<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, 2000
-------------
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
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(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
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Table of Contents
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Page
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Part I. Financial Information:
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Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income for the three and six months
ended June 30, 2000, and June 30, 1999........................ 1
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999............................................. 2-3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000, and June 30, 1999........................ 4
Notes to Consolidated Financial Statements.................... 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14-15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signature.................................................................. 17
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<TABLE>
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Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC CITY ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
OPERATING REVENUES $236,249 $246,143 $445,135 $490,982
------------- -------------- -------------- -------------
OPERATING EXPENSES
Electric fuel and purchased energy and capacity 105,180 108,353 195,135 223,259
Operation and maintenance 60,510 64,527 121,552 117,757
Depreciation and amortization 25,612 28,788 51,307 57,482
Taxes other than income taxes 8,536 8,508 18,050 18,483
------------- -------------- -------------- -------------
199,838 210,176 386,044 416,981
------------- -------------- -------------- -------------
OPERATING INCOME 36,411 35,967 59,091 74,001
------------- -------------- -------------- -------------
OTHER INCOME 1,394 4,197 3,016 6,441
------------- -------------- -------------- -------------
INTEREST EXPENSE
Interest charges 18,971 14,860 38,837 29,507
Allowance for borrowed funds used during
construction and capitalized interest (183) (152) (359) (319)
------------- -------------- -------------- -------------
18,788 14,708 38,478 29,188
------------- -------------- -------------- -------------
PREFERRED DIVIDEND REQUIREMENTS ON
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 1,904 1,905 3,809 3,825
------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES 17,113 23,551 19,820 47,429
INCOME TAXES 3,000 8,673 4,134 17,460
------------- -------------- -------------- -------------
NET INCOME 14,113 14,878 15,686 29,969
DIVIDENDS ON PREFERRED STOCK 532 533 1,065 1,066
------------- -------------- -------------- -------------
EARNINGS APPLICABLE TO COMMON STOCK $ 13,581 $ 14,345 $ 14,621 $ 28,903
============= ============== ============== =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
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ATLANTIC CITY ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2000 1999
--------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 4,963 $ 7,924
Accounts receivable, net of allowances
of $3,500 and $3,500, respectively 135,065 133,879
Intercompany loan receivable 55,126 73,532
Inventories, at average cost
Fuel (coal and oil) 12,597 19,598
Materials and supplies 9,575 8,890
Prepaid income taxes 18,128 88,483
Deferred income taxes, net 18,697 6,245
Prepaid New Jersey sales and excise taxes 31,260 -
Other prepayments 1,510 2,223
--------------- ---------------
286,921 340,774
--------------- ---------------
Investments 108,762 105,371
--------------- ---------------
Property, Plant and Equipment
Electric generation 258,147 256,899
Electric transmission and distribution 1,244,887 1,224,644
Other electric facilities 122,908 128,388
Other property, plant, and equipment 5,772 5,772
--------------- ---------------
1,631,714 1,615,703
Less: Accumulated depreciation 649,641 626,080
--------------- ---------------
Net plant in service 982,073 989,623
Construction work-in-progress 41,430 46,025
Leased nuclear fuel, at amortized cost 26,366 30,391
--------------- ---------------
1,049,869 1,066,039
--------------- ---------------
Deferred Charges and Other Assets
Recoverable stranded costs 974,095 988,273
Unrecovered purchased power costs 21,708 28,923
Deferred recoverable income taxes 20,531 21,867
Unrecovered New Jersey state excise taxes 16,577 22,567
Deferred debt refinancing costs 12,894 13,574
Deferred other postretirement benefit costs 31,230 32,479
Unamortized debt expense 13,361 14,197
Other 23,168 20,595
--------------- ---------------
1,113,564 1,142,475
--------------- ---------------
Total Assets $2,559,116 $2,654,659
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
<CAPTION>
ATLANTIC CITY ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<S> <C> <C>
June 30, December 31,
2000 1999
----------- -----------
CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt $ - $ 30,000
Long-term debt due within one year 10,075 46,075
Variable rate demand bonds 22,600 22,600
Accounts payable 55,615 62,169
Interest accrued 20,860 20,182
Dividends payable 17,906 18,071
Current capital lease obligation 15,480 15,480
Deferred energy supply costs 41,638 46,375
Above-market purchased energy contracts
and other electric restructuring liabilities 7,785 7,992
Other 34,141 31,893
----------- -----------
226,100 300,837
----------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes, net 406,847 389,594
Regulatory liability for New Jersey income tax benefit 49,262 49,262
Above-market purchased energy contracts
and other electric restructuring liabilities 16,877 16,921
Deferred investment tax credits 37,707 39,608
Long-term capital lease obligation 10,886 14,911
Pension benefit obligation 23,168 20,309
Other postretirement benefit obligation 40,122 42,952
Other 19,246 22,381
----------- -----------
604,115 595,938
----------- -----------
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 110,948 129,981
----------- -----------
Total common stockholder's equity 658,918 677,951
Preferred stock not subject to mandatory redemption 6,231 6,231
Preferred stock subject to mandatory redemption 23,950 23,950
Preferred securities of subsidiary trusts subject to mandatory
redemption 95,000 95,000
Long-term debt 944,802 954,752
----------- -----------
1,728,901 1,757,884
----------- -----------
Commitments and Contingencies (Note 6) - -
----------- -----------
Total Capitalization and Liabilities $2,559,116 $2,654,659
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
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ATLANTIC CITY ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,686 $ 29,969
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 57,688 62,962
Investment tax credit adjustments, net (1,901) (1,267)
Deferred income taxes, net 6,137 (14,713)
Deferred energy supply costs (6,601) 23,855
Net change in:
Accounts receivable 7,296 (6,185)
Inventories 6,316 (6,611)
Prepaid New Jersey sales & excise taxes (33,308) (20,156)
Accounts payable (6,554) (9,081)
Taxes accrued 70,355 6,923
Other current assets and liabilities (1) 6,908 7,570
Other, net 3,961 (847)
------------ ------------
Net cash provided by operating activities 125,983 72,419
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Intercompany loan receivable 18,406 -
Capital expenditures (28,112) (14,947)
Deposits to nuclear decommissioning trust funds (405) (3,212)
Other, net (1,567) 366
------------ ------------
Net cash used by investing activities (11,678) (17,793)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (33,655) (40,608)
Preferred dividends paid (1,230) (1,840)
Long-term debt redeemed (46,000) (48,900)
Principal portion of capital lease payments (6,381) (5,480)
Net change in short-term debt (30,000) 30,000
Other, net - (61)
------------ ------------
Net cash used by financing activities (117,266) (66,889)
------------ ------------
Net change in cash and cash equivalents (2,961) (12,263)
Cash and cash equivalents at beginning of period 7,924 28,767
------------ ------------
Cash and cash equivalents at end of period $ 4,963 $ 16,504
============ ============
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
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ATLANTIC CITY ELECTRIC COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Note 1. Financial Statement Presentation
------- --------------------------------
The consolidated condensed interim financial statements contained herein 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 1999 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 1999 Annual
Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for
additional relevant information.
Within the Consolidated Statements of Income, amounts previously reported for
the three and six months ended June 30, 1999 as "Electric fuel and purchased
power" and "Purchased electric capacity" have been combined and reported as
"Electric fuel and purchased energy and capacity." Certain other
reclassifications of prior period data have been made to conform with the
current presentation.
Note 2. Divestiture of Electric Generating Plants
------- -----------------------------------------
As previously disclosed in Note 11 to the Consolidated Financial Statements
included in Item 8 of Part II of ACE's 1999 Annual Report on Form 10-K, Conectiv
is building mid-merit electric generating plants and is selling the nuclear and
non-strategic baseload fossil electric generating plants of ACE. Consummation
of the sales of the nuclear and non-strategic baseload fossil electric
generating plants is subject to the receipt of required regulatory approvals.
In addition, the agreements for the sales of the electric generating plants
contemplate that the sales of the plants of ACE and Delmarva Power & Light
Company (a Conectiv subsidiary) will occur simultaneously. Although management
had expected such sales to close during the third or fourth quarter of 2000, the
current status of litigation relating to certain deregulation matters in New
Jersey (see discussion below under the caption "New Jersey Electric Utility
Industry Restructuring" in Note 4 to the Consolidated Financial Statements)
could result in a delay in such closings. Management cannot predict the outcome
of such litigation, the timing of such outcome, the effect on ACE's ability to
consummate the sales or the impact on ACE's ability to recover or securitize any
related stranded costs.
Effective July 1, 2000, ACE contributed its combustion turbines (502 megawatts
of capacity) and related transmission equipment, inventories, and liabilities to
a wholly-owned subsidiary (Conectiv Atlantic Generation - CAG). ACE then
contributed CAG to Conectiv in conjunction with the formation of an energy-
holding company by Conectiv, which is engaged in non-regulated electricity
production and sales, and energy trading and marketing. The primary effects on
ACE's balance sheet of the contribution to Conectiv were as follows: (a)
property, plant and equipment decreased $86 million (primarily electric
generating plants); (b) fuel and other inventories decreased $16 million ; (c)
deferred income taxes and investment tax credits decreased $10 million; and (d)
the additional paid-in capital portion of common stockholder's equity decreased
$92 million. Based on balances as of June 30, 2000 adjusted to reflect the
effect of ACE's contribution to Conectiv on July 1, 2000 compared to actual
balances as of June 30, 2000, ACE's capital structure, including variable rate
demand bonds and long-term debt due within one year, was primarily affected as
follows: (a) common stockholder's equity as a percent of total
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capitalization decreased to 34.0% from 37.4%, and (b) long-term debt including
current maturities increased to 58.5% from 55.5%.
Note 3. Income Taxes
------- ------------
For the three and six months ended June 30, 2000, the amount computed by
multiplying "Income before income taxes" by the federal statutory rate is
reconciled below to income tax expense.
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
--------------- ---------------
Amount Rate Amount Rate
-------- ----- -------- -----
(Dollars in Thousands)
Statutory federal income tax expense $ 5,993 35% $ 6,937 35%
State income taxes, net of federal benefit 1,295 7 1,794 9
Plant basis differences 625 4 1,250 6
Amortization of investment tax credits (1,267) (7) (1,901) (10)
Resolution of income tax matters (4,254) (25) (4,254) (21)
Other, net 608 4 308 2
------- --- ------- ---
$ 3,000 18% $ 4,134 21%
======= === ======= ===
Note 4. Rate Matters
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An update to the information previously reported in Note 7 to the Consolidated
Financial Statements included in Item 8 of Part II of ACE's 1999 Annual Report
on Form 10-K is presented below.
New Jersey Electric Utility Industry Restructuring
As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued
a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity
supply business and indicated that a more detailed order would be issued at a
later time. The NJBPU's final order for ACE has been delayed due to appeals of
the NJBPU's final order concerning restructuring the electricity supply business
of Public Service Electric and Gas Company (PSE&G). On April 13, 2000, the
Superior Court of New Jersey, Appellate Division, issued its decision on this
matter, generally upholding the orders of the NJBPU.
The New Jersey Business Users and the Division of the Ratepayer Advocate,
appellants in the Superior Court proceeding, petitioned the New Jersey Supreme
Court to review the Superior Court's decision. The New Jersey Supreme Court
agreed to review the Superior Court's decision on July 14, 2000, setting a
schedule for briefing by the parties, with oral argument set for November 8,
2000.
Management cannot predict the effect, if any, of the outcome of the appeals
discussed above upon ACE's final order for restructuring, or related matters,
such as securitization by ACE of its stranded costs and the sale of the electric
generating plants, as discussed in Note 2 to the Consolidated Financial
Statements.
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ACE provides Basic Generation Service (BGS) to customers who do not have an
alternative electricity provider. ACE's ability to recover its BGS supply costs
is subject to review by the NJBPU. In accordance with the Summary Order, ACE
intends to secure BGS supply requirements (net of sources otherwise available to
it at any particular time) by competitive bidding. To date, ACE has issued two
requests for proposals (RFP) for BGS supply. Neither RFP resulted in ACE's
entering into BGS supply contracts, and ACE has secured BGS supplies through
other means.
Note 5. Debt
------- ----
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 31,
2000.
Note 6. 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 is $1.0 million included in ACE's current
liabilities as of June 30, 2000 and December 31, 1999 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 Bottom Atomic Power
Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and 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 $3.9
million.
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Note 7. Supplemental Cash Flow Information
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Six Months Ended
June 30,
------------------
2000 1999
-------- -------
(Dollars in thousands)
Cash paid (received) for:
Interest, net of amounts capitalized $ 35,699 $23,366
Income taxes, net of refunds $(69,013) $25,880
For the six months ended June 30, 2000, ACE received federal and state income
tax refunds of $79.3 million and made estimated tax payments of $10.3 million,
resulting in $69.0 million of income taxes received net of refunds. The income
tax refunds were related to the tax benefit associated with ACE's payment of
$228.5 million on December 28, 1999 to terminate ACE's purchase of electricity
under a contract with the Pedricktown Co-generation Limited Partnership
(Pedricktown). For additional information concerning the contract termination,
see Note 8 to the Consolidated Financial Statements included in Item 8 of Part
II of ACE's 1999 Annual Report on Form 10-K.
Note 8. Business Segments
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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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act)
provides a "safe harbor" for forward-looking statements to encourage such
disclosures without the threat of litigation, provided those statements are
identified as forward-looking and are accompanied by meaningful, cautionary
statements identifying important factors that could cause the actual results to
differ materially from those projected in the statement. Forward-looking
statements have been made in this report. Such statements are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used herein, the words "intend," "will,"
"anticipate," "estimate," "expect," "believe," 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: the effects of deregulation of energy supply and the unbundling
of delivery services; the ability to enter into purchased power agreements on
terms acceptable to ACE; market demand and prices for energy, capacity, and
fuel; weather variations affecting energy usage; operating performance of power
plants; an increasingly competitive marketplace; results of any asset
dispositions; sales retention and growth; federal and state regulatory actions;
future litigation results; costs of construction; operating restrictions;
increased costs and construction delays attributable to environmental
regulations; nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel; and credit market concerns. 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 prior to the effective date of the Litigation Reform Act.
Earnings Results Summary
-------------------------
Earnings applicable to common stock were $13.6 million for the second quarter of
2000, an decrease of $0.7 million in comparison to the $14.3 million of earnings
applicable to common stock for the second quarter of 1999. The $0.7 million
decrease in earnings was primarily due to lower electric revenues, which
reflected the effect of customer rate decreases and other factors, and higher
interest expense, partly offset by lower operating expenses and a decrease in
income taxes related to the resolution of tax matters.
Earnings applicable to common stock were $14.6 million for the six months ended
June 30, 2000, a decrease of $14.3 million in comparison to the $28.9 million of
earnings applicable to common stock for the six months ended June 30, 1999. The
$14.3 million decrease in earnings was mainly due to lower electric revenues,
which reflected the effect of customer rate decreases and other factors, and
higher interest expense, partly offset by lower operating expenses and a
decrease in income taxes related to the resolution of tax matters
Divestiture of Electric Generating Plants
-----------------------------------------
As previously disclosed in Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) under "Deregulated Generation and
Power Plant Divestiture" on page II-6 of ACE's 1999 Annual Report on Form 10-K,
Conectiv is building mid-merit electric generating plants and is selling the
nuclear and non-strategic baseload fossil electric generating plants of ACE.
Consummation of the sales of the nuclear and non-strategic baseload fossil
electric generating plants is subject to the receipt of required regulatory
approvals. In addition, the agreements for the sales of the electric generating
plants
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contemplate that the sales of the plants of ACE and Delmarva Power & Light
Company (a Conectiv subsidiary) will occur simultaneously. Although management
had expected such sales to close during the third or fourth quarter of 2000, the
current status of litigation relating to certain deregulation matters in New
Jersey (see discussion below under the caption "New Jersey Electric Utility
Industry Restructuring") could result in a delay in such closings. Management
cannot predict the outcome of such litigation, the timing of such outcome, the
effect on ACE's ability to consummate the sales or the impact on ACE's ability
to recover or securitize any related stranded costs.
Effective July 1, 2000, ACE contributed its combustion turbines (502 megawatts
of capacity) and related transmission equipment, inventories, and liabilities to
a wholly-owned subsidiary (Conectiv Atlantic Generation - CAG). ACE then
contributed CAG to Conectiv in conjunction with the formation of an energy-
holding company by Conectiv, which is engaged in non-regulated electricity
production and sales, and energy trading and marketing. The primary effects on
ACE's balance sheet of the contribution to Conectiv were as follows: (a)
property, plant and equipment decreased $86 million (primarily electric
generating plants); (b) fuel and other inventories decreased $16 million; (c)
deferred income taxes and investment tax credits decreased $10 million; and (d)
the additional paid-in capital portion of common stockholder's equity decreased
$92 million. Based on balances as of June 30, 2000 adjusted to reflect the
effect of ACE's contribution to Conectiv on July 1, 2000 compared to actual
balances as of June 30, 2000, ACE's capital structure, including variable rate
demand bonds and long-term debt due within one year, was primarily affected as
follows: (a) common stockholder's equity as a percent of total capitalization
decreased to 34.0% from 37.4%, and (b) long-term debt including current
maturities increased to 58.5% from 55.5%.
As a result of the transfers and expected sales of electric generating plants,
the principal business of ACE is expected to be the transmission and
distribution of electricity by late-2000. The businesses of ACE will also
include supplying electricity to customers who do not choose an alternative
electricity supplier (BGS).
ACE's exit from the business of electricity production is expected to cause a
decrease in ACE's earnings capacity and a decrease in its common equity as a
percent of total capitalization.
Electric Utility Industry Restructuring
----------------------------------------
An update to the information previously reported in the MD&A under "Electric
Utility Industry Restructuring," beginning on page II-4 of ACE's 1999 Annual
Report on Form 10-K is presented below.
New Jersey Electric Utility Industry Restructuring
As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued
a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity
supply business and indicated that a more detailed order would be issued at a
later time. The NJBPU's final order for ACE has been delayed due to appeals of
the NJBPU's final order concerning restructuring the electricity supply business
of Public Service Electric and Gas Company (PSE&G). On April 13, 2000, the
Superior Court of New Jersey, Appellate Division, issued its decision on this
matter, generally upholding the orders of the NJBPU.
The New Jersey Business Users and the Division of the Ratepayer Advocate,
appellants in the Superior Court proceeding, petitioned the New Jersey Supreme
Court to review the Superior Court's decision. The New Jersey Supreme Court
agreed to review the Superior Court's decision on July 14, 2000, setting a
schedule for briefing by the parties, with oral argument set for November 8,
2000.
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Management cannot predict the effect, if any, of the outcome of the appeals
discussed above upon ACE's final order for restructuring, or related matters,
such as securitization by ACE of its stranded costs and the sale of the electric
generating plants, as discussed under "Divestiture of Electric Generating
Plants" within the MD&A.
ACE's ability to recover its BGS supply costs is subject to review by the NJBPU.
In accordance with the Summary Order, ACE intends to secure BGS supply
requirements (net of sources otherwise available to it at any particular time)
by competitive bidding. To date, ACE has issued two requests for proposals
(RFP) for BGS supply. Neither RFP resulted in ACE's entering into BGS supply
contracts, and ACE has secured BGS supplies through other means.
Operating Revenues
------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in millions)
Regulated electric revenues $215.3 $244.2 $412.1 $486.6
Non-regulated electric revenues 19.2 28.3
Other revenues 1.7 1.9 4.7 4.4
------ ------ ------ ------
Total electric revenues $236.2 $246.1 $445.1 $491.0
====== ====== ====== ======
The table above shows the amounts of electric revenues earned which are subject
to price regulation (Regulated) and which are not subject to price regulation
(Non-regulated). "Regulated electric revenues" include revenues for delivery
(transmission and distribution) service and BGS.
"Regulated electric revenues" decreased by $28.9 million, from $244.2 million
for the second quarter of 1999 to $215.3 million for the second quarter of 2000.
For the six-month period, "regulated electric revenues" decreased by $74.5
million, from $486.6 million for the six months ended June 30, 1999 to $412.1
million for the six months ended June 30, 2000. Details of the variances in
"regulated electric revenues" are shown below.
<TABLE>
<CAPTION>
Increase (Decrease) in
Regulated Electric Revenues
-----------------------------
Three Months Six Months
--------------- ------------
(Dollars in millions)
<S> <C> <C>
Customers choosing alternative electricity suppliers $ (7.1) $(12.7)
Decrease in retail rates for electric utility industry restructuring (14.3) (28.0)
Revenues recognized due to under-recoveries of BGS costs 14.9 8.6
Lower volumes of interchange sales (3.5) (4.8)
Retail sales volume, sales mix, and other (18.9) (37.6)
------ ------
$(28.9) $(74.5)
====== ======
</TABLE>
The gross margin (revenues less related fuel and purchased power costs) earned
from regulated electricity sales, decreased by approximately $17.0 million for
the three-month period and $33.9 million for the six-month period.
-11-
<PAGE>
"Non-regulated electric revenues" of $19.2 million and $28.3 million for the
three months and six months, respectively, ended June 30, 2000, resulted
primarily from the sale of the electricity generated by ACE's deregulated
electric generating plants. In accordance with the terms of the Summary Order,
ACE sold the electricity generated by its combustion turbines (502 megawatts of
capacity) and Deepwater electric generating plant (239 megawatts of capacity) in
deregulated markets during the six months ended June 30, 2000. Due to the
transfer of the combustion turbines to another Conectiv subsidiary effective
July 1, 2000, ACE will no longer earn revenues from the transferred combustion
turbines. Similarly, ACE will cease earning revenues from operation of the
Deepwater electric generating plant upon completion of its sale, which is
expected by late-2000. ACE's remaining electric generating plants are dedicated
to supplying BGS until they are sold. For additional information concerning
commodity market risk associated with ACE's deregulated generation, see "Item 3.
Quantitative and Qualitative Disclosures About Market Risk," included herein.
Operating Expenses
-------------------
Electric Fuel and Purchased Energy and Capacity
"Electric fuel and purchased energy and capacity" decreased $3.2 million in the
three-month period and $28.1 million for the six-month period. The decreases
for both periods reflect lower costs due to termination of the Pedricktown
purchased power agreement in December 1999. The six-month period also reflects
a decrease due to costs which were recorded during last year's six-month period
pursuant to the energy adjustment clause which was eliminated effective August
1, 1999, in connection with restructuring of the electric utility industry.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $4.0 million in the second quarter
of 2000 primarily due to lower operating expenses billed to ACE by jointly-owned
power plants. For the six-month period, operation and maintenance expenses
increased $3.8 million mainly due to higher power plant maintenance expenses.
Depreciation and amortization
Depreciation and amortization expenses decreased $3.2 million for the three-
month period and $6.2 million for the six-month period mainly due to the write-
downs in the third and fourth quarters of 1999 of electric generating plants in
connection with restructuring the electric utility industry in New Jersey.
Amortization of "Recoverable stranded costs" partly offset the decrease from
lower depreciation of power plants.
Income Taxes
------------
Income taxes decreased $5.7 million for the three-month period and $13.3 million
for the six-month period mainly due to lower income before income taxes and the
resolution of certain tax matters.
Interest Expense
----------------
Interest charges increased $4.1 million for the three-month period and $9.3
million for the six-month period primarily due to interest charges on $228.5
million borrowed in December 1999 to finance the payment to terminate the
Pedricktown purchased power contract. Interest expense accrued on ACE's
regulatory liability related to BGS also contributed to the increases.
-12-
<PAGE>
New Accounting Pronouncements
-----------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," which delayed 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. In June
2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which amended certain aspects of SFAS No. 133.
SFAS No. 133 and 138 established accounting and reporting standards for
derivative instruments and for hedging activities. ACE has not yet adopted SFAS
No. 133 and 138 and currently cannot determine the effect that these accounting
standards will have on its financial statements. However, SFAS No. 133 and 138
may cause the volatility of earnings to increase.
Liquidity and Capital Resources
--------------------------------
Cash Flows From Operating Activities
Due to $126.0 million of cash provided by operating activities, $11.7 million of
cash used by investing activities, and $117.3 million of cash used by financing
activities, cash and cash equivalents decreased by $3.0 million during the six
months ended June 30, 2000.
Net cash provided by operating activities for the six months ended June 30, 2000
included positive cash flow from $79.3 million of income tax refunds, which were
related to the tax benefit associated with the December 1999 payment to
terminate the Pedricktown purchased power contract. Excluding the $79.3 million
positive variance for the income tax refunds, net cash flow from operations for
the six months ended June 30, 2000 decreased by $25.7 million primarily due to
prior-year over-collections of energy costs from customers.
As of June 30, 2000, ACE had prepaid income taxes of $18.1 million in comparison
to prepaid income taxes of $88.5 million as of December 31, 1999. The $70.4
million decrease in prepaid income taxes was mainly due to the $79.3 million of
income tax refunds received during the six months ended June 30, 2000.
The June 30, 2000 balance of "Prepaid New Jersey sales & excise taxes" increased
by $33.3 million compared to the December 31, 1999 balance due to a sales tax
prepayment in the second quarter of 2000, partly offset by amortization of the
balance to expense.
Cash Flows From Investing Activities
Capital expenditures of $28.1 million for the six months ended June 30, 2000
were primarily for electric transmission and distribution system upgrades to
increase system reliability.
The $18.4 million of cash received from "Intercompany loan receivable" for the
six months ended June 30, 2000 represents ACE's partial collection of a loan to
a pool of funds that Conectiv subsidiaries borrow from or invest in, depending
on their cash position.
-13-
<PAGE>
Cash Flows From Financing Activities
Financing activities used cash of $117.3 million primarily due to redemption of
$46.0 million of 6.83% Medium Term Notes at maturity on January 31, 2000, the
repayment of $30.0 million of short-term debt, and the payment of $33.7 million
of common dividends to Conectiv.
ACE's capital structure, including short-term debt, variable rate demand bonds
and current maturities of long-term debt, is shown below as of June 30, 2000 and
December 31, 1999, expressed as a percentage of total capitalization. For
information concerning the effect on ACE's capital structure of contributing its
combustion turbines to Conectiv effective July 1, 2000, refer to "Divestiture of
Electric Generating Plants."
June 30, December 31,
2000 1999
---- ----
Common stockholder's equity 37.4% 36.5%
Preferred stock and preferred trust securities 7.1% 6.7%
Long-term debt, including current maturities,
variable rate demand bonds, and short-term debt 55.5% 56.8%
Ratio of Earnings to Fixed Charges
ACE's ratio of earnings to fixed charges under the SEC Methods 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,
June 30, ----------------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges (SEC Method) 2.05 2.57 1.66 2.84 2.59 3.19
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method) 1.97 2.44 1.55 2.58 2.16 2.43
</TABLE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------
As previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-13 to II-14 of ACE's 1999 Annual Report on Form 10-K,
ACE is subject to market risks, including interest rate risk, equity price risk,
and commodity price risk. An update concerning ACE's commodity price risk is
below.
Effective August 1, 1999, 741 MW of capacity of ACE's electric generating plants
was deregulated. The megawatt-hour (MWH) output of these plants is sold in
markets not subject to price regulation. ACE hedges the MWH output of the
deregulated portion of its electric generating units primarily through forward
contracts, which are used to lock-in selling prices for electricity. ACE also
writes (or sells) options for sale of the electric generating plants' MWH
output.
-14-
<PAGE>
ACE uses a value-at-risk model to assess the market risk of the electricity
output of its deregulated generating units. The model includes fixed price
sales commitments, physical forward contracts, and commodity derivative
instruments. Value-at-risk represents the potential gain or loss on instruments
or portfolios due to changes in market factors, for a specified time period and
confidence level. ACE estimates value-at-risk using a delta-normal
variance/covariance model with a 95 percent confidence level and assuming a
five-day holding period.
ACE's calculated value-at-risk with respect to its commodity price exposure
associated with contractual arrangements was approximately $xx.x million as of
June 30, 2000, in comparison to $6.4 million as of December 31, 1999. The
increase in value-at-risk was primarily due to increased hedging, with forward
contracts, of the deregulated portion of the electricity output of ACE's power
plants.
-15-
<PAGE>
PART II. OTHER INFORMATION
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
-------------------
On June 15, 2000, ACE filed a Current Report on Form 8-K dated June 15, 2000
reporting on Item 5, Other Events.
-16-
<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 14, 2000 /s/ John C. van Roden
--------------- ---------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-17-
<PAGE>
Exhibit Index
-------------
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
