<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
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
---------------------------- ------------
(State 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:
All 18,320,937 issued and outstanding shares of Atlantic City Electric Company
common stock, $3 per share par value, are owned by Conectiv.
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ATLANTIC CITY ELECTRIC COMPANY
------------------------------
Table of Contents
-----------------
Page No.
--------
Part I. Financial Information:
Consolidated Statements of Income for the three months
and the six months ended June 30, 1999 and 1998 1
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 2-3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Part II. Other Information and Signature 18-19
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- -------- --------
OPERATING REVENUES $246,143 $241,883 $490,982 $479,832
OPERATING EXPENSES
Electric fuel and purchased power 64,425 69,438 138,743 142,350
Purchased electric capacity 43,928 41,046 84,516 84,619
Employee separation and other
Merger-related costs - (3,361) - 48,118
Operation and maintenance 64,527 49,869 117,757 100,825
Depreciation and amortization 28,788 29,103 57,482 56,383
Taxes other than income taxes 8,508 9,760 18,483 19,332
-------- -------- -------- --------
210,176 195,855 416,981 451,627
-------- -------- -------- --------
OPERATING INCOME 35,967 46,028 74,001 28,205
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds
used during construction 153 176 298 319
Other income 4,044 2,271 6,143 3,732
-------- -------- -------- --------
4,197 2,447 6,441 4,051
-------- -------- -------- --------
INTEREST EXPENSE
Interest charges 14,860 15,826 29,507 31,363
Allowance for borrowed funds
used during construction
and capitalized interest (152) (313) (319) (563)
-------- -------- -------- --------
14,708 15,513 29,188 30,800
-------- -------- -------- --------
DIVIDENDS ON PREFERRED
SECURITIES OF SUBSIDIARY
TRUSTS 1,905 1,444 3,825 2,888
-------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES 23,551 31,518 47,429 (1,432)
-------- -------- -------- --------
INCOME TAXES 8,673 12,204 17,460 (8)
-------- -------- -------- --------
NET INCOME (LOSS) 14,878 19,314 29,969 (1,424)
-------- -------- -------- --------
DIVIDENDS ON PREFERRED STOCK 533 1,000 1,066 2,000
-------- -------- -------- --------
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $ 14,345 $ 18,314 $ 28,903 $ (3,424)
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
- ---------------------------
CURRENT ASSETS
Cash and cash equivalents $ 16,504 $ 28,767
Accounts receivable 132,833 126,648
Inventories, at average cost:
Fuel (coal and oil) 26,082 27,233
Materials and supplies 29,058 21,296
Deferred income taxes, net 19,003 7,735
Prepaid New Jersey sales & excise taxes 40,234 20,078
Other prepayments 2,599 4,420
------------ ------------
266,313 236,177
------------ ------------
INVESTMENTS
Funds held by trustee 104,487 102,765
Other investments 112 112
------------ ------------
104,599 102,877
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT
Electric 2,627,968 2,600,699
Less: Accumulated depreciation 1,046,436 1,007,106
------------ ------------
Net utility plant in service 1,581,532 1,593,593
Utility construction work-in-progress 80,357 97,955
Leased nuclear fuel, at amortized cost 31,852 35,003
Nonutility property, net 8,085 8,207
------------ ------------
1,701,826 1,734,758
------------ ------------
DEFERRED CHARGES AND OTHER ASSETS
Unrecovered purchased power costs 38,891 48,274
Deferred recoverable income taxes 102,223 102,223
Unrecovered state excise taxes 30,814 35,594
Deferred debt refinancing costs 27,095 28,043
Deferred other postretirement benefit costs 33,728 34,978
Unamortized debt costs 14,092 14,141
Other 31,866 30,157
------------ ------------
278,709 293,410
------------ ------------
TOTAL ASSETS $ 2,351,447 $ 2,367,222
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CURRENT LIABILITIES
Long-term debt due within one year $ 46,075 $ 30,075
Variable rate demand bonds 22,600 22,600
Short-term debt 30,000 -
Accounts payable 45,234 54,315
Interest accrued 20,596 14,774
Dividends payable 3,044 22,236
Taxes accrued 29,839 22,916
Current capital lease obligation 15,542 15,728
Accrued employee separation & Other Merger-related costs 3,839 9,554
Deferred energy costs 39,432 15,577
Other 28,698 28,771
------------ ------------
284,899 236,546
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 339,984 343,429
Deferred investment tax credits 40,875 42,142
Long-term capital lease obligation 16,372 19,523
Pension benefit obligation 12,977 10,477
Other postretirement benefit obligation 46,576 44,607
Other 21,425 24,097
------------ ------------
478,209 484,275
------------ ------------
CAPITALIZATION
Common stock, $3 par value; 25,000,000 shares authorized;
Shares outstanding; 1999 and 1998 - 18,320,937 54,963 54,963
Additional paid-in capital 493,007 493,007
Retained earnings 188,836 182,123
------------ ------------
Total common stockholder's equity 736,806 730,093
Preferred stock subject to mandatory redemption 23,950 23,950
Preferred stock not subject to mandatory redemption 6,231 6,231
ACE obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely ACE debentures 95,000 95,000
Long-term debt 726,352 791,127
------------ ------------
1,588,339 1,646,401
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $2,351,447 $2,367,222
=========== ==========
</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,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTVITIES
Net income (loss) $ 29,969 $ (1,424)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 62,962 60,447
Investment tax credit adjustments, net (1,267) (1,267)
Deferred income taxes, net (14,713) (11,365)
Deferred energy costs 23,855 12,853
Prepaid New Jersey sales & excise taxes (20,156) (58,989)
Employee separation and other Merger-related costs (5,715) 14,791
Net change in:
Accounts receivable (6,185) (7,583)
Inventories (6,611) 5,754
Accounts payable (9,081) 14,658
Other current assets and liabilities (1) 14,493 11,005
Other, net 4,868 6,694
--------- ---------
Net cash provided by operating activities 72,419 45,574
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,947) (30,635)
Nuclear decommissioning trust fund deposits (3,212) (3,212)
Other, net 366 2,370
--------- ---------
Net cash used by investing activities (17,793) (31,477)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends (40,608) (40,808)
Preferred stock dividends (1,840) (2,000)
Long-term debt issued - 85,000
Long-term debt redeemed (48,900) (58,500)
Principal portion of capital lease payments (5,480) (4,064)
Net change in short-term debt 30,000 12,500
Other, net (61) (5,895)
--------- ---------
Net cash used by financing activities (66,889) (13,767)
--------- ---------
Net change in cash and cash equivalents (12,263) 330
Cash and cash equivalents at beginning of period 28,767 20,765
--------- ---------
Cash and cash equivalents at end of period $ 16,504 $ 21,095
========= =========
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
--------------------------------
The consolidated financial statements include the accounts of Atlantic City
Electric Company (ACE) and its wholly-owned subsidiaries and reflect all
adjustments necessary in the opinion of management for a fair presentation of
interim results. In accordance with regulations of the Securities and Exchange
Commission (SEC), disclosures which would substantially duplicate the
disclosures in ACE's 1998 Annual Report on Form 10-K have been omitted.
Accordingly, ACE's consolidated condensed interim financial statements contained
herein should be read in conjunction with ACE's 1998 Annual Report on Form 10-K
and Part II of this Quarterly Report on Form 10-Q for additional relevant
information.
Certain prior year amounts have been reclassified, not affecting net income, to
conform to the current year reporting of these items.
As discussed in Note 4 to ACE's 1998 Consolidated Financial Statements included
in ACE's 1998 Annual Report on Form 10-K, ACE became a subsidiary of Conectiv
(the Merger) on March 1, 1998.
2. EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
--------------------------------------------------
In 1998 enhanced retirement offers and other employee separation programs were
utilized to reduce ACE's workforce. The employee separations and other Merger-
related costs expensed in the first six months of 1998 were $48.1 million before
taxes, reducing net income by $29.0 million. For the three months ended June
30, 1998, revised cost estimates for the employee separation programs resulted
in a decrease in pre-tax expenses of $3.4 million ($2.0 million after taxes).
3. RATE MATTERS
------------
The following information updates the disclosures previously reported in Note 5,
Rate Matters, to ACE's Consolidated Financial Statements included in ACE's 1998
Annual Report on Form 10-K.
NJBPU SUMMARY ORDER
On June 9, 1999, ACE entered into a Stipulation of Settlement (Stipulation) with
some of the parties to proceedings pending before the New Jersey Board of Public
Utilities (NJBPU) concerning ACE's stranded costs, unbundled rates, and
restructuring. The Stipulation was filed with the NJBPU. On July 15, 1999, the
NJBPU approved the Stipulation with modifications and issued a summary order
(Summary Order) detailing the modifications to the Stipulation. The NJBPU
stated that a more detailed order would be issued at a later date.
In its Summary Order, the NJBPU directed ACE to implement a five percent
aggregate rate reduction effective August 1, 1999. ACE also must implement at
least an additional two percent rate reduction by January 1, 2001. By August 1,
2002, rates must be reduced by ten percent from the rates which were in effect
as of April 30, 1997. ACE estimates that the initial rate reduction effective
August 1, 1999 will reduce revenues by approximately $50 million (on an
annualized basis, assuming fiscal year 1998 sales and revenues). Since an
estimated $25 million of the revenue reduction results from the current level of
the energy component of ACE's regulated revenues exceeding related energy costs,
this portion of the revenue reduction should not affect earnings. The ultimate
impact of the mandated rate reductions on ACE's net income depends upon the
nature and extent of cost reductions that may be realized by ACE, among other
factors.
5
<PAGE>
The Summary Order also established minimum initial shopping credits for
customers who choose an alternative electric supplier, from a system average
5.27 cents per kilowatt-hour(kWh), effective August 1, 1999, to a system average
of 5.48 cents per kWh in 2003. These shopping credits include transmission costs
and charges by ACE for Basic Generation Service (BGS) to be provided to retail
customers who do not have a competitive electric power supplier. The Summary
Order also approved the deferral mechanism contained in the Stipulation, in
order to enable ACE to meet and sustain the rate reductions ordered by the
NJBPU. The deferral mechanism provides for the accumulated deferral of costs
(including BGS) and application of certain over-recovery credits, for ultimate
recovery of the resultant net deferred balance, during the four years after the
initial four-year transition period (Transition Period) commencing August 1,
1999. The NJBPU approved certain rates of return to be applied to the deferred
balances.
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a non-utility
affiliated company at the net book value. The Summary Order provided that ACE
shall be permitted the opportunity to recover 100% of the net stranded costs
related to the generation units to be divested, subject to further NJBPU
proceedings. The Summary Order further provided that ACE may also recover 100%
of the stranded costs associated with power purchased from Non-Utility
Generators (NUGs). The Summary Order also provided for the securitization of
amounts used to effect potential buyouts or buydowns of contracts with NUGs as
well as limited incentives for ACE in the event of such contract restructuring.
The Summary Order does not provide for recovery of stranded costs associated
with the electric generating units to be transferred to a non-utility affiliated
company. See "Asset Impairments and Charges to Earnings".
ASSET IMPAIRMENTS AND CHARGES TO EARNINGS
Management has made a preliminary estimate of the amount of stranded costs not
expected to be recovered through regulated electricity delivery rates after the
electric utility industry is restructured in New Jersey. Based on the Summary
Order, management expects that, in the third quarter of 1999, ACE's electricity
supply business will no longer be subject to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result, ACE expects to apply the
requirements of SFAS No. 101, "Regulated Enterprises--Accounting for the
Discontinuation of Application of FASB Statement No. 71," and record an
extraordinary charge to earnings. As discussed below, the portion of the
expected extraordinary charge related to impairment of assets is determined in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of."
To estimate the impairment of electric generating plants of ACE in accordance
with SFAS No. 121, the book value of each generating plant is first compared to
the estimated future net operating cash flows of each generating plant. Any
electric generating plant with undiscounted future net cash flows less than book
value is considered impaired, and the plant's net future cash flows are
discounted. The amount by which the book value of the impaired electric
generating plants exceeds their discounted cash flows (or other estimate of fair
value) is the estimated impairment amount.
As discussed above, the Summary Order provided for ACE to recover 100% of the
stranded costs associated with power it purchases from NUGs.
The total amount that could be charged to earnings, includes the impairment
amount for the electric generating plants of ACE and regulatory assets related
to the electric generation business. The charge to earnings is reduced by the
estimated cost recovery through regulated electricity delivery rates. Based on
this methodology (giving effect to estimated cost recoveries), management
currently estimates that the electric utility industry restructuring in New
Jersey will result in an extraordinary after-tax charge to ACE's earnings of
approximately $50 to $75 million during the third quarter of 1999.
6
<PAGE>
EXPECTED SALES OF ELECTRIC GENERATING PLANTS
On May 11, 1999, Conectiv announced financial and strategic initiatives that
included the intention to sell over 2,000 megawatts (MW) of nuclear and non-
strategic baseload fossil electric generating plants owned by its subsidiaries,
ACE and Delmarva Power & Light Company. Conectiv intends to retain certain ACE
electric generating plants which are strategic to Conectiv's energy business. In
June and July 1999, Conectiv distributed offering memoranda for the proposed
sale of fossil and jointly-owned nuclear electric generating plants. Assuming
the auction process goes as planned, the divestiture of the electric generating
plants is expected to be completed by mid-2000. A summary of ACE's electric
generating plants which have been offered for sale is shown in the table below.
<TABLE>
<CAPTION>
ACE Generating Units
---------------------
MW of Net Book
Capacity Value (a)
--------- ----------
<S> <C> <C>
Fossil Units:
Wholly-owned 686.0 $310.6
Jointly-owned 107.7 35.9
Jointly-owned
nuclear units 383.0 410.7
------- ------
1,176.7 $757.2
======= ======
</TABLE>
(a) Net book value is as of December 31, 1998 and is stated in millions of
dollars.
The net book value of some of the electric generating units offered for sale is
expected to be written down in 1999 due to the impairment resulting from
deregulation of the electricity supply business. Since an impaired electric
generating unit is written down to its estimated fair market value net of
estimated selling costs, the sale of an impaired electric generating plant is
not expected to result in a significant gain or loss. Some of the electric
generating plants which are not impaired may be sold at a gain. Under generally
accepted accounting principles, the write-down of impaired assets is not reduced
by expected future gains on sales of assets which are not impaired by electric
utility industry restructuring; the gain on the sale of an asset is recognized
when the sale occurs.
Potential gains which could be realized from the sale of certain of ACE's
electric generating plants will reduce the amount of stranded cost recovery in
accordance with the Summary Order. Accordingly, any such gain realized would
not affect future earnings. There can be no assurances, that ACE will elect or
be able to sell any such electric generating plants, or that any gains will be
realized from such sales of electric generating plants.
4. DEBT
----
In May 1999, ACE repaid at maturity $4.0 million of 7.54% Medium Term Notes and
$26.0 million of 7.52% Medium Term Notes.
In June 1999, ACE redeemed $12.5 million of 7%, First Mortgage Bonds, due
September 1, 2023, and $6.4 million of 6 5/8%, First Mortgage Bonds, due August
1, 2013.
5. CONTINGENCIES
-------------
ENVIRONMENTAL MATTERS
ACE 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
7
<PAGE>
sites. ACE 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. ACE is also a defendant in an action to recover costs at a federal
superfund site in Gloucester, New Jersey. There was $1.0 million included in
ACE's current liabilities as of June 30, 1999, and December 31, 1998, for
remediation activities at these sites. ACE does not expect such future costs to
have a material effect on its financial position or results of operations.
NUCLEAR INSURANCE
In conjunction with ACE's ownership interests in the Peach Bottom Atomic Power
Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and the Hope
Creek Nuclear Generating Station (Hope Creek), ACE could be assessed for a
portion of any third-party claims associated with an incident at any commercial
nuclear power plant in the United States. Under the provisions of the Price
Anderson Act, if third party claims relating to such an incident exceed $200
million (the amount of primary insurance), ACE could be assessed up to $30.7
million on an aggregate basis for such third-party claims. In addition, Congress
could impose a revenue-raising measure on the nuclear industry to pay such
claims.
The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance
coverage of approximately $2.8 billion for each unit for loss or damage to the
units, including coverage for decontamination expense and premature
decommissioning. In addition, ACE is a member of an industry mutual insurance
company, which provides replacement power cost coverage in the event of a major
accidental outage at a nuclear power plant. Under these coverages, ACE is
subject to potential retrospective loss experience assessments of up to $5.4
million.
6. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Cash paid for: 1999 1998
------- --------
<S> <C> <C>
(dollars in thousands)
Interest, net of capitalized amounts $23,366 $28,261
Taxes, net of refunds $25,880 $25,760
</TABLE>
7. BUSINESS SEGMENTS
-----------------
Conectiv's organizational structure and management reporting information is
aligned with Conectiv's business segments, irrespective of the subsidiary or
subsidiaries through which a business is conducted. Businesses are managed
based on lines of business, not legal entity. Business segment information is
not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a
Conectiv subsidiary, no business segment information, as defined by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," is
available for ACE on a stand-alone basis.
8. ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES
------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," which delays the required
implementation date for SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," until all fiscal quarters of all fiscal years beginning
after June 15, 2000. Reporting entities may elect to adopt SFAS No. 133 prior
to the required implementation date. 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 which are not designated as hedges is recognized in earnings. For
derivatives designated as hedges of changes 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. ACE currently cannot determine the
effect that SFAS No. 133 will have on its financial statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
EARNINGS SUMMARY
- ----------------
ACE's earnings applicable to common stock were $14.3 million for the three
months ended June 30, 1999, compared to earnings applicable to common stock of
$18.3 million for the three months ended June 30, 1998. After excluding the
$2.0 million increase in second quarter 1998 earnings which resulted from
revision of estimated employee separation costs, second quarter earnings
decreased by $2.0 million. This decrease was primarily due to higher operation
and maintenance expenses, partly offset by higher electric revenues due to sales
volume.
ACE's earnings applicable to common stock were $28.9 million for the six months
ended June 30, 1999, compared to a loss applicable to common stock of $3.4
million for the six months ended June 30, 1998. Excluding employee separation
and other Merger-related costs that reduced earnings for the six months ended
June 30, 1998 by $29.0 million, ACE's earnings increased $3.3 million in the
current six-month period as compared to the same period last year. This
increase was primarily due to additional revenues from higher electric sales and
lower net interest costs, partially offset by higher operations and maintenance
costs.
NJBPU SUMMARY ORDER
On June 9, 1999, ACE entered into a Stipulation of Settlement (Stipulation) with
some of the parties to proceedings pending before the New Jersey Board of Public
Utilities (NJBPU) concerning ACE's stranded costs, unbundled rates, and
restructuring. The Stipulation was filed with the NJBPU. On July 15, 1999, the
NJBPU approved the Stipulation with modifications and issued a summary order
(Summary Order) detailing the modifications to the Stipulation. The NJBPU
stated that a more detailed order would be issued at a later date.
In its Summary Order, the NJBPU directed ACE to implement a five percent
aggregate rate reduction effective August 1, 1999. ACE also must implement at
least an additional two percent rate reduction by January 1, 2001. By August 1,
2002, rates must be reduced by ten percent from the rates which were in effect
as of April 30, 1997. ACE estimates that the initial rate reduction effective
August 1, 1999 will reduce electric utility revenues by approximately $50
million (on an annualized basis, assuming fiscal year 1998 sales and revenues).
Since an estimated $25 million of the revenue reduction results from the current
level of the energy component of ACE's regulated revenues exceeding related
energy costs, this portion of the revenue reduction should not affect earnings.
ACE's future earnings will also be affected by its ability to achieve cost
reductions and streamline operations. A productivity improvement and cost
reduction program was announced in May 1999 which seeks to reduce costs over the
next 12 to 18 months. Depreciation costs for generating assets will also
decrease due to a lower book value after impairment write-downs. Also, certain
costs which had previously been deferred under SFAS No. 71 will now be charged
to expense in the period incurred.
The Summary Order also established minimum initial shopping credits for
customers who choose an alternative electric supplier, from a system average
5.27 cents per kWh, effective August 1, 1999, to a system average of 5.48 cents
per kWh in 2003. These shopping credits include transmission costs and charges
by ACE for Basic Generation Service (BGS) to be provided to retail customers who
do not have a competitive electric power supplier. The Summary Order also
approved the deferral mechanism contained in the Stipulation, in order to enable
ACE to meet and sustain the rate reductions ordered by the NJBPU. The deferral
mechanism provides for the accumulated deferral of costs (including BGS) and
application of certain over-recovery credits, for ultimate recovery of the
resultant net deferred balance, during the four years after the initial four-
year transition period (Transition Period) commencing August 1, 1999. The NJBPU
approved certain rates of return to be applied to the deferred balances.
9
<PAGE>
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a non-utility
affiliated company at the net book value. The Summary Order provided that ACE
shall be permitted the opportunity to recover 100% of the net stranded costs
related to the generation units to be divested, subject to further NJBPU
proceedings. The Summary Order further provided that ACE may also recover 100%
of the stranded costs associated with power purchased from Non-Utility
Generators (NUGs). The Summary Order also provided for the securitization of
amounts used to effect potential buyouts or buydowns of contracts with NUGs as
well as limited incentives for ACE in the event of such contract restructuring.
The Summary Order does not provide for recovery of stranded costs associated
with the electric generating units to be transferred to a non-utility affiliated
company. See "Asset Impairments and Charges to Earnings".
ASSET IMPAIRMENTS AND CHARGES TO EARNINGS
Management has made a preliminary estimate of the amount of stranded costs not
expected to be recovered through regulated electricity delivery rates after the
electric utility industry is restructured in New Jersey. Based on the Summary
Order, management expects that, in the third quarter of 1999, ACE's electricity
supply business will no longer be subject to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result, ACE expects to apply the
requirements of SFAS No. 101, "Regulated Enterprises--Accounting for the
Discontinuation of Application of FASB Statement No. 71," and record an
extraordinary charge to earnings. As discussed below, the portion of the
expected extraordinary charge related to impairment of assets is determined in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of."
To estimate the impairment of electric generating plants of ACE in accordance
with SFAS No. 121, the book value of each generating plant is first compared to
the estimated future net operating cash flows of each generating plant. Any
electric generating plant with undiscounted future net cash flows less than book
value is considered impaired, and the plant's net future cash flows are
discounted. The amount by which the book value of the impaired electric
generating plants exceeds their discounted cash flows (or other estimate of fair
value) is the estimated impairment amount.
As discussed above, the Summary Order provided for ACE to recover 100% of the
stranded costs associated with power it purchases from NUGs.
The total amount that could be charged to earnings, includes the impairment
amount for the electric generating plants of ACE and regulatory assets related
to the electric generation business. The charge to earnings is reduced by the
estimated cost recovery through regulated electricity delivery rates. Based on
this methodology (giving effect to estimated cost recoveries), management
currently estimates that the electric utility industry restructuring in New
Jersey will result in an extraordinary after-tax charge to ACE's earnings of
approximately $50 to $75 million during the third quarter of 1999.
10
<PAGE>
EXPECTED SALES OF ELECTRIC GENERATING PLANTS
On May 11, 1999, Conectiv announced financial and strategic initiatives that
included the intention to sell over 2,000 megawatts (MW) of nuclear and non-
strategic baseload fossil electric generating plants owned by its subsidiaries,
ACE and Delmarva Power & Light Company. Conectiv intends to retain certain ACE
electric generating plants which are strategic to Conectiv's energy business. In
June and July 1999, Conectiv distributed offering memoranda for the proposed
sale of fossil and jointly-owned nuclear electric generating plants. Assuming
the auction process goes as planned, the divestiture of the electric generating
plants is expected to be completed by mid-2000. A summary of ACE's electric
generating plants which have been offered for sale is shown in the table below.
<TABLE>
<CAPTION>
ACE Generating Units
---------------------
MW of Net Book
Capacity Value (a)
--------- ----------
<S> <C> <C>
Fossil Units:
Wholly-owned 686.0 $310.6
Jointly-owned 107.7 35.9
Jointly-owned
nuclear units 383.0 410.7
------- ------
1,176.7 $757.2
======= ======
</TABLE>
(a) Net book value is as of December 31, 1998 and is stated in millions of
dollars.
The net book value of some of the electric generating units offered for sale is
expected to be written down in 1999 due to the impairment resulting from
deregulation of the electricity supply business. Since an impaired electric
generating unit is written down to its estimated fair market value net of
estimated selling costs, the sale of an impaired electric generating plant is
not expected to result in a significant gain or loss. Some of the electric
generating plants which are not impaired may be sold at a gain. Under generally
accepted accounting principles, the write-down of impaired assets is not reduced
by expected future gains on sales of assets which are not impaired by electric
utility industry restructuring; the gain on the sale of an asset is recognized
when the sale occurs.
Potential gains which could be realized from the sale of certain of ACE's
electric generating plants will reduce the amount of stranded cost recovery in
accordance with the Summary Order. Accordingly, any such gain realized would
not affect future earnings. There can be no assurances, that ACE will elect or
be able to sell any such electric generating plants, or that any gains will be
realized from such sales of electric generating plants.
INTENT TO RENEGOTIATE PURCHASED POWER CONTRACTS
ACE has four NJBPU-approved long-term power purchase contracts with NUGs. ACE
continues to negotiate buyouts and buydowns of these contracts, which would be
subject to NJBPU and other approvals, including NJBPU authorization to recover
any contract buyout and buydown costs through the issuance of transition bonds,
as permitted by the New Jersey Act. The financial commitments associated with
such buyouts and buydowns could be substantial. Management cannot currently
predict the outcome of contract buyout and buydown negotiations or the costs
associated with such efforts. There can be no assurances, moreover, that the
NJBPU will approve the issuance of transition bonds for such costs or that ACE
will be able to issue and sell any such bonds.
On May 7, 1999, ACE and a NUG, with which ACE has a long-term power purchase
contract, signed a letter of intent (LOI) relating to a transaction which could
ultimately result in the termination of such existing contract. The LOI calls
for the negotiation of a definitive agreement and the establishment of necessary
arrangements associated with the termination. Upon receipt of corporate and
regulatory approvals (including NJBPU approval), the agreement would require,
among other things, a substantial payment by ACE to the NUG (estimated to be in
excess of $100 million) and establishment of a new, substitute long-term power
contract between the NUG and a new power purchaser. Management cannot predict
whether the LOI will result in the negotiation of a definitive agreement
11
<PAGE>
or if such an agreement would receive the necessary approvals. On July 27, 1999,
ACE and the NUG issued a request for proposals from parties prospectively
interested in becoming a purchaser under the substitute power contract.
On July 30, 1999, ACE made a conditional offer to another non-utility supplier
(in which an affiliate has a 50% interest), with which it has a long-term power
purchase contract, to effect the termination of the power contract. Such
conditional offer has not yet been accepted and, if it were to be accepted, it
would also be subject to receipt of corporate and regulatory approvals. In
accordance with such offer, the termination would require a substantial payment
to the power producer (in excess of $200 million) by ACE. It is not possible
for management to predict at this time the ultimate outcome of such offer.
RESULTS OF OPERATIONS
- ---------------------
OPERATING REVENUES
Fluctuations in electric revenues from regulated resale and interchange sales,
and non-regulated bulk electricity sales, generally do not impact earnings to
the same extent as fluctuations in regulated retail electricity sales. Gross
margin percentages earned from regulated and non-regulated bulk power sales are
generally lower than the gross margin percentages earned in regulated retail
electricity markets due to product and pricing differences. Also, interchange
revenues are currently included in energy adjustment clauses, resulting in no
earnings effect from gross margins on these sales. After restructuring becomes
effective, gross margins from interchange revenues generally will affect
earnings and gross margins from regulated retail electricity sales will decrease
due to rate reductions provided for in the Summary Order.
The table below shows the components of operating revenues, including amounts of
electric revenues earned which are subject to price regulation (Regulated) and
which are not subject to price regulation (Non-regulated).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------ --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated electric revenues
Interchange $ 19.6 $ 21.5 $ 37.5 $ 26.8
Retail and other 224.6 214.9 449.1 423.9
Non-regulated electric revenues - 2.8 - 25.8
Other revenues 1.9 2.7 4.4 3.3
------ ------ ------ ------
Total electric revenues $246.1 $241.9 $491.0 $479.8
====== ====== ====== ======
</TABLE>
As shown above, regulated electric "retail and other" revenues increased by $9.7
million and $25.2 million for the three and six month periods, respectively,
ended June 30, 1999 in comparison to the same periods ended June 30, 1998. These
increases were mainly due to higher kWh sales, which increased by 1.0% and 2.4%
for the three-month and six-month periods, respectively, and to higher billings
of certain services related to the electricity delivery business. Retail
electric kWh sales benefited from a 0.9% increase in the number of customers
served and also from colder winter weather.
Non-regulated electric revenues, which primarily represent bulk power sales and
are not subject to price regulation, decreased $2.8 million for the three-month
period and $25.8 million for the six-month period. Subsequent to the Merger,
Conectiv sold non-regulated bulk power solely through Delmarva Power & Light
Company for purposes of achieving merger synergies.
12
<PAGE>
ELECTRIC FUEL AND PURCHASED POWER
Electric fuel and purchased power decreased $5.0 million for the three-month
period mainly due to costs deferred pursuant to the energy adjustment clause and
decreased interchange and non-regulated electricity sales. Electric fuel and
purchased power decreased $3.6 million for the six-month period mainly due to
decreased non-regulated electricity sales, partly offset by higher interchange
and retail sales.
EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
In 1998 enhanced retirement offers and other employee separation programs were
utilized to reduce ACE's workforce. The employee separations and other Merger-
related costs expensed in the first six months of 1998 were $48.1 million before
taxes, reducing net income by $29.0 million. For the three months ended June
30, 1998, revised cost estimates for the employee separation programs resulted
in a decrease in pre-tax expenses of $3.4 million ($2.0 million after taxes).
OPERATION AND MAINTENANCE EXPENSES
Operation and maintenance expenses increased $14.7 million for the three-month
period and $16.9 million for the six-month period ended June 30, 1999, mainly
due to higher costs of certain administrative functions, and also due to higher
power plant maintenance expenses.
OTHER INCOME
Other income increased $1.8 million for the three-month period and $2.4 million
for the six-month period ended June 30, 1999, primarily due to interest income
on a successful income tax appeal and interest and dividend income on higher
average balances invested in money market funds. As discussed under "Liquidity
and Capital Resources," the net cash provided by operating activities increased
in the current six-month period compared to the same period last year.
INTEREST EXPENSE
Interest expense decreased mainly due to decreased balances of long- and short-
term debt.
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
Dividends on preferred securities of subsidiary trusts increased $0.5 million
and $0.9 million for the three- and six-month periods, respectively, due to the
issuance of $25 million of 7.375% preferred securities in November 1998.
DIVIDENDS ON PREFERRED STOCK
Dividends on preferred stock decreased $0.5 million and $0.9 million for the
three- and six-month periods, respectively, as a result of ACE's October 1998
purchase of $23.8 million of various series of its preferred stock, which had an
average dividend rate of 4.4%.
DIVIDEND RESTRICTION
Under the Public Utility Holding Company Act of 1935, as amended, ACE may not
pay dividends on common stock or preferred stock from a retained deficit or
paid-in-capital without SEC approval. In anticipation of the possibility that
retained earnings might be temporarily inadequate, due to the extraordinary
charges expected to result from electric utility industry restructuring, to fund
such dividend payments, ACE has made the necessary SEC filing which has been
duly noticed. ACE will request an appropriate order from the SEC when the final
impact and timing of the pending detailed NJBPU electric restructuring order is
known. It may be necessary for ACE to obtain similar such approval from the
Federal Energy Regulatory Commission (FERC). An appropriate FERC filing will be
made in the near future.
13
<PAGE>
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 during and beyond the year 1999, which could cause a system
failure or other computer errors, leading to disruption of operations. A
project team, originally started in 1996 by ACE, is managing Conectiv's response
to this situation. A Conectiv corporate officer, reporting directly to the
Chief Executive Officer, is coordinating all Year 2000 activities. There have
been substantial challenges in identifying and correcting the computer and
embedded systems critical to generating and delivering power, delivering natural
gas and providing other services to customers.
The project team is using a phased approach to managing its activities. The
first phase was inventory and assessment of all systems, equipment, and
processes. Each identified item was given a criticality rating of high, medium
or low. Those items rated as high or medium were then subject to the second
phase of the project. The second phase -- determining and implementing
corrective action for the identified systems, equipment and processes -- will
conclude with a test of the unit being remediated. The third phase involves
system testing and compliance certification. Additionally, ACE is actively
completing contingency plans in the event that Year 2000 outages do occur.
Contingency plans have been drafted for all mission critical systems and are
being coordinated into a detailed overall Year 2000 restoration plan under the
direction of a senior-level engineering manager. Contingency plans are also
being developed for non-mission critical systems. The Year 2000 plans build on
ACE's existing expertise in service restorations. ACE is also coordinating its
efforts with state and local emergency management agencies.
Overall, Conectiv's Year 2000 Project covers approximately 140 different systems
(some with numerous components) that had been originally identified as high or
medium in criticality. However, only 21 of those 140 systems are essential for
continued operations and customer response across Conectiv's several businesses;
these are regarded as "mission critical." The Year 2000 Project team has
focused on these 21 systems, with work on the other systems continuing based on
their relative importance to Conectiv's businesses.
The following chart sets forth the current estimated completion percentage of
the 140 different systems in the Year 2000 Project by major business group, and
for the information technology systems used in managing Conectiv's business.
Conectiv expects to continue to see significant progress in remediation and
testing over the next quarter based on work that is in process and material that
has been ordered or already received, resulting in timely completion of this
work.
<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
- -------------------------- ----------------- ---------------- -----------
<S> <C> <C> <C>
Business systems 100% 98% 90%
Power production 100% 95% 90%
Electricity distribution 100% 87% 49%
Gas delivery 100% 97% 95%
Competitive services 100% 85%-100% 95%
</TABLE>
Conectiv has also been contacting vendors and service providers to review their
Year 2000 efforts. Many aspects of Conectiv's businesses are dependent on third
parties. For example, fuel suppliers must be able to provide coal or gas to
allow ACE to generate electricity.
Distribution of electricity is dependent on the overall reliability of the
electric grid. ACE has been cooperating with the North American Electric
Reliability Council (NERC) and the PJM Interconnection in Year 2000 remediation,
contingency planning and restoration planning efforts. Recent reports issued by
NERC indicate a small risk of disruption to the electric grid caused by Year
2000 issues. Conectiv's Year 2000 Project timeline and status are in line with
the recommendations of those groups, with limited exceptions.
14
<PAGE>
As requested by NERC, ACE filed its Year 2000 Readiness Statement with NERC
stating that 96% of work on mission critical systems has been completed as of
June 30, 1999. The exceptions to full readiness status were reported to NERC in
the regular monthly filing made on June 30, 1999. They are limited in nature and
are expected to be complete in advance of critical date changes. On the basis of
Conectiv's (including ACE) filings, NERC has designated Conectiv as "Ready with
Limited Exceptions". NERC regards exceptions as "limited" only if they "do not
pose a measurable risk to reliable electric operations into the Year 2000."
NERC, in its report to the Department of Energy dated August 3, 1999, stated
that the factors it considers in making this evaluation include the number of
facilities in a reporting company, the percent of that company's capacity
included in the exception, expected completion date, importance of the
facilities included in the exception and steps taken to mitigate risks. In that
Report, NERC stated that based "on data received through June 30, 1999, NERC
believes that the electric power industry will operate reliably into the Year
2000 with the resources that are Y2k Ready today." (NERC Report, cover letter to
Department of Energy.)
In addition, ACE participated in the first of two NERC drills on April 9, 1999;
a small number of manageable issues similar to those found by other utilities
were identified and have been addressed. ACE will also participate in the
second NERC drill scheduled for September 8-9, 1999 and will conduct its own
drill on November 10, 1999. All of these drills are exercises only and are not
expected to result in service interruptions.
Conectiv has incurred approximately $10.8 million in costs for the Year 2000
Project. The current budget for the Year 2000 Project is $10 million to $15
million, although this budget may exceed total project costs. The costs set
forth above do not include significant expenditures covering new systems, such
as Conectiv's SAP business, financial and human resources management systems, an
energy control system, and a customer information system. While these new
systems effectively remediated Year 2000 problems in the systems they replaced,
Conectiv is not reporting the expenditures on these systems in its costs for the
Year 2000 Project, because the new systems were installed principally for other
reasons. The total cost of these other projects over several years exceeds $87
million.
During July 1999, President Clinton signed the Year 2000 litigation reform bill,
known as the "Y2K Act." The Y2K Act provides some new partial liability and
damages protections to defendants in Year 2000 failure-related cases. It also
establishes new litigation procedures that plaintiffs and defendants must
follow. In general, the Y2K Act provides a pre-litigation notice period,
proportionate liability among defendants in Year 2000 cases, a requirement that
plaintiffs mitigate damages from Year 2000-related failures, and federal court
jurisdiction for Year 2000 claims. The law covers many types of civil actions
that allege harm or injury related to an actual or potential Year 2000-related
failure, or a claim or defense arising or related to such a failure. The Y2K
Act does not, however, cover civil actions for personal injury or wrongful death
or most actions brought by a government entity acting in a regulatory,
supervisory or enforcement capacity. The law governs actions brought after
January 1, 1999 for a Year 2000-related failure occurring before January 1,
2003. Although the Y2K Act will not afford ACE complete protection from Year
2000-related claims, it should serve to help limit any liability related to any
Year 2000-related failures. ACE cannot predict the extent to which such
liability will be limited by the Y2K Act.
Since the project work is ongoing, ACE cannot with certainty determine whether
the Year 2000 issue might cause disruptions to its operations and impact related
costs and revenues. ACE assesses the status of the Year 2000 Project on at
least a semi-monthly basis to determine the likelihood of disruption. Based on
its own Year 2000 program, as well as reports from NERC and other utilities,
ACE's management believes it is unlikely that significant Year 2000-related
disruptions will occur. However, any substantial disruption to ACE's operations
could negatively impact ACE's revenues, significantly impact its customers and
could generate legal claims against ACE, liability from which may be mitigated
under the provisions of the Y2K Act. ACE'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.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Due to $72.4 million of cash provided by operating activities, $17.8 million of
cash used by investing activities, and $66.9 million of cash used by
financing activities, cash and cash equivalents decreased by $12.3 million
during the first six months of 1999.
Net cash provided by operating activities was $72.4 million for the six months
ended June 30, 1999, compared to $45.6 million for the six months ended June 30,
1998. The $26.8 million increase in net cash provided by operating activities
was mainly due to a lower prepayment of New Jersey sales tax, the absence of
last year's payments for employee separation and other Merger-related costs, and
over-collections of deferred energy costs in the current year.
The June 30, 1999 balance of "Prepaid New Jersey sales & excise taxes" increased
by $20.2 million compared to the December 31, 1998 balance due to the sales tax
prepayment in the second quarter of 1999, partly offset by amortization of the
balance to expense.
Primarily due to over-collections of energy costs from utility customers, ACE's
liability for deferred energy costs was $39.4 million as of June 30, 1999.
These over-collections of energy costs will ultimately be returned to regulated
customers as ACE transitions to customer choice.
The balance of "Long-term debt due within one year" as of June 30, 1999
increased $16.0 million from the December 31, 1998 balance mainly due to
reclassification of $46.0 million of debt which became due within one year after
December 31, 1998, partly offset by redemption at maturity in May 1999 of $30
million of ACE's Medium Term Notes (7.52% average interest rate). The balance
of long-term debt as of June 30, 1999 decreased $64.8 million from the December
31, 1998 balance primarily due to the redemption of $18.9 million of First
Mortgage Bonds (6.88% average interest rate) prior to maturity in June 1999 and
reclassification of the $46.0 million of debt that became current after December
31, 1998.
On an interim basis, ACE finances construction costs and other capital
requirements in excess of internally generated funds through the issuance of
unsecured short-term debt, consisting of commercial paper and notes from banks.
As of June 30, 1999, ACE had authority to issue $150 million in short-term debt.
In June 1999, ACE issued $30 million of short-term notes which are due in March
2000.
The decrease in the balance of "Dividends payable" from $22.2 million as of
December 31, 1998 to $3.0 million as of June 30, 1999, reflects the alignment of
ACE's dividend policy to that of the Atlantic Utility Group, the notional entity
from which earnings available for Conectiv Class A common stockholders are
determined in accordance with the Restated Certificate of Incorporation of
Conectiv.
ACE'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, -----------------------
1999 1998 1997 1996 1995
--------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges 2.34 1.66 2.84 2.59 3.19
Fixed Charges and Preferred
Stock Dividends 2.22 1.55 2.58 2.16 2.43
</TABLE>
Under the SEC Method, earnings, including allowance for funds used during
construction, 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.
16
<PAGE>
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-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" 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 of
energy supply and the unbundling of delivery services; an increasingly
competitive energy marketplace; results of any asset dispositions; 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 storing facilities for spent nuclear fuel; and
credit market concerns. ACE 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 list 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 ACE prior to the effective date of
the Litigation Reform Act.
17
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
ACE has entered into an Administrative Consent Order with the New Jersey
Department of Environmental Protection (NJDEP) in settlement of alleged
violation of NJDEP-issued permits regarding air pollution control. Without an
admission of liability, the settlement resolves a number of Administrative
Orders and Notices of Civil Penalty Assessments issued to ACE between April 1993
and March 1998 for alleged permit violations at the B.L. England, Deepwater,
Missouri Avenue, Cumberland and Sherman Avenue electric generating stations and
requires ACE to pay a civil administrative penalty of $300,000.
ITEM 5. OTHER INFORMATION
- -------------------------
During early July 1999, including the July 4th holiday weekend, there were
electric service outages affecting customers in ACE's service territory. These
interruptions occurred during an extended period of hot and humid weather in the
mid-Atlantic region and northeastern United States. The weather caused there to
be high demands for electricity, and the weather adversely affected both
regional and local electric transmission and distribution system equipment and
operations.
On July 15, 1999, the NJBPU initiated an investigation of the outages occurring
in the service territories of ACE and other New Jersey electric utilities. In
addition to investigating the outages themselves, the investigation is expected
to address, among other topics, communications between ACE and public agencies
and officials during these kinds of situations. ACE is currently responding to
information requests submitted by the NJBPU.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
Exhibits
- --------
Exhibit 12-A, Ratio of Earnings to Fixed Charges
Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
ACE filed a Report on Form 8-K dated July 15, 1999 reporting on Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
18
<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, 1999 /s/ John C. van Roden
--------------- ----------------------------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
-------
Ratio of earnings to fixed charges 12-A
Ratio of earnings to fixed charges
and preferred dividends 12-B
Financial Data Schedule 27
<PAGE>
Exhibit 12-A
Atlantic City Electric Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12 Months
Ended Year Ended December 31,
June 30, -----------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- --------------
Net income $ 61,668 $ 30,276 $ 85,747 $ 75,017 $ 98,752
---------------- ---------------- ---------------- ---------------- --------------
Income taxes 35,647 18,178 50,442 36,958 48,277
---------------- ---------------- ---------------- ---------------- --------------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and expense 62,084 63,940 64,501 64,847 62,879
Other interest 3,392 3,435 3,574 4,019 4,364
Preferred dividend requirements
of subsidiary trusts 6,989 6,052 5,775 1,428 -
---------------- ---------------- ---------------- ---------------- --------------
Total fixed charges 72,465 73,427 73,850 70,294 67,243
---------------- ---------------- ---------------- ---------------- --------------
Earnings before income taxes
and fixed charges $ 169,780 $ 121,881 $ 210,039 $ 182,269 $ 214,272
================ ================ ================ ================ ==============
Ratio of earnings to fixed charges 2.34 1.66 2.84 2.59 3.19
</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 subsidiary trusts, and the interest factor associated
with the ACE's major leases.
<PAGE>
Exhibit 12-B
Atlantic City Electric Company
Ratio of Earnings to Fixed Charges and Preferred Dividends
----------------------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
June 30, ----------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net income $ 61,668 $ 30,276 $ 85,747 $ 75,017 $ 98,752
------------- ------------- ------------- ------------- -------------
Income taxes 35,647 18,178 50,442 36,958 48,277
------------- ------------- ------------- ------------- -------------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and expense 62,084 63,940 64,501 64,847 62,879
Other interest 3,392 3,435 3,574 4,019 4,364
Preferred dividend requirements
of susidiary trusts 6,989 6,052 5,775 1,428 -
------------- ------------- ------------- ------------- -------------
Total fixed charges 72,465 73,427 73,850 70,294 67,243
------------- ------------- ------------- ------------- -------------
Earnings before income taxes
and fixed charges $ 169,780 $ 121,881 $ 210,039 $ 182,269 $ 214,272
============= ============= ============= ============= =============
Fixed charges $ 72,465 $ 73,427 $ 73,850 $ 70,294 $ 67,243
Preferred dividend requirements 3,948 5,289 7,506 14,214 20,839
------------- ------------- ------------- ------------- -------------
Total fixed charges and preferred
dividend requirements $ 76,413 $ 78,716 $ 81,356 $ 84,508 $ 88,082
============= ============= ============= ============= =============
Ratio of earnings to fixed charges
and preferred dividends 2.22 1.55 2.58 2.16 2.43
</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 subsidiary trusts, and the interest factor associated
with the ACE's major leases. Preferred dividend requirements represent
annualized preferred dividend requirements multiplied by the ratio that pre-tax
income bears to net income.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM ACE'S 2ND QUARTER 1999
10-Q AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,581,532
<OTHER-PROPERTY-AND-INVEST> 112,684
<TOTAL-CURRENT-ASSETS> 266,313
<TOTAL-DEFERRED-CHARGES> 278,709
<OTHER-ASSETS> 112,209
<TOTAL-ASSETS> 2,351,447
<COMMON> 54,963
<CAPITAL-SURPLUS-PAID-IN> 493,007
<RETAINED-EARNINGS> 188,836
<TOTAL-COMMON-STOCKHOLDERS-EQ> 736,806
118,950
6,231
<LONG-TERM-DEBT-NET> 726,352
<SHORT-TERM-NOTES> 30,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 46,075
0
<CAPITAL-LEASE-OBLIGATIONS> 16,372
<LEASES-CURRENT> 15,542
<OTHER-ITEMS-CAPITAL-AND-LIAB> 655,119
<TOT-CAPITALIZATION-AND-LIAB> 2,351,447
<GROSS-OPERATING-REVENUE> 490,982
<INCOME-TAX-EXPENSE> 17,460
<OTHER-OPERATING-EXPENSES> 416,981
<TOTAL-OPERATING-EXPENSES> 434,441
<OPERATING-INCOME-LOSS> 56,541
<OTHER-INCOME-NET> 6,441
<INCOME-BEFORE-INTEREST-EXPEN> 62,982
<TOTAL-INTEREST-EXPENSE> 33,013
<NET-INCOME> 29,969
1,066
<EARNINGS-AVAILABLE-FOR-COMM> 28,903
<COMMON-STOCK-DIVIDENDS> 22,189
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 72,419
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
