<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
This amendment changes the Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1999 included in Part I, Item 1. No other changes
have been made to the Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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.
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
Table of Contents
-----------------
Page
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income for the three months
and the nine months ended September 30, 1999 and
September 30, 1998............................................ 1
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998......................................... 2-3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998............... 4
Notes to Consolidated Financial Statements.................... 5-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 22
Part II. Other Information
Item 1. Legal Proceedings............................................. 23
Item 5. Other Information............................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signature................................................................ 24
i
<PAGE>
PART I. FINANCIAL INFORMATION
ATLANTIC CITY ELECTRIC COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $351,372 $332,514 $842,354 $812,345
OPERATING EXPENSES
Electric fuel and purchased energy 110,265 99,824 249,008 242,174
Purchased electric capacity 43,611 44,964 128,127 129,583
Special charges 12,301 1,014 12,301 49,132
Operation and maintenance 59,910 58,354 177,667 159,178
Depreciation and amortization 28,897 28,081 86,379 84,464
Taxes other than income taxes 11,088 12,516 29,571 31,848
------------ ------------ ------------ ------------
266,072 244,753 683,053 696,379
------------ ------------ ------------ ------------
OPERATING INCOME 85,300 87,761 159,301 115,966
------------ ------------ ------------ ------------
OTHER INCOME
Allowance for equity funds used
during construction 174 110 472 429
Other income 1,626 2,176 7,769 5,908
------------ ------------ ------------ ------------
1,800 2,286 8,241 6,337
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest charges 14,986 16,091 44,493 47,455
Allowance for borrowed funds used during
construction and capitalized interest (174) (221) (493) (784)
------------ ------------ ------------ ------------
14,812 15,870 44,000 46,671
------------ ------------ ------------ ------------
DIVIDENDS ON PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS 1,904 1,444 5,729 4,332
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 70,384 72,733 117,813 71,300
INCOME TAXES, EXCLUDING INCOME TAXES
APPLICABLE TO EXTRAORDINARY ITEM 34,431 31,183 51,891 31,174
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 35,953 41,550 65,922 40,126
EXTRAORDINARY ITEM (Net of $12,413 of
income taxes) (17,483) - (17,483) -
------------ ------------ ------------ ------------
NET INCOME 18,470 41,550 48,439 40,126
DIVIDENDS ON PREFERRED STOCK 533 863 1,599 2,863
------------ ------------ ------------ ------------
EARNINGS APPLICABLE TO COMMON STOCK $ 17,937 $ 40,687 $ 46,840 $ 37,263
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-1-
<PAGE>
ATLANTIC CITY ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
ASSETS
------
<S> <C> <C>
Current Assets
Cash and cash equivalents $114,390 $28,767
Accounts receivable 161,442 130,148
Allowance for doubtful accounts (3,500) (3,500)
Inventories, at average cost
Fuel (coal and oil) 21,545 27,233
Materials and supplies 11,134 21,296
Deferred income taxes, net 26,008 7,735
Prepaid New Jersey sales and excise taxes 17,134 20,078
Other prepayments 1,395 4,420
-------------- --------------
349,548 236,177
-------------- --------------
Investments
Funds held by trustee 105,286 102,765
Other investments 103 112
-------------- --------------
105,389 102,877
-------------- --------------
Property, Plant and Equipment
Electric generation 468,555 1,257,009
Electric transmission and distribution 1,218,530 1,199,130
Other electric facilities 129,067 144,560
Other property, plant, and equipment 8,772 8,772
-------------- --------------
1,824,924 2,609,471
Less: Accumulated depreciation 681,557 1,007,671
-------------- --------------
Net plant in service 1,143,367 1,601,800
Construction work-in-progress 47,793 97,955
Leased nuclear fuel, at amortized cost 30,539 35,003
-------------- --------------
1,221,699 1,734,758
-------------- --------------
Deferred Charges and Other Assets
Recoverable stranded costs 659,336 -
Unrecovered purchased power costs 33,965 48,274
Deferred recoverable income taxes 21,867 102,223
Unrecovered New Jersey state excise taxes 28,424 35,594
Deferred debt refinancing costs 13,621 28,043
Deferred other postretirement benefit costs 33,104 34,978
Unamortized debt expense 13,893 14,141
Other 18,580 30,157
-------------- --------------
822,790 293,410
-------------- --------------
Total Assets $2,499,426 $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>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
Current Liabilities
Short-term debt $30,000 $ -
Long-term debt due within one year 46,075 30,075
Variable rate demand bonds 22,600 22,600
Accounts payable 62,764 54,315
Taxes accrued 77,796 22,916
Interest accrued 13,377 14,774
Dividends payable 18,520 22,236
Current capital lease obligation 15,480 15,728
Deferred energy costs 53,422 15,577
Other 43,483 38,325
-------------- --------------
383,517 236,546
-------------- --------------
Deferred Credits and Other Liabilities
Deferred income taxes, net 331,810 343,429
Regulatory liability for deferred New Jersey income tax benefit 40,831 -
Other electric restructuring liabilities 16,953 -
Deferred investment tax credits 40,242 42,142
Long-term capital lease obligation 15,059 19,523
Pension benefit obligation 14,440 10,477
Other postretirement benefit obligation 45,960 44,607
Other 21,141 24,097
-------------- --------------
526,436 484,275
-------------- --------------
Capitalization
Common stock, $3 par value; shares authorized:
25,000,000; shares outstanding: 18,320,937 54,963 54,963
Additional paid-in capital 493,007 493,007
Retained earnings 189,945 182,123
-------------- --------------
Total common stockholder's equity 737,915 730,093
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 726,377 791,127
-------------- --------------
1,589,473 1,646,401
-------------- --------------
Contingencies (Note 9)
Total Capitalization and Liabilities $2,499,426 $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)
Nine Months Ended
September 30,
-------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48,439 $ 40,126
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item (net of tax) 17,483 -
Special charges 12,301 49,132
Depreciation and amortization 95,334 91,930
Investment tax credit adjustments, net (1,900) (1,901)
Deferred income taxes, net (27,706) (22,218)
Deferred energy costs 30,891 31,164
Prepaid New Jersey sales & excise taxes 2,944 (49,609)
Net change in:
Accounts receivable (46,707) (21,950)
Inventories (1,844) 9,872
Accounts payable (20,387) 6,695
Taxes payable 54,880 36,848
Other current assets and liabilities (1) 22,574 (21,191)
Other, net 6,739 17,584
------------ ------------
Net cash provided by operating activities 193,041 166,482
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (31,886) (49,980)
Deposits to nuclear decommissioning trust funds (3,213) (3,212)
Other, net 665 (428)
------------ ------------
Net cash used by investing activities (34,434) (53,620)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (42,494) (61,146)
Preferred dividends paid (1,839) (2,863)
Long-term debt issued - 85,000
Long-term debt redeemed (48,900) (58,500)
Preferred stock redeemed - (10,000)
Principal portion of capital lease payments (9,653) (7,466)
Net change in short-term debt 30,000 (54,800)
Other, net (98) (838)
------------ ------------
Net cash used by financing activities (72,984) (110,613)
------------ ------------
Net change in cash and cash equivalents 85,623 2,249
Cash and cash equivalents at beginning of period 28,767 20,765
------------ ------------
Cash and cash equivalents at end of period $114,390 $ 23,014
============ ============
(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
----------------------------------------------
(Unaudited)
Note 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.
Note 2. Significant Accounting Policies
- ------- -------------------------------
Regulation of Utility Operations
As discussed in Note 5 to the Consolidated Financial Statements, on July 15,
1999, the New Jersey Board of Public Utilities (NJBPU) issued a summary order
(Summary Order) to ACE, concerning restructuring ACE's electricity supply
business. The order was issued pursuant to the New Jersey electric
restructuring legislation enacted in February 1999. Based on the Summary Order,
ACE determined that the requirements of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," no longer applied to its electricity supply business as of August
1, 1999. As a result, ACE discontinued applying SFAS No. 71 to its electricity
supply business and applied the requirements of SFAS No. 101, "Regulated
Enterprises--Accounting for the Discontinuation of Application of FASB Statement
No. 71" and Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of
the Pricing of Electricity--Issues Related to the Application of FASB Statements
No. 71 and No. 101" (EITF 97-4). For information concerning the extraordinary
charge to earnings in the third quarter of 1999 which resulted from applying the
requirements of SFAS No. 101 and EITF 97-4, refer to Note 4 to the Consolidated
Financial Statements.
As discussed under "Shopping Credits and Basic Generation Service" in Note 5 to
the Consolidated Financial Statements, the Summary Order issued by the NJBPU to
ACE provides for recovery through customer rates of energy and other costs of
supplying customers who do not choose an alternative electricity supplier. In
recognition of these cost-based, rate-recovery mechanisms, ACE defers the
difference between customer billings for such costs and actual costs incurred,
and an offsetting adjustment to revenues is recorded.
Deferred Debt Refinancing Costs
Prior to the third quarter of 1999, the costs of refinancing debt of the utility
business were deferred and amortized over the period during which the costs are
recovered in rates, which is generally the life of the new debt. In the third
quarter of 1999, the deferred costs associated with previously refinanced debt
attributed to ACE's electric generation business were written-off and a
regulatory asset, recoverable stranded costs, was established to the extent
recovery was provided for through rates charged to regulated delivery customers.
Any costs incurred in the future for refinancing debt attributed to the electric
generation business for which rate recovery is not provided will be accounted
for in accordance with SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which requires such costs to be expensed.
-5-
<PAGE>
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. ACE
currently cannot determine the effect that SFAS No. 133 will have on its
financial statements.
Note 3. Special Charges
- ------- ---------------
ACE's operating results for the three and nine months ended September 30, 1999
include special charges of $12.3 million before taxes ($7.3 million after taxes)
due to the costs of planned employee separations, additional costs related to
the Merger, and certain other nonrecurring items.
ACE's operating results for the nine months ended September 30, 1998 include
special charges of $49.1 million before taxes ($29.6 million after taxes) for
the costs of Merger-related employee separations and relocations and other
Merger-related costs. ACE's operating results for the three months ended
September 30, 1998 include special charges of $1.0 million before taxes ($0.6
million after taxes) for the costs of Merger-related employee separations and
relocations and other Merger-related costs.
Note 4. Extraordinary Item
- ------- ------------------
As discussed in Note 2 to the Consolidated Financial Statements, based on the
NJBPU's Summary Order, ACE discontinued applying SFAS No. 71 to its electricity
supply business and applied the requirements of SFAS No. 101 and EITF 97-4 in
the third quarter of 1999. Pursuant to the requirements of SFAS No. 101 and
EITF 97-4, ACE recorded an extraordinary charge which reduced earnings by $17.5
million, after-taxes. The portion of the extraordinary charge related to
impaired assets was determined in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of." Since the extraordinary charge was based on the NJBPU's Summary Order and
the NJBPU is to issue a more detailed final order at a later date, the
extraordinary charge could change if the NJBPU's final detailed order were to
differ materially from the Summary Order.
As shown below, the extraordinary charge primarily resulted from impaired
electric generating plants and certain other assets, and other effects of
deregulation requiring loss recognition. Due to the Summary Order's provisions
for stranded cost recovery through rates charged to regulated delivery
customers, most of ACE's stranded costs were offset by a regulatory asset
(recoverable stranded costs) and did not affect earnings.
-6-
<PAGE>
<TABLE>
<CAPTION>
Millions
of Dollars
----------
<S> <C>
The net book value of ACE's B.L. England electric generating
station and ACE's ownership interests in the Peach Bottom
Atomic Power Station (Peach Bottom), the Salem Nuclear
Generating Station (Salem), and the Hope Creek Nuclear
Generating Station (Hope Creek), and other electric plant-
related assets including inventories, were written-down due
to impairment. $(500.9)
Generation-related regulatory assets and certain other
utility assets impaired from deregulation were written-off.
Also, various liabilities resulting from deregulation were
recorded. (190.5)
A regulatory asset, recoverable stranded costs, was
established for the amount of stranded costs expected to be
recovered through regulated electricity delivery rates. 661.5
-----
Total pre-tax extraordinary charge $(29.9)
Income tax benefit 12.4
----
Total extraordinary charge, net of income taxes $(17.5)
=====
</TABLE>
Note 5. 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 February 9, 1999, New Jersey enacted the Electric Discount and Energy
Competition Act (the New Jersey Act) which, among other things, provided
customers of New Jersey electric utilities with a choice of electricity
suppliers beginning August 1, 1999. Pursuant to the New Jersey Act, on July 15,
1999, the NJBPU issued a Summary Order to ACE concerning stranded costs,
unbundled rates, and other matters related to restructuring. The NJBPU stated
that a more detailed order would be issued at a later date. The key provisions
of the Summary Order are discussed below.
Rate Decreases
- --------------
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. Management 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 resulted from the energy
component of ACE's regulated revenues exceeding related energy costs, this
portion of the revenue reduction should not affect earnings.
Stranded Cost Recovery and Securitization
- -----------------------------------------
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a nonutility
affiliated company at net book value. The NJBPU determined that ACE will have
the opportunity to recover 100% of the net stranded costs related to generation
units to be divested and the stranded costs associated with power purchased from
Non-Utility Generators (NUGs), subject to further NJBPU proceedings. The
Summary Order also permits securitization of stranded costs. Securitization is
expected to occur through a special purpose entity which will issue bonds
secured by the right to collect stranded costs from customers. The Summary
Order allows securitization of (a) 100% of the net stranded costs of the
generation units to be divested, over a period not to exceed 15 years, and (b)
100% of the costs to effect potential NUG contract buyouts or buydowns, over a
period not to exceed the remaining term of the restructured contracts. The
Summary Order provides for stranded costs, net of taxes, to be collected from
customers through a
-7-
<PAGE>
transition bond charge over the securitization term. The Summary Order also
provides for customers' rates to include a separate market transition charge for
recovery of the income tax expense associated with the revenues from stranded
cost recovery.
Shopping Credits and Basic Generation Service
- ---------------------------------------------
The Summary Order 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 choose another electricity supplier. ACE is obligated to provide BGS
through July 31, 2002; thereafter, the BGS supplier will be determined each year
based on a competitive bidding process. In accordance with the Summary Order,
ACE will supply the BGS load requirement with power purchased under its NUG
contracts and the output generated by the units to be divested (prior to
divestiture of the units). ACE will purchase power through a competitive
bidding process for any BGS supply requirement greater than the output from the
generation units to be divested and power purchased from NUGs.
The Summary Order established the rates charged to ACE's BGS customers for such
service, which include a component for the market-value of power purchased from
NUGs. The above-market portion of the cost of NUG power is to be collected
through a non-bypassable Net NUG Charge included in regulated electricity
delivery rates, over the remaining term of the NUG contracts. The NJBPU's
Summary Order also provided that ACE's regulatory liability for over-recovered
energy costs as of July 31, 1999 would be offset by any subsequent under-
recoveries of BGS and certain other costs. Due to under-recoveries of such
costs from August 1 to September 30, 1999, ACE reduced its liability for over-
recovered energy costs by $3.5 million and recognized a like amount of revenue.
Similarly, any over-recoveries will increase the regulatory liability.
Customer rates are to be adjusted for any deferred balance remaining after the
initial four-year transition period commencing August 1, 1999; accordingly,
differences between customer billings for such costs and actual costs incurred
are deferred, and an offsetting revenue adjustment is recorded.
Code of Conduct
- ---------------
The NJBPU is presently considering Code of Conduct issues concerning the
relationship between regulated and non-regulated activities.
-8-
<PAGE>
Note 6. Expected Sales of Electric Generating Plants
- ------- --------------------------------------------
Pursuant to the financial and strategic initiatives announced by Conectiv in May
1999, Conectiv distributed offering memoranda for the proposed sale of over
2,500 megawatts (MW) of nuclear and non-strategic baseload fossil electric
generating plants owned by its subsidiaries, ACE and Delmarva Power & Light
Company. Management intends to retain certain ACE electric generating plants
which are strategic to Conectiv's energy business, pursuant to Conectiv's "mid-
merit" strategy as discussed in the "Deregulated Generation and Power Plant
Sales" section of Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A). 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 $234.7
Jointly-owned 107.7 35.5
Jointly-owned
nuclear units 383.0 10.5
------- ------
1,176.7 $280.7
======= ======
</TABLE>
(a) The net book values shown above are as of September 30, 1999, are stated in
millions of dollars, and reflect the write-downs discussed in Note 4 to the
Consolidated Financial Statements.
On September 30, 1999, Conectiv announced that ACE reached agreements to sell
its ownership interests in various nuclear plants to PSEG Power LLC (a
subsidiary of Public Service Enterprise Group Incorporated) and PECO Energy
Company (PECO) for approximately $11 million, plus the net book value of ACE's
interest in nuclear fuel on-hand as of the closing date. ACE's interest in the
nuclear units which are being sold include a 7.51 percent (164 MW) interest in
Peach Bottom, a 7.41 percent interest (164 MW) in Salem, including a 3 MW
interest in a combustion turbine at Salem, and a 5.0 percent interest (52 MW) in
Hope Creek. Upon completion of the sale, ACE will transfer its nuclear
decommissioning trust funds to the purchasers and PSEG Power LLC and PECO will
assume full responsibility for the decommissioning of Peach Bottom, Salem, and
Hope Creek. The sales are subject to various federal and state regulatory
approvals and are expected to close by mid-2000.
ACE is currently conducting an auction for the sale of the fossil fuel-fired
electric generating plants included in the table above.
There can be no assurances that ACE will elect or be able to sell any of the
electric generating plants offered for sale.
The net book value of ACE's B.L. England electric generating station and
interest in the nuclear plants was written down in the third quarter of 1999, as
discussed in Note 4 to the Consolidated Financial Statements. Since the
impaired electric generating units were written down to their estimated fair
market values (net of estimated selling costs), the sale of these impaired
electric generating plants should not result in a significant gain or loss.
Under the NJBPU's Summary Order, any gain or loss realized on the sale of ACE's
electric generating plants (other than certain "mid-merit" plants) will effect
the amount of ACE's recoverable stranded costs. Accordingly, any gain or loss
realized by ACE on the sale of these plants would not affect future earnings.
In the event of a sale within three years of certain "mid-merit" plants, which
began operating on a deregulated basis effective August 1, 1999, 50% of any gain
realized would be shared with ACE's regulated electric customers and the
remaining 50% would affect earnings. If these mid-merit plants were sold and a
loss resulted from the sale, the loss would be recognized in earnings.
-9-
<PAGE>
Note 7. 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.
Note 8. Regulatory Assets And Liabilities
- ------- ---------------------------------
In conformity with SFAS No. 71, ACE's accounting policies reflect the financial
effects of rate regulation and decisions by regulatory commissions having
jurisdiction over ACE's regulated utility business. Regulatory commissions
occasionally provide for future recovery from customers of current period
expenses. When this happens, the expenses are deferred as regulatory assets and
subsequently recognized in the Consolidated Statement of Income during the
period the expenses are recovered from customers. Similarly, regulatory
liabilities may also be created due to the economic impact of an action taken by
a regulatory commission.
In the third quarter of 1999, the electricity supply business of ACE no longer
met the requirements of SFAS No. 71. Accordingly, regulatory assets and
liabilities related to the electricity supply business were written off, except
to the extent that future cost recovery was provided for through the regulated
electricity delivery business. A new regulatory asset, "Recoverable stranded
costs," was established to recognize amounts to be collected from regulated
delivery customers for stranded costs which resulted from deregulation of the
electricity supply business. The table below displays the regulatory assets and
liabilities as of September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
Regulatory Assets (Liabilities) 1999 1998
- -------------------------------------------------------------- -------------- -------------
(Millions of Dollars)
<S> <C> <C>
Recoverable stranded costs (1).............................. $659.3 --
Deferred recoverable income taxes (2)....................... 21.9 $102.2
Deferred debt refinancing costs (3)......................... 13.6 28.1
Unrecovered state excise taxes.............................. 28.4 35.6
Deferred other postretirement benefit costs................. 33.1 35.0
Unrecovered purchased power costs........................... 34.0 48.3
Regulatory liability for deferred energy costs (4).......... (53.4) (15.6)
Deferred costs for nuclear decommissioning/decontamination.. 5.8 6.2
Regulatory liability for New Jersey income tax benefit (5).. (40.8) --
Asbestos removal costs...................................... 8.3 8.5
Other (6)................................................... 0.5 10.3
------ ------
Total....................................................... $710.7 $258.6
====== ======
</TABLE>
(1) Represents recoverable stranded costs, net of amortization recorded through
September 30, 1999.
(2) Deferred recoverable income taxes represents the portion of ACE's deferred
tax liabilities applicable to utility operations that has not been reflected in
current customer rates for which future recovery is probable. Due to
discontinuing the application of SFAS No. 71 to ACE's electricity supply
business, the portion of deferred recoverable income taxes attributable to ACE's
electricity supply business was written off in the third quarter of 1999.
(3) See "Deferred debt refinancing costs" in Note 2 to the Consolidated
Financial Statements.
-10-
<PAGE>
(4) See "Shopping Credits and Basic Generation Service" in Note 5 to the
Consolidated Financial Statements.
(5) In the third quarter of 1999, a deferred tax asset arising from the write
down of ACE's electric generating plant was established. The deferred tax asset
represents the future tax benefit expected to be realized when the higher tax
basis of the generating plants is deducted for New Jersey state income tax
purposes. ACE has requested the New Jersey Division of Taxation to rule on
whether or not this tax benefit may be used to reduce the rates charged to ACE's
regulated electricity delivery customers for stranded cost recovery. To
recognize that this tax benefit probably will be given to ACE's regulated
electricity customers through lower electric rates, ACE recorded a regulatory
liability.
(6) Various regulatory assets attributable to ACE's electricity supply business
were written off in the third quarter of 1999 due to discontinuing the
application of SFAS No. 71 to ACE's electricity supply business.
Note 9. 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 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 County, New Jersey. There was $1.0 million included in ACE's current
liabilities as of September 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 Peach Salem, Salem, and 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.
-11-
<PAGE>
Note 10. Supplemental Cash Flow Information
- -------- ----------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
Cash paid for: 1999 1998
-------- --------
<S> <C> <C>
(dollars in thousands)
Interest, net of capitalized amounts $45,397 $44,157
Taxes, net of refunds $25,124 $25,393
</TABLE>
Note 11. 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.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Earnings Summary
- ----------------
ACE's earnings applicable to common stock were $17.9 million for the three
months ended September 30, 1999, compared to earnings applicable to common stock
of $40.7 million for the three months ended September 30, 1998. Earnings
applicable to common stock for the three months ended September 30, 1999 were
reduced by a $17.5 million extraordinary charge for discontinuing the
application of SFAS No. 71 to ACE's electricity supply business because of
deregulation and $7.3 million of special charges (net of taxes), primarily due
to the costs of planned employee separations, additional costs related to the
Merger, and certain other nonrecurring items. For additional information
concerning deregulation and the extraordinary charge to earnings, refer to Notes
2, 4, 5 and 8 to the Consolidated Financial Statements and the "NJBPU Summary
Order" section below.
Excluding the extraordinary and special charges to earnings, earnings applicable
to common stock increased $1.4 million to $42.7 million for the third quarter of
1999 from $41.3 million for the third quarter of 1998. Warmer summer weather's
positive impact on net regulated electric revenues and earnings from certain
electric generating units of ACE, which were deregulated August 1, 1999, were
substantially offset by the electric rate decrease which became effective August
1, 1999 and a higher effective income tax rate.
ACE's earnings applicable to common stock were $46.8 million for the nine months
ended September 30, 1999, compared to earnings applicable to common stock of
$37.3 million for the nine months ended September 30, 1998. Earnings applicable
to common stock for the nine months ended September 30, 1999 were reduced by a
$17.5 million extraordinary charge for discontinuing the application of SFAS No.
71 to ACE's electricity supply business because of deregulation and $7.3 million
of special charges (net of taxes) primarily due to the costs of planned employee
separations, additional costs related to the Merger, and certain other
nonrecurring items. Earnings applicable to common stock for the nine months
ended September 30, 1998 were reduced by special charges of $29.6 million (net
of taxes), for the costs of Merger-related employee separations and relocations
and other Merger-related costs.
Excluding the extraordinary and special charges to earnings, earnings applicable
to common stock increased $4.8 million to $71.6 million for the nine months
ended September 30, 1999 from $66.8 million for the nine months ended September
30, 1998. The significant positive variances included in the $4.8 million
earnings increase were weather's positive impact on net regulated electric
revenues, earnings from certain electric generating units of ACE, which were
deregulated August 1, 1999, and lower net interest costs. These favorable
earnings variances were substantially offset by higher operations and
maintenance costs and the electric rate decrease which became effective August
1, 1999.
NJBPU Summary Order
- -------------------
As discussed in Notes 2, 4, 5, and 8 to the Consolidated Financial Statements,
on July 15, 1999, the NJBPU issued a Summary Order concerning restructuring
ACE's electricity supply business. Among other matters discussed below, the
Summary Order provided ACE's customers with a choice of electricity suppliers
effective August 1, 1999. Based on the Summary Order, ACE determined that the
requirements of SFAS No. 71 no longer applied to its electricity supply business
as of August 1, 1999. As a result, ACE discontinued applying SFAS No. 71 to its
electricity supply business and applied the requirements of SFAS No. 101 and
EITF 97-4, which among other things, resulted in an extraordinary charge to
earnings of $17.5 million, net of taxes. Since the extraordinary charge was
based on the NJBPU's Summary Order and the NJBPU is to issue a more detailed
final order at a later date, the extraordinary charge could change if the
NJBPU's final detailed order were to differ materially from the Summary Order.
-13-
<PAGE>
Rate Decreases
- --------------
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 resulted from the energy
component of ACE's regulated revenues exceeding related energy costs, this
portion of the revenue reduction should not affect earnings.
Regulatory Implications on Sales of Electric Generating Plants
- --------------------------------------------------------------
Under the NJBPU's Summary Order, the gain or loss realized upon the sale of
ACE's electric generating plants (other than certain "mid-merit" plants) will
affect the amount of stranded costs to be recovered from ACE's customers.
Accordingly, any gain or loss realized by ACE on the sale of these plants would
not affect future earnings. In the event of a sale within three years of
certain "mid-merit" plants, which began operating on a deregulated basis
effective August 1, 1999, 50% of any gain would be shared with ACE's regulated
electric customers and the remaining 50% would affect earnings. There can be no
assurances, however, 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.
Stranded Cost Recovery and Securitization
- -----------------------------------------
The NJBPU's Summary Order provides ACE the opportunity to recover 100% of the
net stranded costs related to the generation units to be divested and the
stranded costs associated with power purchased from NUGs. The Summary Order
also permits securitization of 100% of the net stranded costs of the generation
units to be divested and the costs to effect potential NUG contract buyouts or
buydowns. Securitization is expected to occur through a special purpose entity
which will issue bonds secured by the right to collect stranded costs from
customers. Stranded costs, net of taxes, will be collected from customers
through a transition bond charge and the income tax expense associated with the
revenues from stranded cost recovery will be collected from customers through a
separate market transition charge. ACE's pre-tax recoverable stranded costs,
which are subject to adjustment based on the actual gains and losses realized on
the sale of electric generating plants, were initially estimated and recorded as
$661.5 million in the third quarter of 1999.
Basic Generation Service
- ------------------------
Through July 31, 2002 under New Jersey's BGS, ACE is obligated to supply
electricity to customers who do not choose an alternative electricity supplier.
As the BGS supplier, ACE's BGS rates are designed to recover its costs, except
for the above-market portion of NUG power which is recovered through a separate
non-bypassable Net NUG Charge included in regulated delivery rates. In
accordance with the NJBPU's order, ACE defers the difference between such costs
incurred and the related revenues. ACE's customer rates are to be adjusted for
any deferred balance remaining after the initial four-year transition period
that began August 1, 1999.
Shopping Credits
- ----------------
Customers who choose an alternative electricity supplier receive a credit to
their bill, or a shopping credit, which generally represents the cost of
electricity supply and transmission service. System-average shopping credits
range from 5.27 cents per kWh, effective August 1, 1999, to 5.48 cents per kWh
in 2003.
-14-
<PAGE>
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. 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. During August and
September 1999, ACE and the NUG received proposals from various parties, and
have since been engaged in discussions and negotiations with those parties.
Although discussions and negotiations continue, at this time it is not possible
to predict whether a definitive termination agreement involving a transaction
with a substitute power contract will result.
On July 30, 1999, ACE made a conditional offer to another NUG (in which an
affiliate has a 50% interest), with which ACE has a long-term power purchase
contract, to terminate the power contract. The conditional offer was modified
on August 26, 1999 and accepted by the respective parties, and remains subject
to the receipt of corporate and regulatory (including NJBPU) approvals. The
termination of the power purchase contract would require a payment in excess of
$200 million to the power producer. A Termination Agreement between the
parties, dated as of September 20, 1999, was filed with the NJBPU in connection
with ACE's petition for authorization to proceed with the proposed transaction.
Among other things, the petition requests that the NJBPU approve the Termination
Agreement, make certain findings with respect to the termination payment to be
made by ACE pursuant thereto, approve the interim financing of the termination
payment by ACE, and find that the termination payment is an amount which either
may constitute, or be included as part of, the principal amount of transition
bonds for which ACE may seek approval to issue under the New Jersey Act.
Arrangements with respect to the interim financing of amounts which may be paid
in connection with the termination of the power purchase contracts described
above are being negotiated with several financial institutions. It is presently
contemplated that long-term financing of such termination payments would be
undertaken at a later time, in connection with the financing of these and other
stranded costs of ACE which may be approved by the NJBPU. There can be no
assurances, however, 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.
Deregulated Generation and Power Plant Sales
- --------------------------------------------
Conectiv's management is changing the mix of the types of electric generating
plants owned by its subsidiaries, including ACE, in conjunction with
implementing a "mid-merit" strategy. Mid-merit electric generating plants can
quickly increase or decrease their kWh output level on an economic basis. Mid-
merit plants typically have relatively low fixed operating and maintenance costs
and also can use different types of fuel. These plants are generally operated
during times when demand for electricity rises and prices are higher. As
discussed in Note 6 to the Consolidated Financial Statements, ACE has offered
its nuclear and non-strategic baseload fossil electric generating plants for
sale. Baseload electric generating plants run almost continuously to supply the
base level of demand for electricity, or the minimum demand level which
generally always exists on an electrical system. In a deregulated electricity
supply market,
-15-
<PAGE>
management expects that mid-merit electric generating plants will be more
profitable and provide higher returns on invested capital than baseload electric
generating plants.
Under the NJBPU's Summary Order, the kWh output from certain of ACE's electric
generating units, with approximately 741 MW of capacity, is not dedicated to
supplying BGS customers, but instead is being operated on a deregulated basis,
effective August 1, 1999, under Conectiv's mid-merit strategy.
On September 30, 1999, Conectiv announced that ACE reached agreements to sell
its ownership interests in nuclear plants, representing 383 MW of capacity, to
PSEG Power LLC and PECO. The aggregate sales price of $11 million, less selling
costs, was used as the fair value of the nuclear plants in determining the
amount of impairment that resulted from deregulation and the amount of the write
down of ACE's investments in nuclear plants that was recorded in the third
quarter of 1999. Upon completion of the sale, ACE will transfer its nuclear
decommissioning trust funds to the purchasers and PSEG Power LLC and PECO will
assume full responsibility for the decommissioning of Peach Bottom, Salem, and
Hope Creek. The sales are subject to various federal and state regulatory
approvals and are expected to close by mid-2000.
ACE is currently conducting an auction for the sale of certain fossil fuel-fired
electric generating plants which have 794 MW of capacity and a net book value of
approximately $270 million, which is net of the write downs recorded in the
third quarter of 1999, as a result of deregulation.
There can be no assurances that ACE will elect or be able to sell any of the
electric generating plants offered for sale.
See the preceding MD&A section labeled "Regulatory Implications on Sales of
Electric Generating Plants" for a discussion of any gain or loss that may result
from such sales.
Due to the expected sale of power plants, more electric capacity is expected to
be purchased in the future, which will cause purchased electric capacity costs
to increase. However, since the divested plants will be removed from the
balance sheet upon sale, depreciation expense for these plants will stop. Also,
to the extent the sales proceeds are used to pay off debt which had financed the
plants, interest expense will also decrease.
Management expects the proceeds from the sale of the electric generating plants
will be used for general corporate purposes, including the purchase of a portion
of ACE's outstanding securities. The electric generating plants of ACE which
are not sold to third parties are expected to be transferred into a new electric
generation subsidiary within the next year.
ACE's mortgage indentures require that the electric generating plants being
divested be released from the liens of the mortgage. These assets may be
released with a combination of cash, bondable property additions and credits
representing previously issued and retired first mortgage bonds. ACE has
sufficient bondable property additions and retired first mortgage bonds to
release such assets at fair values.
Operating Revenues
- ------------------
The following table 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).
Electricity supply service in ACE's service area was subject to price regulation
prior to deregulation and will also be subject to price regulation during the
transition period. Thus, revenues from electricity supply service within ACE's
service area are classified below as Regulated electric revenues. Non-regulated
electric revenues resulted primarily from output from deregulated electric
generating plants in 1999 and from electricity trading activities in 1998.
-16-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- -------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated electric revenues
Retail and other $316.8 $305.8 $765.9 $729.7
Interchange 20.2 20.9 57.7 47.8
Non-regulated electric revenues 12.4 5.8 12.4 31.6
Other revenues 2.0 - 6.4 3.2
------ ------ ------ ------
Total operating revenues $351.4 $332.5 $842.4 $812.3
====== ====== ====== ======
</TABLE>
As shown above, Regulated electric "Retail and other" revenues increased by
$11.0 million and $36.2 million for the three and nine month periods,
respectively, ended September 30, 1999 in comparison to the same periods ended
September 30, 1998. These increases were mainly due to higher kWh sales, which
increased by 4.8% and 3.3% for the three-month and nine-month periods,
respectively, and to higher billings of certain services related to the
electricity delivery business. Retail electric kWh sales benefited from a 1.0%
increase in the number of customers served and also from a warmer summer and a
colder winter. Interchange revenues increased $9.9 million for the nine-month
period mainly due to additional revenues for transmission network usage.
Non-regulated electric revenues increased $6.6 million in the third quarter of
1999 due to revenues from electric generating units which were deregulated on
August 1, 1999, partly offset by revenues from electricity trading activities in
the third quarter of 1998. For the nine-month period, Non-regulated electric
revenues decreased because the revenues from electricity trading activities for
the nine months ended September 30, 1998 were higher than revenues earned in the
third quarter of 1999 from ACE's deregulated electric generating units.
However, Non-regulated electric revenues net of energy costs (net revenues)
increased for the nine-month period because the net revenues earned last year
from electricity trading activities were minimal.
Operating Expenses
- ------------------
Electric Fuel and Purchased Power
- ---------------------------------
Electric fuel and purchased power increased $10.4 million for the three-month
period and $6.8 million for the nine-month period mainly due to higher Regulated
retail kWh sales, partly offset by lower costs recorded pursuant to the energy
adjustment clause. The nine-month period increase is also net of a decrease
attributed to purchased energy expenses recorded in 1998 for Non-regulated
electricity trading activities.
Special Charges
- ---------------
ACE's operating results for the three and nine months ended September 30, 1999
include special charges of $12.3 million before taxes ($7.3 million after taxes)
due to the costs of planned employee separations, additional costs related to
the Merger, and certain other nonrecurring items.
ACE's operating results for the nine months ended September 30, 1998 include
special charges of $49.1 million before taxes ($29.6 million after taxes) for
the costs of Merger-related employee separations and relocations and other
Merger-related costs. ACE's operating results for the three months ended
September 30, 1998 include special charges of $1.0 million before taxes ($0.6
million after taxes) for the costs of Merger-related employee separations and
relocations and other Merger-related costs.
-17-
<PAGE>
Operation and Maintenance Expenses
- ----------------------------------
Operation and maintenance expenses increased $18.5 million for the nine-month
period mainly due to higher costs of certain administrative functions, lower
capital expenditures which caused proportionately more resources to be expensed
and less resources to be capitalized, and higher power plant maintenance
expenses.
Other Income
- ------------
Other income increased $1.9 million for the nine-month period primarily due to
interest income on a successful income tax appeal.
Interest Expense
- ----------------
Interest expense, net of amounts capitalized, decreased mainly due to lower
balances of long- and short-term debt.
Dividends on Preferred Securities of Subsidiary Trusts
- ------------------------------------------------------
Dividends on preferred securities of subsidiary trusts increased due to the
issuance of $25 million of 7.375% preferred securities in November 1998.
Dividends on Preferred Stock
- ----------------------------
Dividends on preferred stock decreased 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%.
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. Conectiv has
met 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--
concludes with a test of the unit being remediated. The third phase involves
system testing and compliance certification.
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.
Additionally, ACE has developed and tested contingency plans in the event that
Year 2000 electric system outages do occur. Contingency plans are in place for
all mission critical systems and have been coordinated into a detailed overall
Year 2000 restoration plan under the direction of a senior-level engineering and
operations manager. Contingency plans have also been developed for non-mission
critical systems. The Year 2000 plans build on ACE's existing expertise in
service restorations. ACE has also coordinated these efforts with state and
local emergency management agencies.
-18-
<PAGE>
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 businesses.
Inventory and assessment, corrective action/unit testing and system
testing/compliance in the 21 mission critical systems is 99% complete.
<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
- -------------------------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Business systems 100% 98% 95%
Power production 100% 95% 95%
Electricity distribution 100% 93% 90%
Gas delivery 100% 99% 99%
Competitive services 100% 75%-100% 88%
</TABLE>
Conectiv has also contacted 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 for
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.
As requested by NERC, ACE filed its Year 2000 Readiness Statement with NERC
stating that as of June 30, 1999, 96% of work on mission critical systems had
been completed. The remaining 4% of work constituted three exceptions to full
readiness status and were reported to NERC in the regular monthly filing made on
June 30, 1999. 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."
Since Conectiv's June 30, 1999 NERC filing, Conectiv has addressed two of the
three exceptions and they have been reported as complete to NERC. Mission
critical work is now 99% complete. The outstanding work on the sole remaining
exception is completion of changes to Conectiv's customer information and
billing system, including system changes made necessary by state legislation
authorizing energy choice programs. Remediation efforts are now complete; the
remaining work consists of final integration testing of the system. That
testing is scheduled to be complete by the end of November 1999.
In addition, on October 13, 1999, the NJBPU found that the electric industry in
New Jersey, including ACE, was Year 2000 ready with regard to mission critical
systems that assure the capability to continue to provide safe, adequate service
into the Year 2000. The only further action required of ACE by the NJBPU's
order is continued monthly reporting of project status.
-19-
<PAGE>
ACE participated in the two NERC drills on April 9, 1999 and September 9, 1999;
a small number of manageable issues similar to those found by other utilities
were identified during those drills and have been addressed. In addition, ACE
conducted its own drill on October 28, 1999 where it successfully tested its
contingency plans and communications with customers and emergency management
agencies. All of these drills were exercises only and did not result in service
interruptions.
Conectiv has incurred approximately $12.4 million in costs for the Year 2000
Project. The current budget for the Year 2000 Project is $10 million to $15
million. 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 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.
Until the century change actually occurs, ACE will not with certainty be able to
determine whether the Year 2000 issue might cause disruptions to its operations
and impact related costs and revenues. ACE continues to assess 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 generate legal claims against
ACE. 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.
Liquidity And Capital Resources
- -------------------------------
Due to $193.0 million of cash provided by operating activities, $34.4 million of
cash used by investing activities, and $73.0 million of cash used by financing
activities, cash and cash equivalents increased by $85.6 million during the
first nine months of 1999.
Net cash provided by operating activities was $193.0 million for the nine months
ended September 30, 1999, compared to $166.5 million for the nine months ended
September 30, 1998. The $26.5 million increase in net cash provided by
operating activities was mainly due to a lower prepayment of New Jersey sales
tax and last year's payments for employee separation and other Merger-related
costs.
Accounts receivable increased from $130.1 million as of December 31, 1998 to
$161.4 million as of September 30, 1999 mainly due to seasonality of electricity
sales, which resulted in higher electric revenues in the third quarter of 1999
than in the fourth quarter of 1998.
-20-
<PAGE>
The current liability for taxes accrued increased $54.9 million from December
31, 1998 to September 30, 1999 primarily due to taxable income for the first
nine months of 1999; the items included in the special and extraordinary charges
to earnings for the first nine months of 1999 generally are not currently
deductible for income tax purposes, but instead result in a deferred tax
benefit.
ACE's $53.4 million liability for deferred energy costs as of September 30, 1999
will be offset by any under-recoveries of BGS and certain other costs after
August 1, 1999. ACE's electric rates are to be adjusted for the deferred
balance which remains as of July 31, 2003.
The $40.8 million "Regulatory liability for deferred New Jersey income tax
benefit" included on ACE's September 30, 1999 balance sheet resulted from a
deferred New Jersey income tax benefit recorded in the third quarter of 1999 due
to the write down of ACE's electric generating plants. The deferred tax asset
represents a future tax benefit expected to be realized when the higher tax
basis of the generating plants is deducted for New Jersey state income tax
purposes. ACE has requested the New Jersey Division of Taxation to rule on
whether or not this tax benefit may be used to reduce the rates charged to ACE's
regulated electricity delivery customers for stranded cost recovery. Since this
tax benefit probably will be given to ACE's regulated electricity customers
through lower electric rates, ACE recorded a regulatory liability.
Capital expenditures decreased by $18.1 million to $31.9 million in the current
nine-month period partly due to Conectiv's service subsidiary's capital
expenditures for assets which are used by more than one Conectiv subsidiary.
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 September 30, 1999, ACE had authority to issue up to $250 million in
short-term debt and had $30 million of short-term notes outstanding.
On October 15, 1999, the NJBPU approved ACE's participation in Conectiv's "money
pool," which Conectiv's subsidiaries lend cash to or borrow cash from, depending
on the cash needs of the participating subsidiaries.
The balance of "Long-term debt due within one year" as of September 30, 1999
increased $16.0 million from the December 31, 1998 balance 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 September 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.
Common dividends paid decreased by $18.7 million to $42.5 million in the current
nine-month period due to 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.
-21-
<PAGE>
ACE's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Method are shown below. See Exhibit
12-A, Ratio of Earnings to Fixed Charges, and Exhibit 12-B, Ratio of Earnings to
Fixed Charges and Preferred Dividends, for additional information.
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
September 30, -----------------------
1999 1998 1997 1996 1995
------------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges 2.35 1.66 2.84 2.59 3.19
Fixed Charges and Preferred
Stock Dividends 2.23 1.55 2.58 2.16 2.43
</TABLE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
As of September 30, 1999, there were no material changes in the information
previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-9 and II-10 of ACE's 1998 Annual Report on Form 10-K.
-22-
<PAGE>
Part II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- --------------------------
NUG Contract Fuel Costs
- -----------------------
ACE and a NUG with which it has a power contract are currently arbitrating a
dispute over the calculation of the fuel costs ACE pays to the NUG. ACE has
asserted that fuel costs are overstated by approximately $2 million a year. ACE
has asked for relief that includes a refund of past overpayments and a
prospective change to the calculation of fuel costs over the remaining 25 years
of the power contract. The case will likely be heard in early-2000.
Item 5. Other Information
- -------------------------
Electric System Outages
- -----------------------
As previously reported, after customers experienced electric service outages in
early July during an extended period of hot and humid weather and high demand
for electricity, the NJBPU initiated an investigation of outages occurring in
the service territories of ACE and other New Jersey electric utilities. ACE has
responded to, and expects to continue to respond to, NJBPU information requests
during this investigation. In November 1999, the NJBPU expanded its July outage
investigation to include a general reliability investigation of ACE and all
other New Jersey utilities.
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 (c), Exhibits.
ACE filed a Report on Form 8-K dated September 7, 1999 reporting on Item 5,
Other Events.
ACE filed a Report on Form 8-K dated September 30, 1999 reporting on Item 5,
Other Events, and Item 7 (c), Exhibits.
ACE filed a Report on Form 8-K dated October 26, 1999 reporting on Item 5, Other
Events.
-23-
<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: November 12, 1999 /s/ John C. van Roden
----------------- ----------------------------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-24-
<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>
12 Months
Ended Year Ended December 31,
September 30, -------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before extraordinary item $ 56,072 $ 30,276 $ 85,747 $ 75,017 $ 98,752
-------- -------- -------- -------- --------
Income taxes 38,895 18,178 50,442 36,958 48,277
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and expense 60,978 63,940 64,501 64,847 62,879
Other interest 2,043 3,435 3,574 4,019 4,364
Preferred dividend requirements
of subsidiary trusts 7,449 6,052 5,775 1,428 -
-------- -------- -------- -------- --------
Total fixed charges 70,470 73,427 73,850 70,294 67,243
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $165,437 $121,881 $210,039 $182,269 $214,272
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.35 1.66 2.84 2.59 3.19
</TABLE>
For purposes of computing the ratio, earnings are income before extraordinary
item 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 expense
associated with the ACE's 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,
September 30, -----------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income before extraordinary item $ 56,072 $ 30,276 $ 85,747 $ 75,017 $ 98,752
------------ ------------ ------------ ------------ ------------
Income taxes 38,895 18,178 50,442 36,958 48,277
------------ ------------ ------------ ------------ ------------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and expense 60,978 63,940 64,501 64,847 62,879
Other interest 2,043 3,435 3,574 4,019 4,364
Preferred dividend requirements
of susidiary trusts 7,449 6,052 5,775 1,428 -
------------ ------------ ------------ ------------ ------------
Total fixed charges 70,470 73,427 73,850 70,294 67,243
------------ ------------ ------------ ------------ ------------
Earnings before income taxes
and fixed charges $165,437 $121,881 $210,039 $182,269 $214,272
============ ============ ============ ============ ===========
Fixed charges $ 70,470 $ 73,427 $ 73,850 $ 70,294 $ 67,243
Preferred dividend requirements 3,679 5,289 7,506 14,214 20,839
------------ ------------ ------------ ------------- ------------
Total Fixed charges and preferred
dividend requirements $ 74,149 $ 78,716 $ 81,356 $84,508 $ 88,082
============ ============ ============ ============ ===========
Ratio of earnings to fixed charges 2.23 1.55 2.58 2.16 2.43
</TABLE>
For purposes of computing the ratio, earnings are income before extraordinary
item 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 expense
associated with the ACE's leases. Preferred dividend requirements represent
annualized preferred dividend requirements multiplied by the ratio that pre-tax
income bears to income before extraordinary item.
<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 3RD QUARTER 1999
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,135,344
<OTHER-PROPERTY-AND-INVEST> 113,412
<TOTAL-CURRENT-ASSETS> 349,548
<TOTAL-DEFERRED-CHARGES> 822,790
<OTHER-ASSETS> 78,332
<TOTAL-ASSETS> 2,499,426
<COMMON> 54,963
<CAPITAL-SURPLUS-PAID-IN> 493,007
<RETAINED-EARNINGS> 189,945
<TOTAL-COMMON-STOCKHOLDERS-EQ> 737,915
118,950
6,231
<LONG-TERM-DEBT-NET> 726,377
<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> 15,059
<LEASES-CURRENT> 15,480
<OTHER-ITEMS-CAPITAL-AND-LIAB> 803,339
<TOT-CAPITALIZATION-AND-LIAB> 2,499,426
<GROSS-OPERATING-REVENUE> 842,354
<INCOME-TAX-EXPENSE> 51,891
<OTHER-OPERATING-EXPENSES> 683,053
<TOTAL-OPERATING-EXPENSES> 734,944
<OPERATING-INCOME-LOSS> 107,410
<OTHER-INCOME-NET> 8,241
<INCOME-BEFORE-INTEREST-EXPEN> 115,651
<TOTAL-INTEREST-EXPENSE> 49,729
<NET-INCOME> 48,439
1,599
<EARNINGS-AVAILABLE-FOR-COMM> 46,840
<COMMON-STOCK-DIVIDENDS> 39,017
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 193,041
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
