<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 September 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 302-429-3525
------------
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 September 30, 1998
- --------------------------------------------- ---------------------------------
Common Stock, $0.01 par value Shares 100,832,313
Class A Common Stock, $0.01 par value Shares 6,560,612
<PAGE>
CONECTIV
--------
Table of Contents
-----------------
Page No.
--------
Part I. Financial Information:
Consolidated Statements of Income for the three
and nine months ended September 30, 1998 and 1997 1
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Common
Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-26
Part II. Other Information and Signature 27-32
i
<PAGE>
PART I. FINANCIAL INFORMATION
CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ---------------------
1998 1997 1998 1997
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric.......................... $ 833,037 $332,391 $1,713,567 $ 841,362
Gas............................... 93,773 39,315 282,489 127,731
Other services.................... 85,669 28,796 204,053 88,456
--------- -------- ---------- ---------
1,012,479 400,502 2,200,109 1,057,549
--------- -------- ---------- ---------
OPERATING EXPENSES
Electric fuel and purchased ener-
gy............................... 372,669 128,411 702,638 317,351
Gas purchased..................... 87,590 32,246 248,761 90,430
Other services' cost of sales..... 77,281 20,559 167,711 63,574
Purchased electric capacity....... 53,258 6,980 122,521 20,936
Employee separation and other
merger-related costs............. 728 -- 27,074 --
Operation and maintenance......... 132,054 82,584 369,482 235,537
Depreciation...................... 65,168 34,291 175,030 101,807
Taxes other than income taxes..... 22,976 9,922 54,545 27,879
--------- -------- ---------- ---------
811,724 314,993 1,867,762 857,514
--------- -------- ---------- ---------
OPERATING INCOME................... 200,755 85,509 332,347 200,035
--------- -------- ---------- ---------
OTHER INCOME
Allowance for equity funds used
during construction.............. 794 -- 1,910 --
Other income...................... 5,860 2,021 10,532 5,000
--------- -------- ---------- ---------
6,654 2,021 12,442 5,000
--------- -------- ---------- ---------
INTEREST EXPENSE
Interest charges.................. 41,977 20,932 109,423 62,450
Allowance for borrowed funds used
during construction and capital-
ized interest.................... (1,513) (791) (3,101) (3,027)
--------- -------- ---------- ---------
40,464 20,141 106,322 59,423
--------- -------- ---------- ---------
PREFERRED STOCK DIVIDEND REQUIRE-
MENTS OF SUBSIDIARIES............. 4,817 2,514 13,064 7,657
--------- -------- ---------- ---------
INCOME BEFORE INCOME TAXES......... 162,128 64,875 225,403 137,955
--------- -------- ---------- ---------
INCOME TAXES....................... 68,460 26,556 96,369 58,145
--------- -------- ---------- ---------
NET INCOME......................... $ 93,668 $ 38,319 $ 129,034 $ 79,810
========= ======== ========== =========
EARNINGS APPLICABLE TO COMMON STOCK
Common stock...................... $ 84,221 $ 38,319 $ 117,395 $ 79,810
Class A common stock.............. 9,447 -- 11,639 --
--------- -------- ---------- ---------
$ 93,668 $ 38,319 $ 129,034 $ 79,810
========= ======== ========== =========
COMMON STOCK
Average shares outstanding (000)
Common stock..................... 101,011 61,247 92,253 61,093
Class A common stock............. 6,561 -- 6,561 --
Earnings per average share--basic
and diluted
Common stock..................... $ 0.83 $ 0.63 $ 1.27 $ 1.31
Class A common stock............. $ 1.44 -- $ 1.77 --
Dividends declared per share
Common stock..................... $ 0.385 $ 0.385 $ 1.155 $ 1.155
Class A common stock............. $ 0.80 -- $ 2.40 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 78,875 $ 35,339
Accounts receivable................................. 399,093 197,561
Inventories, at average cost:
Fuel (coal, oil, and gas).......................... 62,314 37,425
Materials and supplies............................. 73,413 40,518
Prepaid New Jersey sales and excise taxes........... 51,989 --
Other prepayments................................... 15,741 11,255
Deferred energy costs............................... -- 18,017
Deferred income taxes, net.......................... 12,593 776
---------- ----------
694,018 340,891
---------- ----------
INVESTMENTS
Investment in leveraged leases...................... 123,144 46,375
Funds held by trustee............................... 165,211 48,086
Other investments................................... 76,318 9,500
---------- ----------
364,673 103,961
---------- ----------
PROPERTY, PLANT, and EQUIPMENT
Electric utility plant.............................. 5,640,279 3,010,060
Gas utility plant................................... 247,645 241,580
Common utility plant................................ 165,633 154,791
---------- ----------
6,053,557 3,406,431
Less: Accumulated depreciation 2,448,514 1,373,676
---------- ----------
Net utility plant in service........................ 3,605,043 2,032,755
Construction work-in-progress....................... 190,791 93,017
Leased nuclear fuel, at amortized cost.............. 65,083 31,031
Nonutility property, net............................ 188,391 74,811
Goodwill, net....................................... 380,466 92,602
---------- ----------
4,429,774 2,324,216
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Unrecovered purchased power costs................... 52,777 --
Deferred recoverable income taxes................... 169,215 88,683
Unrecovered New Jersey state excise tax............. 37,984 --
Deferred debt refinancing costs..................... 45,327 18,760
Deferred other postretirement benefit costs......... 35,602 --
Prepaid employee benefit costs...................... 9,555 58,111
Unamortized debt expense............................ 26,996 12,911
License fees........................................ 25,050 --
Other............................................... 78,437 67,948
---------- ----------
480,943 246,413
---------- ----------
TOTAL ASSETS......................................... $5,969,408 $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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CURRENT LIABILITIES
Short-term debt.................................... $ 295,447 $ 23,254
Long-term debt due within one year................. 68,765 33,318
Variable rate demand bonds......................... 102,500 71,500
Accounts payable................................... 137,950 103,607
Taxes accrued...................................... 99,298 10,723
Interest accrued................................... 42,598 19,902
Dividends payable.................................. 47,741 23,775
Deferred energy costs.............................. 5,120 --
Current capital lease obligation................... 28,415 12,516
Accrued employee separation and other merger-re-
lated costs....................................... 16,198 --
Other.............................................. 59,918 35,819
---------- ----------
903,950 334,414
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Other postretirement benefits obligation........... 91,613 --
Deferred income taxes, net......................... 851,783 492,792
Deferred investment tax credits.................... 80,165 39,942
Long-term capital lease obligation................. 38,413 19,877
Other.............................................. 54,445 30,585
---------- ----------
1,116,419 583,196
---------- ----------
CAPITALIZATION
Common stock: per share par value--$0.01 in 1998,
and $2.25 in 1997; 150,000,000 shares authorized;
shares outstanding--100,832,313 in 1998, and
61,210,262 in 1997................................. 1,011 139,116
Class A common stock, $0.01 par value; 10,000,000
shares authorized; shares outstanding-- 6,560,612
in 1998, None in 1997.............................. 66 --
Additional paid-in capital--common stock............ 1,471,578 526,812
Additional paid-in capital--Class A common stock.... 107,095 --
Retained earnings................................... 297,449 300,757
---------- ----------
1,877,199 966,685
Treasury shares, at cost: 236,785 shares in 1998;
619,237 shares in 1997............................ (4,906) (11,687)
Unearned compensation.............................. -- (502)
---------- ----------
Total common stockholders' equity................. 1,872,293 954,496
Preferred stock of subsidaries:
Not subject to mandatory redemption............... 119,702 89,703
Subject to mandatory redemption................... 163,950 70,000
Long-term debt..................................... 1,793,094 983,672
---------- ----------
3,949,039 2,097,871
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES................ $5,969,408 $3,015,481
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $129,034 $ 79,810
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 189,117 106,269
Allowance for equity funds used during construction...... (1,910) --
Investment tax credit adjustments, net................... (3,398) (1,919)
Deferred income taxes, net............................... (3,966) 3,338
Net change in:
Accounts receivable..................................... (60,530) (33,771)
Inventories............................................. (459) (123)
Prepaid New Jersey sales and excise taxes............... (52,883) --
Accounts payable........................................ 4,887 (2,614)
Other current assets & liabilities (1).................. 80,124 35,831
Other, net................................................ 7,229 (7,631)
-------- --------
Net cash provided by operating activities................. 287,245 179,190
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired........... 4,337 (22,594)
Capital expenditures...................................... (130,749) (108,261)
Investments in partnerships............................... (19,998) (4,324)
Sale of nonutility asset.................................. 5,617 --
Deposits to nuclear decommissioning trust funds........... (6,404) (3,180)
Other, net................................................ 1,603 1,445
-------- --------
Net cash used by investing activities..................... (145,594) (136,914)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid..................................... (110,269) (70,266)
Issuances: Long-term debt............................... 33,000 124,200
Common stock................................. 63 17,711
Redemptions: Long-term debt............................... (193,546) (27,256)
Variable rate demand bonds................... -- (1,500)
Common stock................................. (4,967) (7,274)
Preferred stock.............................. (10,000) --
Principal portion of capital lease payments............... (14,087) (4,462)
Net change in short-term debt............................. 202,261 (72,972)
Cost of issuances and refinancings........................ (570) (4,159)
-------- --------
Net cash used by financing activities..................... (98,115) (45,978)
-------- --------
Net change in cash and cash equivalents................... 43,536 (3,702)
Cash and cash equivalents at beginning of period.......... 35,339 36,533
-------- --------
Cash and cash equivalents at end of period................ $ 78,875 $ 32,831
======== ========
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
--------
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 129,034 129,034
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 (116,597) (116,597)
Class A
common stock (15,745) (15,745)
Reacquired common stock 122 (4,967) (4,845)
Canceled common stock (1) (2,707) 2,708 -
Incentive compensation
Expense recognition 300 (43) 257
Forfeited common shares (12) (533) 545 -
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
September 30, 1998 $ 1,011 $ 66 $1,471,578 $ 107,095 $ 297,449 $ (4,906) - $1,872,293
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</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>
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 common stock (230,617) (230,617)
Canceled common stock (127,273) 127,273
Forfeited incentive shares (25,158) (25,158)
---------------- ---------------- ---------------- ----------------
September 30, 1998 101,069,098 (236,785) 100,832,313 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.
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 organizational structure in which DPL is a subsidiary of
Conectiv. See Note 4 to the Consolidated Financial Statements.
2. ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES
------------------------------------------------------------
Conectiv actively participates in the wholesale energy markets to support its
wholesale utility and competitive retail marketing activities. Conectiv's
energy market participation exposes Conectiv to commodity market risk when, at
times, Conectiv creates net open energy commodity positions or allows net open
positions to continue. To the extent that Conectiv has net open positions,
controls are in place that are intended to keep risk exposures within certain
management-approved risk tolerance levels.
The Emerging Issues Task Force (EITF), which evaluates accounting issues under
the direction of the Financial Accounting Standards Board (FASB), has reached a
tentative conclusion concerning accounting for energy trading activities.
Energy trading activities include the purchase or sale of energy with the
objective of earning profits resulting from changes in market prices. Conectiv
accrues losses on firm commitments, and records other gains and losses from
energy trading transactions at the time of settlement. The EITF has tentatively
concluded that, effective for financial statements issued for fiscal years
beginning after December 15, 1998, contracts entered into in connection with
energy trading activities should be marked to market, with gains and losses
(unrealized and realized) shown net in the income statement. This accounting
method would change the timing of gain and loss recognition in the income
statement and recognize assets and liabilities for unrealized gains and losses.
3. 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, unless early
adoption is elected. 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
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<PAGE>
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.
Upon adoption of SFAS No. 133, Conectiv's balance sheet will be adjusted to
include assets and liabilities for the fair market value of derivative
instruments. Deferred gains and losses on derivative instruments existing at
the time of adoption will be eliminated and be recorded as an effect of a change
in accounting principle in net income or other comprehensive income. As
discussed in Note 2 to the Consolidated Financial Statements, if the EITF
tentative conclusion on Accounting for Energy Trading and Risk Management
Activities becomes final, no gains or losses from energy trading activities
will have been deferred upon Conectiv's adoption of SFAS No. 133. For
additional 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.
4. 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 (PUHCA).
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 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 7 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 nine months ended September 30, 1998 includes seven
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, $270.3 million of goodwill was recorded, which is
being amortized over 40 years. An actuarial valuation of Atlantic's pension
plan liability as of the date of the Merger, based on updated assumptions and
data, resulted in a $33.3 million increase in goodwill recorded in the third
quarter of 1998. The other effects on the financial statements of the actuarial
valuation of Atlantic's pension plan were a $56.4 million decrease in prepaid
employee benefit costs and a $23.1 million increase in deferred tax assets.
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<PAGE>
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 Nine Months Ended
September 30 September 30
-------------------- ----------------------
(Dollars in Thousands except
per share amounts) 1998 1997 1998 1997
- ----------------------------------------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $1,012,479 $742,897 $2,365,294 $1,893,307
Operating Income $ 200,755 $173,962 $ 353,490 $ 378,330
Net Income $ 93,668 $ 83,506 $ 131,275 $ 157,913
Earnings Applicable to Common Stock:
Common stock $ 84,221 $ 72,194 $ 119,483 $ 141,693
Class A common stock $ 9,447 $ 11,312 $ 11,792 $ 16,220
Average common shares outstanding (000)
Common stock 101,011 101,005 101,026 101,005
Class A common stock 6,561 6,561 6,561 6,561
Basic and Diluted Earnings per average
share outstanding of:
Common stock $ 0.83 $ 0.71 $ 1.18 $ 1.40
Class A common stock $ 1.44 $ 1.72 $ 1.80 $ 2.47
</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 nine months ended September 30, 1998, these costs reduced operating
income, net income, and earnings applicable to common stock by $27.1 million,
$16.4 million, and $16.4 million, respectively. For the three months ended
September 30, 1998, higher estimated costs ($3.1 million) were partly offset by
gains on settlements of pension obligations ($2.4 million), which caused
operating income, net income, and earnings applicable to common stock to
decrease by $0.7 million, $0.4 million, and $0.4 million, respectively. See
Note 6 to the Consolidated Financial Statements for additional information.
5. RATE MATTERS
------------
Merger Rate Decrease
ACE and DPL are sharing a portion of the net cost savings expected to result
from the Merger with their customers 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.
-8-
<PAGE>
Electric Utility Industry Restructuring--Background and Accounting Information
For previously reported information on ACE's filings with the New Jersey Board
of Public Utilities (BPU) concerning stranded costs, see pages 3 to 4 of ACE's
1997 Report on Form 10-K. For previously reported information concerning
restructuring the electric utility industry in Delaware, Maryland and Virginia,
refer to page I-2 and page I-4 of DPL's 1997 report on Form 10-K and Note 4 to
the Consolidated Financial Statements of Conectiv's Second Quarter 1998 report
on Form 10-Q.
As previously reported and as discussed below, ACE and DPL have quantified
stranded costs in regulatory filings in New Jersey and Maryland, respectively.
The amount of stranded costs ultimately recovered from utility customers and the
final form of legislation deregulating the electric utility industry in any of
Conectiv's regulated utility jurisdictions cannot be predicted. Also, the
quantification of stranded costs under existing generally accepted accounting
principles (GAAP) can differ from methods used in regulatory filings. Among
other differences, GAAP precludes recognition of the gains on plants (or
purchased power contracts) not impaired, but requires write down of the plants
that are impaired. Due to the aforementioned considerations, Conectiv's
management currently cannot predict the ultimate effects that electric utility
industry deregulation may have on the financial statements of Conectiv and its
subsidiaries, although such effects could be material. Any stranded costs
recovered from transmission and distribution customers through a market
transition charge are expected to reduce the potential one-time charge for the
write-down of assets or reserve for uneconomic purchased power contracts.
In the course of electric restructuring proceedings in any of Conectiv's
regulated utility jurisdictions, the portion of base rates which remains subject
to rate regulation may be decreased.
New Jersey Electric Utility Industry Restructuring
On August 19, 1998, an Administrative Law Judge (ALJ) from the New Jersey Office
of Administrative Law issued an initial decision on ACE's stranded costs and
unbundled rate filing. The ALJ, in reviewing ACE's filing, recognized that
ACE's stranded costs were $812 million for nonutility generation contracts and
$397 million for generation assets. The ALJ made no specific recommendations on
rate issues. A final BPU decision on this filing is expected in the first
quarter of 1999 if the necessary legislation is approved by the New Jersey
legislature and signed by the Governor in the fourth quarter of 1998.
The "Electric Discount and Energy Competition Act" was introduced into the New
Jersey Assembly as Bill A-10 (the Bill) on September 14, 1998. Among other
things, the Bill would require the BPU to provide for retail choice of electric
power suppliers; deregulation of electric power rates and other competitive
services, such as metering and billing; separation of competitive and regulated
services; unbundling of rates for electric power service; and licensing of
electric and gas suppliers. The Bill provides June 1, 1999 as the starting date
for each utility to provide retail choice of electric power suppliers to its
customers. Full implementation of retail choice is expected within 4 months of
the start date of retail competition. A companion Senate bill (Bill S-5) was
introduced shortly after the Assembly Bill and contained identical provisions.
In connection with the deregulation of electric power rates, the Bill would
authorize the BPU to permit electric public utilities to recover a portion of
their stranded costs through a non-bypassable market transition charge for a
fixed number of years. In addition, the Bill would allow for the issuance of
transition bonds to finance portions of a given utility's stranded costs, as
determined to be appropriate by the BPU.
-9-
<PAGE>
The Senate and Assembly are currently holding legislative committee hearings.
These hearings will allow ACE and others the opportunity to voice their support
or opposition and to suggest amendments to the Bills. Full legislative action
is expected by year-end 1998, after the completion of the hearings.
The Bills contain provisions which mandate reductions in ACE's base rates by a
minimum of five to ten percent, relative to the aggregate level of bundled rates
in effect as of April 30, 1997. Under certain circumstances, the minimum rate
reductions may be implemented according to specified time frames. Rate
reductions in addition to the minimums prescribed may be ordered by the BPU, if
it determines that such reductions are necessary in order to achieve just and
reasonable rates. Conectiv's management believes that any rate reductions,
including the minimums required by the proposed legislation, should give
consideration to a utility's financial integrity and result in just and
reasonable rates.
If enacted in its present form, the rate reductions contained in the Bill could
have a material effect upon the results of operations of ACE and Conectiv.
Delaware Utility Industry Restructuring
Legislation (House Bill 570) providing Delaware retail customers with the
ability to choose their electric power 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.
In September 1998, the Alliance for Fair Electric Competition Today, which
includes DPL, began negotiations with Delaware executive branch representatives
and Delaware Public Service Commission and Staff representatives to structure
consensus legislation for passage early in 1999.
Maryland Utility Industry Restructuring
As previously reported in Note 4 to the Consolidated Financial Statements of
Conectiv's Second Quarter 1998 report on Form 10-Q, 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
estimated to be $217 million on a DPL system-wide basis, including $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 full recovery of the Maryland retail
portion of the stranded costs over a three-year period, starting with the
commencement of retail competition on July 3, 2000. The MPSC is scheduled to
issue an order on stranded cost recovery by October 1, 1999.
On September 10, 1998, the MPSC issued an Order addressing rehearing
applications and motions to strike filed by several parties in January 1998.
Among other things, the Order confirmed a schedule intended to result in
electric retail competition by July 3, 2000, and the adoption of an interstate
reciprocity requirement. DPL's request to deregulate generation assets at the
beginning of the transition period was denied. The MPSC proposes to deregulate
generation assets once the market is deemed to be competitive. On October 7,
1998, DPL sought re-consideration of the MPSC's Order. On October 9, 1998, DPL
filed an appeal of the Order to preserve DPL's rights with respect to portions
of the Order that might be deemed final.
-10-
<PAGE>
Virginia
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.
6. EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
--------------------------------------------------
To achieve workforce reductions in conjunction with the Merger, Conectiv
utilized enhanced retirement offers 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 785, of which about 730 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 nine months ended
September 30, 1998, such DPL costs were $27.1 million before taxes, reducing net
income and earnings per common share by $16.4 million and $0.18, respectively.
The charge to expense was reduced by a net $45.4 million gain from curtailments
and settlements of pension and other postretirement benefits, which was
recognized under SFAS No. 88 based on actual settlements through September 30,
1998. For the three months ended September 30, 1998, higher estimated costs
($3.1 million) were partly offset by gains on settlements of pension obligations
($2.4 million) resulting in a net pre-tax expense of $0.7 million, or $0.4
million after-taxes.
For the nine months ended September 30, 1998, employee separation, relocation,
and other related costs for Atlantic and ACE employees were $49.5 million before
taxes ($29.8 million after taxes) and were capitalized as costs of the Merger.
Of the $76.6 million of costs discussed above for DPL, Atlantic, and ACE, $40.7
million were paid as of September 30, 1998, $19.8 million will not require the
use of operating funds, and $16.1 million remains to be paid from operating
funds.
7. CONECTIV CLASS A COMMON STOCK
-----------------------------
Conectiv Class A common stock provides 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 seven months ended September
30, 1998, which is the period included in the
-11-
<PAGE>
Consolidated Conectiv Statement of Income for the nine months ended September
30, 1998, under the purchase method of accounting.
Summarized Financial Information of Atlantic City Electric Company
- ------------------------------------------------------------------
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Seven Months
Ended Ended
Income Statement Information September 30, 1998 September 30, 1998
- ------------------------------- ------------------- -------------------
<S> <C> <C>
Operating Revenues $ 331,403 $ 649,364
Operating Income (1) $ 87,761 $ 94,198
Net Income (1) $ 40,687 $ 31,620
September 30,
Balance Sheet Information 1998
- ------------------------------- ----------------
Current assets $ 274,344
Noncurrent assets 2,140,045
----------------
Total assets $ 2,414,389
================
Current liabilities $ 241,587
Noncurrent liabilities 1,289,989
Preferred stock 123,950
Common stockholders' equity 758,863
----------------
Total capitalization and liabilities $ 2,414,389
================
</TABLE>
Computation of Earnings Applicable to Conectiv Class A Common Stock
- ---------------------------------------------------------------------
(Dollars in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Seven Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net Income of ACE (1) $ 40,687 $ 31,620
Exclude: Employee separation and other
Merger-related costs (1) 600 29,559
Net loss of nonutility activities 203 950
Pro-rata portion of fixed amount of $40 million per year (10,000) (23,333)
------------------ ------------------
Subtotal 31,490 38,796
Percentage applicable to Conectiv Class A common stock 30% 30%
------------------ ------------------
Earnings applicable to Conectiv Class A common stock $ 9,447 $ 11,639
================== ==================
</TABLE>
(1) The amounts shown above reflect employee separation and other Merger-
related costs for ACE which reduced ACE's operating income and net income
for the seven months ended September 30, 1998, by $49.1 million and $29.6
million, respectively. For the three months ended September 30, 1998,
ACE's operating income and net income decreased by $1.0 million and $0.6
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 6 to the Consolidated Financial Statements.
-12-
<PAGE>
8. 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
and $1.0 million of 6.95% Amortizing First Mortgage Bonds.
As of September 30, 1998, Conectiv's $295.4 million short-term debt balance was
comprised primarily of $259.5 million of borrowings under Conectiv's $500
million revolving credit facilities. The weighted average interest rate on the
total $295.4 million short-term debt balance as of September 30, 1998 was 6.1%.
9. 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 limitations 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 September
30, 1998, and $2.0 million as of December 31, 1997, for potential clean-up and
other costs related to 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. For additional information concerning environmental
matters, refer to Part II, Item 5.
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
-13-
<PAGE>
million (the amount of primary insurance), Conectiv could be assessed up to
$51.3 million on an aggregate basis for such third-party claims. In addition,
Congress could impose a revenue-raising measure on the nuclear industry to pay
such claims.
The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance
coverage of approximately $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.
10. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
See the Consolidated Statement of Changes in Common Stockholders' Equity and
Note 4 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 $96.5 million for the
nine months ended September 30, 1998, and $50.0 million for the nine months
ended September 30, 1997. Cash paid for income taxes was $48.9 million for the
nine months ended September 30, 1998, and $42.7 million for the nine months
ended September 30, 1997.
11. 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 of Directors.
Each Right would, after the rights become exercisable, entitle the 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.
-14-
<PAGE>
12. PREFERRED STOCK OF SUBSIDIARIES
-------------------------------
On August 3, 1998, ACE redeemed the remaining 100,000 shares of its $8.20 No Par
Preferred Stock (subject to mandatory redemption) at $100 per share or $10.0
million in total (the book value of the preferred stock).
In October 1998, ACE purchased and retired 237,232 shares, or $23,723,000, of
preferred stock not subject to mandatory redemption which had an average
dividend rate of 4.4%.
A wholly owned subsidiary trust (Atlantic Capital II) was established in
September 1998 as a financing subsidiary of ACE for the purposes of issuing
common and preferred trust securities and holding 7 3/8% Junior Subordinated
Debentures (the Debentures). The Debentures held by the trust are its only
assets. The trust uses interest payments received on the Debentures it holds to
make cash distributions on the trust securities.
The combination of the obligations of ACE pursuant to the Debentures and ACE's
guarantee of distributions with respect to trust securities, to the extent the
trust has funds available therefor, constitute a full and unconditional
guarantee by ACE of the obligations of the trust under the trust securities the
trust has issued. ACE is the owner of all of the common securities of the
trust, which constitute approximately 3% of the liquidation amount of all of the
trust securities issued by the trust.
In November 1998, the trust issued $25 million in aggregate liquidation amount
of 7 3/8% Cumulative Trust Preferred Capital Securities (representing 1,000,000
preferred securities at $25 per security). At the same time, $25.8 million in
aggregate principal amount of 7 3/8% Junior Subordinated Debentures, Series I,
due 2028, were issued to the trust. For consolidated financial reporting
purposes, the Debentures are eliminated in consolidation against the trust's
investment in the Debentures. The preferred trust securities are subject to
mandatory redemption upon payment of the Debentures at maturity or upon
redemption. The Debentures are subject to redemption, in whole or in part at
the option of ACE, at 100% of their principal amount plus accrued interest,
after an initial period during which they may not be redeemed and at any time
upon the occurrence of certain events.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
MERGER WITH ATLANTIC
- --------------------
As discussed in Note 4 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 nine months ended September 30, 1998
includes seven months (March 1998 through September 1998) of results of
operations for ACE and AEE.
EARNINGS SUMMARY
- ----------------
Reported earnings applicable to Conectiv common stock were $84.2 million, or
$0.83 per average common share (101,011,000 average common shares) for the third
quarter of 1998 compared to $38.3 million, or $0.63 per average common share
(61,247,000 average common shares), respectively, for the third quarter of 1997.
The $0.20 increase in earnings per common share reflects higher utility net
earnings due to an 8.5% retail electric sales increase from hotter summer
weather, lower DPL utility operating and maintenance expenses, and net earnings
of the former Atlantic companies in excess of the dilution resulting from
Conectiv common shares issued to Atlantic stockholders. The utility net
earnings increase was substantially offset by anticipated expenses associated
with Conectiv's investments in its new service businesses [telecommunications,
thermal heating and cooling systems, and heating, ventilation, and air
conditioning (HVAC) operations] and participation in the competitive energy
markets. In the third quarter of 1998, these activities resulted in a net loss
of $5.3 million after taxes.
Results of operations for the nine months ended September 30, 1998 include a
charge for DPL employee separation costs and other Merger-related costs of $27.1
million before taxes, $16.4 million after taxes, or $0.18 per share. 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.
On a combined basis, DPL and ACE had approximately 4,600 employees prior to the
Merger. As of September 30, 1998, employee separation programs had reduced the
number of employees by approximately 730.
Reported earnings applicable to Conectiv common stock were $117.4 million, or
$1.27 per average common share (92,253,000 average common shares) for the nine
months ended September 30, 1998, compared to earnings applicable to common stock
of $79.8 million, or $1.31 per average common share (61,093,000 average common
shares) for the nine months ended September 30, 1997. Excluding the impact of
DPL employee separation costs and other Merger-related costs, earnings per
common share for the nine months ended September 30, 1998 were $1.45 compared to
$1.31 for the same period last year.
-16-
<PAGE>
The $0.14 increase in year-to-date earnings per common share (as adjusted) was
due essentially to the same factors affecting the third quarter earnings
variance, except that the increase in retail electric sales was lower because of
milder winter weather. For the nine months ended September 30, 1998, Conectiv's
investment in the operations of its new service businesses and participation in
the competitive energy markets resulted in a net loss of $18.0 million after
taxes.
Earnings applicable to Conectiv Class A common stock were $9,447,000 or $1.44
per Conectiv Class A common share for the third quarter of 1998, and $11,639,000
or $1.77 per Conectiv Class A common share for the nine months ended September
30, 1998. For additional information, see Note 7 to the Consolidated Financial
Statements.
As discussed below, Conectiv is in a transition caused by electric utility
restructuring in New Jersey, Delaware, Maryland, and elsewhere in the region.
Conectiv continues to invest in the establishment and growth of new competitive
businesses, with the objective of providing new sources of earnings in
anticipation of the realization of lower margins on energy sales as the
generation portion of the utility business is restructured.
During this transition, management will remain focused on maximizing total
shareholder return -- the combination of common stock price appreciation and
dividends paid. Conectiv's financial policies will continue to be reviewed
periodically throughout this transition and will reflect results of operations,
financial condition, capital requirements, and other relevant considerations,
such as the progress and outcome of restructuring activities in various states
and the financial requirements of Conectiv's new competitive businesses.
ELECTRIC UTILITY INDUSTRY RESTRUCTURING
- ---------------------------------------
For previously reported information on ACE's filings with the New Jersey Board
of Public Utilities (BPU) concerning stranded costs, see pages 3 to 4 of ACE's
1997 Report on Form 10-K. For previously reported information concerning
restructuring the electric utility industry in Delaware, Maryland and Virginia,
refer to page I-2 and page I-4 of DPL's 1997 report on Form 10-K and Note 4 to
the Consolidated Financial Statements of Conectiv's Second Quarter 1998 report
on Form 10-Q.
As previously reported and as discussed below, ACE and DPL have quantified
stranded costs in regulatory filings in New Jersey and Maryland, respectively.
The amount of stranded costs ultimately recovered from utility customers and the
final form of legislation deregulating the electric utility industry in any of
Conectiv's regulated utility jurisdictions cannot be predicted. Also, the
quantification of stranded costs under existing generally accepted accounting
principles (GAAP) can differ from methods used in regulatory filings. Among
other differences, GAAP precludes recognition of the gains on plants (or
purchased power contracts) not impaired, but requires write down of the plants
that are impaired. Due to the aforementioned considerations, Conectiv's
management currently cannot predict the ultimate effects that electric utility
industry deregulation may have on the financial statements of Conectiv and its
subsidiaries, although such effects could be material. Any stranded costs
recovered from transmission and distribution customers through a market
transition charge are expected to reduce the potential one-time charge for the
write-down of assets or reserve for uneconomic purchased power contracts.
In the course of electric restructuring proceedings in any of Conectiv's
regulated utility jurisdictions, the portion of base rates which remains subject
to rate regulation may be decreased.
-17-
<PAGE>
New Jersey
On August 19, 1998, an Administrative Law Judge (ALJ) from the New Jersey Office
of Administrative Law issued an initial decision on ACE's stranded costs and
unbundled rate filing. The ALJ, in reviewing ACE's filing, recognized that
ACE's stranded costs were $812 million for nonutility generation contracts and
$397 million for generation. The ALJ made no specific recommendations on rate
issues. A final BPU decision on this filing is expected in the first quarter
of 1999 provided that the necessary legislation is approved by the New Jersey
legislature and signed by the Governor in the fourth quarter of 1998.
The "Electric Discount and Energy Competition Act" was introduced into the New
Jersey Assembly as Bill A-10 (the Bill) on September 14, 1998. A companion
Senate Bill (Bill S-5) was introduced shortly after the Assembly Bill and
contained identical provisions. The Bill provides for deregulation of electric
power rates and June 1, 1999 as the date for each utility to begin providing
retail choice of electric power suppliers to its customers. The Bill also
contains provisions which mandate reductions in rates by a minimum of five to
ten percent, relative to the aggregate level of bundled rates in effect as of
April 30, 1997.
If enacted in its present form, the rate reductions contained in the Bill could
have a material effect upon the results of operations of ACE and Conectiv. The
Senate and Assembly are currently holding legislative committee hearings on the
Bills. These hearings will allow ACE and others the opportunity to voice their
support or opposition and to suggest amendments to the Bills. Full legislative
action is expected by year-end 1998, after the completion of the hearings. For
additional information concerning the Bill, refer to Note 5 to the Consolidated
Financial Statements included in this report.
Delaware
Legislation (House Bill 570) providing Delaware retail customers with the
ability to choose their electric power 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.
In September 1998, the Alliance for Fair Electric Competition Today, which
includes DPL, began negotiations with Delaware executive branch representatives
and Delaware Public Service Commission and Staff representatives to structure
consensus legislation for passage early in 1999.
Maryland
As previously reported in Note 4 to the Consolidated Financial Statements of
Conectiv's Second Quarter 1998 report on Form 10-Q, 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
estimated to be $217 million on a DPL system-wide basis, including $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 full recovery of the Maryland retail
portion of the stranded costs over a three-year period, starting with the
commencement of retail competition on July 3, 2000. The MPSC is scheduled to
issue an order on stranded cost recovery by October 1, 1999.
-18-
<PAGE>
On September 10, 1998, the MPSC issued an Order addressing rehearing
applications and motions to strike filed by several parties in January 1998.
Among other things, the Order confirmed a schedule intended to result in
electric retail competition by July 3, 2000, and the adoption of an interstate
reciprocity requirement. DPL's request to deregulate generation assets at the
beginning of the transition period was denied. The MPSC proposes to deregulate
generation assets once the market is deemed to be competitive. On October 7,
1998, DPL sought re-consideration of the MPSC's Order. On October 9, 1998, DPL
filed an appeal of the Order to preserve DPL's rights with respect to portions
of the Order that might be deemed final.
Virginia
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.
ELECTRIC REVENUES
- -----------------
Details of the changes in the various components of electric revenues for the
third quarter of 1998 compared to the third quarter of 1997 are shown below
(dollars in millions):
<TABLE>
<CAPTION>
Consolidated
Conectiv ACE DPL
------------ ------ ------
<S> <C> <C> <C>
Non-fuel (Base Rate) Revenues $ 210.4 $191.5 $ 18.9
Fuel Revenues 114.1 114.0 0.1
Interchange Delivery Revenues 50.4 21.2 29.2
Merchant Revenues 125.7 5.8 119.9
------ ------ ------
Total $ 500.6 $332.5 $168.1
====== ====== ======
</TABLE>
In the third quarter, consolidated Conectiv electric revenues increased by
$500.6 million, from $332.4 million for the third quarter of 1997 to $833.0
million for the third quarter of 1998. As shown above, $332.5 million of the
$500.6 million increase in Conectiv's total electric revenues was due to the
Merger. The addition of ACE's customer base roughly doubled the number of
electric customers served. On a pro forma basis, as though Conectiv's operating
results included ACE's operations in 1997, electric retail kilowatt-hour (kWh)
sales increased 8.5% primarily due to hotter summer weather which caused higher
kWh usage by residential and commercial customers. Conectiv's increase in non-
fuel (or base rate) revenues was reduced by approximately $6.2 million due to
the Merger-related customer base rate decreases discussed in Note 5 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 Conectiv's merchant group has grown its business substantially since
1997, when the group commenced operations. Conectiv actively participates in the
wholesale energy markets to support its wholesale utility and competitive retail
marketing activities. Conectiv's energy market participation exposes Conectiv to
commodity market risk when, at times, Conectiv creates net open energy commodity
positions or allows net open
-19-
<PAGE>
positions to continue. To the extent that Conectiv has net open positions,
controls are in place that are intended to keep risk exposures within certain
management approved risk tolerance levels.
Gross margins (revenues net of fuel costs) from unregulated electric merchant
sales increased by approximately $6.8 million mainly due to profitable
transactions settled in the third quarter of 1998. Due to the nature of the
product sold (a bulk commodity) and competitive markets, the margin percentage
from merchant revenues in excess of related energy costs is generally relatively
small.
Conectiv has emerged as a leading independent energy marketer in Pennsylvania by
adding more than 30,000 new customers in Pennsylvania's pilot programs for
customer choice of electric suppliers. Pennsylvania is transitioning to a
deregulated retail electric power market. One-third of all Pennsylvania
consumers will be able to choose their electric power 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.
Details of the changes in the various components of electric revenues for the
nine months ended September 30, 1998, compared to the nine months ended
September 30, 1997, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Consolidated
Conectiv ACE DPL
------------ ------ -------
<S> <C> <C> <C>
Non-fuel (Base Rate) Revenues $ 392.5 $366.7 $ 25.8
Fuel Revenues 216.0 224.1 (8.1)
Interchange Delivery Revenues 90.3 45.9 44.4
Merchant Revenues 173.4 10.6 162.8
------ ------ ------
Total $ 872.2 $647.3 $224.9
====== ====== ======
</TABLE>
For the nine months ended September 30, 1998, consolidated Conectiv electric
revenues increased by $872.2 million, from $841.4 million for the nine months
ended September 30, 1997 to $1,713.6 million for the nine months ended September
30, 1998. As shown above, $647.3 million of the $872.2 million increase in
Conectiv's total electric revenues was due to the Merger. On a pro forma basis,
as though Conectiv's operating results included ACE's operations in 1997,
electric retail kWh sales increased 3.9%. The weather's effect on year-to-date
electric sales variances was minimal because higher sales from hotter summer
weather were offset by lower sales from milder winter weather earlier in the
year. The 3.9% pro forma sales increase resulted from favorable economic
conditions and a growing customer base. Conectiv's increase in non-fuel (or
base rate) revenues was reduced by approximately $13.5 million due to the
Merger-related customer base rate decreases discussed in Note 5 to the
Consolidated Financial Statements.
The financial impact of, and reasons for changes in, fuel, interchange, and
merchant revenues for the nine-month periods are essentially the same as
discussed above for the third quarter.
GAS REVENUES
- ------------
Total gas revenues increased by $54.5 million in the third quarter, from $39.3
million in the third quarter of 1997 to $93.8 million in the third quarter of
1998, due to higher volumes of unregulated gas merchant transactions. 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 markets. For the nine-month period, total gas revenues
increased by $154.8 million, from $127.7 million for
-20-
<PAGE>
the nine months ended September 30, 1997 to $282.5 million for the nine months
ended September 30, 1998, mainly due to higher volumes of unregulated gas
merchant transactions. 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 Nine Months Ended
September 30 September 30
1998 vs. 1997 1998 vs. 1997
-------------- ------------------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ (0.5) $ (2.7)
Fuel Revenues 0.5 (3.7)
Merchant Revenues 54.5 161.2
----- ------
Total $ 54.5 $ 154.8
===== ======
</TABLE>
The year-to-date decreases shown above for non-fuel and fuel gas revenues were
primarily due to an 11.0% decrease in residential gas sales (based on cubic feet
sold) caused by milder winter and early-spring weather. The weather-related gas
revenue decrease was partly offset by additional gas revenues from a 2.4%
increase in the number of gas customers.
OTHER SERVICES REVENUES
- -----------------------
Other service revenues were comprised of the following:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------- -----------------
(Dollars in millions) 1998 1997 1998 1997
------ ----- -------- -------
<S> <C> <C> <C> <C>
HVAC $24.7 $18.0 $ 66.8 $47.7
Fuel oil and gasoline 38.3 - 80.6 -
Operation of power plants 5.4 5.1 16.5 15.8
Thermal systems 7.9 - 16.6 -
Telecommunications 2.2 0.2 3.6 -
Energy Solutions 3.7 - 7.3 -
Landfill and waste hauling (1) - 2.4 - 8.8
Other 3.5 3.1 12.7 16.2
----- ----- ------ -----
Total $85.7 $28.8 $204.1 $88.5
===== ===== ====== =====
</TABLE>
(1) Landfill and waste hauling operations were sold in the fourth quarter of
1997.
As shown in the preceding table, other services revenues increased $56.9 million
in the third quarter and $115.6 million in the nine-month period mainly due to
sales of fuel oil and gasoline by Petron Oil Corporation (Petron), which was
acquired by Conectiv in March 1998. Acquisitions of HVAC businesses, revenues
from Conectiv Thermal Systems, Inc. (CTS--a district heating and cooling
business gained through the Merger), and start-up of Conectiv's
telecommunications and energy solutions businesses also contributed to the
revenue growth.
Third quarter 1998 telecommunications revenues from Conectiv Communications,
Inc. (CCI) reached $2.2 million. In November 1997, CCI began offering local and
long distance service in Delaware and Pennsylvania. Shortly thereafter, CCI
began providing similar services in Maryland and New Jersey. CCI has sold and
activated over 15,000 phone lines.
-21-
<PAGE>
OPERATING EXPENSES
- ------------------
Electric Fuel and Purchased Energy
The change in electric fuel and purchased energy from inclusion of ACE's
operations in the financial statements beginning March 1, 1998, and from DPL
operations, is shown below (dollars in millions):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
Increase attributed to: 1998 vs. 1997 1998 vs. 1997
- ------------------------- ------------- -----------------
<S> <C> <C>
ACE operations $ 99.8 $188.0
DPL operations 144.5 197.3
------ ------
Total $244.3 $385.3
====== ======
</TABLE>
Electric fuel and purchased energy expenses for DPL operations increased in both
reporting periods primarily due to more energy supplied for greater volumes of
electricity sold off-system and within DPL's service territory.
Gas Purchased
Gas purchased increased from $32.2 million to $87.6 million in the third quarter
and from $90.4 million to $248.8 million for the nine-month period mainly due to
larger volumes of gas purchased for unregulated off-system sales. The year-to-
date increase was partly offset by lower volumes of gas purchased for sale on-
system (due to the milder winter and spring weather).
Purchased Electric Capacity
Purchased electric capacity increased in the third quarter and the nine-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 $27.1 million ($16.4 million after tax or $0.18 per common share) were
charged to operating expenses for the nine months ended September 30, 1998. The
charge to expense was reduced by a net $45.4 million gain from curtailments and
settlements of pension and other postretirement benefits, which was recognized
under SFAS No. 88 based on actual settlements through September 30, 1998.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $49.5 million in the third quarter
and $133.9 million for the nine- month period, mainly due to the Merger.
Excluding operation and maintenance expenses of the former Atlantic-owned
companies which are included only in the 1998 reporting periods, operation and
maintenance expenses decreased $8.0 million in the third quarter and increased
$6.3 million on a year-to-date basis. These variances (as adjusted to exclude
the Atlantic-owned companies) were primarily due to lower utility operating
expenses offset by higher expenses of new, nonutility businesses of
approximately $15 million and $38 million for the three- and nine-month periods,
respectively. Utility operating expenses were lower due to decreased pension
expense, last year's start-up activities at the Salem plant, and lower payroll
and other costs. The increases for the new, nonutility businesses were
attributed mainly to acquisitions of HVAC businesses and start-up costs for the
telecommunications business.
-22-
<PAGE>
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-owned
companies. Depreciation expense also reflects increases of $2.0 million in the
third quarter and $3.9 million in the nine-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 $1.9 million and $5.2 million for the third quarter
and nine-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 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. There are
substantial challenges in identifying and correcting the many computer and
embedded systems critical to generating and delivering power, delivering natural
gas and providing other services to customers.
The project team is using a phased approach to managing its activities. The
first phase is, inventory and assessment of all systems, equipment, and
processes. Each identified item is given a criticality rating of high, medium
or low. Those items rated as high or medium are believed to put Conectiv's
business operations and customers at substantial risk and are then subject to
the second phase of the project. The second phase is determining and
implementing corrective action for the systems, equipment and processes, and
concludes with a test of the unit being remediated. The third phase is system
testing and compliance certification. Additionally, the project team will be
updating existing outage contingency plans to address Year 2000 issues over the
next 12 months.
The following chart sets forth the current completion percentage of the Year
2000 Project by major business group, and for the information technology systems
used in managing Conectiv's business. Conectiv expects significant progress in
remediation and testing over the next two quarters based on work that is in
process and material that is being ordered.
<TABLE>
<CAPTION>
Inventory and Corrective Testing and
Business Group Assessment Action Compliance
- --------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
Business systems 95% 70% 60%
Power production 90% 0% 0%
Electricity distribution 90% 5% 5%
Energy and other services 75%-95% 0%-80% 0%-80%
</TABLE>
-23-
<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's subsidiaries to generate power.
Distribution of electricity is dependent on the overall reliability of the
electric grid. ACE and DPL are cooperating with the North American Electric
Reliability Council and the PJM Interconnection in Year 2000 remediation
efforts, and is accelerating its Year 2000 Project timeline to be generally in-
line with the recommendations of those groups.
Conectiv has incurred approximately $3 million in costs for the Year 2000
Project. Current estimates of the costs for the Year 2000 Project 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 assesses the status of the Year
2000 Project on at least a monthly basis to determine the likelihood of business
disruptions. Any substantial disruption to the 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 $43.5 million for the nine months ended
September 30, 1998. Operating activities provided $287.2 million of net cash
which was used primarily to pay $110.3 million of common dividends and for
$145.6 million of investing activities.
Net cash provided by operating activities increased by $108.0 million for the
nine month period, from $179.2 million last year to $287.2 million this year,
mainly due to cash flow provided by ACE's operations (from March 1998 to
September 1998). Cash used by operations of Conectiv's new businesses, such as
HVAC and telecommunications, reduced the increase in cash flow from operations.
As shown in the cash flow statement, "Acquisition of businesses, net of cash
acquired" provided a $4.3 million cash inflow for the nine months ended
September 30, 1998 due to cash acquired in the Merger, partly offset by cash
paid for direct Merger costs capitalized and acquisitions of nonutility
businesses ($16.7 million). The nonutility businesses acquired by Conectiv
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 $6.0
billion, primarily due to $2.1 billion of ACE and AEE property, plant, and
equipment. The increase in total assets includes $270.3 million of goodwill
recorded under the purchase method of accounting, which is being amortized 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 being consolidated in
the balance sheet. Dividends payable increased from $23.8 million to $47.7
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
-24-
<PAGE>
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 $130.7 million for the nine months ended September
1998 compared to $108.3 million for the nine months ended September 1997.
Capital expenditures for calendar year 1998 are expected to be less than
originally planned. Investing activities also included a $20.0 million cash
out-flow for "Investments in partnerships," which was primarily an investment by
CTS in a thermal energy system under construction for a Las Vegas casino. Other
partnership activities by Conectiv included formation of two new joint ventures
with CNE Energy Services, Inc. which are designed to provide increased
reliability and flexibility to natural gas marketers and end-users in the
Northeast. One venture involves operation of a liquefied natural gas storage
facility, and the other venture provides a firm in-market supply source to
assist energy marketers and local gas distribution companies in meeting the
maximum demands of their customers.
Excluding common dividends paid, financing activities for the nine months ended
September 1998 consisted primarily of a $202.3 million increase in short-term
debt, the issuance of $33.0 million of long-term debt (Medium-Term Notes, 6.81%,
due in 20 years), the refinancing and redemption of $193.3 million of long-term
debt, and the redemption of $10 million of $8.20 No Par Preferred Stock.
The $202.3 million increase in short-term debt reflects $259.5 million of
borrowings under Conectiv's $500 million revolving credit facilities, partly
offset by a decrease in other short-term borrowings. 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 also
occurred in the second quarter of 1998 when DPL and ACE repaid at maturity $34.5
million of Medium Term Notes, Debentures, and Bonds bearing an average interest
rate of 5.8%.
Short-term debt outstanding increased from $23.3 million as of December 31, 1997
to $295.4 million as of September 30, 1998. The $272.1 million increase was
primarily due to consolidation of Atlantic's nonutility revolving credit
facility ($158.2 million), and nonutility business expansions and acquisitions.
By early 1999, 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>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Common stockholders' equity 46.2% 44.0%
Preferred stock
Not subject to mandatory redemption 3.0% 4.1%
Subject to mandatory redemption 4.0% 3.2%
Long-term debt and variable rate demand bonds 46.8% 48.7%
</TABLE>
In September 1998, the Securities and Exchange Commission issued an order under
the PUHCA authorizing Conectiv's issuance of up to $250 million of unsecured
debt securities with maturities of 15 years or less.
-25-
<PAGE>
In October 1998, ACE redeemed $23.7 million of preferred stock not subject to
mandatory redemption which had an average dividend rate of 4.4%. In November
1998, a subsidiary trust of ACE issued $25 million of 7 3/8% preferred stock
subject to mandatory redemption. On a consolidated basis, a tax benefit is
received which is equivalent to the tax effect of a deduction for the trust's
distributions on the preferred securities.
Conectiv's ratio of earnings to fixed charges under the SEC Method are shown
below. The previously reported ratios of earnings to fixed charges are restated
to include preferred stock dividends in fixed charges. See Note 1 to the
Consolidated Financial Statements for additional information.
12 Months
Ended Year Ended December 31,
September 30 -----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges
(SEC Method) (1) 2.62 2.63 2.83 2.92 2.85
(1) Excluding the Merger-related charge discussed in Note 6 to the Consolidated
Financial Statements, which decreased pre-tax income by $27.1 million, the
ratio of earnings to fixed charges was 2.79.
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.
-26-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
As previously reported in Note 18 to the Consolidated Financial Statements
included in DPL's 1997 Form 10-K, on February 27, 1996, the co-owners of Salem,
including DPL and ACE, filed a complaint in the United States District Court for
New Jersey against Westinghouse Electric Corporation (Westinghouse), the
designer and manufacturer of the Salem steam generators. The complaint, which
sought to recover from Westinghouse the costs associated with and resulting from
the cracks discovered in Salem's steam generators and with replacing such steam
generators, alleged violations of federal and New Jersey Racketeer Influenced
and Corrupt Organizations Acts, fraud, negligent misrepresentation and breach of
contract. On November 4, 1998, the Court granted Westinghouse's motion for
summary judgment with regard to the federal Racketeer Influenced and Corrupt
Organizations Act claim, and dismissed the remaining state law claims without
prejudice. DPL and ACE are assessing their options, including a possible appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
A special meeting of ACE shareholders was held on October 14, 1998 to approve an
amendment to the Company's Charter. Shareholders voted to eliminate paragraph
(7)(B)(c) of Article III of the Charter, removing a restriction on the amount of
securities representing unsecured indebtedness issuable by ACE. Votes cast on
the proposal were as follows:
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------
Outstanding For Against Abstain
----------- ---------- ------- -------
<S> <C> <C> <C> <C>
Common Securities: 18,320,937 18,320,937 - 0 - - 0 -
Preferred Securities:
Cumulative Preferred Stock ($100 Par Value)
4% Series 77,000 59,223 232 150
4.10% Series 72,000 71,496 - 0 - - 0 -
4.35% Series 15,000 12,183 - 0 - - 0 -
4.35% 2nd Series 36,000 35,672 - 0 - - 0 -
4.75% Series 50,000 45,550 - 0 - - 0 -
5.00% Series 50,000 46,455 100 - 0 -
No Par Preferred Stock
$7.80 Series 239,500 239,500 - 0 - - 0 -
</TABLE>
ITEM 5. OTHER INFORMATION
- -------------------------
Salem Nuclear Generating Station
- --------------------------------
In September 1998, the Nuclear Regulatory Commission (NRC) issued its periodic
Systematic Assessment of Licensee Performance (SALP) Report on the performance
of activities at Salem for the period March 1, 1997 to August 1, 1998. SALP
reports rate licensee performance in four assessment areas: Operations,
Maintenance, Engineering and Plant Support. Ratings range from a high of "1" to
a low of "3". Salem received a rating of 1 in Operations, a 2 in Maintenance, a
2 in Engineering, and a 1 in Plant Support. The NRC noted that the overall
performance at Salem improved as demonstrated by a nearly event-free return of
both units to operation following the extended outage.
-27-
<PAGE>
Air Quality Regulations
- -----------------------
Due to their location in the Ozone Transport Region created by the federal Clean
Air Act Amendments of 1990, Conectiv subsidiary facilities are required to
reduce nitrogen oxide emissions significantly during warm weather months
beginning in summer 1999. Achieving these reductions will require capital
expenditures of approximately $15 million.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibits
- --------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
On August 3, 1998, Conectiv filed a Form 8-K to announce a common stock
repurchase program.
On September 18, 1998, Conectiv filed a Form 8-K providing updated information
concerning the restructuring of the electric utility industry in New Jersey.
On November 2, 1998, Conectiv filed its press release concerning third quarter
1998 operating results on Form 8-K.
-28-
<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: November 12, 1998 /s/ B. S. Graham
----------------- ---------------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-29-
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Number
------ ------
Ratio of earnings to fixed charges 12 31
Financial Data Schedule 27 32
-30-
<PAGE>
Exhibit 12
Conectiv
--------
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months 12 Months Ended December 31,
Ended September 30, ----------------------------------------------------
1998 1997 1996 1995 1994
------------------- --------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Net income $150,442 $101,218 $107,251 $107,546 $ 98,940
-------- -------- -------- -------- --------
Income taxes 110,379 72,155 78,340 75,540 67,613
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt 116,653 78,350 69,329 65,572 61,128
Other interest 20,839 12,835 12,516 10,353 9,336
Preferred stock dividend
requirements of subsidiaries 15,585 10,178 10,326 9,942 9,370
-------- -------- -------- -------- --------
Total fixed charges 153,077 101,363 92,171 85,867 79,834
-------- -------- -------- -------- --------
Nonutility capitalized interest (950) (208) (311) (304) (256)
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $412,948 $274,528 $277,451 $268,649 $246,131
======== ======== ======== ======== ========
Total fixed charges shown above $153,077 $101,363 $ 92,171 $ 85,867 $ 79,834
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 4,791 3,065 6,025 6,243 6,578
-------- -------- -------- -------- --------
Fixed charges for ratio computation $157,868 $104,428 $ 98,196 $ 92,110 $ 86,412
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.62 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.
-31-
<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 THIRD QUARTER
1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,605,043
<OTHER-PROPERTY-AND-INVEST> 553,064
<TOTAL-CURRENT-ASSETS> 694,018
<TOTAL-DEFERRED-CHARGES> 480,943
<OTHER-ASSETS> 636,340
<TOTAL-ASSETS> 5,969,408
<COMMON> 1,077
<CAPITAL-SURPLUS-PAID-IN> 1,578,673
<RETAINED-EARNINGS> 297,449
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,872,293
163,950
119,702
<LONG-TERM-DEBT-NET> 1,793,094
<SHORT-TERM-NOTES> 295,447
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 68,765
0
<CAPITAL-LEASE-OBLIGATIONS> 38,413
<LEASES-CURRENT> 28,415
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,589,329
<TOT-CAPITALIZATION-AND-LIAB> 5,969,408
<GROSS-OPERATING-REVENUE> 2,200,109
<INCOME-TAX-EXPENSE> 96,369
<OTHER-OPERATING-EXPENSES> 1,867,762
<TOTAL-OPERATING-EXPENSES> 1,964,131
<OPERATING-INCOME-LOSS> 235,978
<OTHER-INCOME-NET> 12,442
<INCOME-BEFORE-INTEREST-EXPEN> 248,420
<TOTAL-INTEREST-EXPENSE> 119,386
<NET-INCOME> 129,034
0
<EARNINGS-AVAILABLE-FOR-COMM> 129,034
<COMMON-STOCK-DIVIDENDS> 132,342
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 287,245
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</TABLE>
