ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
Commission File Number		Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone Number	I.R.S. Employer Identification Number
001-31403		PEPCO HOLDINGS, INC. ("Pepco Holdings," a Delaware corporation) 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	52-2297449
001-1072		POTOMAC ELECTRIC POWER COMPANY ("Pepco," a District of Columbia and Virginia corporation) 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	53-0127880
001-13895		CONECTIV ("Conectiv," a Delaware corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0377417
001-1405		DELMARVA POWER & LIGHT COMPANY ("DPL," a Delaware and Virginia corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0084283
001-3559		ATLANTIC CITY ELECTRIC COMPANY ("ACE," a New Jersey corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	21-0398280
333-59558		ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC ("ACE Funding," a New Jersey corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0408521
Continued
Securities registered pursuant to Section 12(b) of the Act:
Registrant	Title of Each Class		Name of Each Exchange on Which Registered
Pepco Holdings	Common Stock, $.01 par value		New York Stock Exchange
Pepco	Guarantee by Pepco of the 7-3/8% Trust Originated Preferred Securities issued by Potomac Electric Power Company Trust I		New York Stock Exchange
DPL	Guarantee by DPL of the 8.125% Cumulative Trust Preferred Capital Securities of Delaware Power Financing I		New York Stock Exchange
ACE	Guarantee by ACE of the 7-3/8% Cumulative Quarterly Income Preferred Securities, issued by Atlantic Capital II		New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether each of the registrants (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 and (2) has been subject to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark whether Pepco Holdings is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X . No .
Pepco, Conectiv, DPL, ACE, and ACE Funding are not accelerated filers.
Conectiv, DPL, ACE and ACE Funding meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

Registrant	Number of Shares of Common Stock of the Registrant Outstanding at March 31, 2003
Pepco Holdings	170,439,536 ($.01 par value)
Pepco	100 ($.01 par value) (a)
Conectiv	100 ($.01 par value) (a)
DPL	1,000 ($2.25 par value) (b)
ACE	18,320,937 ($3 par value)(b)
ACE Funding	None (c)

(a)	As of August 1, 2002, all voting and non-voting common equity is owned by Pepco Holdings.
(b)	All voting and non-voting common equity is owned by Conectiv.
(c)	All voting and non-voting common equity is owned by ACE.

DOCUMENTS INCORPORATED BY REFERENCE

THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PEPCO HOLDINGS, PEPCO, CONECTIV, DPL, ACE, AND ACE FUNDING. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

TABLE OF CONTENTS
			Page
PART I	FINANCIAL INFORMATION
Item 1.	-	Financial Statements	1
Item 2.	-	Management's Discussion and Analysis of Financial Condition and Results of Operations	73
Item 3.	-	Quantitative and Qualitative Disclosures About Market Risk	117
Item 4.	-	Controls and Procedures	117
PART II	OTHER INFORMATION
Item 1.	-	Legal Proceedings	120
Item 2.	-	Changes in Securities and Use of Proceeds	123
Item 3.	-	Defaults Upon Senior Securities	123
Item 4.	-	Submission of Matters to a Vote of Security Holders	123
Item 5.	-	Other Information	124
Item 6.	-	Exhibits and Reports on Form 8-K	125
Signatures			133
Principal Executive Officer and Principal Financial Officer Certifications			134

TABLE OF CONTENTS - EXHIBITS
Exh. No.	Registrant(s)	Description of Exhibit	Page
12.1	PHI	Statements Re: Computation of Ratios	126
12.2	Pepco	Statements Re: Computation of Ratios	127
12.3	Conectiv	Statements Re: Computation of Ratios	128
12.4	DPL	Statements Re: Computation of Ratios	129
12.5	ACE	Statements Re: Computation of Ratios	130
15	PHI	Independent Accountants' Awareness Letter	131
99.1	PHI	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	158
99.2	Pepco	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	159
99.3	Conectiv	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	160
99.4	DPL	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	161
99.5	ACE	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	162
99.6	ACEF	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	163

THIS PAGE LEFT BLANK INTENTIONALLY

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Listed below is a table that sets forth, for each registrant, the page number where the information is contained herein.

	Registrants
Item	Pepco Holdings	Pepco	Conectiv	DPL	ACE	ACE Funding
Report of Independent Accountants	3	N/A	N/A	N/A	N/A	N/A
Consolidated Statements of Earnings	4	25	37	51	59	68
Consolidated Statements of Comprehensive Income	5	26	38	N/A	N/A	N/A
Consolidated Balance Sheets	6	27	39	52	60	69
Consolidated Statements of Cash Flows	8	29	40	54	62	70
Notes to Consolidated Financial Statements	9	30	42	55	63	71

THIS PAGE LEFT INTENTIONALLY BLANK.

Report of Independent Accountants

To the Shareholders and Board of Directors
of Pepco Holdings, Inc.

We have reviewed the accompanying consolidated balance sheet of Pepco Holdings, Inc. and its subsidiaries (the Company) as of March 31, 2003, and the related consolidated statements of (loss) earnings and consolidated statements of comprehensive (loss) income for each of the three-month periods ended March 31, 2003 and 2002 and the consolidated statement of cash flows for the three-month periods ended March 31, 2003 and 2002. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of earnings, and the consolidated statements of comprehensive income, and consolidated statements of cash flows for the year then ended (not presented herein), and in our report dated February 10, 2003, except as to Note (a) to Note 11 for which the date is February 28, 2003 and as to the eleventh and twelfth paragraphs of Note 15 for which the date is March 4, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP
Washington, DC
May 14, 2003

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS
(Unaudited)

Three Months Ended March 31,

   2003

   2002

(Millions, except $ per share data)

Operating Revenue

  Pepco

$  333.4

$316.1

  Conectiv Power Delivery

640.9

-

  Conectiv Energy

611.2

-

  Pepco Energy Services

314.3

147.1

  Other Non-Regulated

   28.9

26.0

     Total Operating Revenue

1,928.7

489.2

Operating Expenses

  Fuel and purchased energy

1,297.2

255.7

  Other operation and maintenance

373.6

87.2

  Depreciation and amortization

104.0

37.9

  Other taxes

62.0

45.5

  Impairment losses

   52.8

    -

     Total Operating Expenses

1,889.6

426.3

Operating Income

39.1

62.9

Other Income (Expenses)

  Interest and dividend income

7.8

6.3

  Interest expense

(88.5)

(31.4)

  Loss from Equity Investments

(3.4)

(.4)

  Other income

    4.7

   .6

     Total Other (Expenses)

  (79.4)

(24.9)

Preferred Stock Dividend Requirements of Subsidiaries

6.6

3.6

Income Tax (Benefit) Expense

  (22.0)

11.1

Net (Loss) Income

$  (24.9)

$ 23.3

Average Common Shares Outstanding

  Basic

170.0

107.1

  Diluted

170.0

107.1

(Loss) Earnings Per Share of Common Stock

  Basic

$(.15)

$.22

  Diluted

$(.15)

$.22

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)

Three Months Ended
March 31,

  2003

  2002

(Millions of Dollars)

Net (loss) income

$(24.9)

$23.3

Other comprehensive income, net of taxes:

  Energy commodity derivative instruments
    designated as cash flow hedges

    Unrealized gain from cash flow hedges net of
      reclassification adjustments and net of
      taxes of $4.4 million for the three months
      ended March 31, 2003

6.1

-

  Marketable Securities

    Unrealized gain on marketable
      securities net of reclassification
      adjustments and net of taxes of
      $.3 million and $1.4 million for the
      three months ended March 31, 2003 and
      2002, respectively

.6

2.7

  Treasury lock

    Realized loss from treasury lock net of
      taxes of $2.7 million for the three months
      ended March 31, 2003

.3

-

  Interest rate swap agreement designated as
    cash flow hedge

    Unrealized (loss) gain from cash flow hedge net
      of reclassification adjustments and net of
      taxes of $.7 million and $1.6 million
      for the three months ended March 31,
      2003 and 2002

(1.3)

3.0

Other comprehensive income, net of taxes

5.7

5.7

Comprehensive (loss)/income

$(19.2)

$29.0

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited at March 31, 2003)

ASSETS

March 31,     2003

December 31,     2002

(Millions of Dollars)

CURRENT ASSETS

  Cash and cash equivalents

$

94.4

$

82.5

  Restricted cash

14.3

16.3

  Marketable securities

167.8

175.3

  Accounts receivable, less allowance for
    uncollectible accounts of $30.3 million and
    $37.3 million, respectively

1,269.3

1,118.5

  Fuel, materials and supplies-at average cost

224.5

254.9

  Prepaid expenses and other

137.0

54.4

    Total Current Assets

1,907.3

1,701.9

INVESTMENTS AND OTHER ASSETS

  Goodwill

1,432.5

1,431.8

  Regulatory assets, net

1,187.6

1,175.5

  Investment in finance leases

1,096.2

1,091.6

  Prepaid pension expense

121.8

124.9

  Other

529.0

538.0

    Total Investments and Other Assets

4,367.1

4,361.8

PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment

10,650.2

10,625.0

  Accumulated depreciation

(3,889.2)

(3,827.0)

    Net Property, Plant and Equipment

6,761.0

6,798.0

    TOTAL ASSETS

$

13,035.4

$

12,861.7

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited at March 31, 2003)

LIABILITIES AND SHAREHOLDERS' EQUITY

March 31,    2003

December 31,     2002

(Millions of Dollars)

CURRENT LIABILITIES

  Short-term debt

$

1,385.4

$

1,377.4

  Accounts payable and accrued liabilities

673.9

638.8

  Capital lease obligations due within one year

15.8

15.8

  Interest and taxes accrued

76.0

63.4

  Other

   557.2

   501.2

    Total Current Liabilities

2,708.3

2,596.6

DEFERRED CREDITS

  Income taxes

1,534.3

1,535.2

  Investment tax credits

67.6

69.0

  Other

   426.8

   432.0

    Total Deferred Credits

2,028.7

2,036.2

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

  Long-term debt

4,907.0

4,712.8

  Capital lease obligations

   118.6

   119.6

    Total Long-Term Debt and Capital Lease Obligations

5,025.6

4,832.4

COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
  SECURITIES OF SUBSIDIARY TRUST WHICH HOLDS SOLELY
  PARENT JUNIOR SUBORDINATED DEBENTURES

   220.0

   290.0

PREFERRED STOCK

  Serial preferred stock

35.3

35.3

  Redeemable serial preferred stock

    75.4

    75.4

    Total Preferred Stock

   110.7

   110.7

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY

  Common stock, $.01 and $1 par value, respectively-
    authorized 400,000,000 and 200,000,000 shares,
    respectively-issued 170,439,536 shares and 169,982,361
    shares, respectively

1.7

1.7

  Premium on stock and other capital contributions

2,220.3

2,212.0

  Capital stock expense

(3.3)

(3.2)

  Accumulated other comprehensive loss

(47.2)

(52.9)

  Retained income

   770.6

   838.2

    Total Shareholders' Equity

2,942.1

2,995.8

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

13,035.4

$

12,861.7

The accompanying Notes are an integral part of these Consolidated Financial Statements

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months Ended March 31,

   2003

   2002

(Millions of Dollars)

OPERATING ACTIVITIES

Net (loss) income

$ (24.9)

$ 24.6

Adjustments to reconcile net (loss) income to net
  cash from (used by) operating activities:

  Depreciation and amortization

104.0

37.9

  Impairment loss

52.8

-

  Changes in:

    Accounts receivable

(42.3)

26.5

    Regulatory assets, net

(22.1)

10.7

    Prepaid expenses

(32.2)

(22.5)

    Accounts payable and accrued payroll

(93.7)

(59.4)

    Interest and taxes accrued

12.6

(20.4)

    Net other operating activities

92.0

(8.1)

Net Cash From (Used By) Operating Activities

46.2

(10.7)

INVESTING ACTIVITIES

Net investment in property, plant and equipment

(149.1)

(54.5)

Proceeds from/changes in:

  Sales of marketable securities, net of purchases

8.2

3.3

  Sales of other investments, net of purchases

7.5

(9.2)

  Net other investing activities

8.0

(2.6)

Net Cash Used By Investing Activities

(125.4)

(63.0)

FINANCING ACTIVITIES

Dividends paid on preferred and common stock

(44.3)

(28.2)

Common stock issued for the Dividend Reinvestment Plan

6.6

-

Redemption of preferred stock

(70.0)

-

Reacquisition of the Company's common stock

-

(2.2)

Issuances of long-term debt

300.0

34.3

Reacquisitions of long-term debt

(112.5)

(40.0)

Issuances of short-term debt, net

15.5

45.5

Cost of issuances and financings

(3.1)

-

Net other financing activities

(1.1)

   .3

Net Cash From Financing Activities

91.1

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS (Unaudited)

		Three Months Ended March 31,
		2003	2002
	(Millions, except $ per share data)
Operating Revenue
Pepco		$ 333.4	$316.1
Conectiv Power Delivery		640.9	-
Conectiv Energy		611.2	-
Pepco Energy Services		314.3	147.1
Other Non-Regulated		28.9	26.0
Total Operating Revenue		1,928.7	489.2

Operating Expenses
Fuel and purchased energy		1,297.2	255.7
Other operation and maintenance		373.6	87.2
Depreciation and amortization		104.0	37.9
Other taxes		62.0	45.5
Impairment losses		52.8	-
Total Operating Expenses		1,889.6	426.3

Operating Income		39.1	62.9

Other Income (Expenses)
Interest and dividend income		7.8	6.3
Interest expense		(88.5)	(31.4)
Loss from Equity Investments		(3.4)	(.4)
Other income		4.7	.6
Total Other (Expenses)		(79.4)	(24.9)

Preferred Stock Dividend Requirements of Subsidiaries		6.6	3.6

Income Tax (Benefit) Expense		(22.0)	11.1

Net (Loss) Income		$ (24.9)	$ 23.3

Average Common Shares Outstanding
Basic		170.0	107.1
Diluted		170.0	107.1

(Loss) Earnings Per Share of Common Stock
Basic		$(.15)	$.22
Diluted		$(.15)	$.22

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

		Three Months Ended March 31,
		2003		2002
	(Millions of Dollars)

Net (loss) income			$(24.9)		$23.3


Other comprehensive income, net of taxes:

Energy commodity derivative instruments designated as cash flow hedges

Unrealized gain from cash flow hedges net of reclassification adjustments and net of taxes of $4.4 million for the three months ended March 31, 2003			6.1		-

Marketable Securities

Unrealized gain on marketable securities net of reclassification adjustments and net of taxes of $.3 million and $1.4 million for the three months ended March 31, 2003 and 2002, respectively			.6		2.7

Treasury lock

Realized loss from treasury lock net of taxes of $2.7 million for the three months ended March 31, 2003			.3		-

Interest rate swap agreement designated as cash flow hedge

Unrealized (loss) gain from cash flow hedge net of reclassification adjustments and net of taxes of $.7 million and $1.6 million for the three months ended March 31, 2003 and 2002			(1.3)		3.0

Other comprehensive income, net of taxes			5.7		5.7

Comprehensive (loss)/income			$(19.2)		$29.0

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited at March 31, 2003)
ASSETS		March 31, 2003		December 31, 2002
		(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents	$	94.4	$	82.5
Restricted cash		14.3		16.3
Marketable securities		167.8		175.3
Accounts receivable, less allowance for uncollectible accounts of $30.3 million and $37.3 million, respectively		1,269.3		1,118.5
Fuel, materials and supplies-at average cost		224.5		254.9
Prepaid expenses and other		137.0		54.4

Total Current Assets		1,907.3		1,701.9

INVESTMENTS AND OTHER ASSETS
Goodwill		1,432.5		1,431.8
Regulatory assets, net		1,187.6		1,175.5
Investment in finance leases		1,096.2		1,091.6
Prepaid pension expense		121.8		124.9
Other		529.0		538.0

Total Investments and Other Assets		4,367.1		4,361.8

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		10,650.2		10,625.0
Accumulated depreciation		(3,889.2)		(3,827.0)

Net Property, Plant and Equipment		6,761.0		6,798.0

TOTAL ASSETS	$	13,035.4	$	12,861.7

The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited at March 31, 2003)
LIABILITIES AND SHAREHOLDERS' EQUITY	March 31, 2003		December 31, 2002
	(Millions of Dollars)

CURRENT LIABILITIES
Short-term debt	$	1,385.4	$	1,377.4
Accounts payable and accrued liabilities		673.9		638.8
Capital lease obligations due within one year		15.8		15.8
Interest and taxes accrued		76.0		63.4
Other		557.2		501.2
Total Current Liabilities		2,708.3		2,596.6

DEFERRED CREDITS
Income taxes		1,534.3		1,535.2
Investment tax credits		67.6		69.0
Other		426.8		432.0

Total Deferred Credits		2,028.7		2,036.2

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt		4,907.0		4,712.8
Capital lease obligations		118.6		119.6

Total Long-Term Debt and Capital Lease Obligations		5,025.6		4,832.4

COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES		220.0		290.0

PREFERRED STOCK
Serial preferred stock		35.3		35.3
Redeemable serial preferred stock		75.4		75.4
Total Preferred Stock		110.7		110.7

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Common stock, $.01 and $1 par value, respectively- authorized 400,000,000 and 200,000,000 shares, respectively-issued 170,439,536 shares and 169,982,361 shares, respectively		1.7		1.7
Premium on stock and other capital contributions		2,220.3		2,212.0
Capital stock expense		(3.3)		(3.2)
Accumulated other comprehensive loss		(47.2)		(52.9)
Retained income		770.6		838.2
Total Shareholders' Equity		2,942.1		2,995.8

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	13,035.4	$	12,861.7

The accompanying Notes are an integral part of these Consolidated Financial Statements