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 March 31, 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 months ended March 31, 2001, and March 31, 2000.................. 1 Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000......................................... 2-3 Consolidated Statements of Cash Flows for the three months ended March 31, 2001, and March 31, 2000.................. 4 Notes to Consolidated Financial Statements................ 5-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 12 Part II. Other Information Item 1. Legal Proceedings......................................... 13 Item 6. Exhibits and Reports on Form 8-K.......................... 13 Signature.......................................................... 14 i Part 1. FINANCIAL INFORMATION Item 1. Financial Statements ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited) Three Months Ended March 31, --------------------------- 2001 2000 ------------- ------------ OPERATING REVENUES $ 230,538 $208,886 ------------- ------------ OPERATING EXPENSES Electric fuel and purchased energy and capacity 110,410 89,955 Operation and maintenance 56,629 61,042 Depreciation and amortization 21,836 25,695 Taxes other than income taxes 9,261 9,514 ------------- ------------ 198,136 186,206 ------------- ------------ OPERATING INCOME 32,402 22,680 ------------- ------------ OTHER INCOME 3,662 1,622 ------------- ------------ INTEREST EXPENSE Interest charges 17,805 19,866 Allowance for borrowed funds used during construction and capitalized interest (125) (176) ------------- ------------ 17,680 19,690 ------------- ------------ PREFERRED DIVIDEND REQUIREMENTS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 1,905 1,905 ------------- ------------ INCOME BEFORE INCOME TAXES 16,479 2,707 INCOME TAXES 7,203 1,134 ------------- ------------ NET INCOME 9,276 1,573 DIVIDENDS ON PREFERRED STOCK 533 533 ------------- ------------ EARNINGS APPLICABLE TO COMMON STOCK $ 8,743 $ 1,040 ============= ============ See accompanying Notes to Consolidated Financial Statements. -1- ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) March 31, December 31, 2001 2000 --------------- --------------- ASSETS Current Assets Cash and cash equivalents $11,769 $8,117 Accounts receivable, net of allowances of $5,789 and $4,423, respectively 140,291 140,785 Investment in Conectiv money pool 147,785 147,954 Inventories, at average cost Fuel (coal and oil) 14,824 6,818 Materials and supplies 6,916 6,786 Deferred income taxes, net 13,955 15,750 Other prepayments 935 1,738 --------------- --------------- 336,475 327,948 --------------- --------------- Investments 115,666 112,501 --------------- --------------- Property, Plant and Equipment Electric generation 142,243 142,243 Electric transmission and distribution 1,261,364 1,255,184 Other electric facilities 120,025 119,782 Other property, plant, and equipment 5,772 5,772 --------------- --------------- 1,529,404 1,522,981 Less: Accumulated depreciation 653,445 640,103 --------------- --------------- Net plant in service 875,959 882,878 Construction work-in-progress 53,443 50,247 Leased nuclear fuel, at amortized cost 25,129 28,352 --------------- --------------- 954,531 961,477 --------------- --------------- Deferred Charges and Other Assets Recoverable stranded costs 951,968 958,883 Unrecovered purchased power costs 13,988 14,487 Deferred recoverable income taxes 12,006 13,978 Unrecovered New Jersey state excise taxes 7,163 10,360 Deferred debt refinancing costs 12,167 12,409 Deferred other postretirement benefit costs 29,356 29,981 Unamortized debt expense 12,852 12,842 Other 32,272 26,516 --------------- --------------- 1,071,772 1,079,456 --------------- --------------- Total Assets $ 2,478,444 $ 2,481,382 =============== =============== See accompanying Notes to Consolidated Financial Statements. -2- ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) March 31, December 31, 2001 2000 --------------- -------------- CAPITALIZATION AND LIABILITIES Current Liabilities Long-term debt due within one year $ 97,200 $ 97,200 Variable rate demand bonds 22,600 22,600 Accounts payable 58,696 50,744 Taxes accrued 18,302 10,243 Interest accrued 12,579 18,193 Dividends payable 17,871 17,871 Current capital lease obligation 15,480 15,480 Deferred energy supply costs 30,480 34,650 Above-market purchased energy contracts and other electric restructuring liabilities 7,368 7,586 Other 37,758 30,268 --------------- -------------- 318,334 304,835 --------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes, net 401,594 405,385 Regulatory liability for New Jersey income tax benefit 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities 16,799 16,744 Deferred investment tax credits 35,223 35,851 Long-term capital lease obligation 9,649 12,872 Pension benefit obligation 27,597 26,948 Other postretirement benefit obligation 35,802 37,614 Other 29,290 28,918 --------------- -------------- 605,216 613,594 --------------- -------------- 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 106,878 114,962 --------------- -------------- Total common stockholder's equity 572,035 580,119 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 857,678 857,653 --------------- -------------- 1,554,894 1,562,953 --------------- -------------- Commitments and Contingencies (Note 6) --------------- -------------- Total Capitalization and Liabilities $2,478,444 $2,481,382 =============== ============== See accompanying Notes to Consolidated Financial Statements. -3- ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Three Months Ended March 31, ------------------------------------ 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $9,276 $1,573 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,640 29,071 Investment tax credit adjustments, net (628) (633) Deferred income taxes, net (24) (5,556) Deferred energy supply costs (4,170) 7,303 Net change in: Accounts receivable 494 12,150 Inventories (8,136) 5,178 Prepaid New Jersey sales & excise taxes 10,716 2,287 Accounts payable 7,952 (13,594) Taxes accrued 8,059 68,731 Other current assets and liabilities (1) (8,037) 832 Other, net (2,266) 855 ------------ ------------ Net cash provided by operating activities 38,876 108,197 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Decrease in investment in Conectiv money pool 169 3,869 Capital expenditures (12,592) (11,882) Deposits to nuclear decommissioning trust funds (825) - Other, net (1,376) (108) ------------ ------------ Net cash used by investing activities (14,624) (8,121) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid (16,827) (16,827) Preferred dividends paid (533) (497) Long-term debt redeemed - (46,000) Principal portion of capital lease payments (3,240) (3,376) Net change in short-term debt - (30,000) ------------ ------------ Net cash used by financing activities (20,600) (96,700) ------------ ------------ Net change in cash and cash equivalents 3,652 3,376 Cash and cash equivalents at beginning of period 8,117 7,924 ------------ ------------ Cash and cash equivalents at end of period $11,769 $11,300 ============ ============ (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. Note 2. Accounting For Derivative Instruments And Hedging Activities - ------- ------------------------------------------------------------ ACE implemented the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 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 were not affected by the initial adoption of SFAS No. 133, effective January 1, 2001, because ACE did not hold derivative instruments as of December 31, 2000. Also, ACE did not hold derivative instruments during the first quarter of 2001. Note 3. Agreements for the Sale of Electric Generating Plants - ------- ----------------------------------------------------- For information concerning agreements for the sale of electric generating plants, 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. There is no significant new information to report concerning this matter. On April 11, 2001, ACE entered into a purchased power agreement with an affiliate of NRG Energy, Inc. (NRG), the party with which ACE has an agreement for the sale of certain of its fossil fuel-fired electric generating plants. The purchased power agreement provides for ACE to begin purchasing 400 megawatts of capacity and energy over a period that begins when the sale of certain of ACE's electric generating plants to NRG is completed and ends on August 31, 2002. -5- 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. New Jersey Electric Utility Industry Restructuring As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity supply business and indicated that a more detailed order would be issued at a later time. The Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's website in mid-May 2001. The Final Decision and Order supersedes a Summary Order issued on July 15, 1999, which was the subject of a Form 8-K filing made by ACE and Conectiv on July 15, 1999. The Final Decision and Order and the 1999 Summary Order were issued in conjunction with a June 9, 1999 settlement in the NJBPU's restructuring proceeding relating to ACE's stranded costs, unbundled rates, and other provisions relevant to establishing competitive retail electric supply markets within ACE's franchised service area in southern New Jersey. After an initial review, management believes that the substantive provisions of the Final Decision and Order largely track the substantive provisions of the Summary Order filed with and discussed in ACE's and Conectiv's July 15, 1999 Form 8-K filings. Differences between the Summary Order and the Final Decision and Order that have been identified, in management's view, are not material and include: 1) establishing August 1, 2002, as the date for submission of a filing regarding the level of all unbundled rate components proposed to be applicable on and after August 1, 2003; 2) with respect to deferred costs to be recovered in future rates, establishing an interest rate to be applied to the deferred balances that is tied to 7-year Treasury constant maturities rather than tied to intermediate-term maturities actually issued by ACE or Conectiv; 3) finding that such deferred balances and interest are recoverable over a "reasonable period of time" to be determined by the NJBPU rather than the four-year period explicitly set forth in the Summary Order; and 4) striking a provision in the settlement that identified a statutory right for ACE to make an early filing for rate modifications under certain specified conditions. Note 5. Income Taxes - ------- ------------ For the three months ended March 31, 2001, 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 March 31, 2001 ------------------------ Amount Rate ------------ ---------- (Dollars in Thousands) Statutory federal income tax expense $5,768 35% State income taxes, net of federal benefit 1,294 8 Plant basis differences 704 5 Amortization of investment tax credits (628) (4) Other, net 65 ------ ------ Income tax expense $7,203 44% ====== ====== -6- Note 6. Contingencies - ------- -------------- Environmental Matters ACE is subject to regulation with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land use by various federal, regional, state, and local authorities. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. ACE is a potentially responsible party at a state superfund site and has agreed, along with other responsible parties, to remediate the site pursuant to an Administrative Consent Order with the New Jersey Department of Environmental Protection. ACE is also a defendant in an action to recover costs at a federal superfund site in Gloucester County, New Jersey. 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 March 31, 2001 and 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. 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. Under changes in NEIL's by-laws effective December 31, 2000, member account balances no longer exist. NEIL members who sell their interests in nuclear electric generating plants after December 31, 2000, may choose either (1) to continue to receive certain policyholders' distributions from NEIL (if, as, and when declared) over a 5-year period or (2) 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. If the sale of ACE's ownership interests in nuclear electric generating plants is completed, then ACE will be able to choose one of the two options available to it under NEIL's by-laws. 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 -7- 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. Management cannot predict the outcome of this matter. Note 7. Supplemental Cash Flow Information - ------- ---------------------------------- Three Months Ended March 31, ------------------ 2001 2000 ---- ---- (Dollars in thousands) Cash paid (received) for: Interest, net of amounts capitalized $22,636 $ 23,527 Income taxes, net of refunds -- $(61,444) As shown above, ACE received a $61.4 million income tax refund during the three months ended March 31, 2000. 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 8. Business Segments - ------- ----------------- Conectiv's organizational structure and management reporting information is aligned with Conectiv's business segments, irrespective of the subsidiary, or subsidiaries, through which a business is conducted. Businesses are managed based on lines of business, not legal entity. Business segment information is not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a Conectiv subsidiary, no business segment information (as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information") is available for ACE on a stand-alone basis. 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. Note 9. Subsequent Event, Mandatory 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. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements - -------------------------- The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "intend," "will," "anticipate," "estimate," "expect," "believe," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward- looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: the effects of deregulation of energy supply and the unbundling of delivery services; the ability to enter into purchased power agreements on 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 $8.7 million for the first quarter of 2001, compared to $1.0 million for the first quarter of 2000. The $7.7 million earnings increase was mainly due to higher volumes of regulated electricity sales and deliveries, reflecting the effect of colder winter weather on electricity usage by customers with electric heating systems. 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 that exists 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 increase for the first quarter of 2001 also reflects higher investment income and lower expenses, including operating and maintenance costs, depreciation and amortization expenses, and interest expense. The variances that positively affected earnings were partly offset by a negative earnings variance attributed to the transfer of the combustion turbine electric generating units to Conectiv on July 1, 2000. New Jersey Electric Utility Industry Restructuring - -------------------------------------------------- As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity supply business and indicated that a more detailed order would be issued at a later time. The Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's website in mid-May 2001. The Final Decision and Order supersedes a Summary Order issued -9- on July 15, 1999, which was the subject of a Form 8-K filing made by ACE and Conectiv on July 15, 1999. The Final Decision and Order and the 1999 Summary Order were issued in conjunction with a June 9, 1999 settlement in the NJBPU's restructuring proceeding relating to ACE's stranded costs, unbundled rates, and other provisions relevant to establishing competitive retail electric supply markets within ACE's franchised service area in southern New Jersey. After an initial review, management believes that the substantive provisions of the Final Decision and Order largely track the substantive provisions of the Summary Order filed with and discussed in ACE's and Conectiv's July 15, 1999 Form 8-K filings. Differences between the Summary Order and the Final Decision and Order that have been identified, in management's view, are not material and include: 1) establishing August 1, 2002, as the date for submission of a filing regarding the level of all unbundled rate components proposed to be applicable on and after August 1, 2003; 2) with respect to deferred costs to be recovered in future rates, establishing an interest rate to be applied to the deferred balances that is tied to 7-year Treasury constant maturities rather than tied to intermediate-term maturities actually issued by ACE or Conectiv; 3) finding that such deferred balances and interest are recoverable over a "reasonable period of time" to be determined by the NJBPU rather than the four-year period explicitly set forth in the Summary Order; and 4) striking a provision in the settlement that identified a statutory right for ACE to make an early filing for rate modifications under certain specified conditions. Operating Revenues - ------------------ Three Months Ended March 31, ------------------ 2001 2000 ------ ------ (Dollars in millions) Regulated electric revenues $225.3 $196.8 Non-regulated electric revenues 3.5 9.1 Other revenues 1.7 3.0 ------ ------ Total operating revenues $230.5 $208.9 ====== ====== 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 $28.5 million, to $225.3 million for the first quarter of 2001, from $196.8 million for the first quarter of 2000. The increase was primarily due to increased interchange sales, higher sales to electric space-heating customers due to colder winter weather, and additional revenues recognized under the regulated cost-based, rate-recovery mechanism that exists for BGS. "Non-regulated electric revenues" decreased by approximately $5.6 million mainly due to the transfer of the combustion turbine electric generating units to Conectiv on July 1, 2000. -10- Operating Expenses - ------------------- Electric Fuel and Purchased Energy and Capacity "Electric fuel and purchased energy and capacity" increased $20.5 million for the first quarter of 2001 mainly due to increased volume of electricity purchased at a higher average cost. On April 11, 2001, ACE entered into a purchased power agreement with an affiliate of NRG Energy, Inc. (NRG), the party with which ACE has an agreement for the sale of certain of its fossil fuel-fired electric generating plants. The purchased power agreement provides for ACE to begin purchasing 400 megawatts of capacity and energy over a period that begins when the sale of certain of ACE's electric generating plants to NRG is completed and ends on August 31, 2002. Operation and Maintenance Expenses Operation and maintenance expenses decreased $4.4 million for the first quarter of 2001 mainly due to lower expenses associated with ACE's interests in jointly- owned nuclear electric generating units. Depreciation and amortization Depreciation and amortization expenses decreased $3.9 million for the first quarter of 2001 mainly due to expiration of the amortization of a regulatory asset for purchased capacity costs. Other Income - ------------ Other income increased $2.0 million in the first quarter of 2001 primarily due to a higher average investment balance in Conectiv's money pool. Interest Expense - ---------------- Interest expense, net of amounts capitalized, decreased $2.0 million for the first quarter of 2001 mainly due to the redemption of $46.0 million of Medium Term Notes in January 2000, lower amortization of debt issuance and refinancing expenses, and less interest expense attributed to ACE's regulatory liability for deferred energy supply costs. Income Taxes - ------------ Income taxes increased $6.1 million for the first quarter of 2001 mainly due to higher income before income taxes. Liquidity and Capital Resources - -------------------------------- Due to $38.9 million of cash provided by operating activities, $14.6 million of cash used by investing activities, and $20.6 million of cash used by financing activities, cash and cash equivalents increased by $3.7 million during first quarter of 2001. Net cash provided by operating activities decreased by $69.3 million to $38.9 million for the first quarter of 2001, from $108.2 million for the first quarter of 2000. The decrease was primarily due to income tax refunds received in the first quarter of 2000 related to the tax benefit associated with the December 1999 payment to terminate the Pedricktown purchased power contract. -11- ACE's $12.6 million of capital expenditures during the first quarter of 2001 were primarily for the electric transmission and distribution systems of ACE. Cash flows from financing activities for the first quarter of 2001 consisted of $16.8 million of dividends on common stock paid to Conectiv, $0.5 million of dividends paid to preferred stockholders, and $3.2 million of capital lease principal payments. ACE's capital structure, expressed as a percentage of total capitalization, is shown below as of March 31, 2001 and December 31, 2000. March 31, December 31, 2001 2000 ---- ---- Common stockholder's equity 34.2% 34.5% Preferred stock and preferred trust securities 7.5% 7.4% Long-term debt and variable rate demand bonds 52.5% 52.3% Short-term debt and current maturities of long-term debt 5.8% 5.8% 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. 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, March 31, ---------------------------- 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method) 2.21 2.03 2.57 1.66 2.84 2.59 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (SEC Method) 2.12 1.95 2.44 1.55 2.58 2.16 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 March 31, 2001 compared to December 31, 2000. -12- PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- Information reported under the heading "Other" in Note 6 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) Exhibit 99, New Jersey Board of Public Utilities, Final Decision and Order, dated March 30, 2001 (incorporated by reference from Conectiv's Report on Form 10-Q for the quarterly period ended March 31, 2001, filed May 10, 2001) (b) Reports on Form 8-K - ------------------------ On January 8, 2001, ACE filed a Current Report on Form 8-K dated December 29, 2000 reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. -13- 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: May 14, 2001 /s/ John C. van Roden ------------ --------------------- John C. van Roden, Senior Vice President and Chief Financial Officer -14- Exhibit Index ------------- Exhibit 12-A, Ratio of Earnings to Fixed Charges Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends