<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------
OR
- --
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3559
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 21-0398280
--------------- ------------
(States of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231 Wilmington, Delaware 19899
- ---------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3114
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Conectiv owns all of the 18,320,937 outstanding shares of Common Stock of
Atlantic City Electric Company.
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
Table of Contents
-----------------
Page No.
--------
Part I. Financial Information:
Consolidated Statements of Income for the three
months and six months ended June 30, 1998 and 1997 1
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Part II. Other Information and Signature 13-18
<PAGE>
PART I. FINANCIAL INFORMATION
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- ---------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 239,113 $ 239,647 $ 476,541 $ 481,140
Other services 2,770 2,828 3,290 4,756
---------- ---------- ---------- ----------
241,883 242,475 479,831 485,896
---------- ---------- ---------- ----------
OPERATING EXPENSES
Electric fuel and purchased energy 69,438 57,765 142,350 119,623
Purchased electric capacity 41,046 49,066 88,973 97,321
Employee separation & (3,361) - 48,117 -
other Merger-related costs
Operation and maintenance 49,262 40,377 95,080 76,190
Cost of sales - Other services 607 2,927 4,827 4,821
Depreciation 29,103 20,737 52,030 41,299
Taxes other than income taxes 9,760 26,592 20,250 54,253
---------- ---------- ---------- ----------
195,855 197,464 451,627 393,507
---------- ---------- ---------- ----------
OPERATING INCOME 46,028 45,011 28,204 92,389
---------- ---------- ---------- ----------
OTHER INCOME
Allowance for equity funds used
during construction 176 280 319 544
Other income 2,271 2,040 3,732 4,111
---------- ---------- ---------- ----------
2,447 2,320 4,051 4,655
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest charges 15,826 16,669 31,363 32,483
Allowance for borrowed funds used
during construction and
capitalized interest (313) (286) (564) (548)
---------- ---------- ---------- ----------
15,513 16,383 30,799 31,935
---------- ---------- ---------- ----------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,444 1,444 2,888 2,888
---------- ---------- ---------- ----------
INCOME / (LOSS) BEFORE INCOME TAXES 31,518 29,504 (1,432) 62,221
INCOME TAXES 12,204 10,828 (8) 23,174
---------- ---------- ---------- ----------
NET INCOME / (LOSS) 19,314 18,676 (1,424) 39,047
DIVIDENDS ON PREFERRED STOCK 1,000 1,410 2,000 2,820
---------- ---------- ---------- ----------
INCOME(LOSS) APPLICABLE TO COMMON STOCK $ 18,314 $ 17,266 $ (3,424) $ 36,227
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
ASSETS
- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 21,095 $ 20,765
Accounts receivable 133,731 126,148
Inventories, at average cost:
Fuel (coal and oil) 18,822 22,670
Material and supplies 22,649 20,893
Emission allowances 6,489 6,489
Prepaid state excise & sales tax 62,207 3,804
Other prepayments 2,298 3,949
Deferred energy costs 14,571 27,424
---------- ----------
281,862 232,142
---------- ----------
INVESTMENTS
Funds held by trustee 95,517 88,743
Other investments 112 9
---------- ----------
95,629 88,752
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT
Electric 2,571,330 2,591,825
Less: Accumulated depreciation 969,120 945,921
---------- ----------
Net utility plant in service 1,602,210 1,645,904
Construction work-in-progress 118,647 106,806
Leased property, net 33,375 38,795
Nonutility property, net 8,332 8,517
---------- ----------
1,762,564 1,800,022
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Unrecovered other postretirement employee benefit costs 36,227 37,476
Unamortized debt costs 13,438 13,416
Deferred debt refinancing costs 28,990 30,002
Deferred recoverable income taxes 85,858 85,858
Unrecovered purchased power costs 57,277 66,264
Unrecovered state excise taxes 40,374 45,154
Other 27,807 37,669
---------- ----------
289,971 315,839
---------- ----------
TOTAL ASSETS $2,430,026 $2,436,755
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
CAPITALIZATION AND LIABILITIES
- --------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Short term debt $ 84,600 $ 55,675
Long-term debt due within one year 30,075 -
Preferred stock due within one year 10,000 -
Accounts payable 50,208 37,779
Interest accrued 22,664 19,562
Dividends declared 21,555 21,215
Current capital lease obligation 15,948 15,653
Employee separation & Merger-related
accrued costs 16,498 -
Deferred income taxes, net 6,764 9,974
Other 19,705 46,996
---------- ----------
278,017 206,854
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 344,084 352,239
Deferred investment tax credits 42,776 44,043
Long-term capital lease obligation 17,991 24,077
Accrued other postretirement employee benefit costs 44,512 37,476
Other 20,856 21,339
---------- ----------
470,219 479,174
---------- ----------
CAPITALIZATION
Common stock 54,963 54,963
Additional paid-in capital 492,872 493,161
Retained earnings 190,678 234,909
---------- ----------
Total common stockholder's equity 738,513 783,033
Preferred stock subject to mandatory redemption 23,950 33,950
Preferred stock not subject to mandatory redemption 30,000 30,000
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Company debentures 70,000 70,000
Long-term debt 819,327 833,744
---------- ----------
1,681,790 1,750,727
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $2,430,026 $2,436,755
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,424) $ 39,047
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 52,030 41,300
Investment tax credit adjustments, net (1,267) (1,267)
Deferred income taxes, net (11,365) (752)
Prepaid state sales taxes (45,583) -
Prepaid excise taxes (13,406) (46,865)
Unrecovered purchased power costs 8,987 8,563
Unrecovered state excise taxes 4,780 4,780
Employee separation & Merger-related costs 14,791 -
Net change in:
Accounts receivable (7,583) (8,888)
Inventories 5,754 2,144
Accounts payable 14,658 (12,290)
Other current assets & liabilities 10,807 9,890
Other, net 10,331 8,060
-------- --------
Net cash provided by operating activities 41,510 43,722
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (30,635) (39,265)
Nuclear decommissioning trust fund deposits (3,212) (3,212)
Other, net 2,370 (978)
-------- --------
Net cash used by investing activities (31,477) (43,455)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends: Common (40,808) (40,428)
Preferred (2,000) (2,820)
Issuances: Long-term debt 85,000 15,000
Redemptions: Long-term debt (58,500) (100)
Net change in short-term debt 12,500 35,950
Other, net (5,895) (7,307)
-------- --------
Net cash (used) provided by financing activities (9,703) 295
-------- --------
Net change in cash and cash equivalents 330 562
Cash and cash equivalents at beginning of period 20,765 7,927
-------- --------
Cash and cash equivalents at end of period $ 21,095 $ 8,489
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
--------------------------------
The consolidated financial statements include the accounts of Atlantic City
Electric Company (the Company) and its wholly-owned subsidiaries. The
statements reflect all adjustments necessary in the opinion of the Company for a
fair presentation of interim results. They should be read in conjunction with
the Company's 1997 Annual Report on Form 10-K and Part II of this report on Form
10-Q for additional information.
Certain reclassifications, not affecting net income, have been made to conform
amounts for the three months ended and the six months ended June 30, 1997 to the
current presentation. Primarily, the operating results of nonutility activities
were reclassified from "Other Income" into other classifications within the
income statement. Revenues from "Other services" includes revenues from these
nonutility activities of the Company. Reclassifications have also been made
within the balance sheet to conform to current year reporting.
2. MERGER WITH DELMARVA POWER & LIGHT COMPANY
------------------------------------------
As previously reported, on March 1, 1998, Atlantic Energy, Inc. (AEI) merged
with Conectiv, with Conectiv as the surviving corporation (the Merger). Prior
to the Merger, AEI owned the Company and Atlantic Energy Enterprises (AEE). As
a result of the Merger, Conectiv owns (directly or indirectly) the Company, AEE,
Delmarva Power & Light Company (DPL), and the nonutility subsidiaries formerly
held by DPL.
The Merger was accounted for under the purchased method as a tax-free, stock-
for-stock transaction with DPL as the acquirer. Under the terms of the
agreement, AEI shareholders received 0.75 shares of Conectiv's common stock and
0.125 shares of Conectiv's Class A common stock for each share of AEI stock
held. DPL shareholders received one share of Conectiv's common stock for each
share of DPL common stock held.
Under the terms of the New Jersey Board of Public Utilities (BPU) approval of
the Merger, approximately 75% or $15.7 million of the Company's total average
annual projected merger savings will be returned to the Company's customers for
an overall Merger-related customer rate reduction of 1.7%.
The Company has recorded the financial effects of enhanced retirement offers and
other employee separation programs utilized to achieve workforce reductions in
conjunction with the Merger. The Company expects a reduction of approximately
360 positions, of which about 275 employee separations have occurred. The
employee separation programs and other Merger-related costs resulted in a $48.1
million pre-tax charge to expense (or $29.0 million after taxes) for the six-
month period ended June 30, 1998. The pre-tax expenses are shown on the
Statement of Income as "Employee separation & other Merger-related costs." As
of June 30, 1998, $18.1 million of the $48.1 million expense had been paid,
$13.5 million will not require the use of operating funds, and $16.5 million
remains to be paid from operating funds.
For the three months ended June 30, 1998 revised cost estimates for the employee
separation programs resulted a decrease in pre-tax expenses of $3.4 million (or
$2.0 million after taxes).
3. DEBT
----
In May 1998, the Company repaid at maturity $6.0 million of 5.5% Medium-Term
Notes and $2.5 million of 7.25% Debentures.
In March and May 1998, the Company arranged two separate uncommitted lines of
credit in the amount of $25 million and $20 million, respectively. The
facilities are renewable annually and bear interest at variable rates.
4. RATES
-----
As previously disclosed in Note 4 of the Consolidated Financial Statements of
the Company's Annual Report on Form 10-K, the Company's total electric base rate
decrease associated with Merger-related cost savings passed on to the Company's
customers is $15.7 million effective as follows: (1) $5.0 million effective
January 1, 1998 coincident with a $5.0 million increase for recovery of other
postretirement benefit costs; (2) $9.9 million effective March 1, 1998, and (3)
$0.8 million effective January 1, 1999.
5
<PAGE>
5. CONTINGENCIES
- --- -------------
Environmental Matters
- ---------------------
The Company is subject to regulation with respect to the environmental effects
of its operations, including air and water quality control, solid and hazardous
waste disposal, and limitation on land use by various federal, regional, state,
and local authorities. Costs may be incurred to clean up facilities found to be
contaminated due to past disposal practices. Federal and state statutes
authorize governmental agencies to compel responsible parties to clean up
certain abandoned or uncontrolled hazardous waste sites. The Company is a
potentially responsible party at a state superfund site and has agreed, along
with other responsible parties, to remediate the site pursuant to an
Administrative Consent Order with the New Jersey Department of Environmental
Protection. The Company is also a defendant in an action to recover costs at a
federal superfund site in Gloucester, New Jersey. There is $1.0 million
included in the Company's current liabilities as of June 30, 1998, for
remediation activities at these sites. The Company does not expect such future
costs to have a material effect on its financial position or results of
operations.
Insurance Programs
- ------------------
Nuclear
- -------
The Company is a member of certain insurance programs that provide coverage for
contamination and property damage to members' nuclear generating plants.
Facilities at Peach Bottom, Salem, and Hope Creek stations are insured against
property damage losses up to $2.8 billion per site under these programs.
In addition, the Company is a member of an insurance program which provides
coverage for the cost of replacement power during prolonged outages of nuclear
units caused by certain specific conditions. The premium for this coverage is
subject to retrospective assessment for adverse loss experience. The maximum
amount of retroactive premiums the Company could be assessed for losses during
the current policy year is $4.4 million under these programs.
The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by
the Price-Anderson Amendments Act of 1988, govern liability and indemnification
for nuclear incidents. All nuclear facilities could be assessed, after
exhaustion of private insurance, up to $79.28 million, per reactor, per
incident, payable at $10 million per year. Based on its ownership of nuclear
facilities, ACE could be assessed up to an aggregate of $27.6 million per
incident. This amount would be payable at an aggregate of $3.48 million per
year, per incident.
6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 which becomes effective in the
first quarter of fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that all derivatives be recognized as assets
or liabilities in the balance sheet and be measured at fair value. Under
specified conditions, a derivative may be designated as a hedge. The change in
the fair value of derivatives not designated as hedge is recognized in earnings.
For derivatives designated as hedges of change in the fair value of an asset or
liability, or as a hedge of exposure to variable cash flows of a forecasted
transaction, earnings are affected to the extent the hedge does not match
offsetting changes in the hedged item.
Based on the Company's current limited level of unregulated electric sales and
trading, SFAS No. 133 should not have a material effect on the Company's
financial statements and related notes. For information concerning the
Company's current policy for derivatives and related energy trading activities,
refer to Note 15 to the 1997 Financial Statements in the Company's 1997 Annual
Report on Form 10-K.
6
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Six Months Ended
June 30,
Cash paid for: 1998 1997
------- -------
(dollars in thousands)
Interest, net of amounts capitalized $28,261 $32,540
Income taxes, net of refunds $25,760 $ 3,373
8. SUBSEQUENT EVENT, PREFERRED STOCK REDEMPTION
--------------------------------------------
On August 3, 1998, the Company redeemed 100,000 shares of its $8.20 No Par
Preferred Stock at $100 per share, or $10.0 million in total (book value).
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
EARNINGS SUMMARY
- ----------------
The Company's operations resulted in net income of $19.3 million for the three
months ended June 30, 1998 compared to net income of $18.7 million for the three
months ended June 30, 1997. The increase was primarily due to revisions made to
estimated employee separation and other Merger-related costs, and reduced
interest expense.
For the six months ended June 30, 1998, the Company reported a net loss of $1.4
million for the six months ended June 30, 1998 compared to net income of $39.0
million for the six months ended June 30, 1997. Merger-related charges
decreased current-year after-tax earnings by $29.0 million. Excluding the
Merger-related charges, the Company earned $27.6 million, an $11.4 million
decrease compared to the same period of the previous year. The decrease was
primarily due to milder winter weather's adverse effect on electric sales in the
first quarter and increased operations and maintenance expenses.
MERGER IMPACT
- -------------
As previously reported, on March 1, 1998, Atlantic Energy, Inc. (AEI) merged
with Conectiv, with Conectiv as the surviving corporation (the Merger). Prior
to the Merger, AEI owned the Company and Atlantic Energy Enterprises (AEE). As
a result of the Merger, Conectiv owns (directly or indirectly) the Company, AEE,
Delmarva Power & Light Company (DPL), and the nonutility subsidiaries formerly
held by DPL.
Under the terms of the New Jersey Board of Public Utilities (BPU) approval of
the Merger, approximately 75%, or $15.7 million, of the Company's total average
annual projected Merger savings will be returned to the Company's customers for
an overall Merger-related customer rate reduction of 1.7%.
The Company has recorded the financial effects of enhanced retirement offers and
other employee separation programs utilized to achieve workforce reductions in
conjunction with the Merger. The Company expects a reduction of approximately
360 positions, of which about 275 employee separations have actually occurred.
The employee separation programs and other Merger-related costs resulted in a
$48.1 million pre-tax charge to expense (or $29.0 million after taxes) for the
six-month period ended June 30, 1998. The pre-tax expenses are shown on the
Statement of Income as "Employee separation & other Merger-related costs." As
of June 30, 1998, $18.1 million of the $48.1 million expense had been paid,
$13.5 million will not require the use of operating funds, and $16.5 million
remains to be paid from operating funds.
For the three months ended June 30, 1998, revised cost estimates for the
employee separation programs resulted a decrease in pre-tax expenses of $3.4
million (or $2.0 million after taxes).
Electric Utility Industry Restructuring and Stranded Costs
- ----------------------------------------------------------
For background information concerning restructuring the electric utility
industry in New Jersey refer to page 3 of the Company's 1997 Report on Form 10-
K. Updates to previously disclosed information are shown below:
* Restructuring hearings began on April 27, 1998 and were completed May 28,
1998. It is unknown when the BPU is expected to rule on the proceedings.
However, a decision is expected sometime after the introduction of enabling
legislation. Implementation of a restructuring plan had been planned for
October 1998, but is now more likely to occur in early- to mid-1999.
* With respect to information previously filed by the Company concerning
stranded costs and unbundled rates, the Office of Administrative Law (OAL) is
expected to render a decision by mid-August 1998. The OAL's decision will
then be sent to the BPU for review.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $41.5 million for the six months
ended June 30, 1998 compared to $43.7 million for the six months ended June 30,
1997.
On an interim basis, the Company finances construction costs and other capital
requirements in excess of internally generated funds through the issuance of
unsecured short term debt, consisting of commercial paper and notes from banks.
As of June 30, 1998, the Company had authority to issue $150 million in short
term debt and had $84.6 million outstanding, $25.0 million in short term debt
and $59.6 in commercial paper.
In May 1998, the Company repaid at maturity $6.0 million of 5.5% Medium-Term
Notes and $2.5 million of 7.25% Debentures.
In March and May 1998, the Company arranged two separate uncommitted lines of
credit in the amount of $25 million and $20 million, respectively. The
facilities are renewable annually and bear interest at variable rates.
On August 3, 1998, the Company redeemed 100,000 shares of its $8.20 No Par
Preferred Stock at $100 per share, or $10.0 million in total (book value).
RESULTS OF OPERATIONS
- ---------------------
Electric Revenues
Details of the changes in the various components of electric revenues for the
three-month period and the six-month period ended June 30, 1998, as compared to
the same periods in 1997 are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Variance Variance
------------- -----------
<S> <C> <C>
Non-fuel (Base Rate) Revenues
Change in New Jersey tax law $(12.6) $(23.2)
Merger-related base rate decrease (2.5) (3.3)
All other variances 2.2 (2.1)
------ ------
Subtotal (12.9) (28.6)
Fuel Revenues 6.6 6.4
Interchange Revenues 15.5 9.6
Merchant Revenues (9.7) 8.0
------ ------
Total $ (0.5) $ (4.6)
====== ======
</TABLE>
Electric non-fuel revenues decreased $12.9 million for the three-month period
and $28.6 million for the six-month period, respectively, as shown in the
proceeding table. Although changes in the New Jersey tax law related to sales
of electricity caused electric revenues to decrease as shown above, this revenue
reduction did not affect earnings due to corresponding reductions in taxes other
than income taxes. The sales and use taxes billed to customers in 1998 are
recorded as a current liability, whereas in 1997, certain other state taxes
(which were replaced in part by the sales and use taxes) were recorded as
revenues. The Merger-related base rate decrease shown above results from
sharing with utility customers the expected Merger-related cost savings, as
discussed in Note 4 to the Consolidated Financial Statements. "All other
variances" in electric non-fuel revenues reflect growth in the number of
customers in both periods, which in the six-month period, was more than offset
by the adverse effect of mild winter weather on sales and revenues.
Total retail kilowatt-hour (kWh) sales increased 2.8% and 1.3% for the three-
and six-month periods, respectively, primarily due to customer and economic
growth. Despite the increase in kWh sold during the six-month period, non-fuel
revenues decreased due to lower winter-heating season sales when average rates
are higher.
Interchange delivery revenues for the three-months increased $15.5 million and
for the six-months increased $9.6 million from the same periods of the prior
year due to additional revenues from ancillary transmission and distribution
services. The six-month period increase was offset in-part by reduced sales in
the first quarter to the Pennsylvania-New Jersey-Maryland Interconnection (PJM).
Interchange sales reduce the rates charged to customers under fuel adjustment
clauses and, thus, generally do not affect earnings.
9
<PAGE>
Merchant revenues, which represent bulk power sales and are not subject to price
regulation, decreased $9.7 million for the three-months ended June 30, 1998, due
to a decision to sell bulk power only through DPL after the Merger date to take
advantage of the merger synergies. Merchant revenues for the six months ended
June 30, 1998 increased $8.0 million, reflecting higher merchant sales prior to
the Merger. The margin provided by the wholesale market revenues in excess of
the related energy costs is relatively small due to the competitive nature of
bulk power sales.
Other Services Revenues
- -----------------------
Other services revenue represents the Company's initiative to enter the non-
regulated marketplace with a variety of energy related services, including
energy management services.
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Electric fuel and purchased energy expenses increased $3.7 million for the
three-month period and $14.4 million for the six-month period ended June 30,
1998, due to the increased energy purchases related to wholesale market sales
and increased recognition of energy expenses pursuant to the Company's Levelized
Energy Clause.
Merger-Related Separation Expenses
- ----------------------------------
Estimated employee separation programs and other Merger-related costs of $51.5
million were recorded in March 1998 and were subsequently revised to $48.1
million in June 1998. See Note 2 of the Consolidated Financial Statements for
further details on the Merger and Merger-related expenses.
Operation and Maintenance Expenses
- ----------------------------------
Operation and maintenance expenses increased $8.9 million for the three-month
period and $18.9 million for the six-month period ended June 30, 1998,
primarily due to increased contracted services expenses and other indirect
Merger-related expenses.
Taxes Other Than Income Taxes
- -----------------------------
Taxes other than income taxes decreased $16.8 million for the three-month period
and $34.0 million for the six-month period ended June 30, 1998, due primarily
to the changes in the New Jersey tax laws, eliminating the state gross receipts
and franchise tax. Earnings generally were not affected by this decrease due to
related reductions in electric revenues resulting from the tax law change.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs and embedded systems
using a two-digit format, as opposed to four digits, to indicate the year.
Computer and embedded systems with this characteristic may be unable to
interpret dates beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruption of operations. A Conectiv project
team, originally started in 1996 by the Company, is assisting line management in
addressing the issue of computer programs and embedded systems not properly
recognizing the Year 2000. A Conectiv corporate officer, reporting directly to
the chief executive officer, is coordinating all Year 2000 activities at the
Company. The Company faces substantial challenges in identifying and correcting
the many computer and embedded systems critical to generating and delivering
power and providing other services to its customers.
The project team is using a phased approach to managing its activities. The
first phase is identification, inventory and assessment of all systems,
equipment, and processes. Each identified item is given a criticality rating of
high, medium or low. The second phase is determining and implementing corrective
action for the systems, equipment and processes rated as high or medium and thus
believed to put the Company's business operations and customers at substantial
risk. The third phase is testing. The project team has completed corrective
action on most of the information technology systems
10
<PAGE>
used in managing the Company's businesses and has tested approximately half of
the systems in this area. Assessment of, and modifications to, other impacted
systems, equipment and processes in the power generation, power distribution and
energy services business units are in the early stages and are expected to
continue through 1998 and 1999, with testing of critical items expected to be
done as modifications are completed. The Company will be updating established
outage contingency plans to address Year 2000 issues over the next twelve
months.
The Company is also contacting critical vendors and service providers to review
remediation of their Year 2000 issues. Many aspects of the Company's businesses
are dependent on third parties. For example, fuel suppliers must be able to
provide coal or gas to allow the Company to generate power.
Conectiv has incurred approximately $3 million in costs for Year 2000 activities
and currently expects its costs for the Year 2000 activities to range from $10
million to $15 million. These estimates could change significantly as Year 2000
activities progresses.
Since the project team is still in the process of assessing and correcting
impacted systems, equipment and processes, the Company cannot currently
determine whether the Year 2000 issue might cause disruptions to its operations
and have impacts on related costs and revenues. The Company will be assessing
the status of Year 2000 activities on at least a monthly basis to determine the
likelihood of substantial business disruptions. Any substantial disruption to
operations could significantly impact its customers and could generate legal
claims against the Company. The Company's results of operations and financial
position would likely suffer an adverse impact if other entities, such as
suppliers, customers and service providers do not effectively address their Year
2000 issues.
Ratio of Earnings to Fixed Charges
- ----------------------------------
The Company's ratios of earnings to fixed charges and earnings to fixed charges
and preferred stock dividends under the SEC Method are shown below:
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
June 30, ---------------------------------
1998 1997 1996 1995 1994
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges (1) 2.00 2.84 2.59 3.19 3.07
Fixed Charges and Preferred
Stock Dividends (1) 1.84 2.58 2.16 2.43 2.26
</TABLE>
(1) For the 12 months ended June 30, 1998, excluding the pre-tax $48.1 million
charge for employee separation and other Merger-related costs, the ratio of
earnings to fixed charges is 2.66 and the ratio of earnings to fixed
charges and preferred dividends is 2.49.
Under the SEC Method, earnings, including allowance for funds used during
construction (AFUDC), have been computed by adding income taxes and fixed
charges to net income. Fixed charges include gross interest expense, the
estimated interest component of rentals, and dividends on preferred securities
of a subsidiary trust. For the ratio of earnings to fixed charges and preferred
stock dividends, preferred stock dividends represent annualized preferred stock
dividend requirements multiplied by the ratio that pre-tax income bears to net
income.
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act )
provides a "safe harbor" for forward looking statements to encourage such
disclosure without the threat of litigation, provided those statements are
identified as forward-
11
<PAGE>
looking and are accompanied by meaningful, cautionary statements identifying
important factors that could cause the actual results to differ materially from
those projected in the statement. Forward-looking statements have been made in
this report. Such statements are based on management's beliefs, as well as,
assumptions made by and information currently available to management. When used
herein, the words "will", "anticipate", "estimate", "expect", "objective" and
similar expressions are intended to identify forward-looking statements. In
addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following: deregulation and the unbundling
of energy supplies and services; an increasingly competitive energy marketplace;
sales retention and growth; federal and state regulatory actions; costs of
construction; operating restrictions; increased cost and construction delays
attributable to environmental regulations; nuclear decommissioning and the
availability of reprocessing and storage facilities for spent nuclear fuel; and
credit market concerns. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The foregoing review of factors
pursuant to the Litigation Reform Act should not be construed as exhaustive or
as any admission regarding the adequacy of disclosures made by the Company prior
to the effective date of the Litigation Reform Act.
12
<PAGE>
Part II. OTHER INFORMATION
--------------------------
Item 5. Other Information
- -------------------------
ACE Levelized Energy Clause Rates
- ---------------------------------
As previously reported on page 54 of the Company's 1997 report on Form 10-K, in
February 1997, ACE filed a petition with the BPU requesting an increase in 1997-
1998 Levelized Energy Clause (LEC) revenues of $20.0 million. The requested
increase reflected recovery of previously deferred costs, including Salem
replacement power costs. The BPU had ruled in December 1996 that the Salem
replacement power costs incurred through the agreed upon unit restart dates were
recoverable through LEC rates. In June 1998, a $14.1 million rate increase was
approved by the BPU effective for service rendered on or after June 8, 1998. In
July 1998, the New Jersey Ratepayer Advocate appealed the BPU's decision to the
Superior Court of New Jersey. The Company has filed a cross-appeal. The
Company cannot predict the outcome of this matter.
As previously reported on page 7 of the Company's 1997 report on Form 10-K, the
Rate Intervention Steering Committee (RISC) appealed to the Superior Court of
New Jersey the BPU's decision which provided for the Company's recovery (through
LEC rates) of the cost of power purchased from non-utility generators (NUG). In
May 1998, the Superior Court of New Jersey rejected RISC's appeal and upheld the
BPU's decision providing for LEC recovery of NUG purchased power costs. In May
1998, RISC appealed the Superior Court's decision to the Supreme Court of New
Jersey which denied RISC's final appeal in July 1998.
Salem Nuclear Generating Station
- --------------------------------
On July 28, 1998, the Nuclear Regulatory Commission (NRC) announced that Salem
Nuclear Generating Station has been removed from the NRC's watch list.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
Exhibits
- --------
Exhibit 12-A, Computation of Ratio of Earnings to Fixed Charges
Exhibit 12-B, Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends
Exhibit 27, Financial Data Schedule
Reports On Form 8-K
- -------------------
No reports on Form 8-K were filed in the second quarter of 1998.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atlantic City Electric Company
------------------------------
(Registrant)
Date: August 13, 1998 /s/ B. S. Graham
--------------- ----------------
B. S. Graham, Senior Vice President
and Chief Financial Officer - Conectiv
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------- ------
<S> <C> <C>
Computation of ratio of earnings to fixed charges 12-A 16
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 17
Financial Data Schedule 27 18
</TABLE>
15
<PAGE>
Exhibit 12-A
Atlantic City Electric Company
------------------------------
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months 12 Months Ended December 31,
Ended June 30, ---------------------------------------------------
1998 1997 1996 1995 1994
--------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income $ 45,276 $ 85,747 $ 75,017 $ 98,752 $ 93,174
-------- -------- -------- -------- --------
Income taxes 27,260 50,442 36,958 48,277 36,130
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt 63,381 64,501 64,847 62,879 58,460
Other interest 3,478 3,574 4,019 4,364 4,148
Preferred stock dividend
requirements of subsidiaries 5,775 5,775 1,428 - -
-------- -------- -------- -------- --------
Total fixed charges 72,634 73,850 70,294 67,243 62,608
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $145,170 $210,039 $182,269 $214,272 $191,912
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.00 2.84 2.59 3.19 3.07
-------- -------- -------- -------- --------
</TABLE>
For purposes of computing the ratio, earnings are net income plus income taxes
and fixed charges. Fixed charges consist of interest on long- and short-term
debt, amortization of debt discount, premium, and expense, dividends on
preferred securities of a subsidiary trust, and the interest factor associated
with the Company's major leases.
16
<PAGE>
Exhibit 12-B
Atlantic City Electric Company
------------------------------
Ratio of Earnings to Fixed Charges & Preferred Dividends
--------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months 12 Months Ended December 31,
Ended June 30, ----------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income $ 45,276 $ 85,747 $ 75,017 $ 98,752 $ 93,174
-------- -------- -------- -------- --------
Income taxes 27,260 50,442 36,958 48,277 36,130
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt 63,381 64,501 64,847 62,879 58,460
Other interest 3,478 3,574 4,019 4,364 4,148
Preferred stock dividend
requirements of subsidiaries 5,775 5,775 1,428 - -
-------- -------- -------- -------- --------
Total fixed charges 72,634 73,850 70,294 67,243 62,608
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $145,170 $210,039 $182,269 $214,272 $191,912
======== ======== ======== ======== ========
Fixed charges 72,634 73,850 70,294 67,243 62,608
-------- -------- -------- -------- --------
Preferred dividend requirement 6,214 7,506 14,214 20,839 22,212
-------- -------- -------- -------- --------
$ 78,848 $ 81,356 $ 84,508 $ 88,082 $ 84,820
======== ======== ======== ======== ========
Ratio of earnings to fixed charges &
Preferred dividends 1.84 2.58 2.16 2.43 2.26
-------- -------- -------- -------- --------
</TABLE>
For purposes of computing the ratio, earnings are net income plus income taxes
and fixed charges. fixed charges consist of interest on long- and short-term
debt, amortization of debt discount, premium, and expense, dividends on
preferred securities of a subsidiary trust, and the interest factor associated
with the Company's major leases. Preferred dividend requirements represent
annualized preferred dividend requirements multiplied by the ratio that pre-tax
income bears to net income.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATMENT OF INCOME FROM ATLANTINC CITY ELECTRIC
COMPANY'S SECOND QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,762,564
<OTHER-PROPERTY-AND-INVEST> 95,629
<TOTAL-CURRENT-ASSETS> 281,862
<TOTAL-DEFERRED-CHARGES> 289,971
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,430,026
<COMMON> 54,963
<CAPITAL-SURPLUS-PAID-IN> 492,872
<RETAINED-EARNINGS> 190,678
<TOTAL-COMMON-STOCKHOLDERS-EQ> 738,513
23,950
100,000
<LONG-TERM-DEBT-NET> 819,327
<SHORT-TERM-NOTES> 84,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 30,075
10,000
<CAPITAL-LEASE-OBLIGATIONS> 17,991
<LEASES-CURRENT> 15,948
<OTHER-ITEMS-CAPITAL-AND-LIAB> 589,622
<TOT-CAPITALIZATION-AND-LIAB> 2,430,026
<GROSS-OPERATING-REVENUE> 479,831
<INCOME-TAX-EXPENSE> (8)
<OTHER-OPERATING-EXPENSES> 451,627
<TOTAL-OPERATING-EXPENSES> 451,619
<OPERATING-INCOME-LOSS> 28,212
<OTHER-INCOME-NET> 4,051
<INCOME-BEFORE-INTEREST-EXPEN> 32,263
<TOTAL-INTEREST-EXPENSE> 33,687
<NET-INCOME> (1,424)
2,000
<EARNINGS-AVAILABLE-FOR-COMM> (3,424)
<COMMON-STOCK-DIVIDENDS> 40,808
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 41,510
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
