<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
- --
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13895
CONECTIV
--------
(Exact name of registrant as specified in its charter)
Delaware 51-0377417
- ------------------------ ----------------
(State of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231, Wilmington, Delaware 19899
- ----------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3114
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
- --------------------------------------------- ----------------------------
Common Stock, $0.01 par value Shares 100,969,752
Class A Common Stock, $0.01 par value Shares 6,560,612
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CONECTIV
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Table of Contents
-----------------
Page No.
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Part I. Financial Information:
Consolidated Statements of Income for the three
and six months ended June 30, 1998 and 1997 1
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 4
Consolidated Statement of Changes in Common
Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-23
Part II. Other Information and Signature 24-29
i
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PART I. FINANCIAL INFORMATION
CONECTIV
--------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------- ------------- ------------- -------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 526,402 $ 246,368 $ 880,530 $ 508,971
Gas 72,931 32,299 188,716 88,416
Other services 84,706 32,301 118,384 59,660
------------- ------------- ------------- -------------
684,039 310,968 1,187,630 657,047
------------- ------------- ------------- -------------
OPERATING EXPENSES
Electric fuel and purchased energy 192,715 86,098 329,969 188,940
Gas purchased 62,543 22,431 161,171 58,184
Other services' cost of sales 65,640 22,275 89,328 43,015
Purchased electric capacity 48,320 6,979 69,263 13,956
Employee separation and other merger-related costs (14,277) - 26,346 -
Operation and maintenance 134,994 78,953 238,530 152,953
Depreciation 65,971 34,121 109,862 67,516
Taxes other than income taxes 18,704 8,735 31,569 17,957
------------- ------------- ------------- -------------
574,610 259,592 1,056,038 542,521
------------- ------------- ------------- -------------
OPERATING INCOME 109,429 51,376 131,592 114,526
------------- ------------- ------------- -------------
OTHER INCOME
Allowance for equity funds used
during construction 784 - 1,116 -
Other income 2,157 1,448 4,672 2,979
------------- ------------- ------------- -------------
2,941 1,448 5,788 2,979
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest charges 41,091 20,897 67,446 41,518
Allowance for borrowed funds used during
construction and capitalized interest (824) (1,116) (1,588) (2,236)
------------- ------------- ------------- -------------
40,267 19,781 65,858 39,282
------------- ------------- ------------- -------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES 4,924 2,506 8,247 5,143
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 67,179 30,537 63,275 73,080
INCOME TAXES 27,835 13,624 27,909 31,589
------------- ------------- ------------- -------------
NET INCOME $ 39,344 $ 16,913 $ 35,366 $ 41,491
============= ============= ============= =============
EARNINGS APPLICABLE TO COMMON STOCK
Common stock $ 37,310 $ 16,913 $ 33,174 $ 41,491
Class A common stock 2,034 - 2,192 -
------------- ------------- ------------- -------------
$ 39,344 $ 16,913 $ 35,366 $ 41,491
============= ============= ============= =============
COMMON STOCK
Average shares outstanding (000)
Common stock 101,063 61,177 87,874 61,017
Class A common stock 6,561 - 6,561 -
Earnings per average share--basic and diluted
Common stock $0.37 $0.28 $0.38 $0.68
Class A common stock $0.31 - $0.33 -
Dividends declared per share
Common stock $0.385 $0.385 $0.77 $0.77
Class A common stock $0.80 - $1.60 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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CONECTIV
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 68,994 $ 35,339
Accounts receivable 355,489 197,561
Inventories, at average cost:
Fuel (coal, oil, and gas) 50,042 37,425
Materials and supplies 68,196 40,518
Prepaid New Jersey sales and excise taxes 62,207 -
Other prepayments 9,960 11,255
Deferred energy costs 5,972 18,017
Deferred income taxes, net 1,065 776
-------------- --------------
621,925 340,891
-------------- --------------
INVESTMENTS
Investment in leveraged leases 122,608 46,375
Funds held by trustee 162,129 48,086
Other investments 71,311 9,500
-------------- --------------
356,048 103,961
-------------- --------------
PROPERTY, PLANT, and EQUIPMENT
Electric utility plant 5,583,487 3,010,060
Gas utility plant 245,644 241,580
Common utility plant 156,132 154,791
-------------- --------------
5,985,263 3,406,431
Less: Accumulated depreciation 2,402,550 1,373,676
-------------- --------------
Net utility plant in service 3,582,713 2,032,755
Construction work-in-progress 221,829 93,017
Leased nuclear fuel, at amortized cost 61,029 31,031
Nonutility property, net 179,717 74,811
Goodwill, net 345,337 92,602
-------------- --------------
4,390,625 2,324,216
-------------- --------------
DEFERRED CHARGES AND OTHER ASSETS
Unrecovered purchased power costs 57,277 -
Deferred recoverable income taxes 170,990 88,683
Unrecovered New Jersey state excise tax 40,374 -
Deferred debt refinancing costs 46,447 18,760
Deferred other postretirement benefit costs 36,227 -
Prepaid employee benefit costs 57,593 58,111
Unamortized debt expense 27,427 12,911
License fees 25,393 -
Other 76,822 67,948
-------------- --------------
538,550 246,413
-------------- --------------
TOTAL ASSETS $ 5,907,148 $ 3,015,481
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
--------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CURRENT LIABILITIES
Short-term debt $ 333,939 $ 23,254
Long-term debt and preferred stock due within one year 78,674 33,318
Variable rate demand bonds 102,500 71,500
Accounts payable 139,080 103,607
Taxes accrued 19,547 10,723
Interest accrued 42,582 19,902
Dividends payable 47,167 23,775
Current capital lease obligation 28,537 12,516
Accrued employee separation and
other merger-related costs 23,055 -
Other 57,534 35,819
-------------- --------------
872,615 334,414
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES
Other postretirement benefits obligation 93,887 -
Deferred income taxes, net 866,221 492,792
Deferred investment tax credits 81,438 39,942
Long-term capital lease obligation 34,504 19,877
Other 56,036 30,585
-------------- --------------
1,132,086 583,196
-------------- --------------
CAPITALIZATION
Common stock: per share par value--$0.01 in 1998, and
$2.25 in 1997; 150,000,000 shares authorized; shares
outstanding--100,969,752 in 1998, and 61,210,262 in 1997 1,012 139,116
Class A common stock, $0.01 per share par value;
10,000,000 shares authorized; shares outstanding--
6,560,612 in 1998, None in 1997 66 -
Additional paid-in capital--common stock 1,474,063 526,812
Additional paid-in capital--Class A common stock 107,095 -
Retained earnings 247,824 300,757
-------------- --------------
1,830,060 966,685
Treasury shares, at cost:
226,619 shares in 1998; 619,237 shares in 1997 (4,675) (11,687)
Unearned compensation - (502)
-------------- --------------
Total common stockholders' equity 1,825,385 954,496
Preferred stock of subsidaries:
Not subject to mandatory redemption 119,702 89,703
Subject to mandatory redemption 163,950 70,000
Long-term debt 1,793,410 983,672
-------------- --------------
3,902,447 2,097,871
-------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES $ 5,907,148 $ 3,015,481
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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CONECTIV
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,366 $ 41,491
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 117,573 70,445
Allowance for equity funds used during construction (1,116) -
Investment tax credit adjustments, net (2,125) (1,280)
Deferred income taxes, net (3,090) (5,587)
Net change in:
Accounts receivable (17,940) (18,331)
Inventories 16,480 882
Prepaid New Jersey sales and excise taxes (62,207) -
Accounts payable 6,234 (7,538)
Other current assets & liabilities (1) 1,747 35,193
Other, net 8,343 (1,010)
------------ ------------
Net cash provided by operating activities 99,265 114,265
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired 8,938 (17,303)
Capital expenditures (71,023) (75,625)
Investments in partnerships (10,530) -
Sale of nonutility asset 5,617 -
Deposits to nuclear decommissioning trust funds (5,344) (2,120)
Other, net 2,318 1,441
------------ ------------
Net cash used by investing activities (70,024) (93,607)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (65,966) (46,684)
Issuances: Long-term debt 33,000 124,200
Common stock 63 12,065
Redemptions: Long-term debt (193,336) (2,150)
Variable rate demand bonds - (700)
Common stock (2,028) (70)
Principal portion of capital lease payments (7,711) (2,929)
Net change in short-term debt 240,884 (101,822)
Cost of issuances and refinancings (492) (2,219)
------------ ------------
Net cash provided (used) by financing activities 4,414 (20,309)
------------ ------------
Net change in cash and cash equivalents 33,655 349
Cash and cash equivalents at beginning of period 35,339 36,533
------------ ------------
Cash and cash equivalents at end of period $ 68,994 $ 36,882
============ ============
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
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CONECTIV
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CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Par Value Paid-in Capital
------------------ --------------------
Class A Class A Unearned
Common Common Common Common Retained Treasury Compen-
Stock Stock Stock Stock Earnings Stock sation Total
--------- ------- --------- --------- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 $ 139,116 $ 526,812 $ 300,757 $ (11,687) $ (502) $ 954,496
Net income 35,366 35,366
Common stock issued for:
Business
acquisitions 9,090 9,090
Incentive
compensation 7 (427) 483 63
Atlantic
common stock 394 $ 66 813,135 $ 107,095 920,690
DPL common
stock 618 665,423 (4,580) (502) 660,959
Common stock issuance costs (4,150) (4,150)
DPL common stock canceled (139,123) (526,918) 4,580 502 (660,959)
Common stock dividends:
Common stock (77,802) (77,802)
Class A
common stock (10,497) (10,497)
Reacquired stock and other 188 (2,561) 502 (1,871)
--------- ------ ---------- --------- ---------- --------- ------------ ---------------
June 30, 1998 $ 1,012 $ 66 $1,474,063 $ 107,095 $ 247,824 $ (4,675) - $ 1,825,385
--------- ------ ---------- --------- ---------- --------- ------------ ---------------
</TABLE>
NUMBER OF COMMON SHARES ISSUED AND OUTSTANDING
- ----------------------------------------------
<TABLE>
<CAPTION>
Common Common Common Class A
Stock Treasury Stock Common
Issued Stock Outstanding Stock
---------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1997 61,829,499 (619,237) 61,210,262
Common stock issued for:
Business
acquisitions 488,473 488,473
Incentive
compensation 3,200 22,481 25,681
Atlantic
common stock 39,363,672 39,363,672 6,560,612
DPL common
stock 61,832,699 61,832,699
DPL common stock canceled (61,832,699) (61,832,699)
Reacquired stock and other (118,336) (118,336)
---------------- ------------- --------------- --------------
June 30, 1998 101,196,371 (226,619) 100,969,752 6,560,612
---------------- ------------- --------------- --------------
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
--------------------------------
The consolidated financial statements include the accounts of Conectiv and its
wholly-owned subsidiaries. Conectiv's primary subsidiaries are Atlantic City
Electric Company (ACE), Delmarva Power & Light Company (DPL), Atlantic Energy
Enterprises, Inc. (AEE), Conectiv Services, Inc. (CSI), Conectiv Communications,
Inc. (CCI), and Delmarva Capital Investments, Inc. The statements reflect all
adjustments necessary in the opinion of Conectiv's management for a fair
presentation of interim results. The statements should be read in conjunction
with DPL's 1997 Report on Form 10-K and Part II of this Report on Form 10-Q for
additional relevant information.
Preferred stock dividends on preferred stock of DPL for the prior reporting
periods have been reclassified to Preferred Stock Dividend Requirements of
Subsidiaries, resulting in a deduction before (rather than after) net income.
This reclassification reflects the current legal structure in which DPL is a
subsidiary of Conectiv. See Note 3 to the Consolidated Financial Statements.
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 which becomes effective in the
first quarter of fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that all derivatives be recognized as
assets or liabilities in the balance sheet and be measured at fair value. Under
specified conditions, a derivative may be designated as a hedge. The change in
the fair value of derivatives which are not designated as hedges is recognized
in earnings. For derivatives designated as hedges of changes in the fair value
of an asset or liability, or as a hedge of exposure to variable cash flows of a
forecasted transaction, earnings are affected to the extent the hedge does not
match offsetting changes in the hedged item.
Conectiv has not yet determined the effect that SFAS No. 133 will have on its
financial statements and related notes. For information concerning Conectiv's
current accounting policy for derivatives and related energy trading activities,
refer to Notes 1 and 6 to the Financial Statements in the 1997 Report on Form
10-K for DPL.
3. MERGER WITH ATLANTIC ENERGY, INC.
---------------------------------
As previously reported, on March 1, 1998, DPL and ACE became wholly-owned
subsidiaries of Conectiv (the Merger). Before the Merger, Atlantic Energy, Inc.
(Atlantic) owned ACE, an electric utility serving the southern one-third of New
Jersey, and AEE (which owns nonutility subsidiaries). As a result of the
Merger, Atlantic was merged out of existence, and Conectiv owns (directly or
indirectly) ACE, AEE, DPL, and the nonutility subsidiaries formerly held by DPL.
Conectiv is a registered holding company under the Public Utility Holding
Company Act of 1935.
In accordance with the terms of the Merger, DPL common stockholders received one
share of Conectiv common stock in exchange for each share of DPL common stock,
and Atlantic common stockholders
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<PAGE>
received 0.75 of one share of Conectiv common stock and 0.125 of one share of
Conectiv Class A common stock in exchange for each share of Atlantic common
stock. Atlantic stockholders and DPL stockholders received 39,363,672 and
61,832,699 shares of Conectiv common stock, respectively. Atlantic stockholders
received 6,560,612 shares of Conectiv Class A common stock. See Note 6 to the
Consolidated Financial Statements for information concerning Conectiv Class A
common stock and the apportionment of earnings between Conectiv Class A common
stock and Conectiv common stock.
The Merger was accounted for under the purchase method of accounting, with DPL
as the acquirer. Based on the Merger date of March 1, 1998, the Consolidated
Statement of Income for the six months ended June 30, 1998 includes four months
of results of operations for ACE and AEE.
The total consideration paid to Atlantic's common stockholders, measured by the
average daily closing market price of Atlantic's common stock for the three
trading days immediately preceding and the three trading days immediately
following the public announcement of the Merger, was $920.7 million. In
connection with the Merger, $236.2 million of goodwill was recorded, which is
being amortized over 40 years.
PRO FORMA INFORMATION (UNAUDITED)
- ---------------------------------
Pro forma unaudited financial information for Conectiv on a consolidated basis,
giving effect to the Merger as if it had occurred at the beginning of all
periods presented, is shown below. The pro forma information presented below is
not necessarily indicative of the results that would have occurred, or that will
occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in Thousands except ------------------ ----------------------
per share amounts) 1998 1997 1998 1997
- ----------------------------------------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $684,039 $556,992 $1,352,815 $1,150,410
Operating Income $109,429 $ 95,246 $ 152,874 $ 204,780
Net Income $ 39,344 $ 32,687 $ 37,746 $ 74,825
Earnings Applicable to Common Stock:
Common stock $ 37,310 $ 30,540 $ 35,401 $ 69,918
Class A common stock $ 2,034 $ 2,147 $ 2,345 $ 4,907
Average common shares outstanding (000)
Common stock 101,063 101,005 101,034 101,005
Class A common stock 6,561 6,561 6,561 6,561
Basic and Diluted Earnings per average
share outstanding of:
Common stock $ 0.37 $ 0.30 $ 0.35 $ 0.69
Class A common stock $ 0.31 $ 0.33 $ 0.36 $ 0.75
</TABLE>
The pro forma information shown above has not been adjusted to exclude the
effects of employee separation and other Merger-related costs incurred by DPL.
For the six months ended June 30, 1998, these costs reduced operating income,
net income, and earnings applicable to common stock by $26.3 million, $16.0
million, and $16.0 million, respectively. For the three months ended June 30,
1998, gains on settlements of pension obligations ($13.3 million) and revised
cost estimates ($1.0 million) caused
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<PAGE>
operating income, net income, and earnings applicable to common stock to
increase by $14.3 million, $8.6 million, and $8.6 million, respectively. See
Note 5 to the Consolidated Financial Statements for additional information.
4. RATE MATTERS
------------
ACE and DPL are sharing with their customers a portion of the net cost savings
expected to result from the Merger through reduced electric and gas retail
customer base rates. ACE's total Merger-related electric base rate decrease of
$15.7 million is being phased-in as follows: (1) $5.0 million effective January
1, 1998 coincident with a $5.0 million increase for recovery of other
postretirement benefit costs; (2) $9.9 million effective March 1, 1998, and (3)
$0.8 million effective January 1, 1999. DPL's total Merger-related base rate
decrease of $13.0 million is being phased-in as follows: (1) $11.5 million
effective March 1, 1998, (2) $1.1 million effective March 1, 1999, and (3) $0.4
million effective March 1, 2000.
On July 1, 1998, DPL filed with the Maryland Public Service Commission (MPSC)
its quantification of stranded costs and computation of unbundled rates.
Stranded costs were computed by comparing the net present value (NPV) of
projected future net revenues to the book values of generation units, or in the
case of purchased power, to the NPV of purchased power contract costs. For
purposes of the filing, stranded costs were reduced if the NPV of the projected
future net revenues exceeded the generating unit's book value or the NPV of the
purchased power contract's costs. The discount rate used was DPL's after-tax
cost of capital (7.83%). Based on this methodology, stranded costs were
quantified to be $217 million on a total DPL system basis, of which $69 million
is the retail Maryland portion. The $217 million stranded cost total consists
of $123 million attributable to generating units, $54 million associated with
purchased power contracts, $21 million related to fuel inventory financing
costs, and $19 million of regulatory assets.
DPL proposed that the Maryland retail portion of the stranded costs be recovered
over a three-year period, starting July 1, 2000, through a market transition
charge (MTC) per kilowatt-hour (kWh) to all transmission and distribution
customers of roughly one cent. Over the three year period, $121.5 million would
be collected, which on an after-tax, NPV basis equates to the $69 million of
retail Maryland stranded costs.
Contingent on a reasonable overall resolution of all restructuring issues, DPL
suggested that rates be frozen during the three-year transition period at rates
effective as of the start of the transition period.
The effects of the above proposal, if accepted by the MPSC, on Conectiv's
financial statements have not yet been determined. However, stranded costs
recovered from transmission and distribution customers through the MTC would
reduce any potential one-time charge for the write-down of assets or reserve for
uneconomic purchased power contracts. The final determination of the amount of
stranded costs for regulatory purposes and the amount to be recovered from
customers may differ from the amounts in DPL's filing. Also, the quantification
of stranded costs under existing generally accepted accounting principles (GAAP)
differs from the method used to quantify DPL's stranded costs for the MPSC.
Among other differences, GAAP would preclude recognition of the gains on plants
(or purchased power contracts) not impaired, but would require write down of the
plants that are impaired.
For information on ACE's filings with the New Jersey Board of Public Utilities
concerning stranded costs, see pages 3 to 4 of ACE's 1997 Report on Form 10-K.
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<PAGE>
5. EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
--------------------------------------------------
To achieve workforce reductions in conjunction with the Merger, Conectiv
utilized enhanced retirement offers (ERO) and other employee separation
programs. On a combined basis, DPL and Atlantic had approximately 4,600
employees prior to the Merger. The employee separation programs are expected to
reduce the number of employees by approximately 790, of which about 660 employee
separations have occurred.
The employee separation and other costs for DPL employees under Statement of
Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for
Settlement and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," were charged to operating expenses. For the six months ended June
30, 1998, such DPL costs were $26.3 million before taxes, reducing net income
and earnings per common share by $16.0 million and $0.18, respectively. The
charge to expense was reduced by a net $42.3 million gain from curtailments and
settlements of pension and other postretirement benefits, which was recognized
under SFAS No. 88 based on actual settlements through June 30, 1998. For the
three months ended June 30, 1998, gains on settlements of pension obligations
($13.3 million) and revised cost estimates ($1.0 million) caused pre-tax
expenses to decrease by $14.3 million and net income and earnings per common
share to increase by $8.6 million and $0.09, respectively. Settlements of
pension obligations with employees after June 30, 1998 are expected to result in
additional settlement gains ranging from $4 million to $7 million, which will be
recorded during the remainder of 1998.
Employee separation, relocation, and other related costs for Atlantic employees
were $48.5 million before taxes ($29.2 million after taxes) and were capitalized
as costs of the Merger.
Of the $74.8 million of costs discussed above for DPL and Atlantic, $32.9
million were paid as of June 30, 1998, $19.2 million will not require the use of
operating funds, and $22.7 million remains to be paid from operating funds.
6. CONECTIV CLASS A COMMON STOCK
-----------------------------
Conectiv Class A common stock gives its holders a proportionately greater
opportunity to share in the growth prospects of, and a proportionately greater
exposure to the uncertainties associated with the electric utility business of
ACE. Earnings applicable to Conectiv Class A common stock are equal to 30% of
the net of (1) earnings attributable to ACE's regulated electric utility
business, as the business existed on August 9, 1996, less (2) $40 million per
year. Earnings applicable to Conectiv common stock are the consolidated
earnings of Conectiv less earnings applicable to Conectiv Class A common stock.
Presented on the following page is summarized ACE financial information and the
calculation of earnings applicable to Conectiv Class A common stock. The year-
to-date ACE income statement amounts are for the four months ended June 30,
1998, the period included in the Consolidated Conectiv Statement of Income for
the six months ended June 30, 1998 under the purchase method of accounting.
-9-
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<TABLE>
<CAPTION>
Summarized Financial Information of Atlantic City Electric Company
- ---------------------------------------------------------------------
(Dollars in Thousands)
Three Months Four Months
Ended Ended
Income Statement Information June 30, 1998 June 30, 1998
- ---------------------------------- ------------- --------------
<S> <C> <C>
Operating Revenues $ 241,883 $ 317,962
Operating Income (1) $ 46,028 $ 6,437
Net Income (Loss ) (1) $ 18,314 $ (9,067)
June 30,
Balance Sheet Information 1998
- ---------------------------------- ----------
Current assets $ 281,862
Noncurrent assets 2,148,164
----------
Total assets $2,430,026
==========
Current liabilities $ 278,017
Noncurrent liabilities 1,289,546
Preferred stock 123,950
Common stockholders' equity 738,513
----------
Total capitalization and liabilities $2,430,026
==========
</TABLE>
<TABLE>
<CAPTION>
Computation of Earnings Applicable to Conectiv Class A Common Stock
- ---------------------------------------------------------------------
(Dollars in Thousands)
Three Months Four Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Net Income (Loss) of ACE (1) $ 18,314 $ (9,067)
Exclude: Employee separation and other
Merger-related costs (1) (1,987) 28,959
Net loss of nonutility activities 453 747
Pro-rata portion of fixed amount of $40 million per year (10,000) (13,333)
---------- ----------
Subtotal 6,780 7,306
Percentage applicable to Conectiv Class A common stock 30% 30%
---------- ----------
Earnings applicable to Conectiv Class A common stock $ 2,034 $ 2,192
========== ========
</TABLE>
(1) The amounts shown above reflect employee separation and other Merger-
related costs for ACE which reduced ACE's operating income and net
earnings for the four months ended June 30, 1998 by $48.1 million and
$29.0 million, respectively. For the three months ended June 30, 1998,
ACE's operating income and net income increased by $3.4 million and $2.0
million, respectively, due to revision of ACE's estimated employee
separation and other Merger-related costs. In the Consolidated Conectiv
Financial Statements, these costs were capitalized as costs of the Merger,
as discussed in Note 5 to the Consolidated Financial Statements.
-10-
<PAGE>
7. DEBT
----
In January 1998, DPL issued $33.0 million of 6.81% unsecured Medium-Term Notes
which mature in 20 years. On the consolidated balance sheet as of December 31,
1997, $25.4 million of short-term debt was reclassified to long-term debt to
recognize the amount of short-term debt refinanced with the Medium-Term Notes.
In March 1998, borrowings under Conectiv's revolving credit facilities were
primarily used for repayment of debt as follows: (1) $53.5 million was used to
repay the balance outstanding under Atlantic's revolving credit and term loan
facility; (2) $92.2 million was used to repay the balance outstanding under the
revolving credit and term loan facility of Atlantic Thermal Systems, Inc. (an
AEE subsidiary); and (3) $12.5 million was used to repay the balance outstanding
under the revolving credit and term loan facility of ATE Investment Inc. (an AEE
subsidiary).
In May 1998, ACE repaid at maturity $6.0 million of 5.5% Medium-Term Notes and
$2.5 million of 7.25% Debentures.
In June 1998, DPL repaid at maturity $25.0 million of 5.69% Medium-Term Notes.
As of June 30, 1998, Conectiv's $333.9 million short-term debt balance included
$202.5 million under Conectiv's $500 million revolving credit facilities, $56.1
million of other bank loans, and $75.3 million of commercial paper. The
weighted average interest rate on the total $333.9 million short-term balance as
of June 30, 1998 was 6.3%.
8. CONTINGENCIES
-------------
Environmental Matters
- ---------------------
Conectiv's subsidiaries are subject to regulation with respect to the
environmental effects of their 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. Federal and state
statutes authorize governmental agencies to compel responsible parties to clean
up certain abandoned or uncontrolled hazardous waste sites. Costs may be
incurred to clean up facilities found to be contaminated due to past disposal
practices. Conectiv's current liabilities include $3.0 million as of June 30,
1998 and $2.0 million as of December 31, 1997 for potential clean-up and other
costs related to federal and state superfund sites at which a Conectiv
subsidiary is a potentially responsible party or alleged to be a third party
contributor. Conectiv does not expect such future costs to have a material
effect on its financial position or results of operations.
Nuclear Insurance
- -----------------
In conjunction with Conectiv's subsidiaries' (DPL and ACE) ownership interests
in the Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear
Generating Station (Salem), and the Hope Creek Nuclear Generating Station (Hope
Creek), Conectiv could be assessed for a portion of any third-party claims
associated with an incident at any commercial nuclear power plant in the United
States. Under the provisions of the Price Anderson Act, if third-party claims
relating to such an incident exceed $200 million (the amount of primary
insurance), Conectiv could be assessed up to $51.3 million on an
-11-
<PAGE>
aggregate basis for such third-party claims. In addition, Congress could impose
a revenue-raising measure on the nuclear industry to pay such claims.
The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance
coverage of approximately $2.8 billion for each unit for loss or damage to the
units, including coverage for decontamination expense and premature
decommissioning. In addition, Conectiv is a member of an industry mutual
insurance company, which provides replacement power cost coverage in the event
of a major accidental outage at a nuclear power plant. Under these coverages,
Conectiv is subject to potential retrospective loss experience assessments of up
to $8.9 million on an aggregate basis.
9. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
See Note 3 to the Consolidated Financial Statements for information concerning
the issuance of Conectiv common stock and Conectiv Class A common stock in
exchange for DPL and Atlantic common stock.
Cash paid for interest, net of amounts capitalized, was $57.8 million for the
six months ended June 30, 1998 and $33.5 million for the six months ended June
30, 1997. Cash paid for income taxes was $46.9 million for the six months ended
June 30, 1998 and $30.6 million for the six months ended June 30, 1997.
10. STOCKHOLDERS RIGHTS PLAN
------------------------
On April 23, 1998, Conectiv's Board of Directors adopted a Stockholders Rights
Plan (the Plan). Under the Plan, holders of Conectiv Common Stock and holders
of Conectiv Class A Common Stock were granted preferred stock purchase rights on
May 11, 1998 by means of a dividend at the rate of one Right for each share of
Common Stock and one Right for each share of Class A Common Stock held. The
rights expire in 10 years.
The purpose of the Plan is to guard against partial tender offers or abusive or
unfair tactics that might be used in an attempt to gain control of Conectiv
without paying all stockholders a fair price for their shares. The Plan will
not prevent takeovers, but is designed to deter coercive, abusive, or unfair
takeover tactics and to encourage individuals or entities attempting to acquire
Conectiv to first negotiate with the Board.
Each Right would, after the rights become exercisable, entitle such holder to
purchase from Conectiv one one-hundredth of one share of Series One Junior
Preferred Stock or one one-hundredth of one share of Series Two Junior Preferred
Stock at an initial price of $65. The Rights will be exercisable only if a
person or group acquires beneficial ownership of 15% or more of the aggregate
voting power represented by Conectiv's outstanding securities (i.e. becomes an
"Acquiring Person" as defined in the Rights Plan) or commences a tender or
exchange offer to acquire beneficial ownership of 15% or more of the aggregate
voting power represented by Conectiv's outstanding securities. Conectiv
generally will be entitled to redeem the Rights at $.01 per Right at any time
before a person or group becomes an Acquiring Person.
11. SUBSEQUENT EVENT, PREFERRED STOCK REDEMPTION
--------------------------------------------
On August 3, 1998, ACE redeemed the remaining 100,000 shares of its $8.20 No Par
Preferred Stock at $100 per share or $10.0 million in total (book value).
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MERGER WITH ATLANTIC
- --------------------
As discussed in Note 3 to the Consolidated Financial Statements, on March 1,
1998, DPL and ACE became wholly-owned subsidiaries of Conectiv (the Merger).
Before the Merger, Atlantic Energy, Inc. (Atlantic) owned ACE, an electric
utility serving the southern one-third of New Jersey, and AEE (which owns
nonutility subsidiaries). As a result of the Merger, Atlantic was merged out of
existence, and Conectiv owns (directly or indirectly) ACE, AEE, DPL, and the
nonutility subsidiaries formerly held by DPL.
Effective with the Merger, DPL common stockholders received one share of
Conectiv common stock in exchange for one share of DPL common stock, and
Atlantic common stockholders received 0.75 of one share of Conectiv common stock
and 0.125 of one share of Conectiv Class A common stock in exchange for one
share of Atlantic common stock.
Under the purchase method of accounting, with DPL as the acquirer, the
Consolidated Statement of Income for the six months ended June 30, 1998 includes
four months (March 1998 through June 1998) of results of operations for ACE and
AEE.
EARNINGS SUMMARY
- ----------------
In the first quarter of 1998, Conectiv recorded a $24.6 million after-tax charge
for DPL employee separation costs and other Merger-related costs. In the second
quarter of 1998, primarily due to gains on settlements of pension obligations,
an $8.6 million after-tax credit was recorded, resulting in a net $16.0 million
after-tax charge for the six months ended June 30, 1998. Earnings per average
common share decreased $0.18 in the six month period and increased $0.09 in the
second quarter due to the DPL employee separation costs, other Merger-related
costs, and gains on settlements of pension obligations.
The year-to-date Merger-related charge reflects certain costs associated with
achieving estimated Merger-related cost savings of $500 million over the next 10
years. Conectiv is committed to aggressively pursuing these Merger-related
synergies, with continued emphasis on productivity and lower overall costs. On
a combined basis, DPL and Atlantic had approximately 4,600 employees prior to
the Merger. Employee separation programs are expected to reduce the number of
employees by approximately 790, of which about 660 employee separations have
occurred.
In the second quarter of 1998, earnings applicable to Conectiv common stock were
$37.3 million, or $0.37 per average common share (101,063,000 average common
shares). Excluding the $8.6 million after-tax gain primarily from settlements
of pension obligations, earnings applicable to Conectiv common stock were $28.7
million or $0.28 per average share. In comparison, earnings applicable to
common stock and earnings per average common share in the second quarter of 1997
were $16.9 million and $0.28, respectively, on average common shares of
61,177,000. The average number of common shares outstanding increased due to
the issuance of 39,363,672 common shares to Atlantic stockholders on March 1,
1998.
In the second quarter and the six-month period, the dilutive effect on earnings
per share of more shares outstanding was offset by the net income contributed by
the former Atlantic companies.
-13-
<PAGE>
Although adjusted earnings of $0.28 per share in the second quarter of 1998 were
the same as last year, earnings per share from utility operations increased due
to higher electric sales and cost controls. The additional earnings per share
from utility operations was offset by increased operating expenses from
expected, on-going investments in new businesses--primarily telecommunications
and heating, ventilation, and air conditioning (HVAC) operations.
For the six months ended June 30, 1998, earnings applicable to Conectiv common
stock were $33.2 million, or $0.38 per average common share (87,874,000 average
common shares). Excluding the $16.0 million after-tax Merger-related charge,
earnings applicable to Conectiv common stock were $49.1 million or $0.56 per
average common share. In comparison, earnings applicable to common stock and
earnings per common share for the six months ended June 30, 1997 were $41.5
million and $0.68, respectively, on average common shares of 61,017,000.
The $0.12 decline in adjusted year-to-date earnings per common share was
primarily due to increased operating expenses from expected, on-going
investments in the telecommunications and HVAC businesses. Utility operations
positively impacted the year-to-date earnings per share variance, primarily due
to lower utility operating expenses (excluding ACE's 1998 operating expenses).
Additional utility revenue and sales from favorable economic conditions and a
growing customer base were largely offset by mild winter weather's effect on
sales during the heating season and Merger-related customer rate reductions.
Earnings applicable to Conectiv Class A common stock were $2,034,000 or $0.31
per Conectiv Class A common share for second quarter, and $2,192,000 or $0.33
per Conectiv Class A common share for the six months ended June 30, 1998. For
additional information, see Note 6 to the Consolidated Financial Statements.
ELECTRIC UTILITY INDUSTRY RESTRUCTURING
- ---------------------------------------
For background information concerning the restructuring of the electric utility
industry in New Jersey and ACE's stranded cost filings, see pages 3 to 4 of
ACE's 1997 Report on Form 10-K. Updates to previously disclosed information are
shown below.
* Hearings on restructuring issues were completed on May 28, 1998. Conectiv
expects that the New Jersey Board of Public Utilities (BPU) will rule on the
various proceedings sometime after enabling legislation is introduced in New
Jersey. Based on the current status of the restructuring process, it appears
that retail electric competition in New Jersey is likely to begin in early-
to mid-1999.
* With respect to information previously filed by ACE concerning stranded costs
and unbundled rates, the Office of Administrative Law (OAL) is expected to
render a decision in mid- to late August. The OAL's decision will then be
sent to the BPU for review, and ACE and other parties will have the
opportunity to file Exception Briefs.
For background information concerning the restructuring of the electric utility
industry in Delaware, Maryland, and Virginia, refer to page I-2 and page II-4 of
DPL's 1997 Report on Form 10-K. Updates to previously disclosed information are
shown below.
-14-
<PAGE>
* Legislation (House Bill 570) providing Delaware retail customers with the
ability to choose their electric supplier in July 1999 was passed by the
Delaware House of Representatives on June 2, 1998. However, on June 30,
1998, the Delaware General Assembly adjourned without a Senate vote on House
Bill 570, delaying consideration of Delaware restructuring legislation until
1999.
* On July 1, 1998, DPL filed with the Maryland Public Service Commission (MPSC)
its quantification of stranded costs and computation of unbundled rates.
Stranded costs were computed by comparing the net present value (NPV) of
projected future net revenues to the book values of generation units, or in
the case of purchased power, to the NPV of purchased power contract costs.
For purposes of the filing, stranded costs were reduced if the NPV of the
projected future net revenues exceeded the generating unit's book value or
the NPV of the purchased power contract's costs. The discount rate used was
DPL's after-tax cost of capital (7.83%). Based on this methodology, stranded
costs were quantified to be $217 million on a total system basis, of which
$69 million is the retail Maryland portion. The $217 million stranded cost
total consists of $123 million attributable to generating units, $54 million
associated with purchased power contracts, $21 million related to fuel
inventory financing costs, and $19 million of regulatory assets.
DPL proposed that the Maryland retail portion of the stranded costs be
recovered over a three-year period, starting July 1, 2000, through a market
transition charge (MTC) per kilowatt-hour (kWh) to all transmission and
distribution customers of roughly one cent. Over the three year period,
$121.5 million would be collected, which on an after-tax, NPV basis equates
to the $69 million of retail Maryland stranded costs.
Contingent on a reasonable overall resolution of all restructuring issues,
DPL suggested that rates be frozen during the three-year transition period at
rates effective as of the start of the transition period.
The effects of the above proposal, if accepted by the MPSC, on Conectiv's
financial statements have not yet been determined. However, stranded costs
recovered from transmission and distribution customers through the MTC would
reduce any potential one-time charge for the write-down of assets or reserve
for uneconomic purchased power contracts. The final determination of the
amount of stranded costs for regulatory purposes and the amount to be
recovered from customers may differ from the amounts in DPL's filing. Also,
the quantification of stranded costs under existing generally accepted
accounting principles (GAAP) differs from the method used to quantify DPL's
stranded costs for the MPSC. Among other differences, GAAP would preclude
recognition of the gains on plants (or purchased power contracts) not
impaired, but would require write down of the plants that are impaired.
* On April 15, 1998, the Governor of Virginia signed into law a bill which
establishes a schedule for Virginia's transition to retail competition in the
electric utility industry. The schedule requires that the transition to
retail competition commence on January 1, 2002 and that full retail
competition commence on January 1, 2004. The bill also allows for the full
recovery of just and reasonable net stranded costs.
-15-
<PAGE>
Electric Revenues
- -----------------
Details of the changes in the various components of electric revenues for the
second quarter of 1998 compared to the second quarter of 1997 are shown below
(dollars in millions):
<TABLE>
<CAPTION>
Consolidated
Conectiv ACE DPL
------------ ------ ------
<S> <C> <C> <C>
Non-fuel (Base Rate) Revenues $136.2 $130.5 $ 5.7
Fuel Revenues 81.3 83.3 (2.0)
Interchange Delivery Revenues 46.2 22.5 23.7
Merchant Revenues 16.3 2.9 13.4
------ ------ -----
Total $280.0 $239.2 $40.8
====== ====== =====
</TABLE>
In the second quarter, consolidated Conectiv electric revenues increased by
$280.0 million, from $246.4 million for the second quarter of 1997 to $526.4
million for the second quarter of 1998. As shown above, $239.2 million of the
$280.0 million increase in Conectiv's total electric revenues was due to the
Merger, which also resulted in a 77% electric kWh sales increase. The addition
of ACE's customer base roughly doubled the number of electric customers served.
On a pro forma basis, as though Conectiv included ACE in 1997, electric retail
kWh sales increased 4.2% primarily due to strong sales to residential customers.
Conectiv's increase in non-fuel (or base rate) revenues was reduced by
approximately $5.4 million due to the Merger-related customer rate decreases
discussed in Note 4 to the Consolidated Financial Statements.
Fuel and interchange revenues generally do not affect net income due to (1)
ACE's Levelized Energy Clause (LEC), as discussed on page 51 of ACE's 1997
Report on Form 10-K, and (2) DPL's fuel adjustment clauses, as discussed on
page II-9 of DPL's 1997 Report on Form 10-K.
Electric merchant revenues from off-system, unregulated sales increased mainly
because DPL's merchant group has grown its business substantially since 1997,
when the group was starting up. Due to the nature of the product sold (a bulk
commodity) and competitive markets, the margin from merchant revenues in excess
of related energy costs is relatively small.
Conectiv has emerged as the leading independent energy marketer in Pennsylvania,
by signing up more than 30,000 new customers in Pennsylvania's pilot program for
customer choice of electric suppliers. One-third of all Pennsylvania consumers
will be able to choose their electric supplier by January 1, 1999, another third
will have choice by January 2, 2000, and all Pennsylvania consumers will have
choice by January 2, 2001. As the Pennsylvania electric choice program expands,
Conectiv's management believes that Conectiv will retain many of its new
customers and attract an even larger share of the market.
-16-
<PAGE>
Details of the changes in the various components of electric revenues for the
six months ended June 30, 1998 compared to the six months ended June 30, 1997
are shown below (dollars in millions):
<TABLE>
<CAPTION>
Consolidated
Conectiv ACE DPL
------------ ------ ------
<S> <C> <C> <C>
Non-fuel (Base Rate) Revenues $182.1 $175.2 $ 6.9
Fuel Revenues 101.9 110.1 (8.2)
Interchange Delivery Revenues 39.9 24.7 15.2
Merchant Revenues 47.7 5.0 42.7
------ ------ -----
Total $371.6 $315.0 $56.6
====== ====== =====
</TABLE>
For the six months ended June 30, 1998, consolidated Conectiv electric revenues
increased by $371.6 million, from $509.0 million for the first six months of
1997 to $880.5 million for the first six months of 1998. As shown above, $315.0
million of the $371.6 million increase in Conectiv's total electric revenues was
due to the Merger, which also resulted in a 48% increase in retail electric kWh
sales. On a pro forma basis, as though Conectiv included ACE in 1997, electric
retail kWh sales increased 1.3%. Additional sales from favorable economic
conditions and a growing customer base were largely offset by mild winter
weather's adverse effect on sales during the heating season. Conectiv's
increase in non-fuel (or base rate) revenues was reduced by approximately $7.3
million due to the Merger-related customer rate decreases discussed in Note 4 to
the Consolidated Financial Statements.
The financial impact of, and reasons for changes in, fuel, interchange, and
merchant revenues for the six months ended June 30, 1998 are essentially the
same as discussed above for the second quarter.
GAS REVENUES
- ------------
In the second quarter, total gas revenues increased by $40.6 million, from $32.3
million in the second quarter of 1997 to $72.9 million in the second quarter of
1998. For the six-month period, total gas revenues increased by $100.3 million,
from $88.4 million for the six months ended June 30, 1997 to $188.7 million for
the six months ended June 30, 1998. Details of the changes in the various
components of gas revenues for 1998 compared to 1997 are shown below (dollars in
millions):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
-------------- -----------------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ (0.4) $ (2.2)
Fuel Revenues (2.0) (4.1)
Merchant Revenues 43.0 106.6
----- ------
Total $40.6 $100.3
===== ======
</TABLE>
The decreases shown above for non-fuel and fuel gas revenues were primarily due
to lower residential gas sales caused by milder winter and warmer April weather.
Residential gas sales decreased 15.0% and 11.3% (based on cubic feet sold) for
the second quarter and six-month period, respectively. The weather-related gas
revenue decrease was partly offset by additional gas revenues from a 2.3%
increase in the average number of gas customers.
-17-
<PAGE>
Gas merchant revenues increased $43.0 million and $106.6 million for the second
quarter and six-month period, respectively, primarily due to higher off-system
gas sales resulting from a substantial increase in DPL's merchant operations
since start-up last year. Similar to electric merchant revenues, the margin
provided by gas merchant revenues in excess of related purchased gas costs is
relatively small due to the competitive nature of bulk commodity sales.
OTHER SERVICES REVENUES
- -----------------------
Other service revenues were comprised of the following:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
-------------- ----------------
(Dollars in millions) 1998 1997 1998 1997
----- ------- -------- ------
<S> <C> <C> <C> <C>
HVAC $21.8 $16.2 $ 42.1 $29.7
Fuel oil and gasoline 40.2 - 40.2 -
Operation of power plants 5.6 5.8 11.1 10.7
Thermal systems (1) 6.7 - 8.7 -
Telecommunications 1.0 0.2 1.4 0.3
Landfill and waste hauling (2) - 3.7 - 6.5
Other 9.4 6.4 14.9 12.5
----- ----- ------ -----
Total $84.7 $32.3 $118.4 $59.7
===== ===== ====== =====
</TABLE>
(1) Revenues from Conectiv Thermal Systems, Inc. (formerly Atlantic Thermal
Systems, Inc.), a subsidiary of AEE.
(2) Landfill and waste hauling operations were sold in the fourth quarter of
1997.
As shown in the preceding table, other services revenues reflect a $40.2 million
increase in both the second quarter and the six-month period from sales of fuel
oil and gasoline by Petron Oil Corporation (Petron), which was acquired by
Conectiv in March 1998. Excluding the increase due to Petron, other services
revenues increased $12.2 million and $18.5 million in the second quarter and
six-month period, respectively, principally due to higher revenues from HVAC
operations and Conectiv Thermal Systems, Inc. (CTS), a district heating and
cooling business gained through the Merger. CTS continues to expand its
existing customer relationships beyond Atlantic City and expects to complete
construction in the spring of 1999 on a $70 million system which will provide
thermal energy to a casino in Las Vegas (the Sands Venetian energy project).
CTS has a 50% interest in the project with Pacific Enterprises.
Second quarter 1998 telecommunications revenues from Conectiv Communications,
Inc. (CCI) reached $1.0 million. CCI is offering local and long distance
service in Pennsylvania, Maryland, Delaware and New Jersey and has sold and
activated almost 14,000 phone lines.
-18-
<PAGE>
OPERATING EXPENSES
- ------------------
Electric Fuel and Purchased Energy
The change in electric fuel and purchased energy from ACE's operations beginning
in March 1998 and from DPL operations is shown below (dollars in millions):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
Increase attributed to: 1998 vs. 1997 1998 vs. 1997
- ------------------------- ------------- ----------------
<S> <C> <C>
ACE operations $ 69.4 $ 88.2
DPL operations 37.2 52.8
------ ------
Total $106.6 $141.0
====== ======
</TABLE>
Electric fuel and purchased energy expenses for DPL operations increased in both
reporting periods primarily due to energy supplied for greater volumes of
electricity sold off-system and an increase in deferred fuel expense, partly
offset by lower average energy costs per kWh of output.
Gas Purchased
Gas purchased increased from $22.4 million to $62.5 million in the second
quarter and from $58.2 million to $161.2 million for the six-month period mainly
due to larger volumes of gas purchased for resale off-system, partly offset by
lower volumes of gas purchased for sale on-system (due to the milder winter and
warmer April weather).
Purchased Electric Capacity
Purchased electric capacity increased in the second quarter and the six-month
period primarily due to ACE's purchased capacity costs which are recovered
through the LEC.
Employee Separation and Other Merger-Related Costs
Employee separation costs for DPL employees and other Merger related costs
totaling $26.3 million ($16.0 million after tax or $0.18 per common share) were
charged to operating expenses for the six months ended June 30, 1998. The
charge to expense was reduced by a net $42.3 million gain from curtailments and
settlements of pension and other postretirement benefits, which was recognized
under SFAS No. 88 based on actual settlements through June 30, 1998. For the
three months ended June 30, 1998, gains on settlements of pension obligations
($13.3 million) and revised cost estimates ($1.0 million) caused pre-tax
expenses to decrease by $14.3 million and net income and earnings per common
share to increase by $8.6 million and $0.09, respectively. Settlements of
pension obligations with employees after June 30, 1998 are expected to result in
additional settlement gains ranging from $4 million to $7 million, which will be
recorded during the remainder of 1998.
Operation and Maintenance Expenses
Excluding operation and maintenance expenses of the former Atlantic companies
which are included only in the 1998 reporting periods, operation and maintenance
expenses increased $5.3 million and $15.5 million for the second quarter and
six-month period, respectively. These adjusted increases were
-19-
<PAGE>
principally due to a higher level of HVAC business activity and start-up costs
for the telecommunications business, partly offset by approximately a $9 million
decrease in utility operating expenses in both reporting periods.
Depreciation and Taxes Other than Income Taxes
Depreciation and taxes other than income taxes increased in both reporting
periods mainly due to the 1998 operating results of the former Atlantic
companies. Depreciation expense also reflects increases of $1.5 million in the
second quarter and $2.0 million in the six-month period due to amortization of
goodwill associated with the Merger.
FINANCING COSTS
- ---------------
Excluding increases attributed to ACE and AEE operating results for 1998,
financing costs increased $1.7 million and $2.2 million for the second quarter
and six-month period, respectively, due to financing requirements for ongoing
investments in utility and nonutility businesses. Financing costs reflected in
the consolidated income statement include interest charges, allowance for funds
used during construction (AFUDC), and preferred stock dividend requirements of
subsidiaries.
YEAR 2000
- ---------
The Year 2000 issue is the result of computer programs and embedded systems
using a two-digit format, as opposed to four digits, to indicate the year.
Computer and embedded systems with this characteristic may be unable to
interpret dates beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruption of operations. A Conectiv project
team, originally started in 1996 by ACE is assisting line management in
addressing the issue of computer programs and embedded systems not properly
recognizing the Year 2000. A Conectiv corporate officer, reporting directly to
the chief executive officer, is coordinating all Year 2000 activities at
Conectiv. Conectiv faces substantial challenges in identifying and correcting
the many computer programs and embedded systems critical to generating and
delivering power, delivering natural gas, and providing other services to its
customers.
The project team is using a phased approach to managing its activities. The
first phase is identification, inventory and assessment of all systems,
equipment, and processes. Each identified item is given a criticality rating of
high, medium or low. The second phase is determining and implementing
corrective action for the systems, equipment and processes rated as high or
medium, and thus believed to put Conectiv's business operations and customers at
substantial risk. The third phase is testing. The project team has completed
corrective action on most of the information technology systems used in managing
Conectiv's businesses and has tested approximately half of the systems in this
area. Assessment of, and modifications to, other impacted systems, equipment
and processes in the electricity generation, electricity and gas distribution,
and energy services business units are in the early stages and are expected to
continue through 1998 and 1999, with testing of critical items expected to be
done as modifications are completed. Conectiv will be updating established
outage contingency plans to address Year 2000 issues over the next twelve
months.
-20-
<PAGE>
Conectiv is also contacting critical vendors and service providers to review
remediation of their Year 2000 issues. Many aspects of the Conectiv's
businesses are dependent on third parties. For example, fuel suppliers must be
able to provide coal or gas to allow Conectiv to generate power.
Conectiv has incurred approximately $3 million in costs for year 2000
activities, and currently expects the costs for the Year 2000 project to range
from $10 million to $15 million. These estimates could change significantly as
the Year 2000 project progresses.
Since the project team is still in the process of assessing and correcting
impacted systems, equipment and processes, Conectiv cannot currently determine
whether the Year 2000 issue might cause disruptions to its operations and have
impacts on related costs and revenues. Conectiv will be assessing the status of
Year 2000 activities on at least a monthly basis to determine the likelihood of
substantial business disruptions. Any substantial disruption to Conectiv's
operations could significantly impact its customers and could generate legal
claims against Conectiv. Conectiv's results of operations and financial position
would likely suffer an adverse impact if other entities, such as suppliers,
customers and service providers, do not effectively address their Year 2000
issues.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents increased by $33.7 million for the six months ended
June 30, 1998 primarily due to $99.3 million of cash provided by operating
activities offset by $66.0 million of common dividends paid. Capital
expenditures of $71.0 million and other investing activities were funded
primarily by cash raised from net debt financing activities.
Net cash provided by operating activities was $99.3 million for the six months
ended June 30, 1998, compared to $114.3 million for the six months ended June
30, 1997. Cash flow provided by ACE's operations (from March 1998 to June 1998)
was substantially eliminated by the prepayment of $70.6 million of New Jersey
Sales and Excise taxes in the second quarter of 1998. The $15.0 million
decrease in cash flow from operations was primarily due to cash used by
operations of Conectiv's new businesses, such as HVAC and telecommunications.
As shown in the cash flow statement, "Acquisition of businesses, net of cash
acquired" provided an $8.9 million cash inflow for the six months ended June 30,
1998 due to cash acquired in the Merger, partly offset by cash paid for direct
Merger costs capitalized and acquisitions of nonutility businesses. The
nonutility businesses acquired by Conectiv during the first six months of 1998
included HVAC businesses, a fuel oil distributor (Petron), and a gas marketing
enterprise (Enerval LLC).
As a result of the Merger, total assets increased from $3.0 billion to $5.9
billion, primarily due to $2.1 billion of ACE and AEE property, plant, and
equipment. The increase in total assets includes $236.2 million of goodwill
recorded under the purchase method of accounting, which is being amortized
-21-
<PAGE>
over 40 years. Total long-term capitalization increased from $2.1 billion to
$3.9 billion, primarily due to ACE and AEE's capital structures consolidated in
the balance sheet. Dividends payable increased from $23.8 million to $47.2
million, primarily due to declared dividends payable on Conectiv common stock
and Conectiv Class A common stock which was issued to Atlantic stockholders in
conjunction with the Merger. See Note 2 to the Consolidated Financial
Statements in Conectiv's Report on Form 10-Q for the First Quarter of 1998 and
the capital structure table below for additional information concerning the
impact of the Merger on the consolidated balance sheet.
Capital expenditures were $71.0 million for the six months ended June 1998
compared to $75.6 million for the six months ended June 1997. Capital
expenditures for calendar year 1998 are currently expected to be less than
originally planned. Investing activities also included a $10.5 million cash
out-flow for "Investments in partnerships," which was primarily an investment by
CTS in the Sands Venetian energy project.
Excluding $66.0 million of common dividends paid, net cash flows from financing
activities provided $70.4 million of cash, which funded the net cash used by
investing activities. This $70.4 million cash in-flow from financing activities
was primarily due to $240.9 million of short-term debt issued, $33.0 million of
long-term debt issued (Medium-Term Notes, 6.81%, due in 20 years), and $193.3
million of long-term debt refinanced and redeemed.
The $240.9 million of short-term debt issued is comprised of $202.5 million from
Conectiv's $500 million revolving credit facilities, and $38.4 million from
commercial paper and other bank loans. In March 1998, $158.2 million of cash
borrowed under Conectiv's revolving credit facilities was used to repay
outstanding balances of former revolving credit and term loan facilities of
Atlantic, which is shown on the cash flow statement as a redemption of long-term
debt. Additional redemptions of long-term debt occurred in the second quarter
of 1998 as DPL and ACE repaid at maturity $33.5 million of Medium Term Notes and
Debentures bearing an average interest rate of 5.77%.
Short-term debt outstanding increased from $23.3 million as of December 31, 1997
to $333.9 million as of June 30, 1998. The $310.6 million increase was primarily
due to consolidation of Atlantic's nonutility revolving credit facility ($158.2
million), nonutility business expansions and acquisitions, and the seasonality
of utility operations cash flow. By year-end, Conectiv plans to refinance a
significant portion of its short-term debt balance, primarily with long-term
debt collateralized by project assets of CTS.
The table below shows the current long-term capital structure (including
variable rate demand bonds), expressed on a percentage basis, compared to year-
end 1997.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -------------
<S> <C> <C>
Common stockholders' equity 45.6% 44.0%
Preferred stock
Not subject to mandatory redemption 3.0% 4.1%
Subject to mandatory redemption 4.1% 3.2%
Long-term debt and variable rate demand bonds 47.3% 48.7%
</TABLE>
-22-
<PAGE>
On July 30, 1998, Conectiv's Board of Directors authorized the purchase, from
time to time, of up to $60 million of Conectiv common stock in the open market.
The repurchase program does not include specific share price targets or
timetables.
On August 3, 1998, ACE redeemed the remaining 100,000 shares of its $8.20 No Par
Preferred Stock at $100 per share or $10.0 million in total (book value).
Conectiv's ratio of earnings to fixed charges under the SEC Method are shown
below. The previously reported ratios of earnings to fixed charges have been
restated to include in fixed charges the preferred stock dividends which were
reclassified to preferred stock dividend requirements of subsidiaries on the
Consolidated Statement of Income. See Note 1 to the Consolidated Financial
Statements for additional information.
12 Months
Ended Year Ended December 31,
June 30, ----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Ratio of Earnings to
Fixed Charges (SEC Method) (1) 2.19 2.63 2.83 2.92 2.85
(1) Excluding the Merger-related charge discussed in Note 5 to the
Consolidated Financial Statements, which decreased pre-tax income by $26.3
million, the ratio of earnings to fixed charges was 2.38.
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 "will," "anticipate,"
"estimate," "expect," "objective," 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: deregulation and the unbundling of energy supplies and services; an
increasingly competitive energy marketplace; sales retention and growth; federal
and state regulatory actions; future litigation results; costs of construction;
operating restrictions; increased costs and construction delays attributable to
environmental regulations; nuclear decommissioning and the availability of
reprocessing and storage facilities for spent nuclear fuel; and credit market
concerns. Conectiv 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 review of factors pursuant to the Litigation
Reform Act should not be construed as exhaustive or as any admission regarding
the adequacy of disclosures made by Conectiv prior to the effective date of the
Litigation Reform Act.
-23-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION
- -------------------------
Salem Nuclear Generating Station
- --------------------------------
On July 29, 1998, the Nuclear Regulatory Commission (NRC) announced that it had
removed Salem from its "watch list" of troubled nuclear plants.
ACE Levelized Energy Clause Rates
- ---------------------------------
As previously reported on page 54 of ACE's 1997 report on Form 10-K, in February
1997, ACE filed a petition with the BPU requesting an increase in 1997-1998
Levelized Energy Clause (LEC) revenues of $20.0 million. The requested increase
reflected recovery of previously deferred costs, including Salem replacement
power costs. The BPU had ruled in December 1996 that the Salem replacement
power costs incurred though agreed upon unit restart dates were recoverable
through LEC rates. In June 1998, a $14.1 million rate increase was approved by
the BPU. In July 1998, the New Jersey Ratepayer Advocate appealed the BPU's
decision to the Superior Court of New Jersey. ACE has filed a cross-appeal.
Conectiv's management cannot predict the outcome of this matter.
As previously reported on page 7 of ACE's 1997 report on Form 10-K, the Rate
Intervention Steering Committee (RISC) appealed to the Superior Court of New
Jersey the BPU's decision which provided for ACE's recovery (through LEC rates)
of the cost of power purchased from non-utility generators (NUG). In May 1998,
the Superior Court of New Jersey rejected RISC's appeal and upheld the BPU's
decision providing for LEC recovery of NUG purchased power costs. In May 1998,
RISC appealed the Superior Court's decision to the Supreme Court of New Jersey,
which denied RISC's final appeal in July 1998.
Stockholder Proposals
- ---------------------
Conectiv's Annual Meeting of Stockholders will be held at the Grand Opera House,
Wilmington, Delaware on Tuesday, March 30, 1999. Any stockholder proposal
intended to be presented at the 1999 Annual Meeting of Stockholders under Rule
14a-8 under the Securities Exchange Act of 1934 must be received by the
Secretary of the Company, at the Company's principal executive offices no later
than October 27, 1998, in order to be eligible to be considered for inclusion in
Conectiv's proxy materials related to that meeting. Under the Certificate of
Incorporation of the Company, any stockholder proposal intended to be presented
at the Annual Meeting other than pursuant to Rule 14a-8 must be received by the
Secretary of the Company, at the Company's principal executive offices not
earlier than December 31, 1998 and not later than January 26, 1999. Conectiv's
principal executive offices are located at 800 King Street, Wilmington,
Delaware, 19801.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibits
- --------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
-24-
<PAGE>
Reports on Form 8-K
- -------------------
On April 23, 1998, Conectiv filed a Form 8-K to announce the adoption of a
Stockholders' Rights Plan.
On August 3, 1998, Conectiv filed a Form 8-K to announce approval of a common
stock repurchase program.
-25-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Conectiv
--------
(Registrant)
Date: August 13, 1998 /s/ B. S. Graham
--------------- ----------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-26-
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Number
------ ------
Ratio of earnings to fixed charges 12 28
Financial Data Schedule 27 29
-27-
<PAGE>
Exhibit 12
Conectiv
--------
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months 12 Months Ended December 31,
Ended June 30, ----------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Net income $ 95,093 $101,218 $107,251 $107,546 $ 98,940
-------- -------- -------- -------- --------
Income taxes 68,475 72,155 78,340 75,540 67,613
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt 100,859 78,350 69,329 65,572 61,128
Other interest 16,064 12,835 12,516 10,353 9,336
Preferred stock dividend
requirements of subsidiaries 13,282 10,178 10,326 9,942 9,370
-------- -------- -------- -------- --------
Total fixed charges 130,205 101,363 92,171 85,867 79,834
-------- -------- -------- -------- --------
Nonutility capitalized interest (204) (208) (311) (304) (256)
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $293,569 $274,528 $277,451 $268,649 $246,131
======== ======== ======== ======== ========
Total fixed charges shown above $130,205 $101,363 $ 92,171 $ 85,867 $ 79,834
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 4,083 3,065 6,025 6,243 6,578
-------- -------- -------- -------- --------
Fixed charges for ratio computation $134,288 $104,428 $ 98,196 $ 92,110 $ 86,412
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.19 2.63 2.83 2.92 2.85
-------- -------- -------- -------- --------
</TABLE>
For purposes of computing the ratio, earnings are net income plus income taxes
and fixed charges, less nonutility capitalized interest. Fixed charges consist
of interest on long- and short-term debt, amortization of debt discount,
premium, and expense, preferred stock dividend requirements of subsidiaries, and
interest on leases. Preferred dividend requirements for purposes of computing
the ratio have been increased to an amount representing the pre-tax earnings
which would be required to cover such dividend requirements.
-28-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM CONECTIV'S SECOND
QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,582,713
<OTHER-PROPERTY-AND-INVEST> 535,765
<TOTAL-CURRENT-ASSETS> 621,925
<TOTAL-DEFERRED-CHARGES> 538,550
<OTHER-ASSETS> 628,195
<TOTAL-ASSETS> 5,907,148
<COMMON> 1,078
<CAPITAL-SURPLUS-PAID-IN> 1,581,158
<RETAINED-EARNINGS> 247,824
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,825,385
163,950
119,702
<LONG-TERM-DEBT-NET> 1,793,410
<SHORT-TERM-NOTES> 333,939
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 68,674
10,000
<CAPITAL-LEASE-OBLIGATIONS> 34,504
<LEASES-CURRENT> 28,537
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,529,047
<TOT-CAPITALIZATION-AND-LIAB> 5,907,148
<GROSS-OPERATING-REVENUE> 1,187,630
<INCOME-TAX-EXPENSE> 27,909
<OTHER-OPERATING-EXPENSES> 1,056,038
<TOTAL-OPERATING-EXPENSES> 1,083,947
<OPERATING-INCOME-LOSS> 103,683
<OTHER-INCOME-NET> 5,788
<INCOME-BEFORE-INTEREST-EXPEN> 109,471
<TOTAL-INTEREST-EXPENSE> 74,105
<NET-INCOME> 35,366
0
<EARNINGS-AVAILABLE-FOR-COMM> 35,366
<COMMON-STOCK-DIVIDENDS> 88,299
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 99,265
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
