-----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, VnoRcjPuKoYYr5rZWqOOls9qM7uHyMeJEL+PDIAcguyb7+U0ZX/zOZZ+5iN8M0Bn Xqt3JOkw7fINpkXdCdzaJg== /in/edgar/work/0001036050-00-001984/0001036050-00-001984.txt : 20001114 0001036050-00-001984.hdr.sgml : 20001114 ACCESSION NUMBER: 0001036050-00-001984 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 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: 759088 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 September 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 nine months ended September 30, 2000, and September 30, 1999....................... 1 Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999...................................................... 2-3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000, and September 30, 1999....................... 4 Notes to Consolidated Financial Statements.............................. 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 12-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 19 Part II. Other Information Item 1. Legal Proceedings........................................................ 20 Item 6. Exhibits and Reports on Form 8-K......................................... 20 Signature............................................................................. 21
i Part 1. FINANCIAL INFORMATION Item 1. Financial Statements ATLANTIC CITY ELECTRIC COMPANY ------------------------------ CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- OPERATING REVENUES $ 282,966 $ 351,372 $ 728,101 $ 842,354 ----------- ----------- ----------- ----------- OPERATING EXPENSES Electric fuel and purchased energy and capacity 122,692 153,876 317,827 377,135 Special charges - 12,301 - 12,301 Operation and maintenance 59,922 59,910 181,474 177,667 Depreciation and amortization 24,360 28,897 75,667 86,379 Taxes other than income taxes 9,869 11,088 27,919 29,571 ----------- ----------- ----------- ----------- 216,843 266,072 602,887 683,053 ----------- ----------- ----------- ----------- OPERATING INCOME 66,123 85,300 125,214 159,301 ----------- ----------- ----------- ----------- OTHER INCOME 2,422 1,800 5,438 8,241 ----------- ----------- ----------- ----------- INTEREST EXPENSE Interest charges 18,683 14,986 57,520 44,493 Allowance for borrowed funds used during construction and capitalized interest (185) (174) (544) (493) ----------- ----------- ----------- ----------- 18,498 14,812 56,976 44,000 ----------- ----------- ----------- ----------- PREFERRED DIVIDEND REQUIREMENTS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 1,905 1,904 5,714 5,729 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 48,142 70,384 67,962 117,813 INCOME TAXES, EXCLUDING INCOME TAXES APPLICABLE TO EXTRAORDINARY ITEM 19,987 34,431 24,121 51,891 ----------- ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM 28,155 35,953 43,841 65,922 EXTRAORDINARY ITEM (Net of income taxes of $12,413) - (17,483) - (17,483) ----------- ----------- ----------- ----------- NET INCOME 28,155 18,470 43,841 48,439 DIVIDENDS ON PREFERRED STOCK 534 533 1,599 1,599 ----------- ----------- ----------- ----------- EARNINGS APPLICABLE TO COMMON STOCK $ 27,621 $ 17,937 $ 42,242 $ 46,840 =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements -1- ATLANTIC CITY ELECTRIC COMPANY ------------------------------ CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2000 1999 -------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 17,413 $ 7,924 Accounts receivable, net of allowances of $4,231 and $3,500, respectively 155,548 133,879 Intercompany loan receivable 68,244 73,532 Inventories, at average cost Fuel (coal and oil) 11,738 19,598 Materials and supplies 7,634 8,890 Prepaid income taxes - 88,483 Deferred income taxes, net 20,789 6,245 Prepaid New Jersey sales and excise taxes 13,624 - Other prepayments 1,424 2,223 -------------- -------------- 296,414 340,774 -------------- -------------- Investments 110,830 105,371 -------------- -------------- Property, Plant and Equipment Electric generation 138,144 256,899 Electric transmission and distribution 1,256,218 1,224,644 Other electric facilities 122,675 128,388 Other property, plant, and equipment 5,772 5,772 -------------- -------------- 1,522,809 1,615,703 Less: Accumulated depreciation 628,451 626,080 -------------- -------------- Net plant in service 894,358 989,623 Construction work-in-progress 43,240 46,025 Leased nuclear fuel, at amortized cost 30,680 30,391 -------------- -------------- 968,278 1,066,039 -------------- -------------- Deferred Charges and Other Assets Recoverable stranded costs, net 967,287 988,273 Unrecovered purchased power costs 18,098 28,923 Deferred recoverable income taxes 20,325 21,867 Unrecovered New Jersey state excise taxes 13,497 22,567 Deferred debt refinancing costs 12,652 13,574 Deferred other postretirement benefit costs 30,605 32,479 Unamortized debt expense 13,209 14,197 Other 23,843 20,595 -------------- -------------- 1,099,516 1,142,475 -------------- -------------- Total Assets $ 2,475,038 $ 2,654,659 ============== ==============
See accompanying Notes to Consolidated Financial Statements. -2- ATLANTIC CITY ELECTRIC COMPANY ------------------------------ CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2000 1999 --------------- -------------- CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt $ - $ 30,000 Long-term debt due within one year 40,075 46,075 Variable rate demand bonds 22,600 22,600 Accounts payable 51,759 62,169 Interest accrued 14,075 20,182 Dividends payable 17,871 18,071 Current capital lease obligation 15,480 15,480 Deferred energy supply costs 46,847 46,375 Above-market purchased energy contracts and other electric restructuring liabilities 7,691 7,992 Other 34,307 31,893 --------------- -------------- 250,705 300,837 --------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes, net 397,897 389,594 Regulatory liability for New Jersey income tax benefit 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities 16,810 16,921 Deferred investment tax credits 36,480 39,608 Long-term capital lease obligation 15,200 14,911 Pension benefit obligation 24,978 20,309 Other postretirement benefit obligation 37,914 42,952 Other 18,897 22,381 --------------- -------------- 597,438 595,938 --------------- -------------- Capitalization Common stock, $3 par value; shares authorized: 25,000,000; shares outstanding: 18,320,937 54,963 54,963 Additional paid-in capital 410,194 493,007 Retained earnings 121,730 129,981 --------------- -------------- Total common stockholder's equity 586,887 677,951 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 914,827 954,752 --------------- -------------- 1,626,895 1,757,884 --------------- -------------- Commitments and Contingencies (Note 11) - - --------------- -------------- Total Capitalization and Liabilities $ 2,475,038 $ 2,654,659 =============== ==============
See accompanying Notes to Consolidated Financial Statements. -3- ATLANTIC CITY ELECTRIC COMPANY ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------------ 2000 1999 --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 43,841 $ 48,439 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item, net of income taxes - 17,483 Special charges - 12,301 Depreciation and amortization 85,134 95,334 Investment tax credit adjustments, net (2,529) (1,900) Deferred income taxes, net (2,610) (27,706) Deferred energy supply costs (1,392) 30,891 Net change in: Accounts receivable (16,234) (46,707) Inventories 3,342 (1,844) Prepaid New Jersey sales & excise taxes (15,672) 2,944 Accounts payable (10,410) (20,387) Taxes accrued 88,483 54,880 Other current assets and liabilities (1) 6,011 22,574 Other, net 7,091 6,739 --------------- -------------- Net cash provided by operating activities 185,055 193,041 --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Intercompany loan receivable 5,288 - Capital expenditures (40,465) (31,886) Deposits to nuclear decommissioning trust funds (405) (3,213) Other, net (2,236) 665 --------------- -------------- Net cash used by investing activities (37,818) (34,434) --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid (50,482) (42,494) Preferred dividends paid (1,799) (1,839) Long-term debt redeemed (46,000) (48,900) Principal portion of capital lease payments (9,467) (9,653) Net change in short-term debt (30,000) 30,000 Other, net - (98) --------------- -------------- Net cash used by financing activities (137,748) (72,984) --------------- -------------- Net change in cash and cash equivalents 9,489 85,623 Cash and cash equivalents at beginning of period 7,924 28,767 --------------- -------------- Cash and cash equivalents at end of period $ 17,413 $ 114,390 =============== ==============
(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, consisting of only normal recurring 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 nine months ended September 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. New Accounting Pronouncement - ------- ---------------------------- ACE will implement the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, beginning in the first quarter of 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholder's equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. ACE's financial statements are not expected to be affected upon the initial adoption of SFAS No. 133 in the first quarter of 2001 because ACE is not expected to hold derivative instruments as of December 31, 2000. However, if and to the extent ACE does hold derivative instruments as of December 31, 2000, the initial impact would include the following: (a) recognition of assets or liabilities for the fair value of any contracts which would be classified as derivatives under SFAS No. 133; (b) derecognition (or elimination) of any deferred gains or losses on hedging derivatives, which exist as of December 31, 2000; and (c) a "cumulative effect" type of adjustment for the impact on comprehensive income, which would be partly recorded in other comprehensive income and partly in earnings. To the extent ACE holds derivative instruments subsequent to initial adoption of SFAS No. 133, there may be increased volatility in ACE's earnings, revenues and common stockholder's equity. -5- Note 3. Divestiture of Electric Generating Plants - ------- ----------------------------------------- Agreements for the Sale 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 fuel-fired electric generating plants of ACE. Consummation of the sales of the nuclear and non-strategic baseload fossil fuel- fired electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and Delmarva Power & Light Company (DPL, a Conectiv subsidiary) would occur simultaneously. Appeals relating to certain deregulation matters in New Jersey (see discussion below under the caption "New Jersey Electric Utility Industry Restructuring" in Note 7 to the Consolidated Financial Statements) have resulted in delays in the issuance of required regulatory approvals and a delay of the closings of the sales of the electric generating units. As a result, management entered into discussions with the prospective purchasers of its interests in the nuclear electric generating plants. See discussion below in Note 4 to the Consolidated Financial Statements. Management currently expects the sales of the electric generating plants of ACE to take place during 2001. However, management cannot predict the timing or outcome of such appeals, the effect thereof on ACE's ability to consummate the sales of various electric generating plants or the impact thereof on ACE's ability to recover or securitize any related stranded costs. Contribution of Combustion Turbines to Conectiv Effective July 1, 2000, ACE contributed at book value its combustion turbines (502 megawatts of capacity) and related transmission equipment, inventories, and liabilities to a wholly-owned subsidiary (Conectiv Atlantic Generation, LLC, or 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 $6 million; (c) deferred income taxes and investment tax credits decreased $9 million; and (d) the additional paid-in capital portion of common stockholder's equity decreased $83 million. Note 4. Subsequent Event, Wholesale Transaction Confirmation Letter Agreements - ------- ---------------------------------------------------------------------- As discussed in Note 3 to the Consolidated Financial Statements, consummation of the sales of the electric generating plants has been delayed. ACE entered into Wholesale Transaction Confirmation letter agreements (Letter Agreements) on October 3, 2000. The Letter Agreements provide for the sale of the electricity output and capacity associated with the ownership interests of ACE in the Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and Hope Creek Nuclear Generating Station (Hope Creek). PECO Energy Company (PECO) and PSEG Energy Resources & Trade LLC (PSER&T), an indirect subsidiary of Public Service Enterprise Group, will purchase the electricity output and capacity from ACE under the Letter Agreements, as shown in the table below.
Seller Electricity and Capacity Associated With Purchaser(s) - -------- ---------------------------------------- ------------------------------ ACE ACE's 7.51% interest in Peach Bottom PECO (50%) and PSER&T (50%) ACE ACE's 7.41% interest in Salem PSER&T ACE ACE's 5.0% interest in Hope Creek PSER&T
-6- The Letter Agreements became effective October 7, 2000, and will terminate, with respect to the respective interests of ACE in the electricity output and capacity at a given nuclear electric generating plant, upon the earlier of (1) the closing of the sale of that plant, (2) the termination in accordance with its terms of the purchase agreement relating to the sale of such plant or (3) September 30, 2001. In exchange for the electricity output and capacity purchased from a given plant, PECO and PSER&T will reimburse ACE for the nuclear fuel amortized during the term of the Letter Agreements at each plant, and will be responsible for the payment of operation and maintenance costs, inventories, capital expenditures (subject, in certain circumstances, to reimbursement by ACE) and certain other liabilities associated with the ownership interests of ACE in each plant. In addition, ACE, PECO and PSEG Power LLC, a subsidiary of Public Service Enterprise Group, amended the respective purchase agreements relating to the sale of the nuclear electric generating plants, among other things, to give effect to the transactions contemplated by the Letter Agreements and to permit separate closings of the sales of the ACE and DPL interests in such plants. Note 5. Extraordinary Item - ------- ------------------ As previously reported in the third quarter of 1999, after receiving a Summary Order from the New Jersey Board of Public Utilities (NJBPU), ACE discontinued applying SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," to its electricity supply business during the third quarter of 1999. As a result of discontinuing SFAS No. 71, ACE recorded an extraordinary charge of $17.5 million, net of income taxes of $12.4 million, in the third quarter of 1999. The extraordinary charge primarily resulted from financial impairment of electric generating plants and certain other assets, and other effects of deregulation requiring loss recognition. The extraordinary charge was decreased by a regulatory asset established for the amount of stranded costs expected to be recovered through regulated electricity delivery rates (Recoverable stranded costs, net). Note 6. Special Charges - ------- --------------- ACE's operating results for the three and nine months ended September 30, 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) due to the costs of employee separations, additional costs related to the merger by which ACE and DPL became wholly-owned subsidiaries of Conectiv (the Merger), and certain other non-recurring items. Note 7. 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 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. Issuance of 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. -7- 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, setting a schedule for briefing by the parties, with oral argument scheduled 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 3 to the Consolidated Financial Statements. ACE provides Basic Generation Service (BGS) to customers who have not selected an alternative electricity provider. ACE's ability to recover its BGS supply costs is subject to review by the NJBPU. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particular time) through the use of a portfolio approach, including the use of competitive bidding. To date, ACE has issued two requests for proposals (RFP) for BGS supply. Neither RFP resulted in ACE entering into BGS supply contracts, and ACE has procured BGS supplies through other means. Note 8. Income Taxes - ------- ------------ For the three and nine months ended September 30, 2000, the amount computed by multiplying "Income before income taxes" by the federal statutory rate is reconciled in the table below to income tax expense.
Three Months Ended Nine Months Ended September 30, 2000 September 30, 2000 -------------------- -------------------- Amount Rate Amount Rate --------- ------- --------- ------- (Dollars in Thousands) Statutory federal income tax expense $16,850 35% $23,787 35% State income taxes, net of federal benefit 3,178 7 4,972 7 Plant basis differences 625 1 1,875 3 Amortization of investment tax credits (628) (1) (1,896) (3) Resolution of income tax matters * (4,554) (7) Other, net (38) (63) ------- ------- ------- ------- $19,987 42% $24,121 35% ======= ======= ======= =======
* Reflects a change in an estimate of previously accrued income taxes due to the resolution of matters with taxing authorities. Note 9. Common Stockholder's Equity - ------- --------------------------- Common stockholder's equity decreased from $678.0 million as of December 31, 1999 to $586.9 million as of September 30, 2000 as a result of an $82.8 million decrease from the contribution of combustion turbines to Conectiv and an $8.3 million net decrease in retained earnings, which resulted from $50.5 million of common dividends declared payable to Conectiv and $42.2 million of earnings applicable to common stock for the nine months ended September 30, 2000. -8- Note 10. Debt - -------- ---- ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. Note 11. 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. ACE's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean-up-related issues (including whether ACE or a corporate predecessor is responsible for conditions on a particular parcel). There is $1.0 million included in ACE's current liabilities as of September 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, Salem, and Hope Creek, ACE could be assessed for a portion of any third-party claims associated with an incident at any commercial nuclear power plant in the United States. Under the provisions of the Price Anderson Act, if third party claims relating to such an incident exceed $200 million (the amount of primary insurance), ACE could be assessed up to $30.7 million on an aggregate basis for such third-party claims. In addition, Congress could impose a revenue-raising measure on the nuclear industry to pay such claims. The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance coverage of approximately $2.8 billion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning. In addition, ACE is a member of an industry mutual insurance company (NEIL), 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. Under changes in NEIL's bye-laws approved on October 26, 2000, to be effective December 31, 2000, subject to there being no pending legal action or claim by any member of NEIL challenging the validity of such bye-law changes, member account balances will no longer exist. NEIL members who sell their interests in nuclear generating plants on or after December 31, 2000, may choose either (i) to continue to receive certain policyholders' distributions from NEIL (if, as, and when declared) over a 5-year period or (ii) to remain a NEIL member by purchasing other insurance products from NEIL and thus remain eligible for policyholders' distributions (if, as, and when declared) for a longer period. In addition, NEIL members that sell their interests in nuclear generating plants on or before December 30, 2000, may elect -9- prior to February 28, 2001, as an alternative to be paid their member account balances by NEIL as a result of terminating their NEIL insurance coverages. As a result of the NEIL bye-law changes, the choices available to ACE depend on whether and when the sale of ownership interests in Peach Bottom, Salem and Hope Creek occur (see Note 3 to the Consolidated Financial Statements) as well as management's analysis of the choices then-available, including the amounts of non-nuclear insurance coverage that might be obtained from NEIL, the costs of that coverage, and NEIL's prospects generally. Management is uncertain as to the amount, if any, that could be realized by ACE, since sale of nuclear units is unlikely to be completed on or before December 30, 2000 and the value of other options to ACE is uncertain. Other On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities located within the City limits by eminent domain. The City has offered approximately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the assets sought by the City are worth approximately $40 million. Note 12. Supplemental Cash Flow Information - -------- ----------------------------------
Nine Months Ended September 30, -------------------- 2000 1999 -------- -------- (Dollars in thousands) Cash paid (received) for: Interest, net of amounts capitalized $ 60,024 $45,397 Income taxes, net of refunds $(68,444) $25,124
For the nine months ended September 30, 2000, ACE received federal and state income tax refunds of $79.3 million and made estimated tax payments of $10.9 million, resulting in $68.4 million of net income taxes received. 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. Non-cash Investing and Financing Transaction For information concerning a non-cash transaction related to investing and financing activities, see "Contribution of Combustion Turbines to Conectiv" in Note 3 to the Consolidated Financial Statements. -10- Note 13. 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. However, ACE's principal business is expected to be the transmission and distribution of electricity upon completion of the sale of the electric generating plants of ACE (as discussed in Note 3 to the Consolidated Financial Statements). The transfer of the combustion turbines to Conectiv effective July 1, 2000, resulted in electricity transmission and distribution representing a greater proportion of ACE's business. -11- 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 $27.6 million for the third quarter of 2000, compared to $17.9 million of earnings applicable to common stock for the third quarter of 1999. Earnings applicable to common stock for the third quarter of 1999 were reduced by a $17.5 million extraordinary charge for discontinuing the application of SFAS No. 71 to ACE's electricity supply business because of deregulation and $7.3 million, net of income taxes, of special charges. For additional information concerning the extraordinary item, see Note 5 to the Consolidated Financial Statements. The special charges primarily reflected costs of employee separations, costs related to the Merger, and certain other non-recurring items. Excluding the extraordinary and special charges from earnings applicable to common stock for the third quarter of 1999, earnings were $42.7 million compared to earnings of $27.6 million for the third quarter of 2000. The $15.1 million decrease in earnings (excluding the extraordinary and special charges) was primarily due to lower electricity sales associated with cooler summer weather, the effects of lower customer rates related to electric utility industry restructuring, and higher interest expense, partly offset by the benefit of a lower effective income tax rate and lower depreciation expense. -12- Earnings applicable to common stock were $42.2 million for the nine months ended September 30, 2000, compared to $46.8 million of earnings applicable to common stock for the nine months ended September 30, 1999. Excluding the $24.8 million of extraordinary and special charges from earnings applicable to common stock for the nine months ended September 30, 1999, earnings were $71.6 million compared to earnings of $42.2 million for the nine months ended September 30, 2000. The $29.4 million decrease in earnings (excluding the extraordinary and special charges) was primarily due to lower electricity sales associated with cooler summer weather, the effects of lower customer rates related to electric utility industry restructuring, and higher interest expense, partly offset by the benefit of a lower effective income tax rate and lower depreciation expense. As discussed below, ACE contributed combustion turbines with 502 megawatts (MW) of capacity to Conectiv effective July 1, 2000 and has agreements for the sale of its remaining electric generating plants. ACE's exit from the business of electricity production is expected to cause a decrease in ACE's earnings capacity. In part, the third quarter earnings decrease reflects the loss of revenues from the combustion turbines contributed to Conectiv. Agreements for the Sale 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 fuel-fired electric generating plants of ACE. Consummation of the sales of the nuclear and non-strategic baseload fossil fuel-fired electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL would occur simultaneously. Appeals relating to certain deregulation matters in New Jersey (see discussion below under the caption "New Jersey Electric Utility Industry Restructuring") have resulted in delays in the issuance of required regulatory approvals and a delay of the closings of the sales of the electric generating units. As a result, management entered into discussions with the prospective purchasers of its interests in the nuclear electric generating plants. See discussion below under "Wholesale Transaction Confirmation Letter Agreements." Management currently expects the sales of the electric generating units of ACE to take place during 2001. However, management cannot predict the timing or outcome of such appeals, the effect thereof on the ability of ACE to consummate the sales of various electric generating plants or the impact thereof on ACE's ability to recover or securitize any related stranded costs. Contribution of Combustion Turbines to Conectiv - ----------------------------------------------- Effective July 1, 2000, ACE contributed at book value its combustion turbines (502 MW of capacity) and related transmission equipment, inventories, and liabilities to a wholly-owned subsidiary, 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 $6 million; (c) deferred income taxes and investment tax credits decreased $9 million; and (d) the additional paid-in capital portion of common stockholder's equity decreased $83 million. -13- Wholesale Transaction Confirmation Letter Agreements - ---------------------------------------------------- As discussed above, consummation of the sales of the electric generating plants has been delayed. ACE entered into Wholesale Transaction Confirmation letter agreements (Letter Agreements) on October 3, 2000. The Letter Agreements provide for the sale of the electricity output and capacity associated with the ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. PECO and PSER&T will purchase the electricity output and capacity from ACE under the Letter Agreements, as shown in the table below.
Seller Electricity and Capacity Associated With Purchaser(s) - -------- ---------------------------------------- ------------------------------ ACE ACE's 7.51% interest in Peach Bottom PECO (50%) and PSER&T (50%) ACE ACE's 7.41% interest in Salem PSER&T ACE ACE's 5.0% interest in Hope Creek PSER&T
The Letter Agreements became effective October 7, 2000, and will terminate, with respect to the respective interests of ACE in the electricity output and capacity at a given nuclear electric generating plant, upon the earlier of (1) the closing of the sale of that plant, (2) the termination in accordance with its terms of the purchase agreement relating to the sale of such plant or (3) September 30, 2001. In exchange for the electricity output and capacity purchased from a given plant, PECO and PSER&T will reimburse ACE for the nuclear fuel amortized during the term of the Letter Agreements at such plant, and will be responsible for the payment of operation and maintenance costs, inventories, capital expenditures (subject, in certain circumstances, to reimbursement by ACE) and certain other liabilities associated with the ownership interests of ACE in such plant. In addition, ACE, PECO and PSEG Power LLC, a subsidiary of Public Service Enterprise Group, amended the respective purchase agreements relating to the sale of the nuclear electric generating plants, among other things, to give effect to the transactions contemplated by the Letter Agreements and to permit separate closings of the sales of the ACE and Delmarva Power & Light Company interests in such plants. New Jersey 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. 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. Issuance of 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, setting a schedule for briefing by the parties, with oral argument scheduled for November 8, 2000. -14- 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 "Agreements for the Sale of Electric Generating Plants" within the MD&A. ACE provides Basic Generation Service (BGS) to customers who have not selected an alternative electricity provider. ACE's ability to recover its BGS supply costs is subject to review by the NJBPU. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particular time) through the use of a portfolio approach, including the use of competitive bidding. To date, ACE has issued two requests for proposals (RFP) for BGS supply. Neither RFP resulted in ACE entering into BGS supply contracts, and ACE has procured BGS supplies through other means. Operating Revenues - -----------------
Three Months Ended Nine Months Ended September 30, September 30, ---------------- ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (Dollars in millions) Regulated electric revenues $273.0 $337.0 $685.1 $823.6 Non-regulated electric revenues 5.8 12.4 34.1 12.4 Other revenues 4.2 2.0 8.9 6.4 ------ ------ ------ ------ Total operating revenues $283.0 $351.4 $728.1 $842.4 ====== ====== ====== ======
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 $64.0 million, from $337.0 million for the third quarter of 1999 to $273.0 million for the third quarter of 2000. For the nine-month period, "regulated electric revenues" decreased by $138.5 million, from $823.6 million for the nine months ended September 30, 1999 to $685.1 million for the nine months ended September 30, 2000. Details of the variances in "regulated electric revenues" are shown below.
Increase (Decrease) in Regulated Electric Revenues ----------------------------- Three Months Nine Months -------------- ------------- (Dollars in millions) Customers choosing alternative electricity suppliers $(18.3) $ (31.0) Decrease in retail rates for electric utility industry restructuring (8.9) (36.9) Revenue adjustment related to BGS cost recovery (7.7) 1.0 Lower volumes of interchange sales (1.4) (6.4) Retail sales volume, sales mix, and other * (27.7) (65.2) -------------- ------------- $(64.0) $(138.5) ============== =============
* Includes the effect of lower regulated retail electricity sales in the third quarter due to cooler summer weather. -15- The gross margin (revenues less related fuel and purchased power costs) earned from regulated electricity sales, decreased by approximately $35.0 million for the three-month period and $68.9 million for the nine-month period. "Non-regulated electric revenues" include revenues from the combustion turbines (502 MW of capacity) and Deepwater electric generating plant (239 MW of capacity), which became deregulated on August 1, 1999. Upon the transfer of the combustion turbines to Conectiv on July 1, 2000, "non-regulated electric revenues" (and expenses) from these units were excluded from ACE's results of operations. "Non-regulated electric revenues" decreased by $6.6 million in the third quarter due to the transfer of the combustion turbines on July 1, 2000. "Non-regulated revenues increased by $21.7 million for the nine-month period primarily due to the timing of deregulation, which resulted in a longer time period of deregulated operations for the combustion turbines and Deepwater plant in the current nine-month period. ACE's non-regulated electricity generation business will end upon completion of the sale of the Deepwater electric generating plant, which is expected to occur in 2001. 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 $31.2 million in the three-month period and $59.3 million for the nine-month period. The decreases for both periods reflect lower costs due to termination of the Pedricktown purchased power agreement in December 1999, lower energy volumes due to lower sales (including the effects of a cooler summer and the transfer of the combustion turbines), and a decrease due to costs recorded last year pursuant to the energy adjustment clause which was eliminated effective August 1, 1999. Special Charges ACE's operating results for the three and nine months ended September 30, 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) due to the costs of employee separations, additional costs related to the Merger, and certain other non-recurring items. Operation and Maintenance Expenses Operation and maintenance expenses were $59.9 million in the third quarter of 2000 and the third quarter of 1999. For the nine-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 $4.5 million for the three- month period and $10.7 million for the nine-month period mainly due to the contribution of the combustion turbines to Conectiv on July 1, 2000 and 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. Depreciation expense for capital improvements to the electric transmission and distribution systems recently placed in-service and amortization of "Recoverable stranded costs" partly offset the decrease from lower depreciation of power plants. -16- Income Taxes - ------------ Income taxes decreased $14.4 million for the three-month period and $27.8 million for the nine-month period mainly due to lower income before income taxes and a lower effective income tax rate. The nine-month period reflects the impact of the resolution of certain tax matters. Interest Expense - ---------------- Interest charges increased $3.7 million for the three-month period and $13.0 million for the nine-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. New Accounting Pronouncement - ---------------------------- ACE will implement the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, beginning in the first quarter of 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholder's equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. ACE's financial statements are not expected to be affected upon the initial adoption of SFAS No. 133 in the first quarter of 2001 because ACE is not expected to hold derivative instruments as of December 31, 2000. However, if and to the extent ACE does hold derivative instruments as of December 31, 2000, the initial impact would include the following: (a) recognition of assets or liabilities for the fair value of any contracts which would be classified as derivatives under SFAS No. 133; (b) derecognition (or elimination) of any deferred gains or losses on hedging derivatives, which exist as of December 31, 2000; and (c) a "cumulative effect" type of adjustment for the impact on comprehensive income, which would be partly recorded in other comprehensive income and partly in earnings. To the extent ACE holds derivative instruments subsequent to initial adoption of SFAS No. 133, there may be increased volatility in ACE's earnings, revenues and common stockholder's equity. -17- Liquidity and Capital Resources - ------------------------------- Cash Flows From Operating Activities Due to $185.1 million of cash provided by operating activities, $37.8 million of cash used by investing activities, and $137.7 million of cash used by financing activities, cash and cash equivalents increased by $9.5 million during the nine months ended September 30, 2000. Net cash provided by operating activities for the nine months ended September 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 nine months ended September 30, 2000 decreased by $87.3 million primarily due to prior-year over-collections of energy costs from customers, lower electricity sales, and higher interest expense payments. As of September 30, 2000, ACE had accrued income taxes payable of $3.5 million, compared to prepaid income taxes of $88.5 million as of December 31, 1999. The $92.0 million change was mainly due to the $79.3 million of income tax refunds received. Cash Flows From Investing Activities Capital expenditures of $40.5 million for the nine months ended September 30, 2000 were primarily for electric transmission and distribution system upgrades to increase system reliability. The $5.3 million of cash received from "Intercompany loan receivable" for the nine months ended September 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. See "Contribution of Combustion Turbines to Conectiv" for information concerning this non-cash investing and financing transaction, which, among other effects on the balance sheet, caused an $86 million decrease in property, plant and equipment and an $83 million decrease in common stockholder's equity. Cash Flows From Financing Activities Financing activities used cash of $137.7 million primarily due to redemption of $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000, the repayment of $30.0 million of short-term debt, and the payment of $50.5 million of common dividends to Conectiv. The balance of long-term debt as of September 30, 2000 decreased $39.9 million from December 31, 1999, primarily due to debt which became due in one year and was reclassified to "Long-term debt due within one year." ACE's capital structure, including short-term debt, variable rate demand bonds and current maturities of long-term debt, is shown below as of September 30, 2000 and December 31, 1999, expressed as a percentage of total capitalization. The changes in ACE's capital structure reflect the contribution of the combustion turbines to Conectiv, effective July 1, 2000, and the financing activities discussed above. -18-
September 30, December 31, 2000 1999 -------- -------- Common stockholder's equity 34.7% 36.5% Preferred stock and preferred trust securities 7.4% 6.7% Long-term debt, including current maturities, variable rate demand bonds, and short-term debt 57.9% 56.8%
Ratio of Earnings to Fixed Charges ACE's ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred stock dividends 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, September 30, ---------------------------- 2000 1999 1998 1997 1996 1995 ------------- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method) 1.74 2.57 1.66 2.84 2.59 3.19 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (SEC Method) 1.68 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. Due to the contribution of the combustion turbines to Conectiv on July 1, 2000, ACE had 239 MW of deregulated capacity remaining as of September 30, 2000. The megawatt-hour (MWH) output of these plants is sold in markets not subject to price regulation. From time-to-time, 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 may also write (or sell) options for sale of the electric generating plants' MWH output. 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 had no value-at-risk as of September 30, 2000 associated with commodity price exposure stemming from contractual arrangements, compared to $6.4 million as of December 31, 1999. -19- PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- Information reported under the heading "Other" in Note 11 to the Consolidated Financial Statements under Item 1 in Part I herein, concerning an action filed in a New Jersey Superior Court by the City of Vineland, is incorporated by reference. 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 July 7, 2000, ACE filed a Current Report on Form 8-K dated July 1, 2000 reporting on Item 5, Other Events. -20- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Atlantic City Electric Company ---------------------------------- (Registrant) Date: November 13, 2000 /s/ John C. van Roden ----------------- ---------------------------------------- John C. van Roden, Senior Vice President and Chief Financial Officer -21- 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 CHARGES Exhibit 12-A Atlantic City Electric Company Ratio of Earnings to Fixed Charges ---------------------------------- (Dollars in Thousands)
12 Months Ended Year Ended December 31, September 30, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ ------------ Income before extraordinary item $ 41,849 $ 63,930 $ 30,276 $ 85,747 $ 75,017 $ 98,752 ------------ ------------ ------------ ------------ ------------ ------------ Income taxes 21,556 49,326 18,178 50,442 36,958 48,277 ------------ ------------ ------------ ------------ ------------ ------------ Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 73,589 60,562 63,940 64,501 64,847 62,879 Other interest 4,021 3,837 3,435 3,574 4,019 4,364 Preferred dividend require- ments of subsidiary trusts 7,619 7,634 6,052 5,775 1,428 - ------------ ------------ ------------ ------------ ------------ ------------ Total fixed charges 85,229 72,033 73,427 73,850 70,294 67,243 ------------ ------------ ------------ ------------ ------------ ------------ Earnings before extraordinary item, income taxes and fixed charges $148,634 $185,289 $121,881 $210,039 $182,269 $214,272 ============ ============ ============ ============ ============ ============ Ratio of earnings to fixed charges 1.74 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 CHARGES 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 Year Ended December 31, September 30, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ ------------ Income before extraordinary item $ 41,849 $ 63,930 $ 30,276 $ 85,747 $ 75,017 $ 98,752 ------------ ------------ ------------ ------------ ------------ ------------ Income taxes 21,556 49,326 18,178 50,442 36,958 48,277 ------------ ------------ ------------ ------------ ------------ ------------ Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 73,589 60,562 63,940 64,501 64,847 62,879 Other interest 4,021 3,837 3,435 3,574 4,019 4,364 Preferred dividend require- ments of subsidiary trusts 7,619 7,634 6,052 5,775 1,428 - ------------ ------------ ------------ ------------ ------------ ------------ Total fixed charges 85,229 72,033 73,427 73,850 70,294 67,243 ------------ ------------ ------------ ------------ ------------ ------------ Earnings before extraordinary item, income taxes and fixed charges $148,634 $185,289 $121,881 $210,039 $182,269 $214,272 ============ ============ ============ ============ ============ ============ Fixed charges $ 85,229 $ 72,033 $ 73,427 $ 73,850 $ 70,294 $ 67,243 Preferred dividend requirements 3,230 3,777 5,289 7,506 14,214 20,839 ------------ ------------ ------------ ------------ ------------ ------------ $ 88,459 $ 75,810 $ 78,716 $ 81,356 $ 84,508 $ 88,082 ============ ============ ============ ============ ============ ============ Ratio of earnings to fixed charges and preferred dividends 1.68 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 3RD QUARTER 2000-10-2. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 PER-BOOK 889,582 115,606 296,414 1,099,516 73,920 2,475,038 54,963 410,194 121,730 586,887 118,950 6,231 914,827 0 0 0 40,075 0 15,200 15,480 777,388 2,475,038 728,101 24,121 602,887 627,008 101,093 5,438 106,531 62,690 43,841 1,599 42,242 50,482 0 185,055 0 0
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