-----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, Vkr00W7L/kKcJo30k5MJfN+LEiu0MPoG4lM2C7v3bcsmeYCprK/w4NVObZeL57ih E8IdphKQUEFR3uRrpFq5Tw== 0001036050-01-500850.txt : 20010814 0001036050-01-500850.hdr.sgml : 20010814 ACCESSION NUMBER: 0001036050-01-500850 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC CITY ELECTRIC CO CENTRAL INDEX KEY: 0000008192 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210398280 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03559 FILM NUMBER: 1705937 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 d10q.txt ATLANTIC CITY ELECTRIC COMPANY FORM 10-Q 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, 2001 ------------- 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 302-429-3018 ------------ 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, 2001, and June 30, 2000........................ 1 Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000............................................. 2-3 Consolidated Statements of Cash Flows for the six months ended June 30, 2001, and June 30, 2000........................ 4 Notes to Consolidated Financial Statements.................... 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 10-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 15 Part II. Other Information Item 1. Legal Proceedings............................................. 16 Item 6. Exhibits and Reports on Form 8-K.............................. 16 Signature................................................................ 16 i 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, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- OPERATING REVENUES $300,877 $236,249 $531,415 $445,135 -------- -------- -------- -------- OPERATING EXPENSES Electric fuel and purchased energy and capacity 149,737 105,180 260,147 195,135 Operation and maintenance 66,593 60,510 123,222 121,552 Depreciation and amortization 21,712 25,612 43,548 51,307 Taxes other than income taxes 8,627 8,536 17,888 18,050 -------- -------- -------- -------- 246,669 199,838 444,805 386,044 -------- -------- -------- -------- OPERATING INCOME 54,208 36,411 86,610 59,091 -------- -------- -------- -------- OTHER INCOME 2,080 1,394 5,742 3,016 -------- -------- -------- -------- INTEREST EXPENSE Interest charges 14,465 18,971 32,270 38,837 Allowance for borrowed funds used during construction and capitalized interest (136) (183) (261) (359) -------- -------- -------- -------- 14,329 18,788 32,009 38,478 -------- -------- -------- -------- PREFERRED DIVIDEND REQUIREMENTS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 1,904 1,904 3,809 3,809 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 40,055 17,113 56,534 19,820 INCOME TAXES 16,702 3,000 23,905 4,134 -------- -------- -------- -------- NET INCOME 23,353 14,113 32,629 15,686 DIVIDENDS ON PREFERRED STOCK 533 532 1,066 1,065 -------- -------- -------- -------- EARNINGS APPLICABLE TO COMMON STOCK $ 22,820 $ 13,581 $ 31,563 $ 14,621 ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. -1- ATLANTIC CITY ELECTRIC COMPANY ------------------------------ CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
June 30, December 31, 2001 2000 ---------- ------------ ASSETS Current Assets Cash and cash equivalents $ 9,003 $ 8,117 Accounts receivable, net of allowances of $5,789 and $4,423, respectively 179,821 140,785 Investment in Conectiv money pool 34,703 147,954 Inventories, at average cost 23,616 13,604 Deferred income taxes, net - 15,750 Prepayments 29,627 1,738 ---------- ------------ 276,770 327,948 ---------- ------------ Investments 116,348 112,501 ---------- ------------ Property, Plant and Equipment Electric generation 142,243 142,243 Electric transmission and distribution 1,270,738 1,255,184 Other electric facilities 117,964 119,782 Other property, plant, and equipment 5,772 5,772 ---------- ------------ 1,536,717 1,522,981 Less: Accumulated depreciation 664,465 640,103 ---------- ------------ Net plant in service 872,252 882,878 Construction work-in-progress 59,839 50,247 Leased nuclear fuel, at amortized cost 22,413 28,352 ---------- ------------ 954,504 961,477 ---------- ------------ Deferred Charges and Other Assets Recoverable stranded costs 945,047 958,883 Deferred energy supply costs 25,039 - Unrecovered purchased power costs 13,488 14,487 Deferred recoverable income taxes 13,079 13,978 Unrecovered New Jersey state excise taxes 3,906 10,360 Deferred debt refinancing costs 11,924 12,409 Deferred other postretirement benefit costs 28,732 29,981 Unamortized debt expense 12,716 12,842 Other 32,958 26,516 ---------- ------------ 1,086,889 1,079,456 ---------- ------------ Total Assets $2,434,511 $ 2,481,382 ========== ============
See accompanying Notes to Consolidated Financial Statements. -2- ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
June 30, December 31, 2001 2000 ---------- ----------- CAPITALIZATION AND LIABILITIES Current Liabilities Long-term debt due within one year $ 112,200 $ 97,200 Variable rate demand bonds 22,600 22,600 Accounts payable 77,762 50,744 Taxes accrued 3,397 10,243 Interest accrued 17,697 18,193 Dividends payable 6,302 17,871 Current capital lease obligation 15,480 15,480 Deferred income taxes 8,793 - Deferred energy supply costs - 34,650 Above-market purchased energy contracts and other electric restructuring liabilities 7,269 7,586 Other 23,760 30,268 ---------- ----------- 295,260 304,835 ---------- ----------- Deferred Credits and Other Liabilities Deferred income taxes, net 401,715 405,385 Regulatory liability for New Jersey income tax benefit 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities 16,737 16,744 Deferred investment tax credits 34,595 35,851 Long-term capital lease obligation 6,933 12,872 Pension benefit obligation 28,911 26,948 Other postretirement benefit obligation 35,578 37,614 Other 29,540 28,918 ---------- ----------- 603,271 613,594 ---------- ----------- Capitalization Common stock, $3 par value; shares authorized: 25,000,000; shares outstanding: 18,320,937 54,963 54,963 Additional paid-in capital 410,194 410,194 Retained earnings 124,439 114,962 ---------- ----------- Total common stockholder's equity 589,596 580,119 Preferred stock not subject to mandatory redemption 6,231 6,231 Preferred stock subject to mandatory redemption 12,450 23,950 Preferred securities of subsidiary trusts subject to mandatory redemption 95,000 95,000 Long-term debt 832,703 857,653 ---------- ----------- 1,535,980 1,562,953 ---------- ----------- Commitments and Contingencies (Note 8) ---------- ----------- Total Capitalization and Liabilities $2,434,511 $ 2,481,382 ========== ===========
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, ------------------------- 2001 2000 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 32,629 $ 15,686 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,520 57,688 Investment tax credit adjustments, net (1,256) (1,901) Deferred income taxes, net 21,772 6,137 Deferred energy supply costs (59,689) (6,601) Net change in: Accounts receivable (39,036) 7,296 Inventories (10,012) 6,316 Prepaid New Jersey sales & excise taxes (31,100) (33,308) Accounts payable 27,018 (6,554) Taxes accrued (6,846) 70,355 Other current assets and liabilities (1) (3,793) 6,908 Other, net 3,393 3,961 -------- --------- Net cash (used) / provided by operating activities (17,400) 125,983 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease in investment in Conectiv money pool 113,251 18,406 Capital expenditures (30,472) (28,112) Deposits to nuclear decommissioning trust funds (825) (405) Other, net (1,476) (1,567) -------- --------- Net cash provided / (used) by investing activities 80,478 (11,678) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on common stock (33,655) (33,655) Dividends paid on preferred stock (1,066) (1,230) Long-term debt redeemed (10,000) (46,000) Preferred stock redeemed (11,500) - Principal portion of capital lease payments (5,971) (6,381) Net change in short-term debt - (30,000) -------- --------- Net cash used by financing activities (62,192) (117,266) -------- --------- Net change in cash and cash equivalents 886 (2,961) Cash and cash equivalents at beginning of period 8,117 7,924 -------- --------- Cash and cash equivalents at end of period $ 9,003 $ 4,963 ======== =========
(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 that would substantially duplicate the disclosures in ACE's 2000 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 2000 Annual Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for additional relevant information. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and does not permit the use of the pooling of interests method of accounting for business combinations. SFAS No. 142 will be effective January 1, 2002 for companies with a calendar fiscal year, including ACE. Under SFAS No. 142, goodwill will no longer be amortized, but instead will be tested periodically for impairment. If an impairment of goodwill occurs, then a charge to earnings would result. Under SFAS No. 142, historical operating results will not be restated; instead pro forma earnings, adjusted to exclude goodwill amortization, will be disclosed. SFAS No. 141 and No. 142 are not expected to have a material effect on ACE's financial position or results of operations. On August 9, 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations," which establishes the accounting requirements for asset retirement obligations (ARO) associated with tangible long-lived assets. Obligations related to asset retirements for which an entity may have a legal obligation for settlement will be recognized in the financial statements, when the obligation meets the criteria for a liability under FASB Concepts Statement No. 6, Elements of Financial Statements. Under SFAS No. 143, the cost associated with an ARO is capitalized and allocated to expense by using a systematic and rational method. The initial measurement of an ARO is based on the fair value of the obligation. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including ACE. Upon adoption, SFAS No. 143 requires the use of a cumulative-effect approach to recognize transition amounts for any existing ARO liabilities, asset retirement costs, and accumulated depreciation. Management plans to conduct reviews of SFAS No. 141, 142, and 143 that are more comprehensive and may identify additional expected impacts on ACE's financial statements which may result from implementation of these new accounting standards. -5- Note 2. Supplemental Cash Flow Information - ------- ---------------------------------- Six Months Ended June 30, --------------------- 2001 2000 --------- ---------- (Dollars in thousands) Cash paid (received) for: Interest, net of amounts capitalized $32,566 $ 35,699 Income taxes, net of refunds $10,413 $(69,013) 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 net income tax refunds received. The income tax refund was 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 2000 Annual Report on Form 10-K. Note 3. Income Taxes - ------- ------------ 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 June 30, Six Months Ended June 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Amount Rate Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- ------- ---- (Dollars in Thousands) Statutory federal income tax expense $14,019 35% $ 5,990 35% $19,787 35% $ 6,937 35% State income taxes, net of federal benefit 2,625 7 1,295 7 3,920 7 1,794 9 Plant basis differences 704 2 625 4 1,408 2 1,250 6 Investment tax credit amortization (628) (2) (1,267) (7) (1,256) (2) (1,901) (10) Resolution of income tax matters * -- -- (4,254) (25) -- -- (4,254) (21) Other, net (18) -- 611 4 46 -- 308 2 ------- ---- ------- ---- ------- ---- -------- ---- $16,702 42% $ 3,000 18% $23,905 42% $ 4,134 21% ======= ==== ======= ==== ======= ==== ======= ====
* Reflects a change in estimate of previously accrued income taxes due to resolution of matters with taxing authorities. Note 4. Regulatory 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 2000 Annual Report on Form 10-K is presented below. -6- New Jersey Electric Utility Industry Restructuring Final Decision and Order 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 Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's internet website in mid-May 2001. Management believes that the substantive provisions of the Final Decision and Order are not materially different from the substantive provisions of the Summary Order filed with and discussed in ACE's Form 8-K filing dated July 15, 1999. Petition for Securitization of Stranded Costs As previously disclosed in Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K, New Jersey's Electric Discount and Energy Competition Act (the New Jersey Act) permits securitization of stranded costs through the issuance of transition bonds. On June 25, 2001, ACE filed a petition with the NJBPU, seeking the authority to: (i) issue through a special purpose entity up to $2 billion in transition bonds in one or more series; (ii) collect from ACE's customers a non- bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (iii) collect from ACE's customers a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iv) sell "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. The transition bonds are expected to be issued after the NJBPU issues a bondable stranded costs rate order (Financing Order) establishing "bondable transition property," as provided for in the New Jersey Act. To facilitate the issuance of transition bonds, ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) on March 28, 2001. Assuming that the NJBPU issues a Financing Order containing terms and conditions satisfactory to ACE, subsequent to issuance of such order, ACE Transition Funding is expected to issue transition bonds and use the proceeds to purchase the bondable transition property from ACE. The New Jersey Act requires utilities, including ACE, to use the proceeds from the sale of bondable transition property to redeem debt or equity or both, restructure purchased power contracts with non-utility generators, or otherwise reduce costs in order to decrease regulated electricity rates. Note 5. Agreements for the Sale of Electric Generating Plants - ------- ----------------------------------------------------- For information concerning agreements for the sale of the electric generating plants of ACE, see Note 11 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K. Effective June 22, 2001, ACE agreed to amendments to agreements with NRG Energy, Inc. (NRG), and NRG Power Marketing, Inc. (NRG Power), including the following: . The termination dates of the sale agreements between ACE and NRG relating to Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station were extended; and . ACE terminated a purchased power agreement with NRG Power originally intended to be effective after the sale of certain electric generating plants to NRG. -7- Subject to the receipt of the required approvals from the NJBPU and the satisfaction of other closing conditions, ACE expects to complete the sale of certain electric generating assets during 2001. However, there can be no assurances that such approvals will be obtained, or that such sales will be completed. As of June 30, 2001, the ACE plants that are under agreements for sale had an agreed upon total sales price of approximately $189 million (before certain adjustments and expenses), a net book value of approximately $130 million and electric generating capacity of 1,122.7 megawatts (MW). Any gain that may be realized on the sale of these plants would reduce the amount of stranded costs to be recovered from ACE's utility customers. Note 6. Redemption of Preferred Stock - ------- ----------------------------- On May 1, 2001, ACE redeemed 115,000 shares of its $7.80 annual dividend rate preferred stock, which has mandatory redemption provisions, at the $100 per share stated value or $11.5 million in total. Note 7. Debt - ------- ---- On May 15, 2001, ACE redeemed $10 million of 7.0%, Medium Term Notes at maturity. On August 1, 2001, ACE redeemed $30 million of 6.81% Medium Term Notes at maturity. Note 8. 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 $4.0 million included in ACE's current liabilities as of June 30, 2001 ($1.0 million as of December 31, 2000) 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. On July 11, 2001, the New Jersey Department of Environmental Protection (NJDEP) denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. NJDEP has issued a 60-day stay of the denial and has authorized ACE to operate Unit 1 with the current fuel. Management is not able to predict the outcome of ACE's appeal. -8- Nuclear Insurance In conjunction with the ownership interests of ACE 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 $1.8 billion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning. An industry mutual insurance company (NEIL) provides replacement power cost coverage to members 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 $1.9 million on an aggregate basis. 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. The City's Superior Court action has been dismissed, based on the failure to hold a referendum, and the City has appealed this decision. Management cannot predict the outcome of this matter. Note 9. 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 11 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K). 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. -9- 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 acceptable terms; 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 $22.8 million for the second quarter of 2001, compared to $13.6 million for the second quarter of 2000, and $31.6 million for the six months ended June 30, 2001, compared to $14.6 million for the six months ended June 30, 2000. The earnings increases of $9.2 million for the second quarter of 2001 and $17.0 million for the six months ended June 30, 2001 were mainly due to higher volumes of regulated electricity sales and deliveries, reflecting higher electricity usage that resulted from colder winter weather and warmer weather in June 2001. Although ACE experienced higher average energy costs in serving its Basic Generation Service (BGS) customers, additional revenues were recognized based on the regulated cost-based, rate- recovery mechanism for BGS, as discussed in Notes 1 and 7 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K. The earnings increases also reflect higher other income, lower depreciation and amortization expenses and lower interest expense. The variances that positively affected earnings were partly offset by negative earnings variances attributed to a higher effective income tax rate and the transfer of the combustion turbine electric generating units to Conectiv on July 1, 2000. -10- New Jersey Electric Utility Industry Restructuring - -------------------------------------------------- Final Decision and Order 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 Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's internet website in mid-May 2001. Management believes that the substantive provisions of the Final Decision and Order are not materially different from the substantive provisions of the Summary Order filed with and discussed in ACE's Form 8-K filing dated July 15, 1999. Petition for Securitization of Stranded Costs As previously disclosed in Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K, New Jersey's Electric Discount and Energy Competition Act (the New Jersey Act) permits securitization of stranded costs through the issuance of transition bonds. On June 25, 2001, ACE filed a petition with the NJBPU, seeking the authority to: (i) issue through a special purpose entity up to $2 billion in transition bonds in one or more series; (ii) collect from ACE's customers a non- bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (iii) collect from ACE's customers a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iv) sell "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. The transition bonds are expected to be issued after the NJBPU issues a bondable stranded costs rate order (Financing Order) establishing "bondable transition property," as provided for in the New Jersey Act. To facilitate the issuance of transition bonds, ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) on March 28, 2001. Assuming that the NJBPU issues a Financing Order containing terms and conditions satisfactory to ACE, subsequent to issuance of such order, ACE Transition Funding is expected to issue transition bonds and use the proceeds to purchase the bondable transition property from ACE. The New Jersey Act requires utilities, including ACE, to use the proceeds from the sale of bondable transition property to redeem debt or equity or both, restructure purchased power contracts with non-utility generators, or otherwise reduce costs in order to decrease regulated electricity rates. Agreements for the Sale of Electric Generating Plants - ----------------------------------------------------- For information concerning agreements for the sale of the electric generating plants of ACE, see Note 11 to the Consolidated Financial Statements included in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K. Effective June 22, 2001, ACE agreed to amendments to agreements with NRG Energy, Inc. (NRG), and NRG Power Marketing, Inc. (NRG Power), including the following: . The termination dates of the sale agreements between ACE and NRG relating to Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station were extended; and . ACE terminated a purchased power agreement with NRG Power originally intended to be effective after the sale of certain electric generating plants to NRG. -11- Subject to the receipt of the required approvals from the NJBPU and the satisfaction of other closing conditions, ACE expects to complete the sale of certain electric generating assets during 2001. However, there can be no assurances that such approvals will be obtained, or that such sales will be completed. As of June 30, 2001, the ACE plants that are under agreements for sale had an agreed upon total sales price of approximately $189 million (before certain adjustments and expenses), a net book value of approximately $130 million and electric generating capacity of 1,122.7 MW. Any gain that may be realized on the sale of these plants would reduce the amount of stranded costs to be recovered from ACE's utility customers. Operating Revenues - ------------------ Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2001 2000 2001 2000 -------- -------- ------- ------- (Dollars in millions) Regulated electric revenues $296.2 $215.3 $521.4 $412.1 Non-regulated electric revenues 3.3 19.2 6.7 28.3 Other revenues 1.4 1.7 3.3 4.7 ------ ------ ------ ------ Total operating revenues $300.9 $236.2 $531.4 $445.1 ====== ====== ====== ====== The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and BGS. "Regulated electric revenues" increased by $80.9 million for the three months ended June 30, 2001 and $109.3 million for the six months ended June 30, 2001 due to the following factors:
Increase (Decrease) in Regulated Electric Revenues --------------------------- Three Months Six Months -------------- ----------- Additional revenues recognized under the regulated cost-based rate-recovery mechanism for BGS $38.7 $ 49.7 Increased retail and interchange sales and other * 42.2 59.6 ----- ------ $80.9 $109.3 ===== ======
* These increases were primarily due to higher volumes of regulated electricity sales and deliveries, reflecting higher electricity usage that resulted from colder winter weather and warmer weather in June 2001. "Non-regulated electric revenues" decreased by approximately $15.9 million for the three months ended June 30, 2001 and $21.6 million for the six months ended June 30, 2001 mainly due to the transfer of the combustion turbine electric generating units to Conectiv on July 1, 2000. -12- Operating Expenses - ------------------- Electric Fuel and Purchased Energy and Capacity "Electric fuel and purchased energy and capacity" increased $44.6 million and $65.0 million for the three months and six months ended June 30, 2001, respectively, mainly due to increased volumes of electricity purchased at a higher average cost. More electricity was purchased primarily due to ACE's "Wholesale Transaction Confirmation Letter Agreements" (Letter Agreements), under which ACE is selling its interest in the output of nuclear electric generating plants to the companies that operate the plants. For more information concerning the letter agreements, see Note 12 to the Consolidated Financial Statements in Item 8 of Part II of ACE's 2000 Annual Report on Form 10-K. Operation and Maintenance Expenses Operation and maintenance expenses increased $6.1 million and $1.7 million for the three months and six months ended June 30, 2001, respectively, mainly due to increased costs associated with the clean up of environmental contamination. Depreciation and amortization Depreciation and amortization expenses decreased $3.9 million and $7.8 million for the three months and six months ended June 30, 2001, respectively, mainly due to expiration of the amortization of a regulatory asset for purchased capacity costs. Other Income - ------------ Other income increased $0.7 million and $2.7 million for the three months and six months ended June 30, 2001, respectively, primarily due to a higher average investment balance in Conectiv's money pool. Interest Expense - ---------------- Interest expense, net of amounts capitalized, decreased $4.5 million and $6.5 million for the three months and six months ended June 30, 2001, respectively, due to less interest expense attributed to deferred energy supply costs and decreases in other miscellaneous interest expenses. Energy supply costs that were incurred during the second quarter of 2001 and were not recovered from customers caused the balance for the deferred energy supply costs to change from a liability to an asset, representing amounts to be recovered from customers in the future. Income Taxes - ------------ Income taxes increased $13.7 million and $19.8 million for the three months and six months ended June 30, 2001, respectively, due to higher income before income taxes and also because the effective income tax rate for the same periods last year had been decreased by a change in estimate of previously accrued income taxes due to resolution of matters with taxing authorities. Liquidity and Capital Resources - -------------------------------- Due to $17.4 million of cash used by operating activities, $80.5 million of cash provided by investing activities, and $62.2 million of cash used by financing activities, cash and cash equivalents increased by $0.9 million during six months ended June 30, 2001. -13- Net cash from operating activities decreased by $143.4 million, to $17.4 million of cash used by operations for the six months ended June 30, 2001, from $126.0 million of cash provided by operations for the six months ended June 30, 2000. Income tax refunds received during the six months ended June 30, 2000 and higher amounts of purchased electricity during the six months ended June 30, 2001 were the primary reasons for the decrease in net cash from operating activities. During the six months ended June 30, 2001, ACE converted to cash $113.3 million of its investment in Conectiv's "money pool," in which Conectiv subsidiaries invest in or borrow from, depending on their cash position. ACE's Cash Flows From Investing Activities for the six months ended June 30, 2001 also reflect $30.5 million of cash used for capital expenditures, which were primarily for the electric transmission and distribution systems of ACE. Cash Flows From Financing Activities for the six months ended June 30, 2001 included $33.7 million of dividends paid on ACE's common stock held by Conectiv, the redemption of $10.0 million of 7.0% Medium Term Notes, the redemption of $11.5 million of preferred stock ($7.80 annual dividend rate per each $100 share), $6.0 million of capital lease principal payments, and $1.1 million of dividends paid to preferred stockholders. ACE's capital structure, expressed as a percentage of total capitalization, is shown below as of June 30, 2001 and December 31, 2000.
June 30, December 31, 2001 2000 -------- ------------ Common stockholder's equity 35.3% 34.5% Preferred stock and preferred trust securities 6.8% 7.4% Long-term debt and variable rate demand bonds 51.2% 52.3% Short-term debt and current maturities of long-term debt 6.7% 5.8%
On August 1, 2001, ACE redeemed $30 million of 6.81% Medium Term Notes at maturity. 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, June 30, ---------------------------- 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method) 2.57 2.03 2.57 1.66 2.84 2.59 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (SEC Method) 2.46 1.95 2.44 1.55 2.58 2.16
-14- New Accounting Standards - ------------------------ On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and does not permit the use of the pooling of interests method of accounting for business combinations. SFAS No. 142 will be effective January 1, 2002 for companies with a calendar fiscal year, including ACE. Under SFAS No. 142, goodwill will no longer be amortized, but instead will be tested periodically for impairment. If an impairment of goodwill occurs, then a charge to earnings would result. Under SFAS No. 142, historical operating results will not be restated; instead pro forma earnings, adjusted to exclude goodwill amortization, will be disclosed. SFAS No. 141 and No. 142 are not expected to have a material effect on ACE's financial position or results of operations. On August 9, 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations," which establishes the accounting requirements for asset retirement obligations (ARO) associated with tangible long-lived assets. Obligations related to asset retirements for which an entity may have a legal obligation for settlement will be recognized in the financial statements, when the obligation meets the criteria for a liability under FASB Concepts Statement No. 6, Elements of Financial Statements. Under SFAS No. 143, the cost associated with an ARO is capitalized and allocated to expense by using a systematic and rational method. The initial measurement of an ARO is based on the fair value of the obligation. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including ACE. Upon adoption, SFAS No. 143 requires the use of a cumulative-effect approach to recognize transition amounts for any existing ARO liabilities, asset retirement costs, and accumulated depreciation. Management plans to conduct reviews of SFAS No. 141, 142, and 143 that are more comprehensive and may identify additional expected impacts on ACE's financial statements which may result from implementation of these new accounting standards. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- As previously disclosed under "Quantitative and Qualitative Disclosures About Market Risk" on page II-13 to ACE's 2000 Annual Report on Form 10-K, ACE is subject to market risks, including interest rate risk, equity price risk, and commodity price risk. There were no material changes in ACE's level of market risks as of June 30, 2001 compared to December 31, 2000. -15- PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- Information reported under the heading "Other" in Note 8 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 - ------- -------------------------------- (a) Exhibits - ------------- Exhibit 12-A, Ratio of Earnings to Fixed Charges (filed herewith) Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends (filed herewith) (b) Reports on Form 8-K - ------------------------ On June 28, 2001, ACE filed a Current Report on Form 8-K dated June 22, 2001 reporting on Item 5, Other Events, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Atlantic City Electric Company ------------------------------ (Registrant) Date: August 13, 2001 /s/ John C. van Roden --------------- ------------------------------------------ John C. van Roden, Chief Financial Officer -16- Exhibit Index ------------- Exhibit 12-A, Ratio of Earnings to Fixed Charges Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends EX-12.A 3 dex12a.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, June 30, ---------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- Income before extraordinary item $ 71,377 $ 54,434 $ 63,930 $ 30,276 $ 85,747 $ 75,017 -------- -------- -------- -------- -------- -------- Income taxes 56,517 36,746 49,326 18,178 50,442 36,958 -------- -------- -------- -------- -------- -------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 69,611 76,178 60,562 63,940 64,501 64,847 Other interest 4,149 4,518 3,837 3,435 3,574 4,019 Preferred dividend require- ments of subsidiary trusts 7,619 7,619 7,634 6,052 5,775 1,428 -------- -------- -------- -------- -------- -------- Total fixed charges 81,379 88,315 72,033 73,427 73,850 70,294 -------- -------- -------- -------- -------- -------- Earnings before extraordinary item, income taxes and fixed charges $209,273 $179,495 $185,289 $121,881 $210,039 $182,269 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.57 2.03 2.57 1.66 2.84 2.59
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 4 dex12b.txt RATIO OF EARNINGS TO FIXED CHARGES - PREFERRED DIV 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, June 30, ------------------------------------------------------------ 2001 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- Income before extraordinary item $ 71,377 $ 54,434 $ 63,930 $ 30,276 $ 85,747 $ 75,017 -------- -------- -------- -------- -------- -------- Income taxes 56,517 36,746 49,326 18,178 50,442 36,958 -------- -------- -------- -------- -------- -------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 69,611 76,178 60,562 63,940 64,501 64,847 Other interest 4,149 4,518 3,837 3,435 3,574 4,019 Preferred dividend require- ments of subsidiary trusts 7,619 7,619 7,634 6,052 5,775 1,428 -------- -------- -------- -------- -------- -------- Total Fixed charges 81,379 88,315 72,033 73,427 73,850 70,294 -------- -------- -------- -------- -------- -------- Earnings before extraordinary item, income taxes and fixed charges $209,273 $179,495 $185,289 $121,881 $210,039 $182,269 ======== ======== ======== ======== ======== ======== Fixed charges $ 81,379 $ 88,315 $ 72,033 $ 73,427 $ 73,850 $ 70,294 Preferred dividend requirements 3,820 3,571 3,777 5,289 7,506 14,214 -------- -------- -------- -------- -------- -------- $ 85,199 $ 91,886 $ 75,810 $ 78,716 $ 81,356 $ 84,508 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges and preferred dividends 2.46 1.95 2.44 1.55 2.58 2.16
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. -----END PRIVACY-ENHANCED MESSAGE-----