,137 8,916 7,594 7,256 7,296 Total (c)
$ 705,157 $ 675,859 $ 648,173 $ 582,961
$ 579,733 $ 549,531 (a) Exdudcs capacity allocated to a large industrial cuslOmcr.
(b) Include" unit puri.:hase of capacity under contracts with certain other utilities.
(c) Include., sales to an affiliate wnhm the Atlantic Energy consolidated group.
42
Investor Information Atlantic Energy, Inc. and Subsidiaries Where should I send inquiries concerning my investment in Atlantic Energy, Inc.?
The Company serves as recordkeeping agent, dividend disbursing agent and also as Transfer Agent for Common Stock. Correspon-dence concerning such matters as the replacement of dividend checks or stock certificates, address changes, transfer of Common Stock certificates, Dividend Reinvestment and Stock Purchase Plan inquiries or any general information about the Company should be addressed to:
Atlantic Energy, Inc.
Investor Records P.O. Box 1334 1199 Black Horse Pike Pleasantville, New Jersey 08232 Telephone (609) 645-4506 or (609) 645-4507 Ms. S.M. Dodd, Secretary, is the corporate officer responsible for all investor services.
Does the Company have a Dividend Reinvestment and Stock Purchase Plan?
Yes. The Plan allows shareholders and employees to automatically invest their cash dividends and/or optional cash payments in share of the Company's Common Stock. Holders of record of Common Stock interested in enrolling in the Plan should contact Investor Records at the address above.
Where is the Company's stock listed?
Common Stock is listed on the ew York, Pacific and Philadelphia Stock Exchanges. The trading symbol of the Company's Common Stock is ATE; however, newspaper listings generally use AtlEnrg or AtlanEngy.
The high and low sale prices of the Common Stock as reported in the Wall Street Journal as New York Stock Exchange-Composite Transactions for the periods indicated were as follows:
1989 1988 High Low High Low First Quarter 33%
32%
3414 3034 Second Quarter 36 32%
35 31 'fz Third Quarter 381/e 35%
33%
31%
Fourth Quarter 39%
35 34'fz 3234 Is additional information about the Company available?
The annual report to the Securities and Exchange Commission on Form 10-K and other reports containing financial data are available to shareholders. Specific requests should be addressed to:
Atlantic Electric Financial Services Department P.O. Box 1264 1199 Black Horse Pike Pleasantville, NJ 08232 Telephone (609) 645-4655 or (609) 645-4888 43 When are dividends paid?
The proposed record dates and payable dates for dividends on Common Stock are as follows:
Record Dates Payable Dates March 15, 1990 June 15, 1990 September 17, 1990 December 17, 1990 April 16, 1990 July 16, 1990 October 15, 1990 January 15, 1991 The following table indicates dividends paid per share in 1989 and 1988 on Common Stock:
1989 1988 First Quarter
$.69
$.72*
Second Quarter
.69
.67 Third Quarter
.72
.69 Fourth Quarter
.72
.69 Annual Total
$2.82
$2.77
- Includes spenal dividend of $.OS.
Dividends paid on Common Stock in 1989 and 1988 were fully taxable.
Who is the trustee and interest paying agent for Atlantic Electric's bonds and debentures?
First Mortgage Bond recordkeeping and interest disbursing are performed by The Bank of ew York, 101 Barclay Street, New York, New York 10286. Debenture recordkeeping and interest disbursing are performed by First Fidelity Bank, N.A.,
765 Broad Street, Newark, New Jersey 07102.
Whom can I contact regarding the Preferred Stock of Atlantic Electric?
Atlantic Electric serves as recordkeeping agent, dividend disburs-ing agent and Transfer Agent for its Preferred Stock. Inquiries regarding such matters can be directed to Investor Records at the address listed above.
Who are the independent auditors for Atlantic Energy, Inc.?
Deloitte & Touche Certified Public Accountants One World Trade Center New York, N.Y. 10048
Officers of Atlantic Energy, Inc. and Subsidiaries as of January 31, 1990 Officers of Atlantic Energy, Inc.
E. DOUGLAS HUGGARD Chairman and Chief Executive Officer JERROLD L. JACOBS President MEREDITH I. HARLACHER, JR.
Vice President MICHAEL A. JARRETT Vice President JOHN R. LILLY Vice President BRIAN A. PARENT Vice President Officers of Atlantic City Electric Company Years of Service E. DOUGLAS HUGGARD 34 Chairman and Chief Executive Officer JERROLD L. JACOBS 28 President and Chief Operating Officer MEREDITH I.HARLACHER, JR.
24 Senior Vice President-Planning and Regulatory Affairs MICHAEL A. JARRETT 14 Senior Vice President-Corporate Services BRIAN A. PARENT 22 Senior Vice President-Utility Operations J.G. SALOMONE 13 Senior Vice President-Finance and Accounting JOHN M. CARDEN 22 Vice President-Customer Service LANCE E. COOPER 7
Vice President-Control and Assistant Treasurer SABRINA M. DODD 4
Secretary Officer of Atlantic Generation, Inc.
JOHN R. LILLY President, Secretary and Treasurer Officers of Atlantic Southern Properties, Inc.
MICHAEL A. JARRETT President JOHN R. LILLY Vice President Officers of ATE Investment, Inc.
J.G. SALOMONE President LANCE E. COOPER Vice President J. DAVID McCANN Secretary and Treasurer JOHN R. LILLY Vice President J. DAVID McCANN Secretary and Treasurer 44 J.G. SALOMONE Vice President and Treasurer SABRINA M. DODD Secretary J. DAVID McCANN Assistant Secretary and Assistant Treasurer THOMAS E. FREEMAN Vice President-Human Resources JAMES J. LEES Vice President-Marketing and Rates BERTRAM LeMUNYON Vice President-Power Delivery HENRY K. LEVARI, JR.
Vice Presidenc-Corporate Planning and Performance
]. DAVID McCANN Vice President, Treasurer and Assistant Secretary MORGAN T. MORRIS Ill Vice President-Administrative Services HENRY C. SCHWEMM, JR.
Vice President-Production Directors of Atlantic Energy's subsidiaries are:
Messrs. Huggard, Harlacher, Jacobs, Jarrett, Parent and Salomone.
Years of Service 9
19 30 18 17 20 20