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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




For the fiscal year ended December 31, 2001





or





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission file number 1-3559





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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)





Registrants telephone number (302) 429-3018





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Securities registered pursuant to Section 12(b) of the Act:





Title of each class

Name of each exchange on which registered8.25% Cumulative Quarterly Income Preferred Securities, liquidation preference $25 per preferred security issued by Atlantic Capital I

New York Stock Exchange7 3/8% Cumulative Trust Preferred Capital Securities, liquidation preference $25 per preferred security issued by Atlantic Capital II

New York Stock Exchange





Securities registered pursuant to Section 12(g) of the Act: None





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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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x





All 18,320,937 issued and outstanding shares of Atlantic City Electric Company common stock, $3 per share par value, are owned by Conectiv.





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TABLE OF CONTENTS





PagePART IItem 1.

BusinessGeneral

I-1Business Segments

I-1Regulation

I-1Divestiture of Electric Generating Plants

I-2Securitization

I-2Basic Generation Service

I-2Purchased Power

I-3PJM Interconnection L.L.C.

I-3Fuel Supply for Electric Generation

I-4New Jersey Electric System Reliability Standards

I-4Affiliate Transactions

I-4Capital Spending and Financing Program

I-4Environmental Matters

I-5Air Quality Regulations

I-5Water Quality Regulations

I-6Hazardous Substances

I-6Executive Officers

I-6Item 2.

Properties

I-7Item 3.

Legal Proceedings

I-7Item 4.

Submission of Matters to a Vote of Security Holders

I-7PART IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

II-1Item 6.

Selected Financial Data

II-2Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

II-3Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

II-14Item 8.

Financial Statements and Supplementary Data

II-15Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

II-42PART IIIItem 10.

Directors and Executive Officers of the Registrant

III-1Item 11.

Executive Compensation

III-1Item 12.

Security Ownership of Certain Beneficial Owners and Management

III-6Item 13.

Certain Relationships and Related Transactions

III-6PART IVItem 14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

IV-1Signatures

IV-4




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PART I





ITEM
1.BUSINESS





General





Atlantic City Electric Company (ACE) is a regulated public electric utility and a subsidiary
of Conectiv, which is a Delaware corporation and a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries.
ACE was organized under the laws of New Jersey on April 28, 1924, by merger and consolidation of several utility companies. Effective March 1, 1998, Atlantic Energy, Inc. (Atlantic) and Delmarva Power & Light Company (DPL) consummated a series
of merger transactions (the 1998 Merger) by which ACE and DPL became wholly-owned subsidiaries of Conectiv. Atlantic owned ACE prior to the 1998 Merger.





On February 9, 2001, the Boards of Directors of Conectiv and Potomac Electric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv
for a combination of cash and stock, and Conectiv and Pepco will become wholly owned subsidiaries of Pepco Holdings Inc. (Conectiv/Pepco Merger). The Conectiv/Pepco Merger was approved by the stockholders of Conectiv and Pepco during 2001.
Management currently expects the Conectiv/Pepco Merger to close in the second quarter of 2002, subject to timely receipt of various statutory and regulatory approvals.





As a public electric utility, ACE supplies and delivers electricity to its customers. These businesses, which are discussed below, are weather sensitive and seasonal because sales of
electricity are usually higher during the summer months due to air conditioning usage. ACE delivers electricity to approximately 508,600 customers through its transmission and distribution systems and also supplies electricity to most of its
delivery customers. ACEs regulated service area covers about 2,700 square miles within the southern one-third of New Jersey and has a population of approximately 0.9 million.





Conectivs service company, Conectiv Resource Partners, Inc. (CRP), provides a variety of support services to Conectiv subsidiaries. The costs of CRP are directly assigned and
allocated to the Conectiv subsidiaries using CRPs services.





ACE operates its electric distribution system under long term
franchise rights granted by the municipalities within its service area. Franchises with certain municipalities are subject to renewal during the next five years. ACE expects such franchises will be renewed but cannot predict whether such renewals
will occur. ACE also  possesses certain rights to provide service by virtue of state-wide grants and state-level regulation of its  businesses.





As of December 31, 2001, ACE had 680 employees, of which 513 were represented by a labor organization.





Business Segments





For other information concerning ACEs business segments, see Note 20 to
ACEs Consolidated Financial Statements included in Item 8 of Part II.





Regulation





ACEs electric retail utility business is subject to regulation by the New Jersey
Board of Public Utilities (NJBPU), including rates charged to electric customers. The Federal Energy Regulatory Commission (FERC) also has regulatory authority over wholesale electricity sales and the transmission of electricity.





The electricity generation business of ACE was restructured in the third quarter of 1999, pursuant to New Jerseys Electric Discount and
Energy Competition Act (the New Jersey Act) and a Summary Order issued by the




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NJBPU to ACE. The restructuring provided for customer choice of electricity suppliers, rate decreases, and quantification of the recovery through customer rates of the uneconomic portion of
assets and long-term contracts that resulted from restructuring (stranded costs). Based on the Summary Order, ACE determined that the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of
Certain Types of Regulation (SFAS No. 71) no longer applied to its electricity generation business and an extraordinary charge to 1999 earnings resulted. For information concerning the effects of SFAS No. 71 on ACEs financial statements,
including discontinuing the application of SFAS No. 71 to the electricity generation business, see Notes 1, 5, 6, 7 and 10 to the Consolidated Financial Statements included in Item 8 of Part II.





For information concerning changes in retail electric rates, see Note 6 to the Consolidated Financial Statements included in Item 8 of Part II.





As discussed above, as a subsidiary of a registered holding company under the PUHCA, ACE is subject to certain restrictions imposed by PUHCA on the
operations of subsidiaries of registered holding companies.





Divestiture of Electric Generating Plants





ACE continued with the divestiture of its electric
generating plants during 2001. The divestiture began effective July 1, 2000 with ACEs contribution to Conectiv at net book value of its combustion turbines, which had an electric generating capacity of 502 megawatts (MW). On October 18, 2001,
ACE sold its ownership interests in nuclear electric generating plants with 383 MW of capacity. As of December 31, 2001, all electric generating plants owned by ACE, which had a carrying value of $111 million and 739.7 MW of capacity, were subject
to agreements for sale.





The 739.7 MW of electric generating capacity provided by the plants that are subject to agreements for
sale, includes 471.0 MW from coal-fired plants, 241.0 from oil-fired plants, and 27.7 MW from combustion turbine and diesel units. The net generating capacity available for operations at any time may be less than the total net installed generating
capacity due to generating units being out of service for inspection, maintenance, repairs, or unforeseen circumstances.





See
Note 9 to the Consolidated Financial Statements included in Item 8 of Part II for information concerning the divestiture of ACEs electric generating plants, including the sale of plants during 2001 and the agreement for the sale of the
electric generating plants owned by ACE as of December 31, 2001.





Securitization





For information concerning the expected securitization of stranded costs, see
Securitization in Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A), included in Item 7 of Part II and Note 6 to the Consolidated Financial Statements included in Item 8 of Part II.





Basic Generation Service





Through July 31, 2002, ACE is obligated to provide Basic Generation Service
(BGS); this service entails supplying electricity to customers in ACEs service area who do not choose an alternative supplier. The Final Decision and Order of the NJBPU concerning restructuring the electric generation business of ACE provided
for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from non-utility generators (NUGs), and
the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACEs
customers for BGS, the under-recovered costs are deferred as a regulatory asset.




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ACE deferred costs related to providing BGS (deferred electric service costs) in
the amounts of $143.2 million for 2001, $7.5 million for 2000 and $17.2 million for 1999, reflecting managements assessment that these costs are probable of future recovery. Pursuant to the terms of the 1999 restructuring of ACEs
electric generation business, during 1999-2001, the under-recovered costs were first applied to a deferred energy cost liability which was eliminated and then a regulatory asset was established ($106.3 million as of December 31, 2001). After the
initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the deferred cost balance over a reasonable period of time to be determined by the NJBPU. ACEs recovery of the deferred costs is subject to
review by the NJBPU.





The actual 2001 peak load (demand for electricity) associated with ACEs BGS was 2,259 MW. Management
currently forecasts a peak load of 2,243 MW for ACEs BGS in 2002. The forecasted 2002 peak load is expected to be less than the 2001 actual peak load primarily due to hotter weather for the 2001 peak than the weather assumed for the 2002 peak
load forecast.





Purchased Power





On June 29, 2001, New Jersey electric utilities, including ACE, filed a proposal with
the NJBPU to use an auction process to procure electricity supply for BGS customers. ACE and the other New Jersey electric utilities proposed that the BGS supply period for which the auction be conducted be the final year of the transition period
(August 1, 2002-July 31, 2003) provided for in the New Jersey Act. Under this supply arrangement, ACE, as agent for its BGS customers, will pay for electricity from the suppliers selected by the auction process and the costs associated with this
supply will be subject to the regulated cost-based, rate-recovery mechanism for BGS. ACE will continue to collect BGS revenues and will continue to provide all customer-related services. On February 15, 2002, the NJBPU approved the results of the
auction that was held from February 4, to February 13, 2002. As result of the auction, four suppliers will provide electricity for 1,900 MW, or about 80% of ACEs load, at a price of 5.12 cents per kilowatt-hour (kWh) beginning on August 1,
2002. The remaining 20% of ACEs load will continue to be supplied with power purchased under ACEs existing purchased power contracts with NUGs. If there is a default by a supplier determined by the auction process, then the defaulted
load will be offered to other winning bidders of the auction process, or if that is not possible, then ACE would purchase the electricity supply from the PJM Interconnection L.L.C.





As of December 31, 2001, ACEs commitments under long-term purchased power contracts provided ACE 1,800 MW of capacity and varying amounts of firm electricity per hour during each
month of a given year. Commitments for purchased capacity under contracts existing as of December 31, 2001 will decrease by approximately 1,300 MW in 2002, primarily due to the anticipated replacement of the capacity supplied by these contracts with
the capacity and energy to be provided by the BGS suppliers selected by the auction process discussed above. ACEs long-term purchased power contracts include 494 MW of capacity and energy purchased from NUGs, at prices which generally are
above market prices. ACE purchases electricity from the NUGs as a result of legislation enacted in 1978 which requires electric utilities to purchase such power. ACE recovers the costs of these contracts through rates charged to customers for BGS.





PJM Interconnection, L.L.C.





As a result of Conectiv being a member of the PJM Interconnection, L.L.C.
(PJM), the generation and transmission facilities of Conectivs subsidiaries are operated on an integrated basis with other electricity suppliers in Pennsylvania, New Jersey, Maryland, and the District of Columbia, and are interconnected with
other major utilities in the eastern half of the United States. This power pool improves the reliability and operating economies of the systems in the group and provides capital economies by permitting shared reserve requirements. The PJMs
installed capacity as of December 31, 2001, was 59,350 MW. The PJMs peak demand during 2001 was 54,176 MW on August 9, 2001, which resulted in a summer reserve margin of 9.1% (based on installed capacity of 59,100 MW on that date).




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In December 1999 and February 2000, the FERC issued orders that require all public utilities to
join or form a regional transmission organization (RTO) in furtherance of the FERCs goal to increase competition in the wholesale generation market. The FERC conditionally granted RTO status to PJM on July 12, 2001. The FERC has also directed
PJM to continue its current efforts at expanding Westward and to work with New York Independent System Operator (NYISO) and ISO New England to develop a regional transmission organization that encompasses the entire Northeast. On January
21, 2002, the PJM and the Midwest Independent Transmission System Operator, Inc. (MISO) announced that they have executed a letter of intent to develop a single wholesale market for electricity producers and consumers in all or parts of 27 Midwest
and mid-Atlantic states, the District of Columbia and the Canadian province of Manitoba. MISO, including TRANSlink and the Southwest Power Pool, has approximately 125,000 MW of generating capacity.





Fuel Supply for Electric Generation





The coal used by ACEs coal-fired electric generating
plants, which are under contracts to be sold, is procured under purchase orders expiring in 2002 and 2003. ACEs coal supply obligations for its electric generating units are expected to be assumed by NRG Energy, Inc., the party which has
agreed to purchase the plants. The oil supply for ACEs oil-fired electric generating units is purchased on the spot market. Natural gas used by ACEs electric generating units is primarily purchased from a local gas distribution company
on a semi-firm basis. Management does not anticipate any difficulty in obtaining adequate amounts of fuel for ACEs electric generating plants.





New Jersey Electric System Reliability Standards





On November 28, 2000, the NJBPU approved interim
reliability standards which are in effect through 2002 and are intended to reduce the frequency and duration of electric system outages, as well as improve maintenance and inspection of electric facilities. Final reliability standards are expected
to be adopted in late-2002, after the NJBPU reviews data submitted by New Jersey utilities, including ACE. The NJBPU could fine a utility up to $50,000 per violation of these requirements.





Affiliate Transactions





On March 15, 2000, the NJBPU adopted Interim Affiliate Relations, Fair
Competition and Accounting Standards and Related Reporting Requirements (Interim Standards). A compliance audit of these interim standards was conducted during 2000. On February 2, 2002, the NJBPU approved seven uncontested recommendations of the
compliance audit, which ACE has complied with.





Capital Spending and Financing Program





For financial information concerning ACEs capital
spending and financing program, refer to Liquidity and Capital Resources in the MD&A included in Item 7 of Part II and Notes 12 to 14 to the Consolidated Financial Statements, included in Item 8 of Part II.





ACEs ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends under the Securities and Exchange Commission
(SEC) Methods are shown below.





Year Ended December 31,2001

2000

1999

1998

1997Ratio of Earnings to Fixed Charges (SEC Method)

2.67

2.03

2.57

1.66

2.84Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (SEC Method)

2.58

1.95

2.44

1.55

2.58




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For purposes of computing the above ratios, earnings, including Allowance For Funds During
Construction, are income before extraordinary item plus income taxes and fixed charges. Fixed charges include gross interest expense, the estimated interest component of rentals, and dividends on preferred securities of a subsidiary trust. For the
ratio of earnings to fixed charges and preferred dividends, preferred stock dividends represent preferred stock dividend requirements multiplied by the ratio that pre-tax income bears to net income.





Environmental Matters





ACE is subject to various federal, regional, state, and local environmental
regulations, including air and water quality control, oil pollution control, solid and hazardous waste disposal, and limitations on land use. Permits are required for construction projects and the operation of existing and planned facilities. ACE
has incurred, and expects to continue to incur, capital expenditures and operating costs because of environmental considerations and requirements. ACE has a continuing program to assure compliance with the environmental standards adopted by various
regulatory authorities.





Included in ACEs forecasted capital requirements are construction expenditures for compliance
with environmental regulations, which are estimated to be $1 million in 2002.





Air Quality Regulations





The federal Clean Air Act required utilities and other industries to
significantly reduce emissions of air pollutants such as sulfur dioxide (SO 2 ) and oxides of nitrogen (NO x ) by 2000. Under Title I of the Clean Air Act (Ozone Attainment), a third phase of NO x reductions are required in the Northeast Ozone Transport Region by 2003. This requirement is expected to result in reductions of NO x during the ozone season (May through September) of up to 85% below baseline years for a 22-state region, including New Jersey.
Compliance with the emission standards may be attained through changes to electric generating units or the purchase of allowances under a market-based allowance system established by the United States Environmental Protection Agency (USEPA). New
Jersey has a similar system.





On January 31, 2002, ACE notified the New Jersey Department of Environmental Protection (NJDEP)
that it was unable to procure all of the 2001 Discrete Emission Reductions (DERs) required by January 30, 2002 under New Jerseys NO x Reasonably Available Control Technology (RACT) rules. The deficiency is related to the removal of Public Service Electric & Gas Companys DER credits from the market under a January 2002 consent decree.
Management has initiated discussions with the NJDEP about this matter but is unable to predict the outcome of those discussions or the impact (if any) of the unavailability of New Jersey NO x DERs on the operation of ACE-owned electric generating units requiring such credits.





Under Title III of the Clean Air Act, the USEPA is currently developing MACT (Maximum Achievable Control Technology) standards for several listed chemicals, including mercury from
coal-fired plants and nickel from oil-fired plants. Regulations are scheduled to be drafted by the end of 2002 and promulgated in 2003, with compliance anticipated three years later. A plan for compliance will be developed when the rules are final.





The USEPA requested data from a number of electric utilities regarding older coal-fired units in order to determine compliance
with the regulations for the Prevention of Significant Deterioration of Air Quality (PSD). A number of settlements of litigation brought as a result of such inquires alleging violations of so-called new source standards have been announced.
Beginning on February 23, 2000, ACE received a number of requests for data from the USEPA and the NJDEP on coal-fired operations at the Deepwater and B.L. England electric generating stations. In response to USEPA and NJDEP requests, data was
submitted throughout 2000 and 2001 and continues to be submitted. At this time it is not possible to predict the impact of these data requests, if any, on Deepwater or B.L. England operations.




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On July 11, 2001, the 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. The NJDEP has issued a stay of the denial to authorize ACE to operate Unit 1 with the current fuel
until June 30, 2002 and an addendum to the permit/certificate to operate authorizing a trial burn of coal with a sulfur content less than 2.6%. Management is not able to predict the outcome of ACEs appeal.





Water Quality Regulations





The Clean Water Act imposes effluent limitations to regulate the discharge
of pollutants, including heat, into the waters of the United States. National Pollution Discharge Elimination System (NPDES) permits issued by state environmental regulatory agencies specify effluent limitations, monitoring requirements, and special
conditions with which facilities discharging waste-waters must comply. To ensure that water quality is maintained, permits are issued for a term of five years and are modified as necessary to reflect requirements of new or revised regulations or
changes in facility operations.





ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits issued by the
NJDEP for the Deepwater and B.L. England power stations. The NJPDES permit for the Deepwater Station expired in 1991. The permit has been administratively extended and the plant continues to operate under the conditions of the existing permit while
negotiations are underway for permit renewal. The NJPDES permit for the B.L. England station expired in December 1999, but has been administratively extended and the plant continues to operate under the conditions of the existing permit until a
renewal permit is issued by NJDEP.





Hazardous Substances





See Environmental Matters in Note 19 to the Consolidated Financial
Statements included in Item 8 of Part II for information concerning hazardous substances.





Executive Officers





The names, ages, and positions of all of the executive officers of ACE as of
December 31, 2001, are listed below, along with their business experiences during the past five years. Officers of ACE are elected annually by ACEs Board of Directors. There are no family relationships among these officers, nor any arrangement
or understanding between any officer and any other person pursuant to which the officer was selected.





Executive Officers of ACE


(As of December 31, 2001)





Name, Age and Position

Business Experience During Past 5 YearsJoseph M. Rigby, 45 President

Elected 2000 as Senior Vice President of Conectiv and President of ACE. 1999, Vice President, Electric Delivery, Conectiv. 1998, Vice President, Gas Delivery, Conectiv. 1997,
Vice President, Merger Integration Team, Conectiv.John C. van Roden, 52 Chief Financial Officer

Elected 2000 as Senior Vice President and Chief Financial Officer of Conectiv and Chief Financial Officer of ACE. Elected 1998 as Senior Vice President and Chief Financial
Officer of Conectiv. Principal, Cook and Belier, Inc. in 1998. Senior Vice President/Chief Financial Officer and Vice President/Treasurer, Lukens, Inc. from 1987 to 1998.James P. Lavin, 54 Controller and Chief Accounting Officer

Elected 1998 as Controller of Conectiv and ACE. Elected 1993 as Comptroller, Delmarva Power & Light Company.




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ITEM 2.    
PROPERTIES





Electric Generating Station

Location

Generating Capacity (kilowatts)Coal-FiredB L England

Beesleys Pt., NJ

284,000Conemaugh

New Florence, PA

65,000
*Keystone

Shelocta, PA

42,000
*Deepwater

Pennsville, NJ

80,000471,000Oil-FiredB L England

Beesleys Pt., NJ

155,000Deepwater

Pennsville, NJ

86,000241,000Combustion TurbinesDeepwater

Pennsville, NJ

19,000Diesel UnitsB L England

Beesleys Pt., NJ

8,000Keystone

Shelocta, PA

300
*Conemaugh

New Florence, PA

400
*8,700Total Electric Generating Capacity

739,700


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|* |  | Represents ACEs ownership interest in jointly-owned plants.
|- |  | ------------------------------------------------------------




The electric generating plants shown in the table above were subject to agreements for sale as discussed in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II.





Substantially all utility plants and properties of ACE are subject to the lien of the Mortgage under which First Mortgage Bonds are issued.





The electric transmission and distribution systems of ACE includes 1,231 transmission poleline miles of overhead lines, 7,901
distribution poleline miles of overhead lines, and 2,283 distribution cable miles of underground cables.





ITEM 3.    
LEGAL PROCEEDINGS





Information reported under the heading Other in Note 19 to the
Consolidated Financial Statements, included in Item 8 of Part II, concerning an action filed in a New Jersey Superior Court by the City of Vineland, is incorporated by reference.





Information reported under the heading Environmental Matters, Air Quality Regulations included in Item 1 of Part I is incorporated by reference.





ITEM 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No matter was submitted during the fourth
quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.




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ATLANTIC CITY ELECTRIC COMPANY





PART II





|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | ---------------------------------------------------------------------




All
18,320,937 shares of ACEs common stock outstanding are owned by Conectiv, its parent company.





ACEs certificate of
incorporation requires payment of all preferred dividends in arrears (if any) prior to payment of common dividends to Conectiv, and has certain other limitations on the payment of common dividends.





As a subsidiary of a registered holding company under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is
obtained.




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ATLANTIC CITY ELECTRIC COMPANY





ITEM
6.    
SELECTED FINANCIAL DATA





Year Ended December 31,2001

2000

1999(1)


1998(2)

1997(3)(Dollars in Thousands)Operating ResultsOperating Revenues

$
1,041,171

$
960,862

$
1,059,415


$
1,039,750

$
1,084,890Operating Income


179,741


166,524


171,931



108,868


190,052Income Before Extraordinary Item


75,476


54,434


63,930



30,276


85,747Extraordinary Item, Net of Income Taxes of $40,474 (4)








(58,095
)





Net Income


75,476


54,434


5,835



30,276


85,747Earnings Applicable to Common Stock


73,793


52,302


3,703



29,385


80,926CapitalizationCommon Stockholders Equity

$
621,309

$
580,119

$
677,951


$
730,093

$
783,033Preferred StockNot Subject to Mandatory Redemption


6,231


6,231


6,231



6,231


30,000Subject to Mandatory Redemption


12,450


23,950


23,950



23,950


33,950Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures


95,000


95,000


95,000



95,000


70,000Variable Rate Demand Bonds (VRDB) (5)


22,600


22,600


22,600



22,600


22,600Long-Term Debt


636,303


857,653


954,752



791,127


811,144Total Capitalization with VRDB

$
1,393,893

$
1,585,553

$
1,780,484


$
1,669,001

$
1,750,727Other InformationTotal Assets

$
2,432,330

$
2,481,382

$
2,654,659


$
2,367,222

$
2,436,755Long-Term Capital Lease Obligations





12,872


14,911



19,523


24,077Capital Expenditures


70,023


53,717


48,931



71,342


80,896Common Dividends Declared (6)


32,603


67,309


55,845



81,450


80,857


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|(1) |  | Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DPL) became wholly-owned subsidiaries of Conectiv ( the 1998 Merger) on March 1, 1998. In 1999,
special charges for employee separations, additional costs related to the 1998 Merger, and other non-recurring costs reduced operating income by $12.3 million and income before extraordinary item, net income, and earnings applicable to common stock
by $7.3 million.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In 1998, special charges for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related charges reduced operating income by $61.1
million and income before extraordinary item, net income, and earnings applicable to common stock by $36.6 million. Also, in 1998, the write-down to fair value of certain operational and administrative facilities to be sold due to the 1998 Merger
reduced operating income by $18.0 million and income before extraordinary item, net income, and earnings applicable to common stock by $10.6 million.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In 1997, special charges for 1998 Merger-related employee separation benefits reduced operating income by $22.6 million and income before extraordinary item, net income, and
earnings applicable to common stock by $15.6 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | As discussed in Note 5 to the Consolidated Financial Statements, the extraordinary item in 1999 resulted from the restructuring of the electric utility industry and
discontinuing the application of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Although Variable Rate Demand Bonds are classified as current liabilities, ACE intends to use the bonds as a source of long-term financing as discussed in Note 14 to ACEs
Consolidated Financial Statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Amounts are shown in total, rather than on a per-share basis, since ACE is a wholly-owned subsidiary of Conectiv.
|--- |  | -----------------------------------------------------------------------------------------------------------------



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ATLANTIC CITY ELECTRIC COMPANY





|ITEM 7. |  | 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 electricity generation, including securitization of stranded costs, and the unbundling of delivery services; the ability to
purchase power on acceptable terms; volatility in market demand and prices for energy, capacity, and fuel; changes in weather and economic conditions affecting energy usage; operating performance of power plants; competition; asset sales; energy
sales retention and growth; federal and state regulatory actions and legislation affecting the energy industry; future litigation results; costs of construction; operating restrictions; effects of environmental regulations on operations and
construction; and interest rate fluctuations 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.





OVERVIEW





ACE is a subsidiary of Conectiv, which
is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with Atlantic Energy, Inc. and Delmarva Power & Light
Company (DPL).





On February 9, 2001, the Boards of Directors of Conectiv and Potomac Electric Power Company (Pepco) approved an
Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock, and Conectiv and Pepco will become wholly owned subsidiaries of Pepco Holdings Inc. (Conectiv/Pepco Merger).
The Conectiv/Pepco Merger was approved by the stockholders of Conectiv and Pepco during 2001. Management currently expects the Conectiv/Pepco Merger to close in the second quarter of 2002, subject to timely receipt of various statutory and
regulatory approvals.





ACE is a public utility which supplies and delivers electricity to its customers under the trade name
Conectiv Power Delivery. ACE delivers electricity within its service area to approximately 508,600 customers through its transmission and distribution systems and also supplies electricity to most of its electricity delivery customers, who have the
option of choosing an alternative supplier.





The electricity generation business of ACE was restructured in the third quarter of
1999, pursuant to New Jerseys Electric Discount and Energy Competition Act (the New Jersey Act) and a Summary Order issued by the New Jersey Board of Public Utilities (NJBPU) to ACE. The restructuring provided for customer choice of
electricity suppliers, rate decreases, and quantification of the recovery through customer rates of the uneconomic portion of assets and long-term contracts that resulted from restructuring (stranded costs). Based on the Summary Order, ACE
determined that the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71) no longer applied to its electricity




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##### Table of Contents

generation business and an extraordinary charge to 1999 earnings resulted, as discussed below and in Notes 1, 5, 6, 7 and 10 to the Consolidated Financial Statements.





As discussed in Note 9 to the Consolidated Financial Statements, ACE continued the divestiture of its electric generating plants during 2001. The
divestiture began effective July 1, 2000 with ACEs contribution to  Conectiv at net book value of its combustion turbines, which had an electric generating capacity of 502  megawatts (MW). On October 18, 2001, ACE sold its ownership
interests in nuclear electric generating plants with 383 MW of capacity. As of December 31, 2001, all of ACEs remaining electric generating plants, which had a carrying value of $117 million and 739.7 MW of capacity, were subject to agreements
for sale.





ACEs exit from the business of electricity production is expected to cause a decrease in ACEs earnings
capacity.





BASIC GENERATION SERVICE





Through July 31, 2002, ACE is obligated to provide Basic Generation Service (BGS); this service entails supplying electricity to customers in ACEs service area who do not choose an alternative supplier. The
Final Decision and Order of the NJBPU concerning restructuring the electric generation business of ACE provided for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric
generating plants, the above-market portion of the cost of power purchased from non-utility generators (NUGs), and the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery
mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACEs customers for BGS, the under-recovered costs are deferred as a regulatory asset.





ACE deferred costs related to providing BGS (deferred electric service costs) in the amounts of $143.2 million for 2001, $7.5 million for 2000 and $17.2 million for 1999,
reflecting managements assessment that these costs are probable of future recovery. If management had been unable to conclude that recovery of these costs in the future is probable, then net income would have decreased by approximately $84.7
million for 2001, $4.4 million for 2000, and $10.2 million for 1999. The increase in deferred expenses for 2001 reflects the cumulative effect of rate decreases and more electricity purchased, partly due to Wholesale Transaction Confirmation
Letter Agreements under which ACE sold its interest in the kilowatt-hour (kWh) output of nuclear electric  generating plants. Pursuant to the terms of the 1999 restructuring of ACEs electric generation business, during 1999-2001,
the under-recovered costs were first applied to a deferred energy cost liability which was eliminated and then a regulatory asset was established ($106.3 million as of December 31, 2001). After the initial four-year transition period ends July 31,
2003, customer rates are to be adjusted to recover the deferred cost balance over a reasonable period of time to be determined by the NJBPU. ACEs recovery of the deferred costs is subject to review by the NJBPU.





On June 29, 2001, New Jersey electric utilities, including ACE, filed a proposal with the NJBPU to use an auction process to procure electricity supply
for BGS customers. ACE and the other New Jersey electric utilities proposed that the BGS supply period for which the auction be conducted be the final year of the transition period (August 1, 2002-July 31, 2003) provided for in the New Jersey Act.
Under this supply arrangement, ACE, as agent for its BGS customers, will pay for electricity from the suppliers selected by the auction process and the costs associated with this supply will be subject to the regulated cost-based, rate-recovery
mechanism for BGS. ACE will continue to collect BGS revenues and will continue to provide all customer-related services. On February 15, 2002, the NJBPU approved the results of the auction that was held from February 4, to February 13, 2002. As
result of the auction, four suppliers will provide electricity for 1,900 MW, or about 80% of ACEs load, at a price of 5.12 cents per kWh beginning on August 1, 2002. The remaining 20% of ACEs load will continue to be supplied with power
purchased under ACEs existing purchased power contracts with NUGs. If there is a default by a supplier determined by the auction process, then the defaulted load will be offered to other winning bidders of the auction process, or if that is
not possible, then ACE would purchase the electricity supply from the PJM Interconnection L.L.C.




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EARNINGS SUMMARY





Earnings applicable to common stock increased by $21.5 million to $73.8 million for 2001, from $52.3 million for 2000. The $21.5 million earnings increase was mainly due to higher volumes of regulated electricity
sales and deliveries, reflecting higher electricity usage related to warmer summer weather and growth in the number of customers. Due to increased volumes of purchased power, ACE incurred higher average energy costs in serving its BGS customers;
however, earnings were unaffected because, to the extent costs exceeded revenues from billings to ACEs customers for BGS, costs were deferred as a regulatory asset. The earnings increase also reflects lower depreciation and amortization
expenses and lower interest expense. The variances that positively affected earnings were partly offset by the loss of earnings attributed to the transfer of the combustion turbine electric generating units to Conectiv on July 1, 2000.





Earnings applicable to common stock were $52.3 million for 2000, compared to $3.7 million for 1999. In 1999, earnings applicable to common
stock of $3.7 million included (i) a $58.1 million extraordinary charge, after income taxes of $40.5 million, for discontinuing the application of SFAS No. 71 to ACEs electricity generation business, and (ii) $7.3 million of special charges,
net of taxes, primarily for the costs of 1998 Merger-related employee separations and relocations and other 1998 Merger-related costs. For additional information concerning deregulation and the extraordinary charge to earnings, see Notes 1, 5, 6, 7
and 10 to the Consolidated Financial Statements.





Earnings of $52.3 million for 2000 represent a $16.8 million decrease from
earnings of $69.1 million for 1999, adjusted to exclude the $58.1 million extraordinary charge and $7.3 million of special charges. The $16.8 million decrease in earnings (excluding the 1999 extraordinary and special charges) was primarily due to
lower electricity sales during the summer when average rates are higher, lower customer rates related to electric utility industry restructuring, and higher interest expense, partly offset by the benefit of lower operating expenses and a lower
effective income tax rate.





SECURITIZATION





In mid-May 2001, the NJBPU issued a Final Decision and Order to ACE containing details about restructuring ACEs electric utility business, pursuant to the New Jersey Act that was enacted February 9, 1999.





As of December 31, 2001, the balance for ACEs pre-tax recoverable stranded costs was $930 million, which is approximately
$550 million on an after-tax basis.





Under the New Jersey Act, up to 100% of recovery-eligible stranded costs related to
electric generating plants and the costs to effect buyouts or buydowns of NUG contracts may be recovered through customer rates. Also, the New Jersey Act permits securitization of stranded costs through the issuance of transition bonds in the amount
approved by the NJBPU. More specifically, the New Jersey Act provides for securitization of: (a) up to 75% of recovery-eligible stranded costs related to electric generating plants, over a period not to exceed 15 years, and (b) 100% of the costs to
effect NUG contract buyouts or buydowns, over a period not to exceed the remaining term of the restructured contracts. The principal of and interest on transition bonds is to be collected from customers through a transition bond charge over the
securitization term. Also, customer rates are to include a separate market transition charge for recovery of the income tax expense associated with the revenues from transition bond charges. The ability to issue transition bonds depends on approval
of the NJBPU and conditions in the relevant capital markets at the times of the offerings.





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 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.




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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) during 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. When issued, the transition bonds of ACE Transition Funding will be included in ACEs Consolidated Balance Sheet. 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 NUG purchased power contracts, or otherwise reduce costs in order to decrease regulated electricity rates.





The balance for ACEs pre-tax recoverable stranded costs of $930 million as of December 31, 2001, primarily includes the $228.5 million payment in December 1999 to terminate
ACEs contract with Pedricktown (a NUG) and stranded costs related to electric generating plants. On November 10, 1999, the NJBPU issued a Decision and Order, which found that ACE is entitled to recover from customers and securitize the
Pedricktown contract termination payment and related transaction costs. On September 17, 2001, the NJBPU issued a Decision and Order that determined the amount eligible for recovery by ACE of stranded costs associated with ACEs former
ownership interests in nuclear electric generating plants to be approximately $298 million, after income taxes, (or $504 million before income taxes) as of December 31, 1999, subject to further adjustments. As discussed below, on February 20, 2002,
the NJBPU issued a Decision and Order approving the sale of ACEs fossil fuel-fired electric generating plants and determined the amount eligible for recovery by ACE of stranded costs associated with such plants to be approximately $101 million
after income taxes (or $171 million before income taxes) as of December 31, 1999, subject to further adjustment. The amount of ACEs recoverable stranded costs remains subject to adjustment based on the actual gain or loss which may be realized
on the expected sale of ACEs fossil fuel-fired electric generating plants (see Agreements for the Sales of Electric Generating Plants below), additional buyouts or buydowns of NUG contracts, and the final amount determined by the
NJBPU to be recoverable through customer rates under the New Jersey Act. ACE expects that securitization of ACEs stranded costs will occur during 2002.





AGREEMENTS FOR THE SALES OF ELECTRIC GENERATING PLANTS





Agreements between ACE and NRG Energy, Inc. (NRG)
provide for the sale by ACE to NRG of fossil fuel-fired electric generating plants that include Deepwater Station, B.L. England Station, and interests in Conemaugh and Keystone Stations. As of December 31, 2001, ACEs fossil fuel-fired plants
that were under agreements for sale had an agreed-upon total sales price of approximately $178 million (before certain adjustments and expenses), a net book value of approximately $117 million and electric generating capacity of 739.7 MW. Due to the
terms of ACEs electric utility restructuring in 1999 and expected sales proceeds, (i) the loss expected to be realized on the sale of the Deepwater Station was included in the extraordinary charge to earnings in 1999, (ii) the loss expected to
be realized on the sale of the B.L. England Station is included in recoverable stranded costs, and (iii) any net gain that may be realized on the sale of ACEs interests in Conemaugh and Keystone Stations is expected to reduce the amount of
stranded costs to be recovered from ACEs utility customers.





As discussed above, on February 20, 2002, the NJBPU issued a
Decision and Order approving the sale of ACEs fossil fuel-fired electric generating plants. The agreements between ACE and NRG for the sale of the fossil fuel-fired electric generating plants remain in effect, but, after February 28, 2002, are
subject to termination by either party, by giving notice. Neither party has terminated the agreements. The appeal period for the Decision and Order that was issued by the NJBPU to approve the plant sales expires in early-April 2002. ACE cannot
predict whether or not any or all of the plants will be sold, but ACE is endeavoring to close the sales on mutually-acceptable terms and timetable.




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OPERATING REVENUES





2001

2000

1999(Dollars in millions)Regulated electric revenues

$
1,026.7

$
909.3

$
1,031.4Non-regulated electric revenues


8.9


40.7


19.9Other revenues


5.6


10.9


8.1Total operating revenues

$
1,041.2

$
960.9

$
1,059.4





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.





The gross margin earned from total electric revenues is equal to revenues decreased by electric fuel and purchased energy and capacity
expenses and increased by deferred electric service costs. The gross margin earned from total electric revenues was $542.2 million in 2001, $536.7 million in 2000, and $588.2 million in 1999. Gross margin increased by approximately $5.5
million in 2001 and decreased by approximately $51.5 million in 2000. The decrease in the 2000 gross margin primarily reflects the effects of lower customer rates.





In 2001, regulated electric revenues increased by $117.4 million to $1,026.7 million, from $909.3 million for 2000. In 2000, regulated electric revenues decreased
by $122.1 million to $909.3 million, from $1,031.4 million for 1999. Details of the variances in regulated electric revenues are shown below.





Increase (Decrease) in Regulated Electric Revenues2001 compared to 2000


2000 compared to 1999(Dollars in millions)Customers choosing alternative electricity suppliers (1)

$
53.8


$
(86.0
)Decrease in retail rates from electric utility industry restructuring (2)


(10.0
)


(38.9
)Variance in volumes of interchange sales


37.6



4.0Retail sales volume, sales mix, and all other (3)


36.0



(1.2
)$
117.4


$
(122.1
)


---

|(1) |  | The $53.8 million increase for 2001 represents customers returning to ACE from alternative suppliers and the $86.0 million decrease for 2000 represents customers choosing
alternative suppliers.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Electric rate decreases were implemented as a result of electric utility restructuring. In addition to the rate decreases which have already been implemented, ACEs rates
are expected to be reduced by about $30 million on an annualized basis by August 1, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Regulated retail electricity delivery sales increased 2.4% in 2001 and 0.5% in 2000. Although regulated electricity sales increased in 2000, a $1.2 million revenue decrease
resulted due to lower sales during the summer when customer rates are higher.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Non-regulated electric
revenues include revenues from the combustion turbine electric generating units and Deepwater electric generating plant 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. ACEs non-regulated electricity generation business will end upon completion of the sale of the Deepwater electric
generating plant.





Non-regulated electric revenues decreased $31.8 million for 2001 mainly due to the transfer of
the combustion turbine electric generating units to Conectiv, effective July 1, 2000. Non-regulated electric revenues increased $20.8 million for 2000 compared to 1999, mainly due to the timing of deregulation which resulted in a longer
period of deregulated power plant operations in 2000.




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OPERATING EXPENSES





Electric Fuel and Purchased Energy and Capacity





Electric fuel and purchased energy and capacity
increased $215.8 million for 2001 compared to 2000 mainly due to increased volumes of electricity purchased, partly due to ACEs Wholesale Transaction  Confirmation Letter Agreements, under which ACE sold its interest in the kWh output of
nuclear electric  generating plants. Electric fuel and purchased energy and capacity decreased $59.6 million for 2000 compared to 1999 mainly due to lower average costs, reflecting termination of the Pedricktown purchased power
agreement in December 1999 and other favorable variances.





Special Charges





ACEs operating expenses for 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) for employee separation and other costs related to the 1998 Merger
and certain other nonrecurring costs.





Operation and Maintenance Expenses





In 2001, operation and maintenance expenses increased $5.6 million due to increased allowances for  uncollectible accounts receivable and higher costs for pension and other
postretirement benefits, partly offset by a decrease from the sale of ACEs interests in nuclear electric generating units on October 18, 2001. In 2000, operation and maintenance expenses decreased $10.3 million primarily due to lower costs for
pension and other postretirement benefits.





Depreciation and amortization





In 2001, depreciation and amortization expenses decreased $16.8 million mainly due to expiration of the amortization of a regulatory asset and the sale of ACEs interests in nuclear
electric generating plants.





In 2000, depreciation and amortization expenses decreased $12.2 million mainly due to the
contribution of the combustion turbines to Conectiv on July 1, 2000 and the 1999 write-downs 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 and amortization of Recoverable stranded costs partly offset the decrease from lower depreciation of power plants.





Taxes Other Than Income Taxes





Taxes other than
income taxes decreased $8.4 million in 2000 mainly due to the phasing-out of  New Jerseys transitional energy facility assessment.





Deferred Electric Service Costs





For information about Deferred Electric Service Costs, see
Basic Generation Service above in  Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).





OTHER INCOME





Other income increased $3.7 million in 2001 mainly due to a higher average investment balance in
 Conectivs money pool, which Conectiv subsidiaries invest in and borrow from, depending on cash needs.




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INTEREST EXPENSE





Interest expense, net of amounts capitalized, decreased $14.1 million in 2001 due to lower interest rates on ACEs term loan that funded the Pedricktown contract buyout, debt redemptions, and less interest
expense on the deferred energy cost liability that was eliminated in 2001 by under-recoveries of costs related to providing BGS.





In 2000, interest charges, net of amounts capitalized, increased $15.8 million primarily due to interest charges on $228.5 million borrowed in December 1999 to finance the payment to terminate the Pedricktown contract buyout.





INCOME TAXES





Income taxes increased
$10.0 million in 2001 mainly due to higher pre-tax income, partly offset by a lower effective income tax rate. Income taxes decreased $12.6 million in 2000, primarily due to lower pre-tax income and also due to a lower effective income tax rate.





CRITICAL ACCOUNTING POLICIES





ACEs accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. Critical accounting policies are those that are considered important to the portrayal of ACEs financial condition and
results, and require exercise of judgment by management. The critical accounting policy concerning Accounting for the Effects of Certain Types of Regulation is discussed below.





Accounting for the Effects of Certain Types of Regulation





The requirements of
SFAS No. 71 apply to ACEs electric delivery business and to BGS, because certain aspects of these businesses are subject to regulation. When utility revenues are insufficient to recover current period expenses from customers, the NJBPU may
provide for future recovery from customers of such current period expenses. In accordance with SFAS No. 71, when future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and
subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory
commission. As of December 31, 2001, ACE had $1.1 billion of regulatory assets, under the jurisdiction of the NJBPU, including $930.0 million of pre-tax stranded costs and $106.3 million of deferred electric service costs. Managements
assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. Should existing facts or circumstances change in the future to indicate that a regulatory
asset is not probable of recovery, then the regulatory asset would be charged to earnings. For additional information, see (i) Basic Generation Service above within the MD&A, (ii) Securitization above within the MD&A,
and (iii) Notes 6 and 10 to the Consolidated Financial Statements.





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. SFAS No. 142 became effective January 1, 2002. The
adoption of SFAS No. 141 and SFAS No. 142 is not expected to immediately affect ACEs financial statements.





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. If a legal obligation for
an ARO exists, then SFAS No. 143 requires recognition of a liability,




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capitalization of the cost associated with the ARO, and allocation of the capitalized cost to expense. The initial measurement of an ARO is based on the fair value of the obligation, which may
result in a gain or loss upon the settlement of the ARO. If the requirements of SFAS No. 71 are met, a regulated entity shall also recognize a regulatory asset or liability for timing differences between financial reporting and rate-making in the
recognition of the period costs associated with an ARO. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including ACE. Upon adoption of SFAS No. 143, the difference between the net amount recognized in the
balance sheet under SFAS No. 143 and the net amount previously recognized in the balance sheet will be recognized as the cumulative effect of a change in accounting principle. ACE is currently evaluating SFAS No. 143 and cannot predict the impact
that this standard may have on its financial position or results of operations; however, any such impact could be material.





On
October 3, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens discontinued
operations to include more disposal transactions. Under SFAS No. 144, operating losses of discontinued operations are recognized in the period in which they occur; future operating losses are not accrued upon discontinuation of the business
operation. SFAS No. 144 became effective on January 1, 2002. ACE does not expect the adoption of SFAS No. 144 will materially affect its financial position or results of  operations.





LIQUIDITY AND CAPITAL RESOURCES





General





ACEs capital structure as of December 31, 2001 and 2000, expressed as a percentage of total capitalization is shown below.





December 31,2001

December 31,2000Common stockholders equity

37.4%

34.5%Preferred stock

1.1%

1.8%Preferred trust securities

5.8%

5.6%Long-term debt and variable rate demand bonds

39.7%

52.3%Short-term debt and current maturities of long-term debt

16.0%

5.8%





ACE borrowed $228.5 million through a bank term loan on December 28, 1999 to
finance a cash payment for termination of a NUG purchased power contract with Pedricktown, as discussed in Note 7 to the Consolidated Financial Statements. On December 20, 2001, ACE repaid $57.1 million of the term loan balance; the remaining $171.4
million balance is due December 20, 2002.





ACEs term loan contains financial and other covenants which, if not met, could
result in the acceleration of repayment obligations under the agreement or restrict ACEs ability to borrow under the agreement. The term loan requires a ratio of total indebtedness to total capitalization of 65% or less. As of December 31,
2001, the ratio was 56%, computed in accordance with the terms of the agreement. The term loan also contains a number of events of default that could be triggered by the acceleration of indebtedness under certain other borrowing arrangements,
bankruptcy actions or judgments or decrees against ACE, as well as by a change of control of ACE, such as the Conectiv/Pepco Merger. ACE plans to request a waiver of its term loan change of control provisions so the term loan will continue after the
Conectiv/Pepco Merger. ACE plans to repay this debt with proceeds from the expected issuance of transition bonds, which are discussed in Note 6 to the Consolidated Financial Statements and under Securitization above.





Credit ratings assigned to securities of ACE by Moodys Investor Service (Moodys) and Standard & Poors (S&P) are
shown in the table below. These security ratings are not a recommendation to buy, sell or hold securities.




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The ratings are subject to revision or withdrawal at any time by the respective rating agencies. Each rating should be evaluated independently of any other rating.





Type of Security

Moodys

S&PSenior secured debt

A2

A-Senior unsecured debt

A3

BBB+Short-term debt

P-1

A-2Preferred stock

a3

BBBPreferred trust securities

a3

BBB





As of December 31, 2001, provisions of certain contracts under which ACE procures
electricity for BGS would require ACE to provide cash collateral of $42.1 million, if ACEs credit ratings were downgraded below investment grade. The cash collateral required in the event of a credit rating downgrade fluctuates based on energy
market conditions. Changes in credit ratings could also affect ACEs cost of capital and access to capital markets. Credit rating agencies are paying increased attention to issuer companies, including ACE, given changes in the structure of the
energy industry and the bankruptcy of Enron. ACEs future credit ratings may be affected by many factors including rating agency standards, utility and energy industry conditions, legislative changes impacting the electric or gas industry,
general economic conditions, decisions of regulatory commissions, and the capital structure, financial coverage ratios, and operating results of ACE.





ACEs operating results are expected to continue to be affected by the implementation of electric utility industry restructuring in New Jersey, including (i) an expected $30 million annualized decrease in
ACEs electric rates scheduled to become effective by August 1, 2002, (ii) the planned securitization of ACEs stranded costs, and (iii) the planned sale of ACEs interests in fossil fuel-fired electric generating plants, which may
decrease ACEs earnings capacity. Also, as discussed in Note 19 to the Consolidated Financial Statements, the City of Vineland, New Jersey, has initiated an action to acquire by eminent domain the electric distribution facilities of ACE located
within the City. In addition, weather and general economic conditions affect the level of electricity sales and earnings realized by ACE. Due to the various factors which may affect ACEs earnings, past results are not an indication of future
business prospects or financial results of ACE.





The cash required by ACEs contractual obligations as of December 31, 2001
and certain reasonably likely construction expenditures are summarized in the table below.





Payments Due by PeriodContractual obligations*

Total

Less than 1 Year

1-3 Years

4-5 Years

After 5 Years(Dollars in Millions)Short-term debt

$
45.0

$
45.0

$


$


$
Variable rate demand bonds


22.6











22.6Long-term debt


857.8


221.5


137.2


106.9


392.2Preferred stock subject to mandatory redemption


12.5


11.5


1.0





Preferred trust securities


95.0











95.0Capital and operating leases


41.0


8.2


16.4


16.4


Purchased power contracts


1,182.0


297.0


420.0


465.0


Construction expenditures *


320.5


84.0.


138.3


98.2


Total

$
2,576.4

$
667.2

$
712.9

$
686.5

$
509.8


---

|* |  | Construction expenditures include amounts which are not contractual commitments but are reasonably likely to occur based on ACEs obligation to serve utility customers.
For after 5 years, construction expenditures have not been forecasted, but are expected to continue for ACEs electric delivery business. The future level of capital expenditures may change depending upon growth in demand for electricity,
construction scheduling, permitting, state and federal legislation, and other factors.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ACEs contractual obligations shown above for purchased power are funded with operating
cash flow associated with cash collected from electric service customers. ACEs capital requirements generally include construction expenditures for the electric delivery business and electric generating units, repayment of debt, preferred
stock, preferred trust securities, and capital lease obligations. ACEs primary sources of capital are cash flow from operating activities and external financings. As discussed under Securitization, capital is also expected to be
raised in 2002 through the securitization of ACEs stranded costs, after the NJBPU issues a Financing Order containing terms and conditions satisfactory to ACE. In addition, as discussed under Agreements For The Sales Of Electric
Generating Plants, ACE plans to sell electric generating units with 739.7 MW of capacity in 2002 for approximately $178 million, before certain adjustments and selling expenses.





Summary of Cash Flows





ACEs cash flows for 2001, 2000, and 1999 are summarized
below.





Cash Provided (Used)2001


2000


1999(Dollars in Millions)Operating Activities

$
44.0


$
282.6


$
(33.3
)Investing Activities


(45.4
)


(49.9
)


(48.1
)Financing Activities


(140.4
)


(158.0
)


134.1Net change in cash and cash equivalents

$
(141.8
)

$
74.7


$
52.7





Cash Flows From Operating Activities





Cash flow from operating activities decreased $238.6 million to $44.0 million for 2001, from $282.6 million for 2000. The decrease in net cash from operating activities was primarily due
to higher amounts of electricity purchased during 2001 (as discussed above under Basic Generation Service and income tax refunds received during 2000.





In 1999, cash flow from operating activities used $33.3 million of cash due to the $228.5 million payment by ACE in December 1999 to terminate its purchased power contract with
Pedricktown. Excluding the $228.5 million contract termination payment, operating activities provided net cash of $195.2 million in 1999, compared to $282.6 million for 2000. This $87.4 million increase in cash flow for 2000 compared to 1999 was due
to a $170.9 million decrease in income tax payments, partly offset by the effects of higher interest expense payments, rate decreases and other items.





Cash Flows From Investing Activities





The most significant items included in cash flows from investing
activities during 2001, 2000, and 1999 are summarized below.





Cash Provided (Used)2001


2000


1999(Dollars in Millions)Capital expenditures

$
(70.0
)

$
(53.7
)

$
(48.9
)Sale of electric generating plants


29.6







All other investing cash flows, net


(5.0
)


3.8



0.8Net cash used by investing activities

$
(45.4
)

$
(49.9
)

$
(48.1
)





Capital expenditures were $70.0 million in 2001, $53.7 million in 2000, and $48.9
million in 1999. ACEs capital expenditures are primarily for ACEs electric transmission and distribution systems.




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##### Table of Contents




On October 18, 2001, ACE sold for $29.6 million its ownership interests in nuclear electric
generating plants (383 MW of capacity) and the related nuclear fuel to the utilities which operate the plants. ACEs trust funds and obligation for decommissioning the plants were transferred to the purchasers in conjunction with the sale. The
2001 Consolidated Statement of Cash Flows excludes the assumption of former nuclear decommissioning liabilities of ACE by the purchasers and also excludes the transfer of nuclear decommissioning trust funds to the purchasers. The fair value of the
nuclear decommissioning trust funds that were transferred in 2001 was $115.8 million. The net assets that were sold had a carrying value of $27.3 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. ACE used $20.5
million of the proceeds to repay the lease obligations related to the nuclear fuel. Repayment of the lease obligation is included in financing activities within the Consolidated Statement of Cash Flows. There was a $2.4 million pre-tax gain on the
sale, which did not affect earnings due to the terms of the 1999 restructuring of the electricity generation business of ACE; instead, the pre-tax gain on the sale decreased the balance of deferred recoverable stranded costs. The sale of ACEs
ownership interests in nuclear electric generating plants is also discussed in Note 9 to the Consolidated Financial  Statements.





The non-cash investing and financing transaction involving the contribution to Conectiv during 2000 of combustion turbines with 502 MW of electric generating capacity is excluded from the 2000 Consolidated Statement of Cash Flows. This
transaction resulted in an $83 million decrease in ACEs common stockholders equity. Also, see Note 9 to the Consolidated Financial Statements and the Consolidated Statement of Changes in Common Stockholders Equity for information
concerning this transaction.





Cash Flows From Financing Activities





ACE pays a common dividend each quarter to Conectiv. Common dividends paid were $44.2 million in 2001, $67.3 million in 2000, and $59.3 million in 1999. As a subsidiary of a registered
holding company under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is obtained.





On May 1, 2001 ACE redeemed 115,000 shares of its $7.80 annual dividend rate preferred stock at the $100 per share stated value or $11.5 million in total. ACEs other external financing activities during 2001, 2000, and 1999, primarily
involved debt. Cash flows from debt financing activity are summarized below.





Cash Provided (Used)2001


2000


1999(Dollars in millions)Long-term debtIssuances

$



$



$
228.5Purchases and redemptions


(97.2
)


(46.1
)


(48.9
)Net


(97.2
)


(46.1
)


179.6Net change in short-term debt


45.0



(30.0
)


30.0Net financing activity for long- and short-term debt

$
(52.2
)

$
(76.1
)

$
209.6





During 2001, ACE redeemed at maturity $40 million of 6.81%-7.0%, Medium Term
Notes and repaid $57.1 million of its bank term loan. ACE also borrowed $45.0 million on a short-term basis during 2001.





ACE
redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. ACE also repaid in 2000 the $30 million it borrowed on a short-term basis during 1999.





During 1999, ACE borrowed $228.5 million under a credit facility that was converted in 2000 to a term loan and repaid $48.9 million of long-term debt, including $30.0 million of Medium
Term Notes (7.52% average interest rate) and $18.9 million of First Mortgage Bonds (6.87% average interest rate).




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##### Table of Contents




ITEM 7A.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The following discussion contains
forward looking statements. These projected results have been prepared based upon certain assumptions considered reasonable given the information currently available to ACE. Nevertheless, because of the inherent unpredictability of
interest rates and equity market prices as well as other factors, actual results could differ materially from those projected in such forward-looking information.





Interest Rate Risk





ACE is subject to the risk of fluctuating interest rates in the
normal course of business. ACE manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. As of December 31, 2001 and 2000, a hypothetical 10% change in interest rates for short-term and variable rate debt would
result in a $0.1 million change in interest costs and earnings before taxes.





Equity Price Risk





As of December 31, 2001, ACE had $3.7 million of investments, including marketable equity securities. As of December 31, 2000, ACE had $112.5 million of
investments, primarily nuclear decommissioning trust funds which were transferred to the purchasers of ACEs interests in nuclear electric generating plants on October 18, 2001. ACE had no equity price risk for changes in the fair value of the
nuclear decommissioning trust funds due to periodic adjustment of utility customer rates for such changes. ACEs equity price risk from a hypothetical 10% change in quoted securities prices was approximately $0.4 million as of December 31, 2001
and 2000.





Commodity Price Risk





As of December 31, 2001 and 2000, ACE had no value at risk with respect to commodity price exposure because ACE did not hold any derivative instruments. See Basic Generation Service above for a discussion about how ACE supplies
electricity to its customers.




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##### Table of Contents

ATLANTIC CITY ELECTRIC COMPANY





ITEM
8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





REPORT OF MANAGEMENT





Management is responsible for the information and representations contained in the consolidated financial statements of Atlantic City Electric Company
(ACE). Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, based upon currently available facts and circumstances and managements best estimates
and judgments of the expected effects of events and transactions.





ACE and its subsidiary companies maintain a system of
internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of
internal audits, and procedures to assure the selection and training of qualified personnel.





PricewaterhouseCoopers LLP,
independent accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with auditing standards generally accepted in the United States which include a review of selected
internal controls to determine the nature, timing, and extent of audit tests to be applied.





The Audit Committee of
Conectivs Board of Directors, composed of outside directors only, meets with management, internal auditors, and independent accountants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed
by the Board of Directors on recommendation of the Audit Committee.





/s/    JOSEPH M. RIGBY

/s/    JOHN C. VAN RODENJoseph M. Rigby

John C. van RodenPresident

Chief Financial Officer





February 8, 2002




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##### Table of Contents

REPORT OF INDEPENDENT ACCOUNTANTS





To the
Board of Directors


Atlantic City Electric Company


Wilmington, Delaware





In our opinion, the accompanying consolidated financial statements listed in the accompanying index appearing under Item 14(a)(1) on page IV-I present fairly, in all material respects,
the financial position of Atlantic City Electric Company and subsidiary companies (ACE) as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 14(a)(2) on page IV-1,
 presents fairly, in all material respects, the information set forth therein when read in conjunction with the  related consolidated financial statements. These financial statements and financial statement schedule are the responsibility
of the ACEs management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of the consolidated financial statements in accordance with auditing standards generally accepted in
the United States of America which require that we plan and perform the  audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial  statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.





/s/    PRICEWATERHOUSECOOPERS LLP


---

PricewaterhouseCoopers LLP


Philadelphia, Pennsylvania





February 8, 2002




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##### Table of Contents

ATLANTIC CITY ELECTRIC COMPANY





CONSOLIDATED STATEMENTS OF INCOME





For the Year Ended December 31,2001


2000


1999(Dollars in Thousands)Operating Revenues

$
1,041,171


$
960,862


$
1,059,415Operating ExpensesElectric fuel and purchased energy and capacity


636,552



420,737



480,381Special charges










12,301Operation and maintenance


249,247



243,682



253,970Depreciation and amortization


84,703



101,527



113,714Taxes other than income taxes


34,118



35,913



44,288Deferred electric service costs


(143,190
)


(7,521
)


(17,170
)861,430



794,338



887,484Operating Income


179,741



166,524



171,931Other Income


11,504



7,808



8,712Interest ExpenseInterest charges


62,166



76,178



60,562Allowance for borrowed funds used during construction and capitalized interest


(714
)


(645
)


(809
)61,452



75,533



59,753Preferred Dividend Requirements on Preferred Securities of Subsidiary Trusts


7,619



7,619



7,634Income Before Income Taxes and Extraordinary Item


122,174



91,180



113,256Income Taxes, Excluding Income Taxes Applicable to Extraordinary Item


46,698



36,746



49,326Income Before Extraordinary Item


75,476



54,434



63,930Extraordinary Item (Net of income taxes of $40,474)










(58,095
)Net Income


75,476



54,434



5,835Dividends on Preferred Stock


1,683



2,132



2,132Earnings Applicable to Common Stock

$
73,793


$
52,302


$
3,703





See accompanying Notes to Consolidated Financial Statements.




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##### Table of Contents




ATLANTIC CITY ELECTRIC COMPANY





CONSOLIDATED BALANCE SHEETS





As of December 31,2001

2000(Dollars in Thousands)ASSETSCurrent AssetsCash and cash equivalents

$
14,261

$
156,071Accounts receivable net of allowances of $7,804 and $4,423, respectively


159,679


140,785Inventories, at average costFuel (coal and oil)


20,331


6,818Materials and supplies


10,738


6,786Prepaid income taxes


41,044


Other prepayments


1,756


1,738Deferred income taxes, net


181


15,750247,990


327,948Investments


3,666


112,501Property, Plant and EquipmentElectric generation


136,152


142,243Electric transmission and distribution


1,276,896


1,255,184Other electric facilities


116,215


119,782Other property, plant, and equipment


5,772


5,7721,535,035


1,522,981Less: Accumulated depreciation


569,495


640,103Net plant in service


965,540


882,878Construction work-in-progress


74,780


50,247Leased nuclear fuel, at amortized cost





28,3521,040,320


961,477Deferred Charges and Other AssetsRegulatory assetsRecoverable stranded costs, net


930,036


958,883Deferred electric service costs


106,259


Other non-current regulatory assets


82,944


101,273Unamortized debt expense


12,966


12,842Other


8,149


6,4581,140,354


1,079,456Total Assets

$
2,432,330

$
2,481,382





See accompanying Notes to Consolidated Financial Statements.




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##### Table of Contents

ATLANTIC CITY ELECTRIC COMPANY





CONSOLIDATED BALANCE SHEETS





As of December 31,2001

2000(Dollars in Thousands)CAPITALIZATION AND LIABILITIESCurrent LiabilitiesShort-term debt

$
44,951

$
Long-term debt due within one year


221,450


97,200Variable rate demand bonds


22,600


22,600Accounts payable


58,001


50,744Interest accrued


17,224


18,193Dividends payable


6,302


17,871Current capital lease obligation





15,480Deferred energy supply costs





34,650Other


40,461


48,097410,989


304,835Deferred Credits and Other LiabilitiesDeferred income taxes, net


470,420


405,385Deferred investment tax credits


28,482


35,851Regulatory liability for New Jersey income tax benefit


49,262


49,262Above-market purchased energy contracts and other electric restructuring liabilities


16,615


16,744Long-term capital lease obligation





12,872Pension benefit obligation


35,529


26,948Other postretirement benefit obligation


36,429


37,614Other


13,311


28,918650,048


613,594CapitalizationCommon stock, $3 par value; shares authorized: 25,000,000 ; shares outstanding: 18,320,937


54,963


54,963Additional paid-in capital


410,194


410,194Retained earnings


156,152


114,962Total common stockholder's equity


621,309


580,119Preferred stock not subject to mandatory redemption


6,231


6,231Preferred stock subject to mandatory redemption


12,450


23,950Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures


95,000


95,000Long-term debt


636,303


857,6531,371,293


1,562,953Commitments and Contingencies (Note 19)





Total Capitalization and Liabilities

$
2,432,330

$
2,481,382





See accompanying Notes to Consolidated Financial Statements.




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##### Table of Contents

ATLANTIC CITY ELECTRIC COMPANY





CONSOLIDATED STATEMENTS OF CASH FLOWS





For the Year Ended December 31,2001


2000


1999(Dollars in Thousands)Cash Flows From Operating ActivitiesNet income

$
75,476


$
54,434


$
5,835Adjustments to reconcile net income to net cash provided by operating activities:Deferred recoverable purchased power contract termination payment










(228,500
)Extraordinary item net of income taxes










58,095Depreciation and amortization


93,987



113,853



126,857Investment tax credit adjustments, net


(7,369
)


(3,157
)


(2,534
)Deferred income taxes, net


83,603



23,121



71,897Deferred electric service and energy supply costs


(143,190
)


(7,521
)


23,844Net change in:Accounts receivable


(17,359
)


(7,333
)


(22,644
)Inventories


(15,645
)


9,110



(7,949
)Prepaid New Jersey sales and excise taxes


12,772



13,374



22,216Accounts payable


5,697



(15,008
)


7,921Taxes accrued


(51,287
)


98,726



(111,399
)Other current assets and liabilities (1)


3,377



(2,721
)


(3,796
)Other, net


3,926



5,705



26,828Net cash provided (used) by operating activities


43,988



282,583



(33,329
)Cash Flows From Investing ActivitiesCapital expenditures


(70,023
)


(53,717
)


(48,931
)Sale of electric generating plants


29,568







Deposits to nuclear decommissioning trust funds


(825
)


(405
)


(3,213
)Other, net


(4,117
)


4,196



4,070Net cash used by investing activities


(45,397
)


(49,926
)


(48,074
)Cash Flows From Financing ActivitiesCommon dividends paid


(44,172
)


(67,309
)


(59,321
)Preferred dividends paid


(1,683
)


(2,332
)


(2,821
)Preferred stock redeemed


(11,500
)






Long-term debt issued










228,500Long-term debt redeemed


(97,200
)


(46,075
)


(48,900
)Principal portion of capital lease payments


(29,824
)


(12,326
)


(13,143
)Net change in short-term debt


44,951



(30,000
)


30,000Other, net


(973
)






(223
)Net cash provided (used) by financing activities


(140,401
)


(158,042
)


134,092Net change in cash and cash equivalents


(141,810
)


74,615



52,689Beginning of year cash and cash equivalents


156,071



81,456



28,767End of year cash and cash equivalents

$
14,261


$
156,071


$
81,456


---

|(1) |  | Other than debt and deferred income taxes classified as current.
|--- |  | ----------------------------------------------------------------




See accompanying Notes to Consolidated Financial Statements.




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##### Table of Contents

ATLANTIC CITY ELECTRIC COMPANY





CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS EQUITY





Total Common Stockholders Equity


Common Stock

Additional Paid-in Capital


Retained Earnings(Dollars in Thousands)Balance as of January 1, 1999

$
730,093


$
54,963

$
493,007


$
182,123Net income


5,835










5,835Less Cash Dividends:Preferred stock


(2,132
)









(2,132
)Common stock


(55,845
)









(55,845
)Balance as of December 31, 1999


677,951



54,963


493,007



129,981Net income


54,434










54,434Less Cash Dividends:Preferred stock


(2,132
)









(2,132
)Common stock


(67,309
)









(67,309
)Contribution to Conectiv of subsidiaries which owned combustion turbine electric generating units (1)


(82,825
)





(82,813
)


(12
)Balance as of December 31, 2000


580,119



54,963


410,194



114,962Net income


75,476










75,476Less Cash Dividends:Preferred stock


(1,683
)









(1,683
)Common stock


(32,603
)









(32,603
)Balance as of December 31, 2001

$
621,309


$
54,963

$
410,194


$
156,152





As of December 31, 2001, ACE had 25 million authorized shares of common stock at
$3 par value.





There were 18,320,937 shares outstanding during 1999, 2000 and 2001 which are owned by Conectiv.


---

|(1) |  | See Note 9 to the Consolidated Financial Statements for additional information.
|--- |  | -------------------------------------------------------------------------------







See accompanying Notes to Consolidated Financial Statements.




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##### Table of Contents




ATLANTIC CITY ELECTRIC COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1.    SIGNIFICANT
ACCOUNTING POLICIES





Nature of Business





Atlantic City Electric Company (ACE) is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998
Merger) through an exchange of common stock with Atlantic Energy, Inc. and Delmarva Power & Light Company (DPL).





On
February 9, 2001, the Boards of Directors of Conectiv and Potomac Electric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock
and Conectiv and Pepco will become wholly-owned subsidiaries of Pepco Holdings, Inc. (the Conectiv/Pepco Merger). The stockholders of Conectiv and Pepco voted in 2001 to approve the Conectiv/Pepco Merger. Management currently expects the
Conectiv/Pepco Merger to close in the second quarter of 2002, subject to timely receipt of various statutory and regulatory approvals.





ACE is a public utility which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery. ACE delivers electricity within its service area to approximately 508,600 customers through its transmission and
distribution systems and also supplies electricity (Basic Generation Service) to most of its electricity delivery customers, who have the option of choosing an alternative supplier. ACEs regulated service area covers about 2,700 square miles
within the southern one-third of New Jersey and has a population of approximately 0.9 million.





As discussed in Note 9 to the
Consolidated Financial Statements, ACE continued the divestiture of its electric generating plants during 2001. The divestiture began effective July 1, 2000 with ACEs contribution to Conectiv at net book value of its combustion turbines, which
had an electric generating capacity of 502 megawatts (MW). On October 18, 2001, ACE sold its ownership interests in nuclear electric generating plants with 383 MW of capacity. As of December 31, 2001, all of ACEs remaining electric generating
plants, which had a carrying value of $117 million and 739.7 MW of capacity, were subject to an agreement for sale.





Regulation of Utility Operations





Certain aspects of ACEs electric utility business are subject to regulation by the New Jersey Board of Public
Utilities (NJBPU) and the Federal Energy Regulatory Commission (FERC).





ACEs electric delivery business and Basic
Generation Service (BGS) are subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Prior to the third quarter of 1999,
ACEs electricity generation business was subject to the requirements of SFAS No. 71. As a result of the restructuring of ACEs electricity generation business in the third quarter of 1999, as discussed in Note 6 to the Consolidated
Financial Statements, ACE discontinued applying SFAS No. 71 to its electricity generation business and recorded an extraordinary charge to earnings, as discussed in Note 5 to the Consolidated Financial Statements.





ACE recovers through customer rates the costs it incurs in providing BGS, which entails supplying electricity to customers in ACEs service area
who do not choose an alternative supplier. When utility revenues are insufficient to recover current period expenses from customers, the NJBPU may provide for future recovery from customers of such current period expenses. When future recovery is
probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly,
regulatory liabilities may also be created due to the economic impact of an action taken by the NJBPU.




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##### Table of Contents




Refer to Note 10 for information about regulatory assets and liabilities arising from the
financial effects of rate regulation.





Financial Statement Presentation





The consolidated financial statements include the accounts of ACE and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.





Adjustments for under-recoveries of costs related to BGS of $7.5 million for 2000 and $17.2 million for 1999
have been reclassified within the Consolidated Statements of Income from electric operating revenues to operating expenses, as a separate line item captioned Deferred electric service costs. The accounting policy for BGS is discussed
under Regulation of Utility Operations, shown above.





Certain other reclassifications of prior period data have been
made to conform with the current presentation.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and
assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and assumptions.





Revenue Recognition





ACE recognizes revenues for the supply and delivery of electricity upon delivery to the customer, including amounts for services rendered, but not yet
billed.





Nuclear Fuel





As
discussed in Note 9 to the Consolidated Financial Statements, on October 18, 2001, ACE sold its interests in Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and Hope Creek Nuclear Generating Station (Hope
Creek) and the related nuclear fuel to the utilities which operate the plants. Prior to the sale, the ownership interests of ACE in nuclear fuel at the Peach Bottom, Salem and Hope Creek generating stations were financed through contracts accounted
for as capital leases. Nuclear fuel costs, including a provision for the future disposal of spent nuclear fuel, were charged to fuel expense on a unit-of-production basis.





Depreciation





The annual provision for depreciation on utility property is computed on
the straight-line basis using composite rates by classes of depreciable property. ACEs overall composite rate of depreciation was 3.5% for 2001, 3.6% for 2000, and 3.7% for 1999. Through the date of the sale of ACEs interests in nuclear
electric generating plants on October 18, 2001, depreciation expense included a provision for ACEs share of the estimated cost of decommissioning nuclear power plant reactors based on site-specific studies. Accumulated depreciation is charged
with the cost of depreciable property retired, including removal costs less salvage and other recoveries.





Interest Expense





The amortization of debt discount, premium, and expense, including deferred debt extinguishment costs, is included in interest expense.




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##### Table of Contents




Income Taxes





The Consolidated Financial Statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on ACEs federal and state income tax returns. Deferred
income taxes are discussed below.





Deferred income tax assets and liabilities represent the tax effects of temporary differences
between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of ACEs deferred tax liability applicable to utility operations that has not been recovered from
utility customers represents income taxes recoverable in the future (deferred recoverable income taxes) and is included on the Consolidated Balance Sheets in other non-current regulatory assets.





Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable
income taxes.





Investment tax credits from utility plant purchased in prior years are reported on the Consolidated Balance
Sheets as Deferred investment tax credits. These investment tax credits are being amortized to income over the useful lives of the related utility plant.





Cash Equivalents





In the Consolidated Financial Statements, ACE considers all highly
liquid investments and debt securities purchased with a maturity of three months or less to be cash equivalents. Investments in Conectivs money pool, which Conectiv subsidiaries may invest in, or borrow from, are considered cash
equivalents.





Utility Plant





Electric generating plants that became impaired as a result of the restructuring of the electric utility industry in 1999 are stated at the estimated fair value of the plants at the time of restructuring, based on amounts included in
agreements for the sales of the plants. All other property, plant and equipment is stated at original cost.





Utility plant is
generally subject to a first mortgage lien.





Allowance for Funds Used During Construction and Capitalized Interest





Effective in the third quarter of 1999, the cost of financing the construction of electric generation plant is capitalized in accordance with SFAS No.
34, Capitalization of Interest Cost.





Allowance for Funds Used During Construction (AFUDC) is included in the cost
of utility plant and represents the cost of borrowed and equity funds used to finance construction of new utility facilities. In the Consolidated Statements of Income, the borrowed funds component of AFUDC is reported as a reduction of interest
expense and the equity funds component of AFUDC is reported as other income. AFUDC was capitalized on utility plant construction at the rate of 8.25% for 2001, 2000 and 1999.





Deferred Debt Extinguishment Costs





Debt extinguishment costs for which recovery through
regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.





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




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Assets. SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 142 became effective January 1,
2002. The adoption of SFAS No. 141 and SFAS No. 142 is not expected to immediately affect ACEs financial statements.





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. If a legal
obligation for an ARO exists, then SFAS No. 143 requires recognition of a liability, capitalization of the cost associated with the ARO, and allocation of the capitalized cost to expense. The initial measurement of an ARO is based on the fair value
of the obligation, which may result in a gain or loss upon the settlement of the ARO. If the requirements of SFAS No. 71 are met, a regulated entity shall also recognize a regulatory asset or liability for timing differences between financial
reporting and rate-making in the recognition of the period costs associated with an ARO. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including ACE. Upon adoption of SFAS No. 143, the difference between
the net amount recognized in the balance sheet under SFAS No. 143 and the net amount previously recognized in the balance sheet will be recognized as the cumulative effect of a change in accounting principle. ACE is currently evaluating SFAS No. 143
and cannot predict the impact that this standard may have on its financial position or results of operations; however, any such impact could be material.





On October 3, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which requires that one accounting model be used for long-lived assets to be disposed of by
sale and broadens discontinued operations to include more disposal transactions. Under SFAS No. 144, operating losses of discontinued operations are recognized in the period in which they occur; future operating losses are not accrued upon
discontinuation of the business operation. SFAS No. 144 became effective on January 1, 2002. ACE does not expect the adoption of SFAS No. 144 will materially affect its financial position or results of  operations.





NOTE 2.    SUPPLEMENTAL CASH FLOW INFORMATION





Cash
Paid During the Year





2001

2000


1999(Dollars in Thousands)Interest, net of capitalized amounts

$
59,696

$
73,520


$
51,723Income taxes, net of refunds

$
21,849

$
(80,677
)

$
90,185





During 2000, ACE received federal and state income tax refunds of $114.2 million
and made estimated tax payments of $33.5 million, resulting in $80.7 million of net income taxes received. The income tax refunds received in 2000 were primarily 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 7 to the Consolidated
Financial Statements.





Non-cash Investing and Financing Transaction





The 2001 Consolidated Statement of Cash Flows excludes the assumption of former nuclear decommissioning liabilities of ACE by the purchasers of ACEs ownership interests in nuclear
electric generating plants and also excludes the transfer of nuclear decommissioning trust funds to the purchasers. The fair value of the nuclear decommissioning trust funds that were transferred in 2001 was $115.8 million. For additional
information about the sale of ACEs ownership interests in nuclear electric generating plants, see Note 9 to the Consolidated Financial Statements.




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The 2000 Consolidated Statement of Cash Flows excludes the non-cash transaction for ACEs
contribution of combustion turbines to Conectiv. See Contribution of Combustion Turbines to Conectiv in 2000 in Note 9 to the Consolidated Financial Statements for additional information.





NOTE 3.    INCOME TAXES





ACE,
as a subsidiary of Conectiv, is included in the consolidated federal income tax return of Conectiv. Income taxes are allocated to ACE based upon the taxable income or loss, determined on a separate return basis.





Components of Consolidated Income Tax Expense





2001


2000


1999(Dollars in Thousands)OperationsFederal:

Current

$
(23,952
)

$
6,930


$
(20,940
)Deferred


65,568



22,509



57,713State:

Current


(5,584
)


9,853



902Deferred


18,035



611



14,185Investment tax credit adjustments(1)


(7,369
)


(3,157
)


(2,534
)46,698



36,746



49,326Extraordinary ItemFederal:

Deferred










(31,585
)State:

Deferred










(8,889
)







(40,474
)Total Income Tax Expense

$
46,698


$
36,746


$
8,852


---

|(1) |  | In 2001, $4.9 million of deferred investment tax credits were reversed and credited to tax expense due to the sale of ACEs ownership interests in nuclear electric
generating plants.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Reconciliation of Effective Income Tax Rate





The amount computed by multiplying Income before income taxes and extraordinary item by the federal statutory rate is reconciled below to income tax expense on operations
(which excludes amounts applicable to the extraordinary item).





2001


2000


1999Amount


Rate


Amount


Rate


Amount


Rate(Dollars in Thousands)Statutory federal income tax expense

$
42,761


35
%

$
31,913


35
%

$
39,639


35
%State income taxes, net of federal tax benefit


8,093


6



6,951


8



9,806


9Plant basis differences


2,000


2



2,172


2



2,275


2Amortization of investment tax credits


(7,369
)

(6
)


(3,157
)

(3
)


(2,534
)

(2
)Other, net


1,213


1



(1,133
)

(2
)


140


Total income tax expense

$
46,698


38
%

$
36,746


40
%

$
49,326


44
%




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Components of Deferred Income Taxes





Items comprising deferred tax balances as of December 31, 2001 and December 31, 2000 are as follows:





2001

2000(Dollars in Thousands)Deferred tax liabilities:Utility plant basis differences

$
340,113

$
308,424Deferred recoverable income taxes


3,860


4,915Payment for termination of purchased power contracts with non-utility electric generators


96,840


94,982Deferred electric service expenses


47,479


Other


46,079


42,181Total deferred tax liabilities


534,371


450,502Deferred tax assets:Deferred investment tax credits


9,968


19,324Other


54,164


41,543Total deferred tax assets


64,132


60,867Total deferred taxes, net

$
470,239

$
389,635





NOTE 4.    SPECIAL CHARGES





ACEs operating results for 1999 include special charges of $12.3 million before taxes ($7.3 million after taxes) for the costs of employee
separations, additional costs related to the 1998 Merger, and certain other nonrecurring costs.





NOTE 5.    EXTRAORDINARY ITEM





As discussed in Note 6 to the Consolidated Financial Statements, on July 15, 1999, the NJBPU issued a Summary Order to ACE
that, among other things, provided for customer choice of electricity suppliers, rate decreases, and quantification of the recovery through customer rates of the uneconomic portion of assets and long-term contracts that resulted from restructuring
(stranded costs). As a result, ACE discontinued applying SFAS No. 71 to its electricity generation business and applied the requirements of SFAS No. 101, Regulated EnterprisesAccounting for the Discontinuation of Application of FASB
Statement No. 71 (SFAS No. 101) and Emerging Issues Task Force (EITF) Issue No. 97-4, Deregulation of the Pricing of ElectricityIssues Related to the Application of FASB Statements No. 71 and No. 101 (EITF 97-4).





Pursuant to the requirements of SFAS No. 101 and EITF 97-4, ACE recorded extraordinary charges in the third and fourth quarters
of 1999 which reduced 1999 earnings by $58.1 million, net of income taxes of $40.5 million. The portion of the extraordinary charge related to impaired assets was determined in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of (SFAS No. 121). The extraordinary charge primarily resulted from impaired electric generating plants and certain other assets, uneconomic energy contracts, and other effects of
deregulation requiring loss recognition. The impairment amount for electric generating plants was determined based on expected proceeds under agreements for the sale of the electric generating plants, which are discussed in Note 9 to the
Consolidated Financial Statements. The extraordinary charge was decreased by the regulatory asset established for the amount of stranded costs expected to be recovered through regulated electricity delivery rates.




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The details of the 1999 extraordinary charge are shown below.





Items Included in the 1999 Extraordinary Charge

Millions of DollarsThe net book value of the nuclear power plants and certain fossil fuel-fired plants and other electric plant-related assets
including inventories, were written-down due to impairment.

$
(662.1
)Generation-related regulatory assets and certain other utility assets impaired from deregulation were written-off. Also, various
liabilities resulting from deregulation were recorded.


(205.7
)A regulatory asset, recoverable stranded costs, was established for the amount of stranded costs expected to be recovered through
regulated electricity delivery rates.


769.2Total pre-tax extraordinary charge


(98.6
)Income tax benefit


40.5Total extraordinary charge, net of income taxes

$
(58.1
)





NOTE 6.    REGULATORY MATTERS





Restructuring





On February 9, 1999, New Jersey
enacted the Electric Discount and Energy Competition Act (the New Jersey Act). The New Jersey Act provided for restructuring of the electric utility industry in New Jersey and established that customers of New Jersey electric utilities could choose
alternative electricity suppliers beginning August 1, 1999. Restructuring the New Jersey electric utility industry resulted in stranded costs, which include the portion of electric generating plants, other assets, and long-term contracts
that became uneconomic as a result of the restructuring. Pursuant to the New Jersey Act, on July 15, 1999, the NJBPU issued a Summary Order to ACE concerning stranded costs, unbundled rates, and other matters related to restructuring. In mid-May
2001, the NJBPU issued a Final Decision and Order, which had substantially the same provisions as the Summary Order. The NJBPU determined that ACE will have the opportunity to recover 100% of the net stranded costs related to certain generation
units and the stranded costs associated with power purchased from non-utility generators (NUGs), subject to further NJBPU proceedings.





Rate Decreases





The NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999 and an additional 2% rate
reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual revenues by approximately $50 million. The
additional 2%, or $20 million, rate reduction required by January 1, 2001 was implemented through two separate 1%, or $10 million, rate reductions effective January 1, 2000 and 2001, respectively. The final rate reduction, which is required by
August 1, 2002, is expected to reduce revenues by an additional $30 million, which would result in a cumulative rate reduction of $100 million since August 1, 1999.





Securitization





Under the New Jersey Act, up to 100% of recovery-eligible stranded costs
related to electric generating plants and the costs to effect buyouts or buydowns of NUG contracts may be recovered through customer rates. Also, the New Jersey Act permits securitization of stranded costs through the issuance of transition bonds in
the amount approved by the NJBPU. More specifically, the New Jersey Act provides for securitization of: (a) up to 75% of recovery-eligible stranded costs related to electric generating plants, over a period not to exceed 15 years, and (b) 100% of
the costs to effect NUG contract buyouts or buydowns, over a period not to exceed the remaining term of the restructured contracts. The principal of and interest on transition bonds is to be collected from customers through a transition bond charge
over the securitization term. Also, customer rates are to include a




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separate market transition charge for recovery of the income tax expense associated with the revenues from transition bond charges. The ability to issue transition bonds depends on approval of
the NJBPU and conditions in the relevant capital markets at the times of the offerings.





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) during 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. When issued, the transition bonds of ACE
Transition Funding will be included in ACEs Consolidated Balance Sheet. 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 NUG
purchased power contracts, or otherwise reduce costs in order to decrease regulated electricity rates.





On September 17, 2001,
the NJBPU issued a Decision and Order concerning the stranded costs associated with ACEs former ownership interests in nuclear electric generating plants. The NJBPU determined the amount of such stranded costs eligible for recovery by ACE to
be approximately $298 million, after income taxes, (or $504 million before income taxes) as of December 31, 1999, subject to further adjustments. The NJBPU also found that ACE shall have the opportunity to recover the eligible stranded costs through
its market transition charge, in a time frame and manner to be determined by the NJBPU.





See Note 7 to the Consolidated
Financial Statements concerning the eligibility for securitization of a $228.5 million payment made by ACE to terminate a NUG purchased power contract. Management anticipates that transition bonds will ultimately be used to finance the stranded
costs associated with the buyout or buydown of ACEs NUG contracts.





On February 20, 2002, the NJBPU issued a Decision and
Order approving the sale of ACEs fossil fuel-fired electric generating plants and determined the amount eligible for recovery by ACE of stranded costs associated with such plants to be approximately $101 million, after income taxes, (or $171
million before income taxes) as of December 31, 1999, subject to further adjustment. See Note 9 to the Consolidated Financial Statements for additional information.





Basic Generation Service





Through July 31, 2002, ACE is obligated to provide Basic
Generation Service (BGS); this service entails supplying electricity to customers in ACEs service area who do not choose an alternative supplier. The Final Decision and Order provides for the recovery through customer rates of the costs
incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from NUGs, and the above-market portion of costs associated with generating power for BGS
customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACEs customers for BGS, the under-recovered costs are deferred as a regulatory asset.
ACE deferred costs related to providing BGS in the amounts of $143.2 million for 2001, $7.5 million for 2000 and $17.2 million for 1999. Pursuant to the terms of the 1999 restructuring of ACEs




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electric generation business, during 1999-2001, the under-recovered costs were first applied to a deferred energy cost liability which was eliminated and then a regulatory asset was established
($106.3 million as of December 31, 2001). After the initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the under-recovered cost balance over a reasonable period of time to be determined by the NJBPU.
ACEs recovery of the deferred costs is subject to review by the NJBPU.





On June 29, 2001, New Jersey electric utilities,
including ACE, filed a proposal with the NJBPU to use an auction process to procure electricity supply for BGS customers. ACE and the other New Jersey electric utilities proposed that the BGS supply period for which the auction be conducted be the
final year of the transition period (August 1, 2002-July 31, 2003) provided for in the New Jersey Act. Under this supply arrangement, ACE, as agent for its BGS customers, will pay for electricity from the suppliers selected by the auction process
and the costs associated with this supply will be subject to the regulated cost-based, rate-recovery mechanism for BGS. ACE will continue to collect BGS revenues and will continue to provide all customer-related services. On February 15, 2002, the
NJBPU approved the results of the auction that was held from February 4, to February 13, 2002. As result of the auction, four suppliers will provide electricity for 1,900 MW, or about 80% of ACEs load, at a price of 5.12 cents per kWh
beginning on August 1, 2002. The remaining 20% of ACEs load will continue to be supplied with power purchased under ACEs existing purchased power contracts with NUGs. If there is a default by a supplier determined by the auction process,
then the defaulted load will be offered to other winning bidders of the auction process, or if that is not possible, then ACE would purchase the electricity supply from the PJM Interconnection L.L.C.





NOTE 7.    TERMINATION OF PURCHASED POWER CONTRACT





On November 10, 1999, the NJBPU issued a Decision and Order approving termination of a contract under which ACE had purchased energy and capacity from Pedricktown, a NUG partnership which was owned 50% by other
Conectiv subsidiaries prior to June 29, 2001. The NJBPU decided that ACE is entitled to recover from customers the contract termination payment of $228.5 million, transaction costs, and interim financing costs. The NJBPU also found that the contract
termination payment and related transaction costs are eligible for long-term financing through the issuance of transition bonds. On December 28, 1999, ACE paid $228.5 million to terminate the contract. The contract termination payment and related
costs are included in Recoverable Stranded Costs on the Consolidated Balance Sheets. Effective January 1, 2000, ACEs customer rates were reduced by about 1% (approximately $10 million of revenues on an annualized basis) as a result
of the net savings from the contract termination.





NOTE 8.    JOINTLY-OWNED PLANT





ACEs Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. ACE has ownership
interests in electric generating plants, transmission facilities, and other facilities in which various parties have ownership interests. ACEs proportionate shares of operating and maintenance expenses of the jointly owned plant is included in
the corresponding expenses in ACEs Consolidated Statements of Income. ACE is responsible for providing its share of financing for the jointly owned facilities.




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Information with respect to ACEs share of jointly owned plant as of December 31, 2001 is
shown below. As discussed in Note 9 to the Consolidated Financial Statements, the jointly-owned coal-fired Keystone and Conemaugh plants were under agreement for sale as of December 31, 2001.





Ownership Share

Megawatt Capability Owned

Plant in Service

Accumulated Depreciation

Construction Work in Progress(Dollars in Thousands)Keystone*

2.47%

42

$
13,758

$
4,694

$
1,661Conemaugh*

3.83%

65


34,777


10,993


1,938Transmission Facilities

Various




24,881


11,802


Other Facilities

Various




1,113


217


Total



107

$
74,529

$
27,706

$
3,599


---

|* |  | Coal-fired electric generating plant.
|- |  | -------------------------------------




NOTE
9.    DIVESTITURE OF ELECTRIC GENERATING PLANTS





ACE continued the divestiture of its electric
generating plants during 2001. The divestiture began effective July 1, 2000 with ACEs contribution to Conectiv at net book value of its combustion turbines (502 MW). On October 18, 2001, ACE sold its ownership interests in nuclear electric
generating plants (383 MW). As of December 31, 2001, all of ACEs remaining electric generating plants, which had a carrying value of $117 million and 739.7 MW of capacity, were subject to an agreement for sale.





After the sales of ACEs electric generating plants are completed, the principal remaining business of ACE will be the transmission and
distribution of electricity. ACE will purchase power to supply electricity to customers who do not choose alternative electricity suppliers. ACEs exit from the electricity production business is expected to cause a decrease in ACEs
earnings capacity.





Sales of Electric Generating Plants Completed in 2001





On October 18, 2001, ACE sold for $29.6 million its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station (Peach Bottom), 7.41% interest (167 MW) in Salem Nuclear Generating
Station (Salem) and 5.0% interest (52 MW) in Hope Creek Nuclear Generating Station (Hope Creek) and the related nuclear fuel to the utilities which operate the plants. ACEs trust funds and obligation for decommissioning the plants were
transferred to the purchasers in conjunction with the sale. The net assets sold had a carrying value of $27.3 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. ACE used $20.5 million of the proceeds to repay the
lease obligations related to the nuclear fuel. There was a $2.4 million pre-tax gain on the sale, which did not affect earnings due to the terms of the 1999 restructuring of the electricity generation business of ACE; instead, the pre-tax gain on
the sale decreased the balance of deferred recoverable stranded costs.





Contribution of Combustion Turbines to Conectiv in 2000





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.




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Electric Generating Plants Subject to Agreements for Sale as of December 31, 2001





As of December 31, 2001, ACEs fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England
Station) were under agreements for sale to NRG Energy, Inc. (NRG) for approximately $178 million (before certain adjustments and expenses). The plants to be sold have electric generating capacity of 739.7 MW, and as of December 31, 2001, the
carrying value of the plants was approximately $117 million. Due to the terms of ACEs electric utility restructuring in 1999 and expected sales proceeds, (i) the loss expected to be realized on the sale of the Deepwater Station was included in
the extraordinary charge to earnings in 1999, (ii) the loss expected to be realized on the sale of the B.L. England Station is included in recoverable stranded costs, and (iii) any net gain that may be realized on the sale of ACEs interests in
Conemaugh and Keystone Stations is expected to reduce the amount of stranded costs to be recovered from ACEs utility customers.





On February 20, 2002, the NJBPU issued a Decision and Order approving the sale of ACEs fossil fuel-fired electric generating plants and determined the amount eligible for recovery by ACE of stranded costs associated with such plants
to be approximately $101 million, after income taxes, (or $171 million before income taxes) as of December 31, 1999, subject to further adjustment. The agreements between ACE and NRG for the sale of the fossil fuel-fired electric generating plants
remain in effect, but, after February 28, 2002, are subject to termination by either party, by giving notice. Neither party has terminated the agreements. The appeal period for the Decision and Order that was issued by the NJBPU to approve the plant
sales expires in early-April 2002. ACE cannot predict whether or not any or all of the plants will be sold, but ACE is endeavoring to close the sales on mutually-acceptable terms and timetable.





Wholesale Transaction Confirmation Letter Agreements





On October 3, 2000, ACE
entered into Wholesale Transaction Confirmation letter agreements (Letter Agreements). The Letter Agreements provided for the sale of the electricity output and capacity associated with the former ownership interests of ACE in Peach Bottom, Salem,
and Hope Creek. Under the Letter Agreements, the operators of the nuclear plants purchased the electricity output and capacity from ACE during the period from October 7, 2000 through October 18, 2001 (the date ACE sold its interests in the plants).
In exchange for the electricity output and capacity purchased from a given plant, the plant operators reimbursed ACE for the nuclear fuel burned and paid ACEs share of operation and maintenance costs, inventories, and capital expenditures.





NOTE 10.    REGULATORY ASSETS AND LIABILITIES





The electric delivery and BGS businesses of ACE are subject to the requirements of SFAS No. 71. ACE recovers through customer rates the costs it incurs in providing BGS, which entails
supplying electricity to customers in ACEs service area who do not choose an alternative supplier. When utility revenues are insufficient to recover current period expenses from customers, the NJBPU may provide for future recovery from
customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during
the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by the NJBPU.




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The table below displays the regulatory assets and liabilities as of December 31, 2001 and
2000.





December 31, 2001

December 31, 2000(Millions of Dollars)Regulatory AssetsDeferred Charges and Other AssetsRecoverable stranded costs

$
930.0

$
958.9Deferred electric service costs


106.3


Other non-current regulatory assetsDeferred recoverable income taxes


11.0


14.0Deferred debt extinguishment costs


11.4


12.4Unrecovered New Jersey state excise taxes





10.4Deferred other postretirement benefit costs


27.5


30.0Unrecovered purchased power costs


12.5


14.5Deferred NUG buyout costs


8.7


4.1Deferred costs for nuclear decommissioning/decontamination





5.1Asbestos removal costs


7.7


8.0Other


4.2


2.883.0


101.3Total regulatory assets

$
1,119.3

$
1,060.2Regulatory LiabilitiesDeferred energy supply costs

$


$
34.7Regulatory liability for New Jersey income tax benefit


49.3


49.3Total regulatory liabilities

$
49.3

$
84.0





Recoverable Stranded Costs:    The pre-tax balances of
$930.0 million as of December 31, 2001 and $958.9 million as of December 31, 2000 arose from the $228.5 million NUG contract termination payment in December 1999, as discussed in Note 7 to the Consolidated Financial Statements, and discontinuing the
application of SFAS No. 71 to the electricity generation business in third quarter of 1999, as discussed in Notes 1, 5, and 6 to the Consolidated Financial Statements. The regulatory asset, Recoverable stranded costs, was established in
the third quarter of 1999 to recognize amounts to be collected from regulated delivery customers for stranded costs that resulted from deregulation of the electricity generation business. As discussed in Note 9 to the Consolidated Financial
Statements, any gain realized on the sale of the fossil fuel-fired electric generating plants of ACE that are subject to agreements for sale is expected to reduce the amount of recoverable stranded costs.





Deferred Electric Service Costs:    See Basic Generation Service in Note 6 the Consolidated Financial Statements.





Deferred Recoverable Income Taxes:    Represents the portion of deferred income tax liabilities
applicable to ACEs utility operations that has not been reflected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable
income taxes are amortized.





Deferred Debt Extinguishment Costs:     Debt extinguishment costs for
which recovery through regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.




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Unrecovered New Jersey State Excise Taxes:Represented additional
amounts paid by ACE as a result of prior legislative changes in the computation of New Jersey state excise taxes.





Deferred
Other Postretirement Benefit Costs:    Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period which began on January
1, 1998.





Unrecovered Purchased Power Costs:    Includes costs incurred by ACE for renegotiation of a
long-term capacity and energy contract. These costs are included in current customer rates with the balance scheduled for full recovery over the next 6 years.





Deferred NUG Buyout Costs:    Includes certain NUG buyout costs and a NUG restructuring payment which are probable of recovery from customers based on the terms of the 1999 restructuring of
ACEs electric generation business.





Deferred Costs for Nuclear
Decommissioning/Decontamination:    Prior to the sale of ACEs interests in nuclear electric generating plants, this regulatory asset represented amounts recoverable from ACEs customers for amounts that ACE had
owed to the U.S. government pursuant to the Energy Policy Act of 1992; this obligation was assumed by the purchasers of ACEs interests in nuclear electric generating plants.





Asbestos Removal Costs:    Represents costs incurred by ACE to remove asbestos insulation from a wholly-owned electric generating station. These costs are
included in current customer rates with the balance scheduled for full recovery over the next 28 years.





Deferred Energy
Supply Costs:    At the time of ACEs electric utility restructuring in the third quarter of 1999, ACE had a regulatory liability because energy supply costs had been over-recovered from customers, under an energy
adjustment clause. In accordance with terms of the restructuring, as ACE under-recovered costs related to providing BGS, the under-recovery was first applied to the deferred energy cost supply liability, which was eliminated, and then the regulatory
asset, deferred electric service costs was established.





Regulatory Liability for New Jersey Income Tax
Benefit:    In 1999, a deferred tax asset arising from the write down of ACEs electric generating plants was established. The deferred tax asset represents the future tax benefit expected to be realized when the higher
tax basis of the generating plants is deducted for New Jersey state income tax purposes. To recognize that this tax benefit probably will be given to ACEs regulated electricity delivery customers through lower electric rates, ACE established a
regulatory liability.





NOTE 11.    COMMON STOCKHOLDERS EQUITY





Conectiv owns all 18,320,937 outstanding shares of ACEs common stock ($3 per share par value).





For information concerning changes in ACEs common stockholders equity, see the Statement of Changes in Common Stockholders Equity.





ACEs certificate of incorporation requires payment of all preferred dividends in arrears (if any) prior to payment of common dividends to
Conectiv, and has certain other limitations on the payment of common dividends.





As a subsidiary of a registered holding company
under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is obtained.




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NOTE 12.    PREFERRED STOCK





ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, two million shares of No Par Preferred Stock and three million shares of Preference Stock, No Par Value.
If preferred dividends are in arrears for at least a full year, preferred stockholders have the right to elect a majority of directors to the Board of Directors until all dividends in arrears have been paid.





Preferred Stock Not Subject to Mandatory Redemption





Series

2001

2000

Current Redemption PriceShares

(000)

Shares

(000)4%, $100 par value

24,268

$
2,427

24,268

$
2,427

$
105.504.1%, $100 par value

20,504


2,051

20,504


2,051


101.004.35%, $100 par value

3,102


310

3,102


310


101.004.35%, $100 par value

1,680


168

1,680


168


101.004.75%, $100 par value

8,631


863

8,631


863


101.005%, $100 par value

4,120


412

4,120


412


100.00Total

62,305

$
6,231

62,305

$
6,231





Preferred Stock Subject to Mandatory Redemption





As of December 31, 2001, ACE had 124,500 shares outstanding of $7.80 annual dividend rate preferred stock, $100 per share stated value, or $12.45
million. As of December 31, 2000, ACE had 239,500 shares outstanding of $7.80 annual dividend rate preferred stock, $100 per share stated value, or $23.95 million.





On May 1, 2001 ACE redeemed 115,000 shares of its $7.80 annual dividend rate preferred stock at the $100 per share stated value or $11.5 million in total. Effective May 1, 2001, 115,000
shares of the $7.80 annual dividend rate preferred stock became subject to mandatory redemption annually.





|NOTE 13. |  | COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY COMPANY DEBENTURES
|-------- |  | --------------------------------------------------------------------------------------------------------------------




Issuer

Series

Securities Outstanding

Amount2001

2000

2001

2000(Dollars in Thousands)Atlantic Capital I *

$25 per share, 8.25%

2,800,000

2,800,000

$
70,000

$
70,000Atlantic Capital II *

$25 per share, 7.375%

1,000,000

1,000,000


25,000


25,000$
95,000

$
95,000


---

|* |  | Per share value is stated liquidation value.
|- |  | --------------------------------------------




The outstanding preferred securities issued by ACEs wholly owned financing subsidiary trusts, Atlantic Capital I and Atlantic Capital II, are shown in the above table. The financing subsidiary trusts have common and preferred trust
securities outstanding and hold Junior Subordinated Debentures (the Debentures) of ACE. ACE owns all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the
trusts. The trusts use interest payments received on the Debentures, which are the trusts only assets, to make cash distributions on the trust securities. The obligations of ACE pursuant to the Debentures and guarantees of distributions with
respect to the trusts securities, to the extent the trusts have funds available therefor, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have issued.




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For consolidated financial reporting purposes, the Debentures are eliminated in consolidation
against the trusts investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures held by Atlantic Capital I mature in 2026 and the
Debentures held by Atlantic Capital II mature in 2028. The Debentures are subject to redemption, in whole or in part, at the option of ACE, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be
redeemed and at any time upon the occurrence of certain events.





NOTE 14.    DEBT





Maturities of long-term debt during the next five years are as follows: 2002$221.5 million; 2003$70.1 million; 2004$67.1 million;
2005$40.1 million; and, 2006$66.8 million.





As of December 30, 2001, ACE had $45.0 million of 2.5% short-term debt
outstanding, which was entirely commercial paper.





On May 15, 2001 and August 1, 2001, ACE redeemed at maturity $10 million of
7.0%, Medium Term Notes and $30 million of 6.81% Medium Term Notes, respectively.





ACE borrowed $228.5 million through a bank
term loan on December 28, 1999 to finance a cash payment for termination of a NUG purchased power contract with Pedricktown, as discussed in Note 7 to the Consolidated Financial Statements. On December 20, 2001, ACE repaid $57.125 million of the
term loan balance; the remaining $171.375 million balance is due December 20, 2002.





ACEs term loan contains financial and
other covenants which, if not met, could result in the acceleration of repayment obligations under the agreement or restrict ACEs ability to borrow under this agreement. The term loan requires a ratio of total indebtedness to total
capitalization of 65% or less. As of December 31, 2001, the ratio was 56%, computed in accordance with the terms of the agreement. The term loan also contains a number of events of default that could be triggered by the acceleration of indebtedness
under certain other borrowing arrangements, bankruptcy actions or judgments or decrees against ACE, as well as by a change of control of ACE, such as the Conectiv/Pepco Merger. ACE plans to request a waiver of its term loan change of control
provisions so the term loan will continue after the Conectiv/Pepco Merger. ACE plans to repay this debt with proceeds from the expected issuance of transition bonds, which are discussed in Note 6 to the Consolidated Financial Statements.





Substantially all of ACEs utility plant is subject to the lien of the Mortgage and Deed of Trust dated January 15, 1937,
as amended and supplemented, collateralizing ACEs First Mortgage Bonds and Secured Medium Term Notes. ACEs mortgage requires that electric generating plants sold (as discussed in Note 9 to the Consolidated Financial Statements) be
released from the lien. Assets may be released with a combination of cash, bondable property additions, and credits representing previously issued and retired First Mortgage Bonds. Pursuant to these terms, ACEs interests in nuclear electric
generating plants that were sold on October 18, 2001 were released from the lien. ACE expects to have sufficient credits from retired First Mortgage Bonds to release its fossil fuel-fired plants that are expected to be sold during 2002, as discussed
in Note 9 to the Consolidated Financial Statements.




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Long-term debt outstanding as of December 31, 2001 and 2000 is presented below.





Type of Debt

Maturity Date

December 31,2001


2000(Dollars in Thousands)Secured debtMedium Term Notes Series C (6.86%)

2001

$



$
40,000Medium Term Notes Series C (7.02%)

2002


30,000



30,000Medium Term Notes Series B (7.18%)

2003


20,000



20,000Medium Term Notes Series D (6.00%)

2003


20,000



20,000Medium Term Notes Series A (7.98%)

2004


30,000



30,000Medium Term Notes Series B (7.125%)

2004


28,000



28,000Medium Term Notes Series C (7.15%)

2004


9,000



9,000Medium Term Notes Series B (6.45%)

2005


40,000



40,000Medium Term Notes Series D (6.19%)

2006


65,000



65,0006-3/8% Pollution Control Series

2006


2,125



2,200Medium Term Notes Series C (7.15%)

2007


1,000



1,000Medium Term Notes Series B (6.76%)

2008


50,000



50,000Medium Term Notes Series C (7.25%)

2010


1,000



1,0006-5/8% First Mortgage Bonds

2013


68,600



68,600Medium Term Notes Series C (7.63%)

2014


7,000



7,000Medium Term Notes Series C (7.68%)

2015


15,000



15,000Medium Term Notes Series C (7.68%)

2016


2,000



2,0006.80% Pollution Control Series A

2021


38,865



38,8657% First Mortgage Bonds

2023


62,500



62,5005.60% Pollution Control Series A

2025


4,000



4,0007% First Mortgage Bonds

2028


75,000



75,0006.15% Pollution Control Series A

2029


23,150



23,1507.20% Pollution Control Series A

2029


25,000



25,0007% Pollution Control Series B

2029


6,500



6,500623,740



663,815Unsecured debt6.46% Medium Term Notes Series A

2002


20,000



20,0006.63% Medium Term Notes Series A

2003


30,000



30,0007.52% Medium Term Notes Series A

2007


5,000



5,0007.50% Medium Term Notes Series A

2007


10,000



10,00065,000



65,000Term Loan7.32% Term Loan

2001






57,1252.95% Term Loan

2002


171,375



171,375Unamortized Premium and Discount, Net




(2,362
)


(2,462
)Current Maturities of Long-Term Debt




(221,450
)


(97,200
)Total Long Term Debt




636,303



857,653Variable Rate Demand Bonds, Pollution Control Series A*

2014


18,200



18,200Variable Rate Demand Bonds, Pollution Control Series B*

2017


4,400



4,400Total Long Term Debt and Variable Rate Demand Bonds



$
658,903


$
880,253


---

|* |  | Variable Rate Demand Bonds (VRDB) are classified as current liabilities because the VRDB are due on demand by the bondholder. However, bonds submitted to ACE for purchase are
remarketed by a remarketing agent on a best efforts basis. ACE expects that bonds submitted for purchase will continue to be remarketed successfully due to ACEs credit worthiness and the bonds interest rates being set at market. ACE also
may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, ACE considers the VRDB to be a source of long-term financing. Average interest rates on the VRDB were 2.4% for 2001 and 3.9% for 2000.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 15.    FAIR VALUE OF FINANCIAL INSTRUMENTS





The year-end fair value of certain financial instruments are listed below. The fair values were based on quoted market prices of ACEs securities
or securities with similar characteristics.





2001

2000CarryingValue

Fair Value

Carrying Value

FairValue(Dollars in Thousands)Investments

$
3,666

$
3,666

$
112,501

$
112,501Long Term Debt


636,303


642,304


857,653


850,753Preferred Stock Subject to Mandatory Redemption


12,450


12,948


23,950


24,369Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures


95,000


95,840


95,000


92,914





NOTE 16.    LONG-TERM PURCHASED POWER CONTRACTS





As of December 31, 2001, ACEs commitments under long-term purchased power contracts provided ACE 1,800 MW of capacity and varying amounts of firm
electricity per hour during each month of a given year. Commitments for purchased capacity under contracts existing as of December 31, 2001 will decrease by approximately 1,300 MW in 2002, primarily due to the anticipated replacement of the capacity
supplied by these contracts with the capacity and energy to be provided by the BGS suppliers that were selected by the auction process discussed in Note 6 to the Consolidated Financial Statements. Based on existing contracts as of December 31, 2001,
the commitments of ACE during the next five years for capacity and energy under long-term purchased power contracts are estimated to be as follows: $297 million in 2002, $214 million in 2003; $206 million in 2004; $234 million in 2005; and $231
million in 2006. As of December 31, 2001, provisions of certain contracts under which ACE procures electricity for BGS would require ACE to provide cash collateral of $42.1 million, if ACEs credit ratings were downgraded below investment
grade. The cash collateral required in the event of a credit rating downgrade fluctuates based on energy market conditions.





NOTE
17.    LEASES





Nuclear Fuel





As discussed in Note 9 to the Consolidated Financial Statements, ACE sold its ownership interests in nuclear electric generating plants and the related nuclear fuel on October 18, 2001. Prior to the sale, ACE leased
its share of nuclear fuel at the nuclear electric generating plants. The obligation of ACE under the contracts was repaid upon the sale of the interest in the nuclear electric generating plants on October 18, 2001 with proceeds from the sale.





Leased nuclear fuel costs included in operating expenses were $10.4 million for 2001, $14.2 million for 2000 and $14.8 million
for 1999.





Lease Commitments





ACE also leases other types of property and equipment for use in its operations. Amounts charged to operating expenses for these leases were $8.2 million in 2001, $10.1 million in 2000, and $7.6 million in 1999. Future minimum rental
payments for all non-cancelable lease agreements are less than $10 million per year for each of the next five years.




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NOTE 18.    PENSION AND OTHER POSTRETIREMENT BENEFITS





The employees of ACE and other Conectiv subsidiaries are provided pension benefits and other postretirement benefits under Conectiv benefit plans. The
amounts shown below are for the benefit plans of Conectiv and include amounts for all covered employees of the Conectiv subsidiaries which elect to participate in the benefit plans.





Assumptions





2001

2000

1999Discount rates used to determine projected benefit obligation as of December 31

7.25%

7.50%

7.75%Expected long-term rates of return on assets

9.50%

9.50%

9.00%Rates of increase in compensation levels

4.50%

4.50%

4.50%Health-care cost trend rate on covered charges

10.00%

8.00%

6.50%





The health-care cost trend rate, or the expected rate of increase in health-care
costs, is assumed to gradually decrease to 5.0% by 2007. Increasing the health-care cost trend rates of future years by one percentage point would increase the accumulated postretirement benefit obligation by $10.3 million and would increase annual
aggregate service and interest costs by $0.8 million. Decreasing the health-care cost trend rates of future years by one percentage point would decrease the accumulated postretirement benefit obligation by $10.3 million and would decrease annual
aggregate service and interest costs by $0.9 million.





The following schedules reconcile the beginning and ending balances of
the pension and other postretirement benefit obligations and related plan assets for Conectiv. Other postretirement benefits include medical benefits for retirees and their spouses and retiree life insurance.





Change in Conectivs Benefit Obligation





Pension Benefits


Other Postretirement Benefits2001


2000


2001


2000(Dollars in Thousands)Benefit obligation at beginning of year

$
694,621


$
673,095


$
201,493


$
194,031Service cost


20,338



18,388



4,381



3,908Interest cost


53,154



51,856



17,121



14,513Plan participants contributions










543



511Plan amendments


3,775



4,359







Actuarial loss


38,102



12,689



57,346



5,500Benefits paid


(55,023
)


(66,438
)


(17,047
)


(16,970
)Other






672







Benefit obligation at end of year

$
754,967


$
694,621


$
263,837


$
201,493





Change in Conectivs Plan Assets





Pension Benefits


Other Postretirement Benefits2001


2000


2001


2000(Dollars in Thousands)Fair value of assets at beginning of year

$
948,043


$
1,017,844


$
119,724


$
120,072Actual return on plan assets


(31,628
)


(3,363
)


(2,356
)


166Employer contributions










16,196



15,945Plan participants contributions










543



511Benefits paid


(55,023
)


(66,438
)


(17,047
)


(16,970
)Fair value of assets at end of year

$
861,392


$
948,043


$
117,060


$
119,724




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Reconciliation of Funded Status of Conectivs Plans





Pension Benefits


Other Postretirement Benefits2001


2000


2001


2000(Dollars in Thousands)Funded status at end of year

$
106,425


$
253,422


$
(146,777
)

$
(81,769
)Unrecognized net actuarial (gain) loss


(24,781
)


(181,008
)


22,438



(46,246
)Unrecognized prior service cost


17,727



7,794



99



149Unrecognized net transition (asset) obligation


(7,480
)


(10,245
)


34,404



37,531Net amount recognized at end of year

$
91,891


$
69,963


$
(89,836
)

$
(90,335
)Portion applicable to ACE

$
(35,529
)

$
(26,948
)

$
(36,429
)

$
(37,614
)





Based on fair values as of December 31, 2001, the pension plan assets were
comprised of publicly traded equity securities ($559.9 million or 65%) and fixed income obligations ($301.5 million or 35%). Based on fair values as of December 31, 2001, the other postretirement benefit plan assets included equity securities ($77.7
million or 66%) and fixed income obligations ($39.4 million or 34%).





Components of Conectivs Net Periodic Benefit Cost





Pension Benefits


Other Postretirement Benefits2001


2000


1999


2001


2000


1999(Dollars in Thousands)Service cost

$
20,338


$
18,388


$
20,288


$
4,381


$
3,908


$
5,282Interest cost


53,154



51,856



51,442



17,121



14,513



13,839Expected return on assets


(88,346
)


(90,037
)


(83,999
)


(8,981
)


(8,645
)


(6,769
)Amortization of:Transition obligation (asset)


(2,764
)


(2,764
)


(2,764
)


3,128



3,128



3,128Prior service cost


1,189



694



406



49



49



49Actuarial (gain)


(5,499
)


(13,767
)


(4,248
)






(3,060
)


(1,059
)Total net periodic benefit cost

$
(21,928
)

$
(35,630
)

$
(18,875
)

$
15,698


$
9,893


$
14,470Portion of net periodic benefit cost applicable to ACE

$
8,580


$
6,154


$
9,546


$
6,641


$
4,607


$
8,856ACE portion of net periodic benefit cost included in results of operations

$
8,580


$
6,154


$
9,546


$
6,641


$
4,607


$
8,856





Conectiv also maintains 401(k) savings plans for covered employees. Conectiv
contributes Conectiv common stock to the plan, at varying levels up to $0.50 of common stock for each dollar of up to 6% of pay contributed by the employee. The amount expensed for ACEs share of the 401(k) savings plan was $1.0 million in
2001, $1.0 million in 2000, and $1.6 million in 1999.





NOTE 19.    COMMITMENTS AND CONTINGENCIES





Commitments





ACEs capital expenditures for
2002 are estimated to be approximately $84 million.





See Note 16 to the Consolidated Financial Statements for commitments
related to long-term purchased power contracts and Note 17 to the Consolidated Financial Statements for commitments related to leases.




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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 (NJDEP). 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 $3.2 million included in ACEs current liabilities as of December 31, 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 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. The NJDEP has issued a stay of the denial to authorize ACE to operate Unit 1 with the current fuel until June 30, 2002 and an addendum to the permit/certificate to operate authorizing a
trial burn of coal with a sulfur content less than 2.6%. Management is not able to predict the outcome of ACEs appeal.





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 carrying value of the electric distribution facilities was approximately $9.1 million, as of December 31, 2001. The Citys Superior Court action has been dismissed, based on the
failure to hold a referendum, and the City has appealed this decision. On November 6, 2001, the City held a referendum and City residents voted to approve the Citys proposal to acquire ACE electric distribution facilities located within the
City limits. On March 8, 2002, ACE and the City announced that they had reached a tentative agreement which provides for ACE to receive $23.9 million for the electric distribution facilities located within the City limits. After a transition period
of 18 to 24 months primarily to reconfigure facilities, the transaction would close and the City would provide electric service to the Citys residents previously served by ACE.





On November 26, 2001, the FERC published a notice establishing a generic refund effective date of January 26, 2002 relative to collections by all utilities pursuant to their market-based
rates (MBR). ACE cannot determine with certainty whether the intent of FERC is to make all MBR collections subject to refund as of January 26, 2002. There has been no allegation that ACE has misused its MBR authority, and any possible refund
liability would not affect 2001 revenues.





NOTE 20.    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 divestiture of the electric generating plants of ACE (as discussed in Note 9 to the Consolidated Financial Statements).




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NOTE 21.    QUARTERLY FINANCIAL INFORMATION (unaudited)





The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results.
Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units.





2001First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total(Dollars in Thousands)Operating Revenues

$
225,771

$
247,323

$
337,827

$
230,250

$
1,041,171Operating Income


32,402


54,208


62,299


30,832


179,741Net Income


9,276


23,353


27,707


15,140


75,476Earnings Applicable to Common Stock


8,743


22,820


27,399


14,831


73,793





2000First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total(Dollars in Thousands)Operating Revenues

$
215,151

$
221,366

$
287,092

$
237,253

$
960,862Operating Income


22,680


36,411


66,123


41,310


166,524Net Income


1,573


14,113


28,155


10,593


54,434Earnings Applicable to Common Stock


1,040


13,581


27,621


10,060


52,302





As discussed in Note 1 to the Consolidated Financial Statements, under-recoveries
of costs related to BGS have been reclassified within the Consolidated Statements of Income from electric operating revenues to operating expenses, as a separate line item captioned Deferred electric service costs. A reconciliation of
quarterly revenues previously reported to restated quarterly revenues is shown below.





2001First Quarter


Second Quarter


Third Quarter(Dollars in Thousands)Operating revenues as reported in 2001quarterly reports on Form 10-Q

$
230,538


$
300,877


$
404,876Adjustment for deferred electric service costs


(4,767
)


(53,554
)


(67,049
)Restated operating revenues

$
225,771


$
247,323


$
337,827





2000First Quarter

Second Quarter


Third Quarter

Fourth Quarter


Total(Dollars in Thousands)Operating revenues as reported in 2000quarterly reports on Form 10-Q andthe 2000 Form 10-K

$
208,886

$
236,249


$
282,966

$
240,282


$
968,383Adjustment for deferred electric service costs


6,265


(14,883
)


4,126


(3,029
)


(7,521
)Restated operating revenues

$
215,151

$
221,366


$
287,092

$
237,253


$
960,862





|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- |  | -------------------------------------------------------------------------------------




None.




II-42




---

##### Table of Contents

PART III





ITEM
10.    
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





Directors

Business Experience during Past 5 YearsAs of December 31, 2001Howard E. Cosgrove, 58 Chairmanof
the Board

Elected 1998 as Chairman of the Board and Chief Executive Officer of Conectiv and Chairman of the Board of ACE. Chairman, President and Chief Executive Officer of Delmarva
Power & Light Company since 1992. Director of the Federal Reserve Board. Chairman of the Board of Trustees of the University of Delaware.Thomas S. Shaw, 54 Director

Elected 2000 as President and Chief Operating Officer of Conectiv. Elected 1998 as Executive Vice President of Conectiv. Elected 1992 as Senior Vice President of Delmarva
Power & Light Company.John C. van Roden, 52 Director

Elected 2000 as Senior Vice President and Chief Financial Officer of Conectiv and Chief Financial Officer of ACE. Elected 1998 as Senior Vice President and Chief Financial
Officer of Conectiv. Principal, Cook and Belier, Inc. in 1998. Senior Vice President/Chief Financial Officer and Vice President/Treasurer, Lukens, Inc. from 1987 to 1998.Barbara S. Graham, 53 Director

Elected 1999 as Senior Vice President of Conectiv. Elected 1998 as Senior Vice President and Chief Financial Officer of Conectiv. Elected 1994 as Senior Vice President,
Treasurer and Chief Financial Officer of Delmarva Power & Light Company.





Executives





Information about ACEs executive officers is included under Item 1.





ITEM
11.    
EXECUTIVE COMPENSATION





The following table shows information regarding the compensation earned
during the past year by the ACE President and by ACEs other four most highly compensated executive officers for the fiscal year ending December 31, 2001.





Table 1SUMMARY COMPENSATION TABLE





Year (1)



Long Term Compensation

All Other Compensation (6)Annual Compensation

Awards

PayoutsName and Principal Position


Salary (2)

Variable Compensation (Bonus) (3)

Other Annual Compensation

Restricted Stock Awards (4)

Securities Underlying Options

LTIP Payouts (5)J. M. Rigby, President

2001 2000

$ $
239,600 182,800

$ $
428,567 70,240

0 0

$ $
21,950 12,500

32,000 28,500

 

$ $
22,285 4,884J. C. van Roden, Senior Vice
President

2001 2000

$ $
294,700 275,000

$ $
90,535 85,400

0 0

$ $
106,725 90,625

39,300 34,700

 

$ $
23,569 8,406J. C. Weller, Vice
President

2001 2000

$ $
171,500 158,794

$ $
33,501 34,500

0 0

$ $
43,125 41,000

13,100 11,100

 

$ $
3,923 4,429J. M. Castaldi, Vice
President

2001 2000

$ $
130,900 126,000

$ $
30,192 28,880

0 0

$ $
9,025 0

7,500 6,800

 

$ $
3,856 4,580J. M. Wathen, Director

2001 2000

$ $
125,300 120,000

$ $
17,180 16,800

0 0

$ $
21,000 20,571

7,200 6,500

 

$ $
3,874 4,362




III-1




---

##### Table of Contents

---

|1. |  | This group of executive officers was appointed as of June 2000 and, therefore, only compensation for years 2000 and 2001 is listed.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------

|2. |  | In 2001 and 2000, Mr. Castaldi was paid an additional $3,528 and $6,057, respectively, for unused vacation.
|-- |  | -----------------------------------------------------------------------------------------------------------

|3. |  | The target award is 40% of annualized salary for Mr. Rigby, 45% for Mr. Van Roden, 30% for Mr. Weller, 20% for Mr. Castaldi and 20% for Mr. Wathen. For 2000, the dollar value
of the bonus reported above has been reduced by the portion of the bonus deferred, as follows: J. M Rigby ($87,800 bonus with $17,560 purchasing Restricted Stock Units (RSUs)); J. C. van Roden ($170,800 bonus with $85,400
purchasing RSUs); J. C. Weller ($69,000 bonus with $34,500 purchasing RSUs); J. M. Castaldi ($36,100 bonus with $7,220 purchasing RSUs); and J. M. Wathen ($33,600 bonus with $16,800 purchasing RSUs). For 2001, the dollar
value of the bonus reported above has been reduced by the portion of the bonus deferred, as follows: J. M Rigby ($157,133 bonus with $78,567 purchasing RSUs); J. C. van Roden ($181,071 bonus with $90,536 purchasing RSUs); J. C. Weller
($67,001 bonus with $33,501 purchasing RSUs); J. M. Castaldi ($37,740 bonus with $7,548 purchasing RSUs); and J. M Wathen ($34,360 bonus with $17,180 purchasing RSUs). In addition, in 2001, Mr. Rigby received a $350,000 retention
bonus related to the Conectiv/Pepco Merger.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | A mandatory 20% of the bonus (reported in this Table as Variable Compensation) and any additional portion of the bonus that an executive elects to defer (up to an
additional 30%) is deferred for at least three years under the Management Stock Purchase Program (MSPP) and used to purchase RSUs at a 20% discount. The dollar value of RSUs deferred under MSPP in 2001 (inclusive of the
discounted portion), based on the fair market value at the award date, was J. M. Rigby ($21,950 of which $4,390 is the discount); J. C. van Roden ($106,750 of which $21,350 is the discount); J. C. Weller ($43,125 of which $8,625 is the discount); J.
M. Castaldi ($9,025 of which $1,805 is the discount); and J. M. Wathen ($21,000 of which $4,200 is the discount). At the end of 2001, the number and value of the aggregate restricted stock holdings (including RSUs, Performance Accelerated
Restricted Stock (PARS) and special grants) valued at $24.49, the closing stock price on December 31, 2001, for the individuals identified in the Summary Compensation Table was as follows: for Mr. Rigby, 9,007 restricted stock holdings
valued at $220,581; for Mr. Van Roden, 20,539 restricted stock holdings valued at $498,592; for Mr. Weller, 8,935 restricted stock holdings valued at $218,818; for Mr. Castaldi 2,269 restricted stock holdings valued at $55,568; and for Mr. Wathen
4,797 restricted stock holdings valued at $117,479.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | As of December 31, 2001, Mr. Rigby held 7,600 shares of restricted stock (with grants of 1,600 for 2000 and 3,800 for 2001); Mr. Van Roden held 12,300 shares of restricted
stock (with grants of 4,700 for 2000 and 4,600 for 2001); Mr. Weller held 5,500 shares of restricted stock (with grants of 1,500 for 2000 and 1,500 for 2001); Mr. Castaldi held 1,900 shares of restricted stock (with grants of 1,000 for 2000 and 900
for 2001); and Mr. Wathen held 3,100 shares of restricted stock (with grants of 900 for 2000 and 800 for 2001). No new grants of Dividend Equivalent Units (DEUs) were made to executives in 2001. For the year 2000, Mr. Rigby
received DEU grants of 5,750; Mr. Van Roden received DEU grants of 17,350; Mr. Weller received DEU grants of 5,550; Mr. Castaldi received DEU grants of 3,400; and Mr Wathen received DEU grants of 3,250. All DEUs granted in years prior to 2001
lapsed following the dividend declared in the fourth quarter of 2000, which was payable in January of 2001. Dividends paid on DEUs for 2000 were as follows: Mr. Rigby, $9,075, $5,280 of which was deferred into the Conectiv Deferred
Compensation Plan; Mr. Van Roden, $20,251, all of which was deferred into the Conectiv Deferred Compensation Plan; Mr. Weller, $9,691; Mr. Castaldi $2,244, and Mr. Wathen, $5,665, $3,520 of which was deferred into the Conectiv Deferred Compensation
Plan. Dividends on shares of restricted stock and DEUs are accrued at the same rate as that paid to all holders of common stock. Holders of restricted stock are entitled to receive dividends as, if and when declared.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | The amount of All Other Compensation for each of the named executive officers for fiscal year 2001 include the following: Mr. Rigby, $4,500 in Conectiv matching contributions
to Conectivs Savings and Investment Plan, $2,700 in Conectiv matching contributions to Conectivs Deferred Compensation Plan, $257 in term life insurance premiums paid by Conectiv and $14,828 in financial planning services and related
taxes; for Mr. van Roden, $5,100 in Conectiv matching contributions to Conectivs Savings and Investment Plan, $2,250 in Conectiv matching contributions to the Conectiv Deferred Compensation Plan, $1,039 in term life in
-
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



III-2




---

##### Table of Contents

| | surance premiums paid by Conectiv, and $15,180 in financial planning services and related taxes; for Mr. Weller, $3,218 in Conectiv matching contributions to Conectivs Savings and
Investment Plan, and $705 in term life insurance premiums paid by Conectiv; for Mr. Castaldi, $3,175 in Conectiv matching contributions to Conectivs Savings and Investment Plan, and $681 in term life insurance premiums paid by Conectiv; and
for Mr. Wathen, $3,526 in Conectiv matching contributions to Conectivs Savings and Investment Plan and $348 in term life insurance premiums paid by Conectiv.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Table 2Option Grants in Last Fiscal Year (1)





Name

Number of Securities Underlying Options Granted(#)


% of Total Options Granted to Employees in Fiscal Year


Exercise Price ($/Sh)

Expiration Date

Grant Date Present Value (3)J.M. Rigby

32,000
(2)

5
%

$
19.53125

1/2/11

$
109,664J.C.van Roden

39,300
(2)

6
%

$
19.53125

1/2/11

$
134,681J.C. Weller

13,100
(2)

2
%

$
19.53125

1/2/11

$
44,894J.M. Castaldi

7,500
(2)

1
%

$
19.53125

1/2/11

$
25,703J.M. Wathen

7,200
(2)

1
%

$
19.53125

1/2/11

$
25,703


---

|1. |  | Currently, Conectiv does not grant stock appreciation rights.
|-- |  | -------------------------------------------------------------

|2. |  | Denotes Nonqualified Stock Options. One-half of such Options vest and are exercisable at the end of the second year from date of grant. Second one-half vest and are exercisable
at end of the third year from the date of grant.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments: (a) exercise price of $19.53125, equal to the Fair Market Value as
of date of grant (b) an option term of ten years (c) risk-free rate of return of 5.00% (d) volatility of 20.00% and (e) dividend yield of 4.75%.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Table 3Aggregated Option Exercises in Last Fiscal Year


and FY-End Option Values





Name

Shares Acquired On Exercise

Value Realized ($) (1)

Number of Securities Underlying Unexercised Options at FY-End (2) Exercisable/Unexercisable

Value of Unexercised in- the-Money Options at FY-End (1) Exercisable/UnexercisableJ. M. Rigby

0

0

9,000/63,500

$
10,598/385,334J. C. van Roden

0

0

10,000/234,000

$
2,400/508,363J. C. Weller

0

0

17,700/35,200

$
11,870/153,795J. M. Castaldi

0

0

0/14,300

$
0/91,098J. M. Wathen

0

0

6,000/15,700

$
7,065/87,712


---

|1. |  | The closing price for Conectivs common stock as reported by the New York Stock Exchange on December 31, 2001 was $24.49. Any value in the options is based on the
difference between the exercise price of the options and the value at the time of the exercise (e.g., $24.49 as of the close of business on December 31, 2001), which difference is multiplied by the number of options exercised.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | All of the unexercisable options listed on Table 3 are in the money except for Mr. Wellers, of which 27,700 out of 35,200 unexercisable options are in the money. Unless
vesting is accelerated under the terms of Conectivs Long-Term Incentiv Plan (LTIP), none of the remaining options may be exercised earlier than two years from date of grant for regular, non-performance based options and nine and
one half years from date of grant for performance based options (subject to accelerated vesting for favorable stock price performance).
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



III-3




---

##### Table of Contents




Table 4Long-Term Incentive Plans  Awards in Last Fiscal Year (1)





Name

Number of Restricted Shares (#)

Performance Period Until Maturation Or Payout(1)J. M. Rigby

3,800 shares

1/2/08J. C. van Roden

4,600 shares

1/2/08J. C. Weller

1,500 shares

1/2/08J. M. Castaldi

900 shares

1/2/08J. M. Wathen

800 shares

1/2/08


---

|1. |  | Awards of PARS were made to all of the named executive officers. The payout of shares of PARS may potentially be performance accelerated. Restrictions may lapse any
time after 3 years (i.e.,after January 2, 2004) upon achievement of favorable stock price performance goals. In the absence of such favorable performance or accelerated vesting under the terms of Conectivs LTIP, restrictions lapse
after 7 years (i.e.,January 2, 2008), provided that at least a defined level of average, total return to stockholders is achieved. As of December 31, 2001, Mr. Rigbys 3,800 PARS were valued at $93,062, Mr.van Rodens 4,600 PARS
were valued at $112,654, Mr. Wellers 1,500 PARS were valued at $36,735, Mr. Castaldis 900 PARS were valued at $22,041, and Mr Wathens 800 PARS were valued at $19,592. These values are based on the December 31, 2001 closing stock
price of $24.49.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PENSION PLAN





The Conectiv Retirement Plan includes the Cash Balance Pension Plan and certain grandfathering provisions relating to the Delmarva Retirement Plan and the Atlantic Retirement
Plan that apply to employees who had either 20 years of service or were age 50 on the effective date of the Cash Balance Pension Plan (January 1, 1999). Certain executives whose benefits from the Conectiv Retirement Plan are limited by the
application of federal tax laws also receive benefits from the Supplemental Executive Retirement Plan.





Cash Balance Pension
Plan





The named executive officers participate in the Conectiv Retirement Plan and earn benefits that generally become
vested after five years of service. Annually, a recordkeeping account in a participants name is credited with an amount equal to a percentage of the participants total pay, including base pay, overtime and bonuses, depending on the
participants age at the end of the plan year, as follows:





Age at end of Plan Year

% of PayUnder 30

530 to 34

635 to 39

740 to 44

845 to 49

950 and over

10





These accounts also receive interest credits based on average U.S. Treasury Bill
rates for the year. In addition, certain annuity benefits earned by participants under the former Delmarva Retirement Plan and Atlantic Retirement Plan are fully protected as of December 31, 1998, and were converted to an equivalent cash amount and
included in each participants initial cash balance account. When a participant terminates employment, the amount credited to his or her account is converted into an annuity or paid in a lump sum.




III-4




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##### Table of Contents




Supplemental Retirement Benefits





Supplemental retirement benefits are provided to certain employees, including each executive officer, whose benefits under the Conectiv Retirement Plan
are limited by type of compensation or amount under federal tax laws and regulations.





Estimated Retirement Benefits
Payable to Named Executives Officers





The following table shows the estimated retirement benefits, including
supplemental retirement benefits under the plans applicable to the named executives, that would be payable if he or she were to retire at normal retirement age (65), expressed in the form of a lump sum payment. Years of service credited to each
named executive officer as of his or her normal retirement date are as follows: Mr. Rigby43, Mr. van Roden16, Mr. Weller21, Mr. Castaldi42, and Mr. Wathen27.





Name

Year of 65th Birthday

Lump Sum ValueJ. M. Rigby

2021

$
2,152,000
(1)J. C. van Roden

2014

$
1,056,000
(1)J. C. Weller

2014

$
530,000
(1)J. M. Castaldi

2012

$
1,206,000
(1)J. M. Wathen

2020

$
733,000
(1)


---

|(1) |  | Amounts include (i) interest credits for cash balances projected to be 5.32% per annum on annual salary credits and prior service balances, if any, and (ii) accrued benefits as
of December 31, 2001, under retirement plans then applicable to the named executive officer. Benefits are not subject to any offset for Social Security payments or other offset amounts and assume no future increases in base pay or total pay.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Under the Conectiv Retirement Plans grandfathering provisions, employees who participated in the
Delmarva or Atlantic Retirement Plans and who met certain age and service requirements as of January 1, 1999, will have retirement benefits for all years of service up to the earlier of December 31, 2008, or retirement calculated according to their
original benefit formula. This benefit will be compared to the cash balance account and the employee will receive, whichever is greater. For years after December 31, 2008, all participants benefits will be calculated under the cash balance
plan. Current actuarial estimates and assumptions indicate that all five of the above executives will receive retirement benefits based on the Cash Balance Pension Plan.





Change in Control Severance Agreements and


Other Provisions Relating to Possible Change in Control





For the executive officers of ACE, Conectiv has entered into change in control severance agreements with Messrs. Rigby and van Roden. The agreements are
intended to encourage the continued dedication of Conectivs senior management team. The agreements provide potential benefits for these executives upon actual or constructive termination of employment (other than for cause) following a change
in control of Conectiv, as defined in the agreements. Each affected executive would receive a severance payment equal to three times base salary and bonus, medical, dental, vision, group life and disability benefits for three years after termination
of employment, and a cash payment equal to the actuarial equivalent of accrued pension credits equal to 36 months of additional service.





In the event of a change in control, the Variable Compensation Plan provides that outstanding options become exercisable in full immediately, all conditions to the vesting of PARS are deemed satisfied and shares will be fully vested and
nonforfeitable, variable compensation deferred under the Management Stock Purchase Program will be immediately distributed, and payment of variable compensation, if any, for the current year will be decided by the Personnel and Compensation
Committee. For the Deferred Compensation Plan, this Committee




III-5




---

##### Table of Contents

may decide to distribute all deferrals in cash immediately or continue the deferral elections of participants, in which case Conectiv will fully fund a springing rabbi trust to
satisfy the obligations. An independent institutional trustee will maintain any trust established by reason of this provision.





ITEM
12.    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





All shares of ACEs common stock
are owned by Conectiv, ACEs parent company.





ITEM 13.    
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





None




III-6




---

##### Table of Contents

PART IV





ITEM
14.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K





(a)  Documents filed as part of this
report.





1.  Financial Statements





The following financial statements are contained in Item 8 of Part II.





Page No.Report of Independent Accountant, PricewaterhouseCoopers LLP

II-16Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999

II-17Consolidated Balance Sheets as of December 31, 2001 and 2000

II-18, 19Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999

II-20Consolidated Statements of Changes in Common Stockholders Equity for the years ended December 31, 2001, 2000, and
1999

II-21Notes to Consolidated Financial Statements

II-22





2.  Financial Statement Schedules





Schedule IIValuation and Qualifying Accounts for each of the three years in the period ended December 31, 2001, is presented below. No other financial statement schedules have
been filed since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or the notes thereto.





Schedule IIValuation and Qualifying Accounts


Years Ended
December 31, 2001, 2000, 1999


(Dollars in thousands)





AdditionsBalance at beginning of period

Charged to cost and expenses

Charged to other accounts

Deductions


Balance at end of period2001Allowance for doubtful accounts

$
4,423

$
11,330



$
7,949
(a)

$
7,8042000Allowance for doubtful accounts


3,500


4,248




3,325
(a)


4,4231999Allowance for doubtful accounts


3,500


5,590




5,590
(a)


3,500


---

|(a) |  | Accounts receivable written-off.
|--- |  | --------------------------------



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---

##### Table of Contents

3.  Exhibits





Exhibit Number2

Amended and Restated Agreement and Plan of Merger, dated as of December 26, 1996, between DPL, Atlantic Energy, Inc., Conectiv,
Inc. and DS Sub, Inc. (Filed with Registration Statement No. 333-18843)3-A

Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc. filed with Delaware Secretary of State, effective as of March 1, 1998 (Filed with 1998 Form 10-K,
file no. 1-3559)3-B

Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc. filed with New Jersey Department of State, effective as of March 1, 1998 (Filed with 1998 Form
10-K, file no. 1-3559)3-C

Certificate to change name from Conectiv, Inc. to Conectiv filed with the Delaware Secretary of State pursuant to Section 102(a) of the Delaware General Corporation Law
(Filed with 1998 Form 10-K, file no. 1-3559)3-D

By-Laws of Atlantic City Electric Company, as amended April 24, 1989 (File No. 1-3559, Form 10-Q for the quarter ended September 31, 1989Exhibit No. 3)4-A

Mortgage and Deed of Trust, dated January 15, 1937, between Atlantic City Electric Company and The Bank of New York (formerly Irving Trust Company) and Supplemental
Indentures through November 1, 1994 (File No. 2-66280Exhibit No. 2(b); File No. 1- 3559, Form 10-K for year ended December 31, 1980Exhibit No. 4(d); Form 10-Q for quarter ended June 30, 1981Exhibit No. 4(a); Form 10-K for year
ended December 31, 1983Exhibit No. 4(d); Form 10-Q for quarter ended March 31, 1984Exhibit No. 4(a); Form 10-Q for quarter ended June 30, 1984Exhibit 4(a); Form 10-Q for quarter ended September 30, 1985Exhibit 4; Form 10-Q
for quarter ended March 31, 1986Exhibit No. 4; Form 10-K for year ended December 31, 1987Exhibit No. 4(d); Form 10-Q for quarter ended September 30, 1989Exhibit No. 4(a); Form 10-K for year ended December 31, 1990Exhibit No.
4(c); File No. 33-49279Exhibit No. 4(b); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1993Exhibits 4(a) & 4(b); Form 10-K for the year ended December 31, 1993Exhibit 4c(i); File no. 1-3559, Form 10-Q for the
quarter ended June 30, 1994-Exhibit 4(a); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1994Exhibit 4(a); Form 10-K for year ended December 31, 1994Exhibit 4(c)(1)4-B

Indenture dated as of March 1, 1997 between Atlantic City Electric Company and The Bank of New York filed on Form 8-K, dated March 24, 1997, File No. 1-3559Exhibit
4(e)4-C

Indenture Supplemental dated as of March 1, 1997 to Mortgage and Deed of Trust dated January 15, 1937 between Atlantic City Electric Company and The Bank of New York filed
on Form 8-K dated March 24, 1997, File No 1-3559, Exhibit 4(b)4-D

Amended and Restated Trust Agreement, dated as of October 1, 1996, by and among Atlantic City Electric Company, as Depositor, The Bank of New York, as Property Trustee, The
Bank of New York (Delaware) as Delaware Trustee and the Administrative Trustees Named Therein, (File No. 1-9760, Form 10-K for year ended December 31, 1996Exhibit No. 4f(7))4-E

Junior Subordinated Indenture, dated as of October 1, 1996, by and between Atlantic City Electric Company and The Bank of New York, as Trustee, (File No. 1-9760, Form 10-K
for year ended December 31, 1996Exhibit No. 4f(8))4-F

Guarantee Agreement, dated as of October 1, 1996, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee, (File No.
1-9760, Form 10-K for year ended December 31, 1996Exhibit No. 4f(9))4-G

Amended and Restated Trust Agreement, dated as of October 1, 1998, by and among Atlantic City Electric Company, as Depositor, The Bank of New York, as Property Trustee, The
Bank of New York (Delaware) as Delaware Trustee and the Administrative Trustees Named Therein (Filed with 1998 Form 10-K, file no. 1-3559)


|
|



IV-2




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##### Table of Contents




Exhibit Number4-H

Junior Subordinated Indenture, dated as of October 1, 1998, by and between Atlantic City Electric Company and The Bank of New York, as Trustee (Filed with 1998 Form 10-K,
file no. 1-3559)4-I

Guarantee Agreement, dated as of October 1, 1998, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee (Filed with 1998
Form 10-K, file no. 1-3559)10-A

Termination Agreement dated August 14, 1997 between Atlantic Energy, Inc. and Michael J. Chesser. (Filed with 1997 Form 10-K, file No. 1-3559)10-B

Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (wholly owned electric generating plants) (filed with ACEs 2000 Annual
Report on Form 10-K, as Exhibit 10-B).10-C

Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc. (jointly owned electric generating plants) (filed with ACEs 2000 Annual
Report on Form 10-K, as Exhibit 10-C).10-D

Second Amendment to the Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc., dated as of October 31, 2001 (wholly owned electric
generating plants) (Filed with ACEs report on Form 10-Q for the quarterly period ended September 30, 2001, as Exhibit 10-B)10-E

Second Amendment to the Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc., dated as of October 31, 2001 (jointly owned electric
generating plants) (Filed with ACEs report on Form 10-Q for the quarterly period ended September 30, 2001, as Exhibit 10-C)12-A

Ratio of earnings to fixed charges, filed herewith12-B

Ratio of earnings to fixed charges and preferred dividends, filed herewith99

Pro Forma Financial StatementsGeneration Asset Sale , filed herewith





(b)  Reports on Form 8-K





The following Reports on Form 8-K were filed in the fourth quarter of 2001:





On October 22, 2001, ACE filed a Current Report on Form 8-K dated October 18, 2001, reporting on Item 5, Other Events, and Item 7, Financial Statements, Pro Forma Financial Statements, and Exhibits.




IV-3




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##### Table of Contents




SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 2002.





| | AT | LANTIC CITY ELECTRIC COMPANY
| | -- | ----------------------------

| | (Re | gistrant)
| | --- | ---------




By

/s/    JOHN C. VAN
RODEN(John C. van Roden, Chief Financial Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 27, 2002.





Signature

Title/S/    HOWARD E. COSGROVE (Howard E. Cosgrove)

Chairman of the Board/S/    JOSEPH M. RIGBY (Joseph M. Rigby)

President/S/    JOHN C. VAN RODEN (John C. van Roden)

Director and Chief Financial Officer/S/    JAMES P. LAVIN (James P. Lavin)

Controller and Chief Accounting Officer/S/    THOMAS S. SHAW (Thomas S. Shaw)

Director/S/    BARBARA S. GRAHAM (Barbara S. Graham)

Director




IV-4




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##### Table of Contents

EXHIBIT INDEX





Exhibit No.

Description12-A

Ratio of Earnings to Fixed Charges12-B

Ratio of Earnings to Fixed Charges and Preferred Dividends99

Pro Forma Financial StatementsGeneration Asset Sale