-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EjogPE7+CFnBteeCa+5n50/dUftIbdsWYuFCoe+NDKdPyuM4fOxUw/NNqeHiX1fn b7K6ENAfP3HcyLzBI+KlFQ== /in/edgar/work/20000811/0001036050-00-001495/0001036050-00-001495.txt : 20000921 0001036050-00-001495.hdr.sgml : 20000921 ACCESSION NUMBER: 0001036050-00-001495 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC CITY ELECTRIC CO CENTRAL INDEX KEY: 0000008192 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 210398280 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03559 FILM NUMBER: 694356 BUSINESS ADDRESS: STREET 1: 800 KING STREET STREET 2: PO BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 BUSINESS PHONE: 6096454100 MAIL ADDRESS: STREET 1: 800 KING STREET STREET 2: PO BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 10-Q 1 0001.txt FORM 10-Q FOR ATLANTIC CITY ELECTRIC COMPANY 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 ------------------------------ (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. Atlantic City Electric Company ------------------------------ Table of Contents ----------------- Page ---- Part I. Financial Information:
Item 1. Financial Statements 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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Part 1. FINANCIAL INFORMATION Item 1. Financial Statements ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited) 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
-1- 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. -2-
ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) 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. -3-
ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Six Months Ended June 30, --------------------------------- 2000 1999 ------------ ------------ 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 ============ ============
(1) Other than debt and deferred income taxes classified as current. See accompanying Notes to Consolidated Financial Statements. -4- 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 -5- 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 - ------- ------------ 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. -6- 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. -7- Note 7. Supplemental Cash Flow Information - ------- ---------------------------------- 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 - ------- ----------------- Conectiv's organizational structure and management reporting information is aligned with Conectiv's business segments, irrespective of the subsidiary, or subsidiaries, through which a business is conducted. Businesses are managed based on lines of business, not legal entity. Business segment information is not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a Conectiv subsidiary, no business segment information (as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information") is available for ACE on a stand-alone basis. -8- 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 -9- 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. -10- 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.
Increase (Decrease) in Regulated Electric Revenues ----------------------------- Three Months Six Months --------------- ------------ (Dollars in millions) 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) ====== ======
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- "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- 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- 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.
12 Months Ended Year Ended December 31, June 30, ---------------------------- 2000 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- 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
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- 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- 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- 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- 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 EX-12.A 2 0002.txt RATIO OF EARNINGS TO FIXED CHANGES Exhibit 12-A Atlantic City Electric Company Ratio of Earnings to Fixed Charges ---------------------------------- (Dollars in Thousands)
12 Months Ended June 30, Year Ended December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 1995 ------------------------------------------------------------- Income before extraordinary items $ 49,647 $ 63,930 $ 30,276 $ 85,747 $ 75,017 $ 98,752 ------------------------------------------------------------- Income taxes 36,000 49,326 18,178 50,442 36,958 48,277 ------------------------------------------------------------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 69,892 60,562 63,940 64,501 64,847 62,879 Other interest 4,052 3,837 3,435 3,574 4,019 4,364 Preferred dividend require- ments of subsidiary trusts 7,618 7,634 6,052 5,775 1,428 - ------------------------------------------------------------- Total fixed charges 81,562 72,033 73,427 73,850 70,294 67,243 ------------------------------------------------------------- Earnings before extraordinary item, income taxes and fixed charges $167,209 $185,289 $121,881 $210,039 $182,269 $214,272 ============================================================= Ratio of earnings to fixed charges 2.05 2.57 1.66 2.84 2.59 3.19
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 estimated interest component of rentals. EX-12.B 3 0003.txt RATIO OF EARNINGS TO FIXED CHANGES AND PREFERRED DIVIDENDS Exhibit 12-B Atlantic City Electric Company Ratio of Earnings to Fixed Charges and Preferred Dividends ---------------------------------------------------------- (Dollars in Thousands)
12 Months Ended June 30, Year Ended December 31, ----------------------------------------------- 2000 1999 1998 1997 1996 1995 ---------------------------------------------------------- Income before extraordinary items $ 49,647 $ 63,930 $ 30,276 $ 85,747 $ 75,017 $ 98,752 ---------------------------------------------------------- Income taxes 36,000 49,326 18,178 50,442 36,958 48,277 ---------------------------------------------------------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 69,892 60,562 63,940 64,501 64,847 62,879 Other interest 4,052 3,837 3,435 3,574 4,019 4,364 Preferred dividend require- ments of subsidiary trusts 7,618 7,634 6,052 5,775 1,428 - ---------------------------------------------------------- Total fixed charges 81,562 72,033 73,427 73,850 70,294 67,243 ---------------------------------------------------------- Earnings before extraordinary item, income taxes and fixed charges $167,209 $185,289 $121,881 $210,039 $182,269 $214,272 ========================================================== Fixed charges $ 81,562 $ 72,033 $ 73,427 $ 73,850 $ 70,294 $ 67,243 Preferred dividend requirements 3,483 3,777 5,289 7,506 14,214 20,839 ---------------------------------------------------------- $ 85,045 $ 75,810 $ 78,716 $ 81,356 $ 84,508 $ 88,082 ========================================================== Ratio of earnings to fixed charges and preferred dividends 1.97 2.44 1.55 2.58 2.16 2.43
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 estimated interest component of rentals. Preferred dividend requirements represent annualized preferred dividend requirements multiplied by the ratio that pre-tax income bears to net income. EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM ACE'S 2/ND/ QUARTER 2000 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 PER-BOOK 977,235 113,600 286,921 1,113,564 67,796 2,559,116 54,963 493,007 110,948 658,918 118,950 6,231 944,802 0 0 0 10,075 0 10,886 15,480 793,774 2,559,116 445,135 4,134 386,044 390,178 54,957 3,016 57,973 42,287 15,686 1,065 14,621 33,655 0 125,983 0 0
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