Item 1
. BUSINESS
In 2001, Atlantic City Electric Company (ACE) formed Atlantic City Electric Transition Funding LLC (ACE Funding). ACE is an indirect wholly owned subsidiary of Pepco Holdings, Inc., a diversified energy company, which is a registered holding company under the Public Utility holding Company Act of 1935. Under New Jersey law, ACE (or a financing entity) is permitted to securitize authorized portions of ACE's recoverable stranded costs through the issuance of bonds (Transition Bonds) and to collect from its customers charges sufficient to fund principal and interest payments on the Transition Bonds and related taxes, expenses and fees. The right to collect the Transition Bond charges is known as Bondable Transition Property (BTP). The sole purpose for the establishment of ACE Funding is to issue Transition Bonds, the proceeds of which are transferred to ACE in exchange for the related BTP. ACE Funding issued $152 million of transition bonds in December 2003 and $440 million of transition bonds in 2002.
ACE Funding has no employees.
Investor Information
ACE Funding is a reporting company under the Exchange Act. Its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are made available free of charge on Pepco Holdings' Internet website as soon as reasonably practicable after such documents are electronically filed with or furnished to the SEC. These reports may be found at http://www.pepcoholdings.com/investors/index_secfilings.html.
Item 2
Item 2
. PROPERTIES
ACE Funding does not own any real property. Its primary asset is the BTP described in Item 1. Business.
Item 3
Item 3
. LEGAL PROCEEDINGS
None.
Item 4
Item 4
. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information for this Item is not required because ACE Funding meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form with a reduced filing format.
Part II
Item 5
Item 5
. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of the membership interests of ACE Funding are owned by ACE. ACE Funding made no distributions to ACE in 2003 or 2002.
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Report of Independent Auditors
To the Member and Managing Board
of Atlantic City Electric Transition Funding LLC
In our opinion, the accompanying balance sheets and the related statement of earnings and member's equity and cash flows present fairly, in all material respects, the financial position of Atlantic City Electric Transition Funding LLC at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the LLC's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these 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.
PricewaterhouseCoopers LLP
February 26, 2004
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The accompanying Notes are an integral part of these Financial Statements.
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NOTES TO FINANCIAL STATEMENTS
ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC.
(1) ORGANIZATION
Atlantic City Electric Transition Funding LLC (ACE Funding), a limited liability company established by Atlantic City Electric (ACE) under the laws of the State of Delaware, was formed on March 28, 2001 pursuant to a limited liability company agreement with ACE dated April 11, 2001 as amended, as sole member of ACE Funding. ACE is a wholly owned subsidiary of Conectiv, which is a wholly owned subsidiary of Pepco Holdings, Inc., a registered holding company under the Public Utility Holding Company Act of 1935. ACE is a public utility, which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery.
ACE Funding was organized for the sole purpose of purchasing and owning Bondable Transition Property (BTP), issuing transition bonds (Transition Bonds) to fund the purchasing of BTP, pledging its interest in BTP and other collateral to the Trustee to collateralize the Transition Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. BTP represents the irrevocable right of ACE or its successor or assignee, to collect a non-bypassable transition bond charge (TBC) from customers pursuant to bondable stranded costs rate orders (NJBPU Financing Orders), issued by the New Jersey Board of Public Utilities (NJBPU) in accordance with the Electric Discount and Energy Competition Act enacted by the state of New Jersey in February 1999.
On September 20, 2002, a NJBPU Financing Order was issued to ACE authorizing the issuance of $440 million of Transition Bonds. ACE Funding issued $440 million of Transition Bonds on December 19, 2002 and used the proceeds to purchase BTP from ACE. On September 25, 2003, a second NJBPU Financing Order was issued to ACE authorizing the issuance of up to $152 million of Transition Bonds. ACE Funding issued $152 million of Transition Bonds on December 23, 2003 and used the proceeds to purchase BTP from ACE.
ACE Funding's organizational documents require it to operate in a manner so that it should not be consolidated in the bankruptcy estate of ACE in the event ACE becomes subject to a bankruptcy proceeding. Both ACE and ACE Funding treat the transfer of the BTP to ACE Funding as a sale under the applicable law. The Bonds are treated as debt of ACE Funding.
For financial reporting, federal income tax and State of New Jersey income and corporation business tax purposes, ACE is treating the transfer of BTP to ACE Funding as a financing arrangement and not as a sale. Furthermore, the results of operations of ACE Funding are consolidated with ACE for income tax reporting purposes.
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Although ACE Funding believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.
Revenues
Substantially all of ACE Funding's revenues are derived from the TBC authorized pursuant to the NJBPU financing order, which is being collected from ACE customers. ACE Funding also accrues unbilled TBC revenues for electric service provided by ACE through the end of the accounting period. In addition, ACE Funding may record investment income on amounts on deposit with the Trustee; however, only earnings on the capital subaccount may be recorded in income, as earning on the other subaccounts must be credited to ACE customers pursuant to the NJBPU financing order. ACE Funding may also earn interest on temporary cash investments.
Restricted Funds
Amounts on deposit with the Trustee are classified as restricted funds held by trustee on the Balance Sheet.
Bondable Transition Property
THE BTP was recorded at the acquired cost and is being amortized over the life of the Bonds, based on TBC revenue collections, interest accruals and other fees.
Prior to issuance of the Bonds, certain costs associated with the issuance were paid by ACE and included as BTP on ACE Funding's Balance Sheet. Upon issuance of the Bonds, ACE Funding reimbursed ACE for these costs, and the costs are being amortized as part of the BTP.
Income Taxes
ACE Funding is a single member limited liability company, which is treated as a disregarded entity for federal and state income tax purposes. Accordingly, ACE Funding's results are included in the tax returns of ACE.
(3) BONDS
On October 20, 2003, ACE Funding redeemed at maturity $14.5 million of 2.80% Class A-1 Notes.
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Scheduled maturity and interest rates for the Transition Bonds at December 31, 2003 are as follows:
The expected final payment date for each class of Transition Bonds is the date on which there is expected to be no further outstanding principal balance for that class, based upon an expected amortization schedule for that class. ACE Funding has made certain assumptions in establishing these amortization schedules, including, among other things, that all TBC collections are received in accordance with ACE's forecasts. There can be no assurance that the principal balance of any class of Transition Bonds will be reduced at the rates indicated in these amortization schedules. The legal final maturity date for each class of Transition Bonds is the date on which ACE Funding is required to pay any outstanding principal balance for that class. The Transition Bonds will not be in default if principal is not paid in accordance with the expected amortization schedules; however, a default will occur if the entire outstanding balance of any class is not paid on or before the legal final maturity date of that class.
The source for repayment of the Transition Bonds is the TBC authorized pursuant to the NJBPU financing order, which is being collected from ACE customers by ACE, as Servicer. Daily, ACE deposits TBC collections into a collection account maintained by the Trustee. ACE began remitting TBC collections to the Trustee on December 31, 2002. In accordance with the Indenture, the Trustee allocates amounts in the collection account to general, reserve, over collateralization and capital sub accounts. The general sub account is used to make principal and interest payments on the Transition Bonds and to pay expenses, fees and charges as specified in the Indenture. The reserve sub account is maintained for the purpose of retaining any excess amount of TBC collections and investment earnings not released to ACE Funding. The funding level of the over collateralization sub account is 0.5% of the initial principal balance of the Transition Bonds. If amounts available in the general, reserve or over collateralization sub accounts are not sufficient on any payment date to make scheduled payments, the Trustee will draw on amounts in the capital sub account. Upon issuance of the Transition Bonds, an amount equal to 0.5% of the initial principal balance of the Bonds was deposited into the capital sub account. Any amounts collateralizing Transition Bonds will be refunded to ACE upon repayment of the Transition Bonds.
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At December 31, 2003, $3.0 million in capital was reflected in the sub accounts maintained by the Trustee.
(4) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the servicing agreement entered into by ACE Funding and ACE concurrently with the issuance of the Bonds, ACE, as Servicer, manages and administers the BTP of ACE Funding and collects the TBC on behalf of ACE Funding. ACE Funding is required to pay an annual servicing fee to ACE equal to $592,000, 1% of the initial principal balance of the Series 2002 and Series 2003 Bonds, which is recovered through the TBC. ACE Funding has also entered into an administration agreement with PHI Service Company, Inc., an affiliated company, pursuant to which PHI Service Company, Inc. is providing administrative services to ACE Funding.
Item 9
. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A
. CONTROLS AND PROCEDURES
ACE Funding is an "asset-backed issuer" (as defined by Rule 15d-14(g) under the Exchange Act) and, accordingly, this Item is not applicable as provided in Rule 15d-15 under the Exchange Act.
Part III
Item 10
. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information for this Item is not required because ACE Funding meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form with a reduced filing format.
Item 11
. EXECUTIVE COMPENSATION
Information for this Item is not required because ACE Funding meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form with a reduced filing format.
Item 12
. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information for this Item is not required because ACE Funding meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form with a reduced filing format.
Item 13
. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information for this Item is not required because ACE Funding meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and therefore is filing this Form with a reduced filing format.
Item 14
. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Omitted pursuant to the instruction to Item 14 of Form 10-K.
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Part IV
Item 15
. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
Documents List
The financial statements filed as part of this report consist of:
(a) The financial statements set forth in Item 8. "Financial Statements and Supplemental Data."
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on December 11, 2003. The items reported on such Form 8-K were Item 5 (Other Events and Required FD Disclosure) and Item 7