<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
- --
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13895
CONECTIV
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3114
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at October 30, 1999
---------------------------------- --------------------------------------
Common Stock, $0.01 par value 87,265,013
Class A Common Stock, $0.01 par value 5,742,604
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Conectiv
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Table of Contents
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<TABLE>
<CAPTION>
Page
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Part I. Financial Information:
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
months ended September 30, 1999, and September 30, 1998..... 1-2
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 3-4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999, and September 30, 1998 5
Notes to Consolidated Financial Statements.................. 6-23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24-44
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 44
Part II. Other Information
Item 1. Legal Proceedings........................................... 44
Item 5. Other Information........................................... 45
Item 6. Exhibits and Reports on Form 8-K............................ 45-46
Signature................................................................ 47
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 795,732 $ 833,037 $1,912,555 $1,713,567
Gas 157,530 93,773 582,560 282,489
Other services 127,150 85,669 334,362 204,053
------------- ------------- ------------- -------------
1,080,412 1,012,479 2,829,477 2,200,109
------------- ------------- ------------- -------------
OPERATING EXPENSES
Electric fuel and purchased energy 315,420 370,027 745,618 696,385
Gas purchased 151,369 87,590 542,181 248,761
Other services' cost of sales 101,164 77,281 265,989 167,711
Purchased electric capacity 57,764 55,900 164,111 128,774
Special charges 105,648 728 105,648 27,074
Operation and maintenance 149,868 132,054 443,631 369,482
Depreciation 68,384 65,168 203,558 175,030
Taxes other than income taxes 23,462 22,976 63,012 54,545
------------- ------------- ------------- -------------
973,079 811,724 2,533,748 1,867,762
------------- ------------- ------------- -------------
OPERATING INCOME 107,333 200,755 295,729 332,347
------------- ------------- ------------- -------------
OTHER INCOME
Allowance for equity funds used
during construction 551 794 1,685 1,910
Other income 5,902 5,860 36,866 10,532
------------- ------------- ------------- -------------
6,453 6,654 38,551 12,442
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest charges 48,154 41,977 131,103 109,423
Allowance for borrowed funds used during
construction and capitalized interest (1,042) (1,513) (4,065) (3,101)
------------- ------------- ------------- -------------
47,112 40,464 127,038 106,322
------------- ------------- ------------- -------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES 5,117 4,817 14,843 13,064
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 61,557 162,128 192,399 225,403
INCOME TAXES, EXCLUDING INCOME TAXES
APPLICABLE TO EXTRAORDINARY ITEM 41,318 68,460 92,106 96,369
------------- ------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM 20,239 93,668 100,293 129,034
EXTRAORDINARY ITEM (Net of $160,193 of
income taxes) (271,106) - (271,106) -
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (250,867) $ 93,668 $ (170,813) $ 129,034
============= ============= ============= =============
(Continued on page 2)
See accompanying Notes to Consolidated Financial Statements.
-1-
</TABLE>
<PAGE>
CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
(Continued from page 1)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
EARNINGS (LOSS) APPLICABLE TO:
Common stock
Income before extraordinary item $ 13,084 $ 84,221 $ 90,159 $ 117,395
Extraordinary item, net of income taxes (266,333) - (266,053) -
------------- ------------- ------------- -------------
Total $ (253,249) $ 84,221 $ (175,894) $ 117,395
============= ============= ============= =============
Class A common stock
Income before extraordinary item $ 7,155 $ 9,447 $ 10,134 $ 11,639
Extraordinary item, net of income taxes (4,773) - (5,053) -
------------- ------------- ------------- -------------
Total $ 2,382 $ 9,447 $ 5,081 $ 11,639
============= ============= ============= =============
AVERAGE SHARES OUTSTANDING (000)
Common stock 87,711 101,011 95,454 92,253
Class A common stock 5,743 6,561 6,234 6,561
EARNINGS (LOSS) PER AVERAGE SHARE--basic
and diluted
Common stock
Before extraordinary item $0.15 $0.83 $0.94 $1.27
Extraordinary item (3.04) - (2.79) -
------------- ------------- ------------- -------------
Total $(2.89) $0.83 $(1.85) $1.27
============= ============= ============= =============
Class A common stock
Before extraordinary item $1.25 $1.44 $1.63 $1.77
Extraordinary item (0.83) - (0.81) -
------------- ------------- ------------- -------------
Total $0.42 $1.44 $0.82 $1.77
============= ============= ============= =============
DIVIDENDS DECLARED PER SHARE
Common stock $0.220 $0.385 $0.825 $1.155
Class A common stock $0.800 $0.800 $2.400 $2.400
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-2-
<PAGE>
CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 139,553 $ 65,884
Accounts receivable 514,209 459,831
Allowance for doubtful accounts (11,274) (4,743)
Inventories, at average cost:
Fuel (coal, oil, and gas) 64,142 71,701
Materials and supplies 51,709 73,047
Prepaid New Jersey sales and excise taxes 17,134 20,078
Deferred energy costs 22,724 -
Other prepayments 18,095 17,278
Deferred income taxes, net 44,260 20,796
-------------- --------------
860,552 723,872
-------------- --------------
INVESTMENTS
Investment in leveraged leases 73,440 122,256
Funds held by trustee 180,029 174,509
Other investments 133,832 90,913
-------------- --------------
387,301 387,678
-------------- --------------
PROPERTY, PLANT, and EQUIPMENT
Electric generation 1,775,763 2,917,011
Electric transmission and distribution 2,608,769 2,539,436
Gas transmission and distribution 255,990 249,383
Other electric and gas facilities 374,074 363,263
Telecommunications, thermal systems, and other property,
plant, and equipment 225,356 202,415
-------------- --------------
Total 5,239,952 6,271,508
Less: Accumulated depreciation 2,121,662 2,522,878
-------------- --------------
Net plant in service 3,118,290 3,748,630
Construction work-in-progress 211,069 265,593
Leased nuclear fuel, at amortized cost 55,293 63,328
Goodwill, net 370,121 402,836
-------------- --------------
3,754,773 4,480,387
-------------- --------------
DEFERRED CHARGES AND OTHER ASSETS
Recoverable stranded costs 703,669 -
Deferred recoverable income taxes 90,900 184,434
Unrecovered purchased power costs 33,965 48,274
Unrecovered New Jersey state excise taxes 28,424 35,594
Deferred debt refinancing costs 21,671 44,223
Deferred other postretirement benefit costs 33,104 34,978
Prepaid employee benefits costs 30,000 16,132
Unamortized debt expense 27,915 27,375
License fees 23,675 24,706
Other 36,196 80,021
-------------- --------------
1,029,519 495,737
-------------- --------------
TOTAL ASSETS $ 6,032,145 $ 6,087,674
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CURRENT LIABILITIES
Short-term debt $ 623,532 $ 376,061
Long-term debt due within one year 67,019 80,822
Variable rate demand bonds 158,430 125,100
Accounts payable 256,368 240,775
Taxes accrued 97,707 41,299
Interest accrued 46,245 37,346
Dividends payable 28,258 47,743
Deferred energy costs 53,422 15,990
Current capital lease obligation 28,033 28,314
Above-market purchased energy contracts 25,885 -
Excess Merrill Creek Reservoir capacity and other
electric restructuring liabilities 27,773 -
Other 87,229 88,341
------------------- -------------------
1,499,901 1,081,791
------------------- -------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Other postretirement benefits obligation 97,522 102,268
Deferred income taxes, net 703,154 862,179
Deferred investment tax credits 75,705 79,525
Regulatory liability for deferred New Jersey income tax benefit 40,831 -
Long-term capital lease obligation 28,452 36,603
Above-market purchased energy contracts 57,222 -
Excess Merrill Creek Reservoir capacity and other
electric restructuring liabilities 64,108 -
Other 54,391 50,702
------------------- -------------------
1,121,385 1,131,277
------------------- -------------------
CAPITALIZATION
Common stock: $0.01 par value;
150,000,000 shares authorized; shares outstanding--
87,742,313 in 1999, and 100,516,768 in 1998 1,020 1,007
Class A common stock, $0.01 par value;
10,000,000 shares authorized; shares outstanding--
5,742,604 in 1999, 6,560,612 in 1998 57 66
Additional paid-in capital--common stock 1,473,135 1,462,675
Additional paid-in capital--Class A common stock 93,742 107,095
Retained earnings 14,389 276,939
------------------- -------------------
1,582,343 1,847,782
Treasury shares, at cost:
14,242,773 shares in 1999; 185,030 shares in 1998 (362,365) (3,797)
Unearned compensation (1,868) (824)
------------------- -------------------
Total common stockholders' equity 1,218,110 1,843,161
Preferred stock of subsidaries:
Not subject to mandatory redemption 95,933 95,933
Subject to mandatory redemption 188,950 188,950
Long-term debt 1,907,866 1,746,562
------------------- -------------------
3,410,859 3,874,606
------------------- -------------------
Contingencies (Note 12)
TOTAL CAPITALIZATION AND LIABILITIES $ 6,032,145 $ 6,087,674
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
- 4 -
</TABLE>
<PAGE>
CONECTIV
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (170,813) $129,034
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item (net of tax) 271,106 -
Special charges 105,648 27,074
Depreciation and amortization 221,942 189,117
Allowance for equity funds used during construction (1,685) (1,910)
Investment tax credit adjustments, net (3,820) (3,398)
Deferred income taxes, net (19,345) (3,966)
Net change in:
Accounts receivable (51,248) (60,530)
Inventories 3,424 (459)
Prepaid New Jersey sales and excise taxes 2,944 (52,883)
Accounts payable 11,209 4,887
Other current assets & liabilities (1) 54,042 63,678
Other, net (24,336) (3,399)
-------------- --------------
Net cash provided by operating activities 399,068 287,245
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (17,098) 4,337
Capital expenditures (221,483) (130,749)
Investments in partnerships (21,149) (19,998)
Deposits to nuclear decommissioning trust funds (5,695) (6,404)
Decrease in bond proceeds held in trust funds 544 -
Decrease in investment in leveraged leases 6,938 6,532
Other, net 1,346 688
-------------- --------------
Net cash used by investing activities (256,597) (145,594)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (112,386) (110,269)
Long-term debt issued 250,000 33,000
Variable rate demand bonds issued 33,330 -
Common stock issued 59 63
Long-term debt redeemed (103,678) (193,546)
Common stock purchased (360,822) (4,967)
Preferred stock purchased - (10,000)
Principal portion of capital lease payments (17,558) (14,087)
Net change in short-term debt 247,471 202,261
Cost of issuances and refinancings (5,218) (570)
-------------- --------------
Net cash used by financing activities (68,802) (98,115)
-------------- --------------
Net change in cash and cash equivalents 73,669 43,536
Cash and cash equivalents at beginning of period 65,884 35,339
-------------- --------------
Cash and cash equivalents at end of period $139,553 $ 78,875
============= =============
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
-5-
</TABLE>
<PAGE>
CONECTIV
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Note 1. Financial Statement Presentation
- ------- --------------------------------
Conectiv's consolidated condensed interim financial statements contained herein
include the accounts of Conectiv and its majority-owned subsidiaries and reflect
all adjustments necessary in the opinion of management for a fair presentation
of interim results. In accordance with regulations of the Securities and
Exchange Commission (SEC), disclosures which would substantially duplicate the
disclosures in Conectiv's 1998 Annual Report on Form 10-K have been omitted.
Accordingly, Conectiv's consolidated condensed interim financial statements
contained herein should be read in conjunction with Conectiv's 1998 Annual
Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for
additional relevant information.
On March 1, 1998, Conectiv became a holding company that owns Delmarva Power &
Light Company (DPL), Atlantic City Electric Company (ACE) and other
subsidiaries. (This transaction is referred to herein as the Merger.) Under the
purchase method of accounting, with DPL as the acquirer of Atlantic Energy, Inc.
(Atlantic) and its subsidiaries, the Consolidated Statement of Income for the
nine months ended September 30, 1998 includes seven months of results of
operations for ACE and the nonutility subsidiaries formerly owned by Atlantic.
For additional information about the Merger, see Note 4 to the Consolidated
Financial Statements included in Conectiv's 1998 Annual Report on Form 10-K.
See Note 6 to the Consolidated Financial Statements of this report for pro forma
information.
Note 2. Significant Accounting Policies
- ------- -------------------------------
Regulation of Utility Operations
As discussed in Note 9 to the Consolidated Financial Statements, during the past
several months, the New Jersey Board of Public Utilities (NJBPU) issued a
Summary Order to ACE, and the Delaware Public Service Commission (DPSC) and
Maryland Public Service Commission (MPSC) issued orders to DPL, concerning
restructuring the electricity supply businesses of ACE and DPL, respectively.
These orders were issued pursuant to the New Jersey, Delaware, and Maryland
electric restructuring legislation enacted earlier in 1999. Based on these
orders, ACE and DPL determined that the requirements of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation," no longer applied to their electricity supply businesses as of
August 1, 1999 and September 30, 1999, respectively. As a result, ACE and DPL
discontinued applying SFAS No. 71 to their electricity supply businesses and
applied the requirements of SFAS No. 101, "Regulated Enterprises--Accounting for
the Discontinuation of Application of FASB Statement No. 71" and Emerging Issues
Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity--
Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF
97-4). For information concerning the extraordinary charge to earnings in the
third quarter of 1999 which resulted from applying the requirements of SFAS No.
101 and EITF 97-4, refer to Note 5 to the Consolidated Financial Statements.
The DPSC and MPSC electric restructuring orders did not provide a rate
adjustment mechanism for any under- or over-recovery of energy costs after
customer choice begins (October 1, 1999 in Delaware and July 1, 2000 in
Maryland), except for the disposition of any deferred balance which remains when
customer choice begins. Thus, DPL will no longer defer the difference between
the amount collected in revenues for energy costs and the amount of actual
energy costs incurred, beginning October 1, 1999 for
-6-
<PAGE>
its Delaware electricity supply business and July 1, 2000 for its Maryland
electricity supply business. As a result, differences between DPL's energy
revenues and expenses will affect earnings and earnings volatility may increase.
As discussed under "Shopping Credits and Basic Generation Service" in Note 9 to
the Consolidated Financial Statements, the electric restructuring order issued
by the NJBPU to ACE provides for recovery through customer rates of energy and
other costs of supplying customers who do not choose an alternative electricity
supplier. In recognition of these cost-based, rate-recovery mechanisms, ACE
defers the difference between customer billings for such costs and actual costs
incurred, and an offsetting adjustment to revenues is recorded.
Deferred Debt Refinancing Costs
Prior to the third quarter of 1999, the costs of refinancing debt of the utility
businesses of DPL and ACE were deferred and amortized over the period during
which the costs are recovered in rates, which is generally the life of the new
debt. In the third quarter of 1999, the deferred costs associated with
previously refinanced debt attributed to ACE's and DPL's electric generation
businesses were written-off and charged to earnings, net of anticipated rate
recovery. Any costs incurred in the future for refinancing debt attributed to
the electric generation business for which rate recovery is not provided will be
accounted for in accordance with SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which requires such costs to be expensed.
Energy Trading and Risk Management Activities
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," which delays the required
implementation date for SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," until all fiscal quarters of all fiscal years beginning
after June 15, 2000. Reporting entities may elect to adopt SFAS No. 133 prior
to the required implementation date. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Conectiv currently cannot determine the effect that SFAS No. 133 will have on
its financial statements.
On January 1, 1999, Conectiv adopted the EITF consensus EITF 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities" under
which contracts entered into in connection with energy trading activities are
marked to market, with gains and losses (unrealized and realized) included in
earnings. Implementation of EITF 98-10 did not have a material impact on net
income.
Note 3. Investment Income
- ------- ------------------
An indirect Conectiv subsidiary holds a 94% limited partner interest in Enertech
Capital Partners, L.P. (Enertech). Enertech is a venture capital fund that
invests in energy-related technology and Internet service companies. Enertech
records its investments at fair value and includes gains and losses on changes
in the fair value of its investments in income in accordance with industry
practice. Conectiv's subsidiary accounts for its investment in Enertech on the
equity method of accounting. Conectiv's equity in pre-tax earnings of Enertech
was $18.0 million ($10.6 million after-income taxes or $0.11 per common share)
for the nine months ended September 30, 1999. The pre-tax earnings are reported
as "Other income" in the Consolidated Statement of Income. Conectiv's equity in
earnings of Enertech was not significant in 1998. Due to the nature of
Enertech's investments, its earnings may be volatile from period to period.
-7-
<PAGE>
Note 4. Special Charges
- ------- ---------------
Conectiv's operating results for the three and nine months ended September 30,
1999 include "Special charges" of $105.6 million before taxes ($71.6 million
after taxes) comprised of the following items:
(A) Due to a decline in the estimated residual values of the airplanes and
cargo container-ships leased by certain Conectiv subsidiaries to third parties
through leveraged lease arrangements, the investment in leveraged leases was
written-down by $43.7 million before taxes ($26.7 million after taxes).
(B) Approximately $10.9 million before taxes, ($6.5 million after taxes) was
accrued for 160 planned employee separations, which are expected to occur within
the next year in conjunction with a cost reduction and productivity program.
(C) Due to lower actual operating cash flows than initially expected when
certain heating, ventilation and air-conditioning (HVAC) businesses were
acquired, the net book value of the HVAC businesses became impaired, based on
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets To Be Disposed Of." SFAS No. 121 requires that goodwill associated
with impaired assets purchased in a business combination be eliminated before
reducing the carrying amounts of the other long-lived assets of the purchased
business. As a result, the goodwill associated with Conectiv's HVAC businesses
was written-down by $35.6 million before taxes ($29.1 million after taxes).
(D) Charges for additional costs related to the Merger, impairments of certain
other assets, and other items were $15.4 million before taxes ($9.3 million
after taxes).
Conectiv's operating results for the nine months ended September 30, 1998
include "Special charges" of $27.1 million before taxes ($16.4 million after
taxes) for the cost of DPL employee separations associated with the Merger-
related workforce reduction and other Merger-related costs. The 1998 employee
separation, relocation, and other Merger-related costs for Atlantic and its
former subsidiaries were capitalized as costs of the Merger.
The effect of the "Special charges" on basic and diluted earnings per average
share of common stock are shown below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Effect of Special Charges on September 30 September 30
Basic and Diluted Earnings ------------------- -------------------
Per Average Share 1999 1998 1999 1998
- ------------------------------ ---------- ------- --------- --------
<S> <C> <C> <C> <C>
Common Stock $(0.80) - $(0.73) $(0.18)
Class A Common Stock $(0.31) - $(0.30) -
</TABLE>
Note 5. Extraordinary Item
- ------- ------------------
As discussed in Note 2 to the Consolidated Financial Statements, based on
electric utility restructuring orders received in the third quarter of 1999, DPL
and ACE discontinued applying SFAS No. 71 to their electricity supply businesses
and applied the requirements of SFAS No. 101 and EITF 97-4. Pursuant to the
requirements of SFAS No. 101 and EITF 97-4, DPL and ACE recorded extraordinary
charges which, on a consolidated basis, reduced earnings by $271.1 million,
after-taxes. The portion of the extraordinary charge related to impaired assets
was determined in accordance with SFAS No. 121. The extraordinary charge
primarily resulted from impaired electric generating plants and certain other
assets, uneconomic energy contracts, and other effects of deregulation requiring
loss recognition. The extraordinary charge was decreased by the regulatory
asset established for the amount of stranded costs expected to be recovered
through regulated electricity delivery rates.
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<PAGE>
As discussed in Note 9 to the Consolidated Financial Statements, ACE's portion
of the extraordinary charge was based on the NJBPU's Summary Order and the NJBPU
is to issue a more detailed order at a later date. If the NJBPU's final
detailed order were to differ materially from the Summary Order, then the
extraordinary charge could change.
The details of the extraordinary charge are shown in the following table.
<TABLE>
<CAPTION>
Consolidated
Items Included in Extraordinary Charge Conectiv DPL ACE
- -------------------------------------- ------------ -------- --------
(Dollars in millions)
<S> <C> <C> <C>
(a) The net book value of certain electric generating stations (the
nuclear plants and a fossil-fuel plant) and other electric
plant-related assets including inventories were written-down due to
impairment. $(754.2) $(253.3) $(500.9)
(b) The net present value of water-supply capacity from the Merrill Creek
Reservoir in excess of the electric generating plants' requirements
was expensed. (45.3) (41.9) (3.4)
(c) The net present value of expected losses under uneconomic energy
contracts, primarily for the purchase of electricity and gas at
above-market prices, was expensed. (100.3) (99.0) (1.3)
(d) Generation-related regulatory assets and certain other utility assets
impaired from deregulation were written-off. Also, various
liabilities resulting from deregulation were recorded. (237.3) (51.5) (185.8)
(e) Regulatory assets were established for the amount of stranded costs
expected to be recovered through regulated electricity delivery rates. 705.8 44.3 661.5
------- ------- -------
Total pre-tax extraordinary charge $(431.3) $(401.4) $ (29.9)
Income tax benefit 160.2 147.8 12.4
------- ------- -------
Total extraordinary charge, net of income taxes $(271.1) $(253.6) $ (17.5)
======= ======= =======
</TABLE>
Note 6. Pro Forma Information (unaudited)
- ------- ----------------------------------
Pro forma unaudited financial information for the nine months ended September
30, 1998, giving effect to the Merger as if it had occurred on January 1, 1998,
is presented below. The pro forma information has not been adjusted to exclude
the charge to earnings for employee separation and other Merger-related costs
incurred by DPL which reduced operating income, net income, earnings applicable
to common stock and earnings per average Conectiv common share for the nine
months ended September 30, 1998 by $27.1 million, $16.4 million, $16.4 million,
and $0.18, respectively. The pro forma information presented on the following
page is not necessarily indicative of the actual results that would have
occurred if the Merger had occurred on January 1, 1998.
-9-
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Information
(Dollars in Thousands, except Nine Months Ended
per share amounts) September 30, 1998
- ----------------------------------------- ------------------
<S> <C>
Operating Revenues $2,365,294
Operating Income $ 353,381
Net Income $ 131,165
Earnings Applicable to Common Stock:
Common stock $ 119,373
Class A common stock $ 11,792
Average common shares outstanding (000)
Common stock 101,026
Class A common stock 6,561
Basic and diluted earnings per average
share outstanding of:
Common stock $ 1.18
Class A common stock $ 1.80
</TABLE>
Note 7. Common Stockholders' Equity
- ------- ---------------------------
(A) Conectiv Common Stock
---------------------
On May 11, 1999, Conectiv announced financial and strategic initiatives that
included an offer to purchase approximately 14,000,000 shares of Conectiv common
stock at a price per share not greater than $25.50 nor less than $23.50 (the
Offer). In June 1999, Conectiv paid $358.9 million to purchase 14,075,338
shares of Conectiv common stock through the Offer at a price of $25.50 per
share, which was determined based on procedures described in the Offer. The
shares of Conectiv common stock purchased through the Offer are held as treasury
shares and are classified as such on the Consolidated Balance Sheet. In
accordance with the Restated Certificate of Incorporation of Conectiv, holders
of shares of Class A common stock could participate in the Offer by electing to
convert shares of Class A common stock into shares of Conectiv common stock and
tendering such shares of Conectiv common stock pursuant to the Offer. The
14,075,338 shares of Conectiv common stock purchased through the Offer included
1,308,788 shares of Conectiv common stock (1.59997 shares of Conectiv common
stock for each share of Class A common stock converted) which were issued to and
then tendered by holders of 818,008 shares of Class A common stock who elected
to convert shares of Class A common stock through the Offer.
Conectiv also continues to purchase shares of Conectiv common stock, from time
to time, pursuant to a plan to purchase up to $60 million (market value) of
Conectiv common stock. From July 1, 1998, when the purchase of Conectiv common
stock was authorized to begin, through September 30, 1999, approximately $13.5
million (market value) of Conectiv common stock was purchased.
The financial and strategic initiatives announced by Conectiv on May 11, 1999
included the intention to reduce the dividends on Conectiv common stock to a
targeted payout ratio of 40% to 60% of earnings per average share of common
stock outstanding. Conectiv's Board of Directors declared a quarterly dividend
per share of Conectiv common stock of $0.385 for the first quarter of 1999,
$0.22 for the second quarter of 1999, and $0.22 for the third quarter of 1999.
For the nine months ended September 30, 1999, dividends declared per share of
Conectiv common stock were $0.825, which represented approximately
-10-
<PAGE>
49% of earnings per average share of Conectiv common stock outstanding adjusted
to exclude the special and extraordinary charges discussed in Notes 4 and 5 to
the Consolidated Financial Statements.
(B) Conectiv Class A Common Stock
-----------------------------
Earnings applicable to Class A common stock are equal to a percentage of
"Company Net Income Attributable to the Atlantic Utility Group," which is
earnings of ACE's regulated electric utility business, as the business existed
on August 9, 1996, less $40 million per year. The percentage of "Company Net
Income Attributable to the Atlantic Utility Group" applicable to Class A common
stock was 30% at the date of the Merger. Certain circumstances, as specified in
the Restated Certificate of Incorporation of Conectiv, result in an adjustment
to the percentage of "Company Net Income Attributable to the Atlantic Utility
Group" applicable to Class A common stock. As discussed in Note 7 (A) to the
Consolidated Financial Statements, the number of shares of Class A common stock
outstanding decreased by 818,008 as a result of the Offer. Due to this
reduction in the number of shares of Class A common stock outstanding and in
accordance with the Restated Certificate of Incorporation of Conectiv, the
percentage of "Company Net Income Attributable to the Atlantic Utility Group"
applicable to Class A common stock decreased to 27.3% in June 1999, when the
Offer was completed.
Dividends declared per share of Class A common stock were $0.80 and $2.40 for
the three and nine months ended September 30, 1999, respectively. In
comparison, earnings excluding special charges and the extraordinary item which
were applicable to Class A common stock were $1.55 and $1.92 for the three and
nine months, respectively, ended September 30, 1999.
The calculation of earnings applicable to Class A common stock and summarized
ACE financial information are presented below. Under the purchase method of
accounting, the Conectiv Consolidated Statement of Income for the nine months
ended September 30, 1998 includes ACE's operating results for the seven months
ended September 30, 1998.
<TABLE>
<CAPTION>
Computation of Earnings Applicable to Conectiv Class A Common Stock
(Dollars in Thousands)(unaudited)
Three Months Ended Nine Months Seven Months
--------------------- Ended Ended
09/30/99 09/30/98 09/30/99 09/30/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings of ACE $ 17,937 $ 40,687 $ 46,840 $ 31,620
Exclude:
Employee separation and other
Merger-related costs 837 600 837 29,559
Net loss (income) of nonutility activities (49) 203 (97) 950
Pro-rata portion of fixed amount
of $40 million per year (10,000) (10,000) (30,000) (23,333)
--------- --------- --------- ---------
Company Net Income Attributable to
the Atlantic Utility Group 8,725 31,490 17,580 38,796
Percentage applicable to Class A
Common Stock [a] 27.3% 30.0% 28.9% 30.0%
--------- --------- --------- ---------
Earnings applicable to Class A Common Stock $ 2,382 $ 9,447 $ 5,081 $ 11,639
========= ========= ========= =========
Earnings (loss) applicable to Class A
Common Stock
Before extraordinary item [b] $ 7,155 $ 9,447 $ 10,134 $ 11,639
Extraordinary item [c] (4,773) - (5,053) -
--------- --------- --------- ---------
$ 2,382 $ 9,447 $ 5,081 $ 11,639
========= ========= ========= =========
</TABLE>
-11-
<PAGE>
[a] The percentage applicable to Class A common stock in a reporting period
is a weighted average based on the number of days the percentage was in
effect during the reporting period.
[b] Includes "Special charges," as discussed in Note 4 to the Consolidated
Financial Statements, of $1.8 million and $1.9 million for the three and
nine months, respectively, ended September 30, 1999.
[c] Represents the portion of the extraordinary item recorded by ACE, as
discussed in Note 5 to the Consolidated Financial Statements, which is
applicable to Class A common stock based on the percentage of "Company
Net Income Attributable to the Atlantic Utility Group" applicable to
Class A common stock for the reporting period.
Summarized Financial Information of Atlantic City Electric Company
(Dollars in Thousands)(unaudited)
<TABLE>
<CAPTION>
Income Statement Information
Three Months Ended Nine Months Seven Months
--------------------- Ended Ended
09/30/99 09/30/98 09/30/99 09/30/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $ 351,372 $ 332,514 $ 842,354 $ 694,364
Operating income (1) $ 85,300 $ 87,761 $ 159,301 $ 94,198
Income before extraordinary item (1) $ 35,953 $ 41,550 $ 65,922 $ 33,790
Extraordinary item, net of income taxes (2) $ (17,483) - $ (17,483) -
Earnings applicable to common stock $ 17,937 $ 40,687 $ 46,840 $ 31,620
</TABLE>
(1) For the three and nine months ended September 30, 1999, "Special charges"
for planned employee separations, additional Merger costs, and certain other
items reduced operating income by $12.3 million and income before
extraordinary item by $7.3 million. For the seven months ended September 30,
1998, employee separation and other Merger-related costs reduced ACE's
operating income by $49.1 million and income before extraordinary item by
$29.6 million. In the Consolidated Conectiv Financial Statements, ACE's
employee separation and other Merger-related costs incurred in 1998 were
capitalized as costs of the Merger.
(2) For information concerning the extraordinary item, refer to Note 5 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Balance Sheet Information
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets $ 349,548 $ 236,177
Noncurrent assets 2,149,878 2,131,045
---------- ----------
Total assets $2,499,426 $2,367,222
========== ==========
Current liabilities $ 383,517 $ 236,546
Noncurrent liabilities 1,252,813 1,275,402
Preferred stock 125,181 125,181
Common stockholder's equity 737,915 730,093
---------- ----------
Total capitalization and liabilities $2,499,426 $2,367,222
========== ==========
</TABLE>
(C) Changes in Consolidated Common Stockholders' Equity
---------------------------------------------------
Consolidated common stockholders' equity decreased from $1,843.2 million as of
December 31, 1998, to $1,218.1 million as of September 30, 1999, primarily due
to $358.9 million paid to purchase Conectiv common stock through the Offer, the
$170.8 million net loss for the nine months ended September 30, 1999, and $91.7
million of common dividends declared.
-12-
<PAGE>
Note 8. Debt
- ------- ----
On May 26, 1999, Conectiv issued $250 million of 6.73% Medium Term Notes which
mature as follows: $100 million in 2002; $50 million in 2003; $50 million in
2004; $30 million in 2005; and $20 million in 2006. Proceeds from the issuance
of the Medium Term Notes and short-term borrowings under Conectiv's bank credit
lines were used to finance the $358.9 million purchase of Conectiv common stock
pursuant to the Offer, as discussed in Note 7 (A) to the Consolidated Financial
Statements.
In May 1999, DPL repaid at maturity $30 million of 7.50% Medium Term Notes and
ACE repaid at maturity $30 million of 7.52% Medium Term Notes. In June 1999,
ACE purchased $18.9 million of First Mortgage Bonds, which had an average
interest rate of 6.88% and were scheduled to mature in 2013 ($6.4 million) and
2023 ($12.5 million). In July 1999, the Delaware Economic Development Authority
issued, on behalf of DPL, $33.33 million of Variable Rate Demand Bonds (VRDB)
due on demand or at maturity in July 2024. The proceeds from the VRDB were used
to refinance $22.33 million of 7.3% long-term debt in September 1999 and $11.0
million of 7.5% long-term debt in October 1999. (For additional information
concerning VRDB, refer to Note 14 to the Consolidated Financial Statements
included in Conectiv's 1998 Annual Report on Form 10-K.)
Conectiv's consolidated short-term debt balance increased $247.4 million from
the $376.1 million balance as of December 31, 1998, to $623.5 million (average
interest rate of 5.83%) as of September 30, 1999. The $247.4 million increase
was primarily due to funding Conectiv's nonutility businesses and subsidiary
service company and financing a portion of the purchase of common stock pursuant
to the Offer. Conectiv has two credit agreements that provide $800 million of
borrowing capability as follows: (a) a $300 million credit agreement which has a
five-year term that expires in February 2003; and (b) a $500 million credit
agreement which has a one-year term that expires in February 2000.
On October 15, 1999, Conectiv filed an application with the SEC to increase its
authorized short-term borrowing capacity until March 2002 from $800 million to
$1.3 billion, excluding ACE's short-term borrowings. The request for
authorization to issue up to $500 million of additional short-term debt was
prompted by expected increased working capital and capital needs of Conectiv and
its subsidiaries. The filing also requested authorization for Conectiv to issue
up to $500 million of additional long-term debt and use the proceeds to pay down
short-term debt. Conectiv also requested authorization to use proceeds from the
issuance of securities for investments in Conectiv Energy, Inc., a Conectiv
subsidiary that will own contractual rights for combustion turbine generating
facilities. For additional information concerning the combustion turbines and
Conectiv's "mid-merit" strategy, see the "Deregulated Generation and Power Plant
Sales" section within Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A).
Conectiv's filing with the SEC on October 15, 1999 also requested authorization
to issue securities as long as consolidated common equity as a percent of total
capitalization (common equity ratio) is 20% or higher. Conectiv's request
anticipated the decrease in the common equity ratio (28.6% as of September 30,
1999) that resulted from the nonrecurring charges to earnings discussed in Notes
4 and 5 to the Consolidated Financial Statements, and that an additional
decrease may occur due to planned expenditures, potential payments to buy out
contracts with Non-Utility Generators (NUG), and securitization of recoverable
stranded costs. (See Note 9 to the Consolidated Financial Statements and the
MD&A for additional information concerning NUG contracts and securitization of
recoverable stranded costs.) Also, the parties to the agreements for Conectiv's
$800 million short-term credit facilities agreed to an amendment permitting a
ratio of total indebtedness to total capitalization of 70% through December 31,
2000. As of September 30, 1999, the ratio of total indebtedness to total
capitalization computed in accordance with the terms of the credit agreements,
which allow for an adjustment to increase common equity by the extraordinary
item, was 61.7%.
-13-
<PAGE>
Note 9. Rate Matters
- ------- ------------
The following information updates the disclosures previously made in Note 6,
Rate Matters, to Conectiv's Consolidated 1998 Financial Statements included in
Conectiv's 1998 Annual Report on Form 10-K.
NJBPU Summary Order
On February 9, 1999, New Jersey enacted the Electric Discount and Energy
Competition Act (the New Jersey Act) which, among other things, provided
customers of New Jersey electric utilities with a choice of electricity
suppliers beginning August 1, 1999. Pursuant to the New Jersey Act, on July 15,
1999, the NJBPU issued a summary order (Summary Order) to ACE concerning
stranded costs, unbundled rates, and other matters related to restructuring.
The NJBPU stated that a more detailed order would be issued at a later date.
The key provisions of the Summary Order are discussed below.
Rate Decreases
- --------------
In its Summary Order, the NJBPU directed ACE to implement a five percent
aggregate rate reduction effective August 1, 1999. ACE also must implement at
least an additional two percent rate reduction by January 1, 2001. By August 1,
2002, rates must be reduced by ten percent from the rates which were in effect
as of April 30, 1997. Management estimates that the initial rate reduction
effective August 1, 1999, will reduce revenues by approximately $50 million (on
an annualized basis, assuming fiscal year 1998 sales and revenues). Since an
estimated $25 million of the revenue reduction resulted from the energy
component of ACE's regulated revenues exceeding related energy costs, this
portion of the revenue reduction should not affect earnings.
Stranded Cost Recovery and Securitization
- -----------------------------------------
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a nonutility
affiliated company at net book value. The NJBPU determined that ACE will have
the opportunity to recover 100% of the net stranded costs related to the
generation units to be divested and the stranded costs associated with power
purchased from NUGs, subject to further NJBPU proceedings. The Summary Order
also permits securitization of stranded costs. Securitization is expected to
occur through a special purpose entity which will issue bonds secured by the
right to collect stranded costs from customers. The Summary Order allows
securitization of (a) 100% of the net stranded costs of the generation units to
be divested, over a period not to exceed 15 years, and (b) 100% of the costs to
effect potential NUG contract buyouts or buydowns, over a period not to exceed
the remaining term of the restructured contracts. The Summary Order provides
for stranded costs, net of taxes, to be collected from customers through a
transition bond charge over the securitization term. The Summary Order also
provides for customers' rates to include a separate market transition charge for
recovery of the income tax expense associated with the revenues from stranded
cost recovery.
Shopping Credits and Basic Generation Service
- ---------------------------------------------
The Summary Order established minimum initial shopping credits for customers who
choose an alternative electric supplier, from a system average 5.27 cents per
kilowatt-hour (kWh), effective August 1, 1999, to a system average of 5.48 cents
per kWh in 2003. These shopping credits include transmission costs and charges
by ACE for Basic Generation Service (BGS) to be provided to retail customers who
do not choose another electricity supplier. ACE is obligated to provide BGS
through July 31, 2002; thereafter, the BGS supplier will be determined each year
based on a competitive bidding process. In accordance with the Summary Order,
ACE will supply the BGS load requirement with power purchased under its NUG
contracts and the output generated by the units to be divested (prior to
divestiture of the
-14-
<PAGE>
units). ACE will purchase power through a competitive bidding process for any
BGS supply requirement greater than the output from the generation units to be
divested and power purchased from NUGs.
The Summary Order established the rates charged to ACE's BGS customers for such
service, which include a component for the market-value of power purchased from
NUGs. The above-market portion of the cost of NUG power is to be collected
through a non-bypassable Net NUG Charge included in regulated electricity
delivery rates, over the remaining term of the NUG contracts. The NJBPU's
Summary Order also provided that ACE's regulatory liability for over-recovered
energy costs as of July 31, 1999 would be offset by any subsequent under-
recoveries of BGS and certain other costs. Due to under-recoveries of such
costs from August 1 to September 30, 1999, ACE reduced its liability for over-
recovered energy costs by $3.5 million and recognized a like amount of revenue.
Similarly, any over-recoveries will increase the regulatory liability.
Customer rates are to be adjusted for any deferred balance remaining after the
initial four-year transition period commencing August 1, 1999; accordingly,
differences between customer billings for such costs and actual costs incurred
are deferred, and an offsetting revenue adjustment is recorded.
Code of Conduct
- ---------------
The NJBPU is presently considering Code of Conduct issues concerning the
relationship between regulated and non-regulated activities.
Delaware Electric Utility Restructuring Legislation
On March 31, 1999, Delaware enacted the Electric Utility Restructuring Act of
1999 (the Delaware Act), which provided for a phase-in of retail customer choice
of electricity suppliers from October 1999 to October 2000, customer rate
decreases, and other matters concerning restructuring the electric utility
industry in Delaware. On April 15, 1999, DPL submitted to the DPSC a compliance
plan for implementing the provisions of the Delaware Act in DPL's Delaware
service area. On August 31, 1999, the DPSC issued an order on DPL's compliance
plan. The DPSC's order is discussed below.
Implementation Dates
- --------------------
The DPSC approved implementation dates for retail customer choice of electric
suppliers of October 1, 1999 for customers with a peak monthly load of 1,000
kilowatts (kW) or more; January 15, 2000 for customers with a peak monthly load
of 300 kW or more; and October 1, 2000 for other customers.
Rate Decrease
- -------------
The DPSC approved DPL's proposed rate structure which provides for a 7.5%
decrease in DPL's Delaware residential electric rates, effective October 1,
1999, with those rates held constant from October 1, 1999 to September 30, 2003.
Also, non-residential rates are to be held constant from October 1, 1999 to
September 30, 2002. Management estimates that the initial 7.5% residential rate
reduction effective October 1, 1999, will reduce revenues by approximately $17.5
million (on an annualized basis, assuming fiscal year 1998 sales and revenues).
Sale of Electric Generating Plants
- ----------------------------------
The Delaware Act permits DPL to sell, transfer, or otherwise divest its electric
generating plants without DPSC approval after October 1, 1999. The DPSC's order
effectively provides that electric rates will remain unchanged as a result of
such divestiture. See Note 10 to the Consolidated Financial Statements for
related information concerning the expected sales of electric generating plants.
-15-
<PAGE>
Stranded Cost Recovery
- ----------------------
The rate structure approved by the DPSC also provides for DPL's recovery of
stranded costs, $16 million net of taxes, or $31 million before taxes, through a
Competitive Transition Charge billed to non-residential customers from October
1, 1999 to September 30, 2002.
Shopping Credits
- ----------------
The system-average customer shopping credits, which include the costs of
electricity supply, transmission, and ancillary services, are 4.736 cents per
kWh for the year beginning October 1, 1999, 4.738 cents per kWh for the year
beginning October 1, 2000, and 4.740 cents per kWh for the year beginning
October 1, 2001. The shopping credits include an energy component based on
initial estimates of DPL's average energy cost per kWh for the twelve months
ended September 30, 1999, which is subject to revision.
Default Service for Electricity Supply
- --------------------------------------
The Delaware Act makes DPL the provider of default service to customers who do
not choose an alternative electricity supplier for a period of 3 or 4 years
(transition period) for non-residential and residential customers, respectively.
Thereafter, the DPSC may conduct a bidding process to select the default
supplier for such customers. During the transition period, the energy component
of customers' rates for default service will be set at DPL's average energy cost
per kWh for the twelve months ended September 30, 1999.
The DPSC order permits customers with demand below 300 kW to choose an
alternative electric supplier and to switch back to DPL's default service
without any time restrictions or price differential. Customers with demand above
300 kW who choose an alternative supplier and switch back to DPL's default
service must either, at the customer's option, return to DPL's default service
for a minimum of 12 months or pay market prices.
Code of Conduct
- ---------------
The DPSC ruled that the existing Code of Conduct will remain in place,
conditioned upon the requirement that a revised code be proposed and, if
necessary, litigated. The DPSC has directed DPL to file a new Cost Accounting
Manual and Code of Conduct by November 15, 1999.
Maryland Electric Utility Restructuring Legislation
On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition
Act of 1999 (the Maryland Act), which provided for customer choice of
electricity suppliers, customer rate decreases, and other matters concerning
restructuring the electric utility industry in Maryland. On May 5, 1999, DPL
submitted to the MPSC a proposed settlement agreement (subsequently
supplemented) for implementing the provisions of the Maryland Act in DPL's
Maryland service area. Prior to September 30, 1999, the MPSC's staff conveyed
to DPL that MPSC approval of the settlement agreement was imminent, and on
October 8, 1999 the MPSC issued an order to DPL which approved the settlement
agreement. The key elements of the approved settlement agreement are discussed
below.
Implementation Date
- -------------------
Effective July 1, 2000, all of DPL's Maryland-retail customers will be eligible
to select an alternative electricity supplier.
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<PAGE>
Rate Decrease
- -------------
The MPSC approved a 7.5% decrease in DPL's Maryland residential electric rates,
effective July 1, 2000, with those rates held constant from July 1, 2000 to June
30, 2004. Also, non-residential rates are to be held constant from July 1, 2000
to June 30, 2003. Management estimates that the initial 7.5% residential rate
reduction effective July 1, 2000, will reduce revenues by approximately $12.5
million (on an annualized basis, assuming fiscal year 1998 sales and revenues).
Sale of Electric Generating Plants
- ----------------------------------
The Maryland Act in conjunction with the approved settlement effectively provide
that electric rates are not expected to be changed in the event DPL sells or
transfers generating assets. See Note 10 to the Consolidated Financial
Statements for related information concerning the expected sales of electric
generating plants.
Stranded Cost Recovery
- ----------------------
The MPSC approved DPL's recovery of stranded costs, $8 million net of taxes, or
$14 million before taxes, through a Competitive Transition Charge billed to non-
residential customers from July 1, 2000 to June 30, 2003.
Shopping Credits
- ----------------
The system-average customer shopping credits, which include the costs of
electricity supply, transmission, and ancillary services, are estimated to be
approximately 5.088 cents per kWh for the year beginning July 1, 2000, 5.090
cents per kWh for the year beginning July 1, 2001, and 5.093 cents per kWh for
the year beginning July 1, 2002. These estimated shopping credits will be reset
so that the energy component is DPL's average energy cost per kWh for the twelve
months ended April 30, 2000.
Default Service for Electricity Supply
- --------------------------------------
DPL is to provide default service to customers who do not choose an alternative
electricity supplier during July 1, 2000 to July 1, 2004 for residential
customers and during July 1, 2000 to July 1, 2003 for non-residential customers.
Subsequent to these default service periods, the MPSC is to determine the
default service supplier. During the initial periods when DPL provides default
service, the energy component of customers' rates will be set at DPL's average
energy cost per kWh for the twelve months ended April 30, 2000.
Code of Conduct
- ---------------
On July 26, 1999, the MPSC initiated a new review of the generic affiliate
transaction provisions of the Maryland Act. Legislative type hearings are
scheduled for mid-November 1999.
Virginia Electric Utility Restructuring Legislation
The Virginia Electric Utility Restructuring Act, signed into law on March 29,
1999, phases-in retail electric competition beginning January 1, 2002.
-17-
<PAGE>
Note 10. Expected Sales of Electric Generating Plants
- -------- --------------------------------------------
Pursuant to the financial and strategic initiatives announced by Conectiv in May
1999, Conectiv distributed offering memoranda for the proposed sale of over
2,500 megawatts (MW) of nuclear and non-strategic baseload fossil electric
generating plants owned by DPL and ACE. Management intends to retain certain
fossil fuel-fired electric generating plants which are strategic to Conectiv's
energy business, pursuant to Conectiv's "mid-merit" strategy as discussed in the
"Deregulated Generation and Power Plant Sales" section of the MD&A. A summary
of the electric generating plants which have been offered for sale is shown in
the following table.
<TABLE>
<CAPTION>
Consolidated Conectiv DPL Generating Units ACE Generating Units
---------------------- --------------------- ---------------------
MW of Net Book MW of Net Book MW of Net Book
Capacity Value (a) Capacity Value (a) Capacity Value (a)
---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fossil Units:
Wholly-owned 1,640.0 $514.5 954.0 $279.8 686.0 $234.7
Jointly-owned 234.5 67.7 126.8 32.2 107.7 35.5
Jointly-owned
nuclear units 714.0 19.1 331.0 8.6 383.0 10.5
------- ------ ------- ------ ------- ------
2,588.5 $601.3 1,411.8 $320.6 1,176.7 $280.7
======= ====== ======= ====== ======= ======
</TABLE>
(a) The net book values shown above are as of September 30, 1999, are stated in
millions of dollars, and reflect the write-downs discussed in Note 5 to the
Consolidated Financial Statements.
On September 30, 1999, Conectiv announced that DPL and ACE reached agreements to
sell their ownership interests in nuclear plants to PSEG Power LLC (a subsidiary
of Public Service Enterprise Group Incorporated) and PECO Energy Company (PECO)
for approximately $20 million, plus the net book value of DPL's and ACE's
interests in nuclear fuel on-hand as of the closing date. DPL's and ACE's
combined interests in the nuclear units which are being sold include a 15.02
percent (328 MW) interest in the Peach Bottom Atomic Power Station (Peach
Bottom), a 14.82 percent interest (328 MW) in the Salem Nuclear Generating
Station (Salem), including a 6 MW interest in a combustion turbine at Salem, and
a 5.0 percent interest (52 MW) in the Hope Creek Nuclear Generating Station
(Hope Creek). Upon completion of the sale, DPL and ACE will transfer their
respective nuclear decommissioning trust funds to the purchasers and PSEG Power
LLC and PECO will assume full responsibility for the decommissioning of Peach
Bottom, Salem, and Hope Creek. The sales are subject to various federal and
state regulatory approvals and are expected to close by mid-2000.
ACE and DPL are currently conducting an auction for the sale of the fossil fuel-
fired electric generating plants included in the above table.
The net book values of the nuclear and certain other electric generating units
offered for sale were written down in the third quarter of 1999, as discussed in
Note 5 to the Consolidated Financial Statements. Since the impaired electric
generating units were written down to their estimated fair market values (net of
estimated selling costs), the sale of these impaired electric generating plants
should not result in a significant gain or loss. Some of the electric
generating plants which were not impaired from deregulation may be sold at a
gain, which would be recognized when the sale occurs. There can be no
assurances, however, that DPL or ACE will elect or be able to sell any such
electric generating plants, or that any gain will be realized from such sales of
electric generating plants.
-18-
<PAGE>
On October 13, 1999, the DPSC initiated a formal proceeding to investigate the
adequacy of DPL's facilities and services, including the remedies and incentives
(if any) to be imposed or offered, respectively, to ensure the continued
adequacy of DPL's facilities and services. That proceeding also will consider
the effects (if any) of electric industry restructuring in Delaware on the
reliability of electric service. The DPSC's order requires that DPL give the
DPSC at least 30 days' notice upon entering any contract for the sale of any
generating facility on the Delmarva Peninsula to any third party.
Under the NJBPU's Summary Order, any gain or loss realized upon the sale of
ACE's electric generating plants (other than certain "mid-merit" plants) will
effect the amount of ACE's recoverable stranded costs. Accordingly, any gain or
loss realized by ACE on the sale of these plants would not affect future
earnings. In the event of a sale within three years of certain "mid-merit"
plants, which began operating on a deregulated basis effective August 1, 1999,
50% of any gain realized would be shared with ACE's regulated electric customers
and the remaining 50% would affect earnings. If these mid-merit plants were
sold and a loss resulted from the sale, the loss would be recognized in
earnings.
Under the restructuring orders issued by the DPSC and MPSC, as discussed in Note
9 to the Consolidated Financial Statements, DPL's Delaware and Maryland retail
electric rates will not be changed in the event DPL sells or transfers
generating assets. Accordingly, the Delaware and Maryland portions of any
gains, or losses, realized on the sale of DPL electric generating plants would
affect future earnings. Management expects a net gain will be recognized in
earnings when DPL sells its electric generating plants which were not impaired
from deregulation.
Note 11. Regulatory Assets and Liabilities
- -------- ---------------------------------
In conformity with SFAS No. 71, Conectiv's accounting policies reflect the
financial effects of rate regulation and decisions by regulatory commissions
having jurisdiction over the regulated utility businesses of DPL and ACE.
Regulatory commissions occasionally provide for future recovery from customers
of current period expenses. When this happens, the expenses are deferred as
regulatory assets and subsequently recognized in the Consolidated Statement of
Income during the period the expenses are recovered from customers. Similarly,
regulatory liabilities may also be created due to the economic impact of an
action taken by a regulatory commission.
In the third quarter of 1999, the electricity supply businesses of ACE and DPL
no longer met the requirements of SFAS No. 71. Accordingly, regulatory assets
and liabilities related to the electricity supply business were written off,
except to the extent that future cost recovery was provided for through the
regulated electricity delivery business. As discussed in Note 5 to the
Consolidated Financial Statements, a new regulatory asset, "Recoverable stranded
costs," was established to recognize amounts to be collected from regulated
delivery customers for stranded costs which resulted from deregulation of the
electricity supply business. The table below displays the regulatory assets and
liabilities as of September 30, 1999 and December 31, 1998.
-19-
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
Regulatory Assets (Liabilities) 1999 1998
- -------------------------------------------------------------- -------------- -------------
(Millions of Dollars)
<S> <C> <C>
Recoverable stranded costs (1).............................. $703.7 -
Deferred recoverable income taxes (2)....................... 90.9 $184.4
Deferred debt refinancing costs (3)......................... 21.7 44.2
Unrecovered state excise taxes.............................. 28.4 35.6
Deferred other postretirement benefit costs................. 33.1 35.0
Unrecovered purchased power costs........................... 34.0 48.3
Deferred energy costs --DPL (4)............................. 22.7 (0.4)
Regulatory liability for deferred energy costs -- ACE (5)... (53.4) (15.6)
Deferred costs for nuclear decommissioning/decontamination.. 5.8 11.9
Regulatory liability for New Jersey income tax benefit (6).. (40.8) -
Asbestos removal costs...................................... 8.3 8.5
Deferred demand-side management costs....................... 4.5 5.7
Other (7)................................................... 3.2 20.1
-------------- -------------
Total....................................................... $862.1 $377.7
============== =============
</TABLE>
(1) Represents recoverable stranded costs, net of amortization recorded through
September 30, 1999.
(2) Deferred recoverable income taxes represents the portion of deferred tax
liabilities applicable to DPL's and ACE's utility operations that has not been
reflected in current customer rates for which future recovery is probable. Due
to discontinuing the application of SFAS No. 71 to the electricity supply
business, the portion of deferred recoverable income taxes attributable to the
electricity supply businesses of DPL and ACE was written off in the third
quarter of 1999.
(3) See "Deferred debt refinancing costs" in Note 2 to the Consolidated
Financial Statements.
(4) The September 30, 1999 balance is primarily attributed to deferred energy
costs of DPL's electricity supply business and most of the balance is to be
recovered from Delaware and Maryland electric retail customers in accordance
with the restructuring orders issued by the DPSC and MPSC, as discussed in Note
9 to the Consolidated Financial Statements.
(5) See "Shopping Credits and Basic Generation Service" in Note 9 to the
Consolidated Financial Statements.
(6) In the third quarter of 1999, a deferred tax asset arising from the write
down of ACE's electric generating plant was established. The deferred tax asset
represents the future tax benefit expected to be realized when the higher tax
basis of the generating plants is deducted for New Jersey state income tax
purposes. ACE has requested the New Jersey Division of Taxation to rule on
whether or not this tax benefit may be used to reduce the rates charged to ACE's
regulated electricity delivery customers for stranded cost recovery. To
recognize that this tax benefit probably will be given to ACE's regulated
electricity customers through lower electric rates, ACE recorded a regulatory
liability.
(7) Various regulatory assets attributable to the electricity supply businesses
of DPL and ACE were written off in the third quarter of 1999 due to
discontinuing the application of SFAS No. 71 to DPL's and ACE's electricity
supply businesses.
-20-
<PAGE>
Note 12. 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, 1999 and December 31, 1998, respectively, 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.
Nuclear Insurance
In conjunction with the ownership interests of DPL and ACE in Peach Bottom,
Salem, and Hope Creek, DPL and ACE could be assessed for a portion of any third-
party claims associated with an incident at any commercial nuclear power plant
in the United States. Under the provisions of the Price Anderson Act, if third-
party claims relating to such an incident exceed $200 million (the amount of
primary insurance), DPL and ACE could be assessed up to $57.0 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 $9.4 million on an aggregate basis.
Note 13. Supplemental Cash Flow Information
- -------- ----------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
----------- ---------
(Dollars in thousands)
<S> <C> <C>
CASH PAID FOR:
Interest, net of amounts capitalized $113,142 $96,516
Income taxes, net of refunds $ 62,910 $48,931
</TABLE>
-21-
<PAGE>
Note 14. Business Segments
- -------- -----------------
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Conectiv's business segments under SFAS No. 131 are as follows: "Energy"--
generates, purchases, and sells electricity (includes trading activities), also
operates power plants and thermal heating and cooling systems; "Power Delivery"-
- -delivers electricity and gas to customers at regulated prices over transmission
and distribution systems; "Telecommunications"--represents services provided by
Conectiv Communications Inc. (CCI), including local and long-distance telephone
service and Internet services; "HVAC"--represents heating, ventilation, and air
conditioning (HVAC) services provided by Conectiv Services, Inc. (CSI).
Billings to electric and gas customers under regulated tariffs include amounts
for services provided by the Energy and Power Delivery business segments. These
revenues are allocated directly to the Energy and Power Delivery business
segments based on the cost of services provided.
The operating results for each business segment are evaluated based on a profit
measure called "contribution to corporate," which is equal to operating revenues
and other income less operating expenses other than corporate expenses and
"Special charges," which are discussed in Note 4 to the Consolidated Financial
Statements. "All Other" business segments' contribution to corporate for the
nine-month period ended September 30, 1999 includes $18.0 million from equity in
earnings of Enertech as discussed in Note 3 to the Consolidated Financial
Statements.
For the nine months ended September 30, 1998, the business segment revenues and
contribution to corporate include the January and February 1998 operating
results of the former Atlantic-owned companies and exclude Merger-related costs
charged to expense.
-22-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
----------------------------- -------------------------
Contribution Contribution
Business Segments Revenues to Corporate Revenues to Corporate
- -------------------- -------------- ------------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Energy $ 867,252 $ 149,210 $ 779,097 $ 124,452
Power Delivery 212,371 94,334 204,329 107,048
Telecommunications 9,810 (7,618) 2,896 (7,155)
HVAC 37,697 (2,170) 24,962 (3,754)
All Other 1,742 (4,886) 1,195 (2,064)
------------- ------------ ---------- -----------
$1,128,872(1) $ 228,870(2) $1,012,479 $ 218,527(3)
============= ============ ========== ===========
</TABLE>
(1) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$46,728; All Other business segments--
$1,732.
(2) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $11,924 of corporate costs
not allocated to business segments, (b) $49,236 of interest expense and
preferred dividends deducted after contribution to corporate, (c) $105,648
of Special Charges, which are discussed in Note 4 to the Consolidated
Financial Statements, and (d) $505 of net Merger-related consolidation
adjustments.
(3) To reconcile contribution to corporate to consolidated income before income
taxes subtract (a) $14,701 of corporate expenses not allocated to business
segments, (b) $41,639 of interest expense and preferred dividends deducted
after contribution to corporate, and (c) $728 of Special Charges, which are
discussed in Note 4 to the Consolidated Financial Statements, and add $669
of net Merger-related consolidation adjustments.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------- -----------------------------
Contribution Contribution
Business Segments Revenues to Corporate Revenues to Corporate
- -------------------- -------------- ------------- -------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Energy $ 2,256,075 $ 250,207 $ 1,768,883 $ 228,405
Power Delivery 587,098 242,466 518,766 241,632
Telecommunications 24,922 (23,430) 6,309 (17,513)
HVAC 102,707 (6,751) 67,830 (13,122)
All Other 5,426 11,113 3,506 (9,935)
------------- ----------- ------------- ------------
$ 2,976,228(1) $ 473,605(2) $ 2,365,294(3) $ 429,467(4)
============= =========== ============= ============
</TABLE>
(1) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$142,029; All Other business segments--
$4,722.
(2) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $41,525 of corporate costs
not allocated to business segments, (b) $132,673 of interest expense and
preferred dividends deducted after contribution to corporate, (c) $105,648
of Special Charges, which are discussed in Note 4 to the Consolidated
Financial Statements, and (d) $1,360 of net Merger-related consolidation
adjustments.
(3) Includes $165,185 of revenues for January to February 1998 of the formerly
Atlantic-owned companies which are excluded from consolidated revenues.
(4) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $20,914 for the January to
February 1998 contribution to corporate of the formerly Atlantic-owned
companies, (b) $27,074 of Special Charges, which are discussed in Note 4 to
the Consolidated Financial Statements, (c) $47,090 of corporate costs not
allocated to business segments (d) $108,608 of interest expense and
preferred dividends deducted after contribution to corporate, and (e) $378
of net Merger-related consolidation adjustments.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial and Strategic Initiatives
- -----------------------------------
For information concerning the previously reported financial and strategic
initiatives which were announced on May 11, 1999, refer to Notes 7(A) and 10 to
the Consolidated Financial Statements contained herein and the "Financial and
Strategic Initiatives" section in the MD&A included in Conectiv's Quarterly
Report on Form 10-Q for the second quarter of 1999.
Common Stock Earnings Summary
- ------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
After-tax contribution to earnings (loss)
applicable to common stock
Income excluding Special Charges
and Extraordinary Item * $ 82.9 $ 84.6 $ 159.9 $ 133.8
Special Charges * (69.8) (0.4) (69.7) (16.4)
------- -------- ------- -------
Income Before Extraordinary Item * $ 13.1 $ 84.2 $ 90.2 $ 117.4
Extraordinary Item * (266.3) - (266.1) -
------- -------- ------- -------
Earnings (loss) applicable to common stock * $(253.2) $ 84.2 $(175.9) $ 117.4
======= ======== ======= =======
* Stated in millions of dollars
Average shares of common stock
outstanding (000) 87,711 101,011 95,454 92,253
------- -------- ------- -------
After-tax contribution to earnings (loss) per
average share of common stock
Income excluding Special Charges
and Extraordinary Item $ 0.95 $ 0.83 $ 1.67 $ 1.45
Special Charges (0.80) - (0.73) (0.18)
------- -------- ------- -------
Earnings (loss) per average
share of common stock:
Before Extraordinary Item $ 0.15 $ 0.83 $ 0.94 $ 1.27
Extraordinary Item (3.04) - (2.79) -
------- -------- ------- -------
Earnings (loss) per average share
of common stock $ (2.89) $ 0.83 $ (1.85) $ 1.27
======= ======== ======= =======
</TABLE>
In the third quarter of 1999, Conectiv reported a net loss applicable to common
stock of $253.2 million, or a loss of $2.89 per average common share (87,711,000
average common shares). The net loss resulted from (i) a $266.3 million
extraordinary charge applicable to common stock ($3.04 per average share of
common stock) for discontinuing the application of SFAS No. 71 to DPL's and
ACE's electricity supply businesses because of deregulation, and (ii) $69.8
million of special charges applicable to common stock ($0.80 per average share
of common stock) primarily for write-downs of investments in non-utility
businesses and accrued employee separation costs. For additional information
concerning deregulation and the extraordinary charge to earnings, see Notes 2,
5, 9 and 11 to the Consolidated Financial Statements and the "Electric Utility
Industry Restructuring" section within the MD&A. As discussed in
-24-
<PAGE>
Note 9 to the Consolidated Financial Statements, ACE's portion of the
extraordinary charge was based on the NJBPU's Summary Order and the NJBPU is to
issue a more detailed order at a later date. If the NJBPU's final detailed order
were to differ materially from the Summary Order, then the extraordinary charge
could change. For additional information concerning special charges, see Note 4
to the Consolidated Financial Statements and the "Special Charges" caption
within the MD&A.
Excluding the extraordinary and special charges to earnings, earnings applicable
to common stock were $82.9 million, or $0.95 per average common share, for the
third quarter of 1999 compared to earnings applicable to common stock of $84.6
million, or $0.83 per average common share, for the third quarter of 1998. This
$0.12 increase in earnings per average common share (excluding extraordinary and
special charges) was primarily due to completion of the Offer in June 1999 (Note
7 (A) to the Consolidated Financial Statements), by which Conectiv purchased its
common stock with proceeds from the issuance of debt. The Offer's effects on
third quarter 1999 operating results include a 12.8 million decrease in the
average number of common shares outstanding, an increase of approximately $5.8
million ($3.5 million after taxes) in interest expense, and a $0.09 net increase
in earnings per average common share. The remainder of the earnings increase
was primarily due to warmer summer weather's positive impact on net regulated
electric revenues, earnings from certain electric generating units of ACE which
were deregulated August 1, 1999, and a reduced operating loss from CSI's HVAC
business, partly offset by higher operating expenses and the electric rate
decrease which became effective August 1, 1999 in New Jersey.
For the nine months ended September 30, 1999, Conectiv reported a net loss
applicable to common stock of $175.9 million, or a loss of $1.85 per average
common share (95,454,000 average common shares). The net loss resulted from (i)
a $266.1 million extraordinary charge applicable to common stock ($2.79 per
average share of common stock) for discontinuing the application of SFAS No. 71
to DPL's and ACE's electricity supply businesses because of deregulation, and
(ii) $69.7 million of special charges applicable to common stock ($0.73 per
average share of common stock) primarily for write-downs of investments in non-
utility businesses and accrued employee separation costs. For the nine months
ended September 30, 1998, earnings applicable to common stock were $117.4
million, or $1.27 per average share of common stock (92,253,000 average common
shares), after special charges of $16.4 million ($0.18 per average common
share).
Excluding the extraordinary and special charges to earnings, earnings applicable
to common stock were $159.9 million, or $1.67 per average common share, for the
nine months ended September 30, 1999 compared to earnings applicable to common
stock of $133.8 million, or $1.45 per average common share, for the same period
last year. The $0.22 increase in earnings per average share of common stock for
the nine month period included $0.11 per share from equity in earnings of a
venture capital fund (as discussed in Note 3 to the Consolidated Financial
Statements), $0.04 per share from the net effect of the Offer, and the remaining
$0.07 per share increase resulted from improved operating results of regulated
utility and non-regulated business operations. The operating results of
regulated utility operations improved mainly due to higher retail electric and
gas sales, which benefited from the effects of weather, partly offset by
electric rate decreases and higher operating expenses. The operations of non-
regulated businesses resulted in a net after-tax loss of approximately $18
million for the current nine-month period compared to a net after-tax loss of
approximately $26 million for the same period last year. The net loss for the
current nine-month period decreased due to higher net profits from the non-
regulated energy businesses and a lower loss from HVAC operations, partly offset
by a larger loss for the telecommunications business which incurred higher
expenses to gain new customers and expand operations.
-25-
<PAGE>
Excluding the effect of the Offer, the average number of shares of common stock
outstanding reflects an increase in the current nine-month period attributed to
the two additional months outstanding for shares of common stock issued to
Atlantic stockholders concurrent with the March 1998 Merger. However, under the
purchase method of accounting (and based on the Merger date of March 1, 1998),
Conectiv's consolidated operating results for the first nine months of 1998
included seven months of operating results for ACE and the nonutility businesses
formerly owned by Atlantic. Thus, there are two additional months of earnings
reflected in Conectiv's Consolidated Statement of Income for the nine months
ended September 30, 1999 for the former Atlantic-owned companies in comparison
to the same period last year. The two additional months of earnings offset the
dilution of earnings per common share resulting from the two additional months
the shares of common stock issued to Atlantic stockholders in March 1998 were
outstanding in the current nine-month period.
The financial and strategic initiatives announced by Conectiv on May 11, 1999
included the intention to reduce the dividends on shares of common stock to a
targeted payout ratio of 40% to 60% of earnings per average share of common
stock outstanding. Conectiv's Board of Directors declared quarterly dividends
per share of common stock of $0.385 for the first quarter of 1999, $0.22 for the
second quarter of 1999, and $0.22 for the third quarter of 1999. For the nine
months ended September 30, 1999, dividends declared per share of common stock
were $0.825, which represented approximately 49% of earnings per average share
of common stock outstanding adjusted to exclude the special and extraordinary
charges discussed in Notes 4 and 5 to the Consolidated Financial Statements.
-26-
<PAGE>
Class A Common Stock Earnings Summary
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
After-tax contribution to earnings (loss)
applicable to Class A common stock
Income excluding Special Charges
and Extraordinary Item * $ 8.9 $ 9.4 $ 12.0 $ 11.6
Special Charges * (1.7) - (1.8) -
------ ------ ------ ------
Income Before Extraordinary Item * $ 7.2 $ 9.4 $ 10.2 $ 11.6
Extraordinary Item * (4.8) - (5.1) -
------ ------ ------ ------
Earnings applicable to
Class A common stock * $ 2.4 $ 9.4 $ 5.1 $ 11.6
====== ====== ====== ======
* Stated in millions of dollars
Average shares of Class A common
stock outstanding (000) 5,743 6,561 6,234 6,561
------ ------ ------ ------
After-tax contribution to earnings (loss) per
average share of Class A common stock
Income excluding Special Charges
and Extraordinary Item $ 1.55 $ 1.44 $ 1.92 $ 1.77
Special Charges (0.30) - (0.29) -
------ ------ ------ ------
Earnings (loss) per average share of
Class A common stock:
Before Extraordinary Item $ 1.25 $ 1.44 $ 1.63 $ 1.77
Extraordinary Item (0.83) - (0.81) -
------ ------ ------ ------
Earnings per average share
of Class A common stock $ 0.42 $ 1.44 $ 0.82 $ 1.77
====== ====== ====== ======
</TABLE>
Earnings applicable to Class A common stock were $2.4 million, or $0.42 per
average share of Class A common stock, for the third quarter of 1999. Excluding
the $4.8 million extraordinary charge and $1.7 million of special charges
applicable to Class A common stock, earnings applicable to Class A common stock
were $8.9 million, or $1.55 per average share of Class A common stock, for the
third quarter of 1999 compared to $9.4 million, or $1.44 per average share of
Class A common stock, for the third quarter of 1998. The $0.11 increase in
earnings per average share of Class A common stock (excluding the extraordinary
item and special charges) was mainly due to the positive net effects of the
Offer. For the third quarter, the Offer resulted in 12.5% fewer average shares
of Class A common stock outstanding and a 9.0% decrease in the percentage of
"Company Net Income Attributable to the Atlantic Utility Group" applicable to
Class A common stock.
Earnings applicable to Class A common stock were $5.1 million, or $0.82 per
average share of Class A common stock, for the nine months ended September 30,
1999. Excluding the $5.1 million extraordinary charge and $1.8 million of
special charges applicable to Class A common stock, earnings applicable to Class
A common stock were $12.0 million, or $1.92 per average share of Class A common
stock, for the first nine months of 1999 compared to $11.6 million, or $1.77 per
average share of Class A common stock, for the same period last year. The $0.15
increase in earnings per average share of Class A common stock (excluding the
extraordinary item and special charges) was mainly due to the positive net
effects of
-27-
<PAGE>
the Offer and the two additional months of ACE's operating results included in
consolidated earnings for the nine months ended September 30, 1999.
As previously disclosed, Conectiv's Board of Directors intends that the
quarterly dividend on shares of Class A common stock will remain $0.80 per share
($3.20 annualized rate) until March 31, 2001 (the "Initial Period"), subject to
declaration by Conectiv's Board of Directors and the obligations of Conectiv's
Board of Directors to consider the financial condition and regulatory
environment of Conectiv and its subsidiaries and the results of operations of
Conectiv and its subsidiaries; and also subject to the limitations under
applicable law and the provisions of Conectiv's Restated Certificate of
Incorporation.
Conectiv intends, following the Initial Period, subject to declaration by
Conectiv's Board of Directors and the obligation of the Board of Directors to
consider the financial condition and regulatory environment of Conectiv and its
subsidiaries and the results of operations of Conectiv and its subsidiaries, to
pay annual dividends on the Class A common stock in an aggregate amount equal to
(1) 90% of "Company Net Income (Loss) Attributable to the Atlantic Utility
Group" (as defined in the Restated Certificate) multiplied by (2) the
Outstanding Atlantic Utility Fraction. The Outstanding Atlantic Utility
Fraction, as defined in Conectiv's Restated Certificate of Incorporation,
represents the proportionate interest of the Class A common stock in the equity
value of the Atlantic Utility Group. Notwithstanding the Conectiv's intention
with respect to dividends on the Class A common stock following the Initial
Period, if and to the extent that the annual dividends paid on the Class A
common stock during the Initial Period exceed 100% of the earnings of the
Atlantic Utility Group that were applicable to the Class A common stock during
such period, Conectiv's Board of Directors may consider such fact in determining
the appropriate annual dividend rate on the Class A common stock following the
Initial Period. Dividends declared per share of Class A common stock were $2.40
for the nine months ended September 30, 1999 (or $0.80 per quarter). In
comparison, earnings per average share of Class A common stock excluding special
charges and the extraordinary item for the nine months ended September 30, 1999
were $1.92. In 1998, dividends declared per share of Class A common stock were
$3.20, compared to earnings per average share of Class A common stock of $1.82.
There can be no assurance that earnings attributable to the Atlantic Utility
Group that are applicable to the shares of Class A common stock will be
sufficient to cover dividends on the Class A common stock during the remainder
of the Initial Period. The earnings of the Atlantic Utility Group will be
affected by the implementation of the restructuring order in New Jersey,
including the rate decrease that was effective August 1, 1999. The earnings of
the Atlantic Utility Group also will be affected by the anticipated sales of
certain generating plants (and resulting loss of earnings capacity) and the
utilization of proceeds from such sales. The precise impact of the anticipated
sales on the earnings of the Atlantic Utility Group will depend on the
utilization of the proceeds and such impact cannot be determined at this time.
For additional information concerning Class A common stock, see Note 7 (B) to
the Consolidated Financial Statements.
-28-
<PAGE>
Electric Utility Industry Restructuring
- ----------------------------------------
As discussed in Notes 2, 5, 9, and 11 to the Consolidated Financial Statements,
during the past several months, the NJBPU issued an order to ACE, and the DPSC
and MPSC issued orders to DPL, concerning restructuring the electricity supply
businesses of ACE and DPL, respectively. Based on these orders, ACE and DPL
determined that the requirements of SFAS No. 71 no longer applied to their
electricity supply businesses as of August 1, 1999 and September 30, 1999,
respectively. As a result, ACE and DPL discontinued applying SFAS No. 71 and
applied the requirements of SFAS No. 101 and EITF 97-4, which among other
things, resulted in an extraordinary charge to earnings of $271.1 million, net
of taxes.
Implementation Dates
The table below shows when DPL's Delaware and Maryland and ACE's New Jersey
retail electric customers may choose an alternative supplier. The Virginia
Electric Utility Restructuring Act, signed into law on March 29, 1999, phases-in
retail electric competition beginning January 1, 2002.
<TABLE>
<CAPTION>
State Customer Group Effective Date for Choice
- ------------ --------------------------------------------- -------------------------
<S> <C> <C>
New Jersey All customers August 1, 1999
Delaware Customers with peak loads of 1,000 kW or more October 1, 1999
Delaware Customers with peak loads of 300 kW or more January 15, 2000
Delaware All other Delaware retail electric customers October 1, 2000
Maryland All customers July 1, 2000
</TABLE>
Revenue Reductions
Pursuant to the electric utility restructuring orders issued by the NJBPU, DPSC,
and MPSC during the past several months, electric rate decreases became
effective, or are scheduled to become effective, as shown in the table below.
<TABLE>
<CAPTION>
Estimated Annualized
State Revenue Decrease (1) Effective Date
- ------------ -------------------- ---------------
<S> <C> <C>
New Jersey $50 million (2) August 1, 1999
Delaware $17.5 million (3) October 1, 1999
Maryland $12.5 million (3) July 1, 2000
</TABLE>
(1) Estimated based on 1998 fiscal year sales and revenues.
(2) Represents a 5% rate reduction. Approximately $25 million of the estimated
$50 million decrease in ACE's New Jersey electric revenues is for the
energy component of ACE's electric revenues which had been greater than the
related energy costs. Thus, $25 million of this estimated revenue decrease
should not affect earnings. An additional two percent rate reduction is
required by January 1, 2001, and by August 1, 2002, rates must be ten
percent lower that the rates which were in effect April 30, 1997.
(3) Represents a 7.5% reduction for residential rates, which are held constant
for four years. Non-residential rates are held constant for three years.
Regulatory Implications on Sales of Electric Generating Plants
Under the NJBPU's Summary Order, the gain or loss realized upon the sale of
ACE's electric generating plants (other than certain "mid-merit" plants) will
affect the amount of stranded costs to be recovered from customers.
Accordingly, any gain or loss realized on the sale of these plants would not
affect future earnings. In the event of a sale within three years of certain
"mid-merit" plants, which began operating on a deregulated basis effective
August 1, 1999, 50% of any gain realized would be shared with ACE's
-29-
<PAGE>
regulated electric customers and the remaining 50% would affect earnings. If
these mid-merit plants were sold and a loss resulted from the sale, the loss
would be recognized in earnings.
Under the DPSC's and MPSC's electric restructuring orders, any gain or loss
realized on the sale of DPL's electric generating plants will affect net income
to the extent the net selling proceeds differ from the plants' net book value,
as adjusted for any impairment write-down recorded in the third quarter of 1999.
Management expects a net gain will be recognized in earnings when DPL sells its
electric generating plants which were not impaired from deregulation. There can
be no assurances, however, that DPL or ACE will elect or be able to sell any
such electric generating plants, or that any gain will be realized from such
sales of electric generating plants.
Stranded Cost Recovery and Securitization
The NJBPU's Summary Order provides ACE the opportunity to recover 100% of the
net stranded costs related to the generation units to be divested and the
stranded costs associated with power purchased from NUGs. The Summary Order
also permits securitization of 100% of the net stranded costs of the generation
units to be divested and the costs to effect potential NUG contract buyouts or
buydowns. Securitization is expected to occur through a special purpose entity
which will issue bonds secured by the right to collect stranded costs from
customers. Stranded costs, net of taxes, will be collected from customers
through a transition bond charge and the income tax expense associated with the
revenues from stranded cost recovery will be collected from customers through a
separate market transition charge. ACE's pre-tax recoverable stranded costs,
which are subject to adjustment based on the actual gains and losses realized on
the sale of electric generating plants, were initially estimated and recorded as
$661.5 million in the third quarter of 1999.
Based on the $24 million of after-tax stranded cost recovery that the DPSC and
MPSC restructuring orders provided for, DPL recorded recoverable stranded costs
on a pre-tax basis of $44.3 million in the third quarter of 1999. Although
only partial stranded cost recovery was provided for by the DPSC's and MPSC's
restructuring orders, any gain that may be realized on the sale of DPL's
electric generating units which were not impaired by deregulation will increase
future earnings.
Basic Generation Service and Default Service
Through July 31, 2002, under New Jersey's BGS, ACE is obligated to supply
electricity to customers who do not choose an alternative electricity supplier.
As the BGS supplier, ACE's BGS rates are designed to recover its costs, except
for the above-market portion of NUG power which is recovered through a separate
non-bypassable Net NUG Charge included in regulated delivery rates. In
accordance with the NJBPU's order, ACE defers the difference between such costs
incurred and the related revenues. ACE's customer rates are to be adjusted for
any deferred balance remaining after the initial four-year transition period
that began August 1, 1999.
DPL is obligated to supply electricity to customers who do not choose an
alternative electricity supplier for three or fours years (depending on customer
class) after October 1, 1999 in Delaware and July 1, 2000 in Maryland. The
energy component to be included in customers' rates for such "default service"
is established based on the average energy cost for the 12 months ended
September 30, 1999 for Delaware customers and the average energy cost for the 12
months ended April 30, 2000 for Maryland customers. After October 1, 1999 in
Delaware and July 1, 2000 in Maryland, Conectiv's earnings will be affected to
the extent that DPL's actual energy costs vary from the amounts included in its
customer rates.
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<PAGE>
Shopping Credits
Customers who choose an alternative electricity supplier receive a credit to
their bill, or a shopping credit, which generally represents the cost of
electricity supply and transmission service. System-average shopping credits
for the first three to four years (depending on the state and/or customer group)
after customer choice begins, have been initially estimated to range from 5.27
to 5.48 cents per kWh for ACE's New Jersey customers, from 4.736 to 4.740 cents
per kWh for DPL's Delaware customers, and from 5.088 to 5.093 cents per kWh for
DPL's Maryland customers.
Earnings Impact
The deregulation of electricity traditionally supplied by DPL and ACE results in
deregulation of the revenues earned from the previously regulated electricity
supply service. Accordingly, the impact on earnings of deregulating the supply
of electricity depends on various factors in addition to the mandated revenue
reductions. The return on the proceeds from the expected sale of power plants
compared to returns earned on such power plants prior to their sale will impact
earnings. The performance and operating results of deregulated power plants,
which previously were subject to rate regulation, will also impact earnings.
Earnings will also be affected to the extent that DPL's actual energy costs vary
from the amounts included in its customer rates for default service. Conectiv's
future earnings will also be affected by its ability to achieve cost reductions
and streamline operations. Due to these factors which may affect Conectiv's
future earnings after deregulation of electricity supply, Conectiv's earnings
may be more volatile in the future.
The sole source of earnings applicable to Class A common stock is the Atlantic
Utility Group, which consists of the regulated utility business of ACE.
Earnings applicable to Conectiv common stock result from all the businesses and
subsidiaries of Conectiv, including the regulated utility business of ACE.
Thus, ACE's earnings, including any changes in ACE's earnings due to
deregulation or other factors, have a significantly greater impact on the
earnings per share of Class A common stock in comparison to the impact on
earnings per share of Conectiv's common stock.
Intent to Renegotiate Purchased Power Contracts
ACE has four NJBPU-approved long-term power purchase contracts with NUGs. ACE
continues to negotiate buyouts and buydowns of these contracts, which would be
subject to NJBPU and other approvals, including NJBPU authorization to recover
any contract buyout and buydown costs through the issuance of transition bonds,
as permitted by the New Jersey Act. The financial commitments associated with
such buyouts and buydowns could be substantial. Management cannot currently
predict the outcome of contract buyout and buydown negotiations or the costs
associated with such efforts. There can be no assurances, moreover, that the
NJBPU will approve the issuance of transition bonds for such costs or that ACE
will be able to issue and sell any such bonds.
On May 7, 1999, ACE and a NUG, with which ACE has a long-term power purchase
contract, signed a letter of intent (LOI) relating to a transaction which could
ultimately result in the termination of such existing contract. The LOI calls
for the negotiation of a definitive agreement and the establishment of necessary
arrangements associated with the termination. Upon receipt of corporate and
regulatory approvals (including NJBPU approval), the agreement would require,
among other things, a substantial payment by ACE to the NUG (estimated to be in
excess of $100 million) and establishment of a new, substitute long-term power
contract between the NUG and a new power purchaser. On July 27, 1999, ACE and
the NUG issued a request for proposals from parties prospectively interested in
becoming a purchaser under the substitute power contract. During August and
September 1999, ACE and the NUG received proposals from various parties, and
have since been engaged in discussions and negotiations with those parties.
Although discussions and negotiations continue, at this time it is not possible
to
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<PAGE>
predict whether a definitive termination agreement involving a transaction with
a substitute power contract will result.
On July 30, 1999, ACE made a conditional offer to another NUG (in which an
affiliate has a 50% interest), with which ACE has a long-term power purchase
contract, to terminate the power contract. The conditional offer was modified
on August 26, 1999 and accepted by the respective parties, and remains subject
to the receipt of corporate and regulatory (including NJBPU) approvals. The
termination of the power purchase contract would require a payment in excess of
$200 million to the power producer. A Termination Agreement between the
parties, dated as of September 20, 1999, was filed with the NJBPU in connection
with ACE's petition for authorization to proceed with the proposed transaction.
Among other things, the petition requests that the NJBPU approve the Termination
Agreement; make certain findings with respect to the termination payment to be
made by ACE pursuant thereto, approve the interim financing of the termination
payment by ACE, and find that the termination payment is an amount which either
may constitute, or be included as part of, the principal amount of transition
bonds for which ACE may seek approval to issue under the New Jersey Act.
Arrangements with respect to the interim financing of amounts which may be paid
in connection with the termination of the power purchase contracts described
above are being negotiated with several financial institutions. It is presently
contemplated that long-term financing of such termination payments would be
undertaken at a later time, in connection with the financing of these and other
stranded costs of ACE which may be approved by the NJBPU. There can be no
assurances, however, that the NJBPU will approve the issuance of transition
bonds for such costs or that ACE will be able to issue and sell any such bonds.
Deregulated Generation and Power Plant Sales
- --------------------------------------------
Conectiv is changing the mix of the types of electric generating plants it owns
in conjunction with implementing its "mid-merit" strategy. Mid-merit electric
generating plants can quickly increase or decrease their kWh output level on an
economic basis. Mid-merit plants typically have relatively low fixed operating
and maintenance costs and also can use different types of fuel. These plants
are generally operated during times when demand for electricity rises and prices
are higher. As discussed in Note 10 to the Consolidated Financial Statements,
DPL and ACE have offered their nuclear and non-strategic baseload fossil
electric generating plants for sale. Baseload electric generating plants run
almost continuously to supply the base level of demand for electricity, or the
minimum demand level which generally always exists on an electrical system. In
a deregulated electricity supply market, management expects that mid-merit
electric generating plants will be more profitable and provide higher returns on
invested capital than baseload electric generating plants.
Under the NJBPU's Summary Order, the kWh output from certain ACE electric
generating units, with approximately 741 MW of capacity, is not dedicated to
supplying BGS customers, but instead is being operated on a deregulated basis,
effective August 1, 1999, under Conectiv's mid-merit strategy. Effective
October 1, 1999, the Delaware portion (approximately 59%) of DPL's electric
generating plants is deregulated and the plants' kWh output may, at DPL's
option, be sold in deregulated markets or used to supply default service
customers in Delaware. Similarly, effective July 1, 2000, the Maryland portion
(approximately 30%) of DPL's electric generating plants is deregulated and the
plants' kWh output may, at DPL's option, be sold in deregulated markets or used
to supply default service customers in Maryland.
On September 15, 1999, Conectiv announced plans to construct a new mid-merit,
electric power plant in northern Delaware comprised of three combustion turbines
and a waste heat recovery boiler and steam turbine (combined cycle unit).
Assuming all permits and licenses are obtained, the new mid-merit power plant
will be installed on the site which currently includes the Hay Road combined
cycle unit and the
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<PAGE>
Edge Moor power plant. The new mid-merit power plant is expected to cost
approximately $300 million and have capacity of approximately 500 MW. The
installation of the three new combustion turbine units is expected to be
completed by June 2001 and installation of the waste heat recovery boiler and
steam turbine is expected to be completed by June 2002. The expected
installation dates could change depending on whether construction proceeds on
schedule, permits and licenses are obtained as planned, and other factors.
Conectiv Energy, Inc. (CEI), a Conectiv subsidiary, will own contractual rights
for the new 500 MW combustion turbine/combined cycle unit. The electric
generating units of DPL and ACE which are not sold to third parties are expected
to be transferred into new electric generation subsidiaries within the next
year.
On September 30, 1999, Conectiv announced that DPL and ACE reached agreements to
sell their ownership interests in nuclear plants, representing 714 MW of
capacity, to PSEG Power LLC and PECO. The aggregate sales price of $20 million,
less selling costs, was used as the fair value of the nuclear plants in
determining the amount of impairment that resulted from deregulation and the
amount of the write down of DPL's and ACE's investments in nuclear plants that
was recorded in the third quarter of 1999. Upon completion of the sale, DPL and
ACE will transfer their respective nuclear decommissioning trust funds to the
purchasers, and PSEG Power LLC and PECO will assume full responsibility for the
decommissioning of Peach Bottom, Salem, and Hope Creek. The sales are subject
to various federal and state regulatory approvals and are expected to close by
mid-2000.
ACE and DPL are currently conducting an auction for the sale of certain fossil
fuel-fired electric generating plants which have 1,875 MW of capacity and a net
book value of approximately $582 million, which is net of the write downs
recorded in the third quarter of 1999, as a result of deregulation.
See the preceding MD&A section labeled "Regulatory Implications on Sales of
Electric Generating Plants" for a discussion of any gain or loss that may result
from such sales.
In order to fulfill its obligations in Delaware and Maryland as a default
service provider, DPL may arrange contracts to purchase energy and capacity from
the buyer(s) of the fossil fuel-fired plants. These contracts are expected to
establish a favorable cost structure for DPL's default service. Alternatively,
DPL may purchase energy and capacity from third parties.
Due to the expected sale of power plants, more electric capacity is expected to
be purchased in the future, which will cause purchased electric capacity costs
to increase. However, since the divested plants will be removed from the
balance sheet upon sale, depreciation expense for these plants will stop. Also,
to the extent the sales proceeds are used to pay off debt which had financed the
plants, interest expense will also decrease.
Management expects that the aggregate proceeds from the sale of the electric
generating plants and securitization of stranded costs will be approximately
$1.0 billion, on an after-tax basis. Management expects to use the proceeds for
general corporate purposes, including the purchase of a portion of the
outstanding debt and other securities of Conectiv and its subsidiaries, and for
investments in businesses.
Both ACE's and DPL's mortgage indentures require that the electric generating
plants being divested be released from the liens of the respective mortgages.
These assets may be released with a combination of cash, bondable property
additions and credits representing previously issued and retired first mortgage
bonds. Both ACE and DPL have sufficient bondable property additions and retired
first mortgage bonds to release such assets at fair values.
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<PAGE>
Electric Revenues
- ------------------
The table below shows the amounts of electric revenues earned which are subject
to price regulation (Regulated) and which are not subject to price regulation
(Non-regulated). Electricity supply service in DPL's and ACE's service areas
was subject to price regulation prior to deregulation and will also be subject
to price regulation during the transition periods. Thus, revenues from
electricity supply service within DPL's and ACE's service areas are classified
below as Regulated electric revenues. Non-regulated electric revenues result
primarily from electricity trading activities, sales of output from deregulated
electric generating plants, and competitive retail sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated electric revenues $684.9 $661.4 $1,676.6 $1,463.6
Non-regulated electric revenues 110.8 171.6 236.0 250.0
------ ------ -------- --------
Total electric revenues $795.7 $833.0 $1,912.6 $1,713.6
====== ====== ======== ========
</TABLE>
Regulated electric revenues increased by $23.5 million, from $661.4 million in
the third quarter of 1998 to $684.9 million in the third quarter of 1999. The
$23.5 million increase was primarily due to a 2.3% increase in retail kWh sales,
reflecting hotter summer weather, and higher resale revenues due to higher
demand charges as a result of the hot weather. The increase in Regulated
electric revenues was reduced by the New Jersey electric restructuring rate
decrease which became effective August 1, 1999. This rate decrease caused
Regulated electric revenues to decrease by approximately $10.2 million, or by
$5.1 million net of related energy costs.
Non-regulated electric revenues decreased by $60.8 million, from $171.6 million
in the third quarter of 1998 to $110.8 million in the third quarter of 1999.
The $60.8 million decrease was mainly due to lower electricity trading volumes,
partly offset by higher competitive retail electricity sales in Pennsylvania and
revenues from ACE's deregulated electric generating units. Although Non-
regulated electric revenues decreased, Non-regulated electric revenues net of
energy costs (net revenues) increased because the lower electricity trading
volume had a minimal impact on net revenues, while the output sold from the
deregulated electric generating units contributed additional net revenues.
For the nine month period, Regulated electric revenues increased by $213.0
million, from $1,463.6 million for the nine months ended September 30, 1998 to
$1,676.6 million for the nine months ended September 30, 1999. The $213.0
million increase was primarily due to a $163.5 million increase for two
additional months of ACE's revenues in the current reporting period, with the
remaining $49.5 million increase comprised of the following items: (a) a $25.7
million revenue increase from a 2.7% increase in retail kWh sold (due to the
effects of weather and a 1.2% increase in the number of customers) and higher
billings of certain services related to the electricity delivery business, (b) a
$23.1 million increase in interchange revenues primarily from revenues for
transmission network usage and system congestion, and (c) a $0.7 million
increase in resale revenues from higher third quarter demand revenues, which
were largely offset by a kWh sales decrease from a scheduled load reduction by
DPL's largest resale customer.
Non-regulated electric revenues decreased $14.0 million for the nine month
period, from $250.0 million for the nine months ended September 30, 1998 to
$236.0 million for the nine months ended September 30, 1999. The $14.0 million
decrease was mainly due to lower electricity trading volumes, partly offset by
revenues from higher competitive retail electricity sales in Pennsylvania and
ACE's deregulated electric generating units. Although Non-regulated electric
revenues decreased, there was an increase in Non-regulated electric revenues net
of energy costs (net revenues). Net revenues from trading activities
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<PAGE>
increased despite lower trading volume and additional net revenues were realized
from the output sold by the deregulated electric generating units.
Gas Revenues
- ------------
The table below shows the amounts of gas revenues earned which are subject to
price regulation (Regulated) and which are not subject to price regulation (Non-
regulated).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
--------- ------- -------- -------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated gas revenues $ 12.0 $13.0 $ 87.5 $ 79.0
Non-regulated gas revenues 145.5 80.8 495.1 203.5
------ ----- ------ ------
Total gas revenues $157.5 $93.8 $582.6 $282.5
====== ===== ====== ======
</TABLE>
Regulated gas revenues increased $8.5 million for the nine-month period ended
September 30, 1999, due primarily to a 12.8% increase in cubic feet of natural
gas sold to residential customers because colder winter weather caused
residential customers to use more gas to heat their homes. Higher average rates
charged under the energy adjustment clause also contributed to the increase.
Due to higher Non-regulated natural gas trading volumes, Non-regulated gas
revenues increased $64.7 million for the three-month period and $291.6 million
for the nine-month period. However, the variance, for the three-month period
and for the nine-month period compared to the same periods last year, in Non-
regulated gas revenues net of related purchased gas costs was not significant.
The margin earned from Non-regulated natural gas trading revenues in excess of
related purchased gas costs is relatively small mainly due to the competitive
nature of natural gas trading activities.
Other Services Revenues
- -----------------------
Other services revenues were comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Fuel oil and gasoline $ 56.2 $38.5 $139.5 $ 78.7
HVAC 37.7 25.0 102.7 67.8
Telecommunications 9.8 2.9 24.9 6.3
Thermal systems 7.7 7.9 20.1 16.6
Operation of power plants 8.3 5.9 21.6 16.5
Solutions (1) 5.3 3.7 14.5 7.3
Other 2.2 1.8 11.1 10.9
------------------ -----------------
Total $127.2 $85.7 $334.4 $204.1
================== =================
</TABLE>
(1) Refer to page I-3 of Conectiv's 1998 Annual Report on Form 10-K for a
description of this business.
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<PAGE>
As shown in the preceding table, other services revenues increased to $127.2
million in the third quarter of 1999, from $85.7 million in the third quarter of
1998. The $41.5 million revenue increase for the third quarter was mainly due
to additional acquisitions of HVAC service businesses, expansion of Conectiv's
telecommunications business, and higher sales of fuel oil and gasoline. For the
nine months ended September 30, 1999, other services revenues increased to
$334.4 million from $204.1 million for the nine months ended September 30, 1998.
The $130.3 million increase for the nine-month period was primarily due to an
additional three months of revenues from a business acquired by Conectiv in
March 1998 which distributes fuel oil and gasoline, additional acquisitions of
HVAC service businesses, and expansion of Conectiv's telecommunications and
Solutions businesses.
As shown in the table above, telecommunications revenues from CCI grew
substantially. Among other services, CCI offers customers local and long-
distance phone service, a regional calling plan, and a plan for calls within the
United States. CCI had sold about 65,000 access line equivalents as of
September 30, 1999, which is about double the number of access lines CCI had
sold at December 31, 1998. However, CCI does not expect to have sold by year-
end 1999 the number of access lines it had originally planned to sell due to
longer than expected customer provisioning intervals and lower than anticipated
customer credit quality. In its efforts to reduce provisioning intervals and
increase customer satisfaction, during the third quarter of 1999, CCI engaged in
extensive negotiations with Bell Atlantic regarding the terms and conditions for
interconnection of the CCI and Bell Atlantic networks and CCI's access to
elements of Bell Atlantic's network as required by federal law. In accordance
with provisions of the Communications Act, as amended by the Telecommunications
Act of 1996, CCI petitioned the public utility commissions in Delaware,
Maryland, New Jersey and Pennsylvania to arbitrate certain open issues in the
negotiations. Decisions in the arbitrations are expected by year-end, which
should result in completing new interconnection agreements in these four states
during the first quarter of 2000. CCI is also negotiating similar issues with
Bell Atlantic with regard to its planned expansion into New York and the
District of Columbia. If these negotiations are unsuccessful, CCI may seek
arbitration in these jurisdictions as well, which would likely take place during
the first or second quarter of 2000.
In June 1999, CCI purchased an Internet service provider which offers dedicated
and dial-up Internet service, consulting, data security, and web services. This
acquisition combined with CCI's DSL (digital subscriber line--a high speed
Internet connection) service, enables CCI to provide end-to-end Internet
service.
Conectiv recently announced the appointment of a 30-year veteran of the
telecommunications industry as the new president of CCI.
Operating Expenses
- -------------------
Electric Fuel and Purchased Energy
Electric fuel and purchased energy decreased $54.6 million in the third quarter
of 1999 due to lower non-regulated electricity trading volumes, partly offset by
higher regulated electricity sales.
Electric fuel and purchased energy increased $49.2 million in the current nine
month period mainly due to $50.3 million of expenses associated with the
additional two months of ACE's operations in the current period. The remaining
$1.1 million decrease resulted from lower non-regulated electricity trading
volumes and a decrease in energy expense recorded pursuant to regulated energy
adjustment clauses, partly offset by higher energy expenses from increased
regulated electricity sales.
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<PAGE>
Gas Purchased
Gas purchased increased by $63.8 million to $151.4 million for the third quarter
of 1999, and by $293.4 million to $542.2 million for the first nine months of
1999 mainly due to larger volumes of gas purchased for resale off-system.
Higher on-system sales demand due to the colder winter weather also contributed
to the increase for the nine-month period.
Other Services Cost of Sales
Other services cost of sales increased by $23.9 million and $98.3 million for
the third quarter and the nine-month period, respectively, primarily due to
increased volumes of fuel oil and gasoline sold and higher volumes of HVAC
services provided.
Purchased Electric Capacity
Purchased electric capacity costs increased $35.3 million for the nine-month
period due to $28.0 million for the two additional months of ACE's operations in
1999 and higher capacity requirements associated with energy supplied within and
outside of DPL's and ACE's regulated service territories.
Special Charges
As discussed in Note 4 to the Consolidated Financial Statements, special charges
of $105.6 million before taxes ($71.6 million after taxes) were recorded in the
third quarter of 1999 as a result of (a) a decline in the estimated residual
values of assets leased through leveraged lease arrangements ($43.7 million
before taxes, or $26.7 million after taxes), (b) costs for 160 employee
separations expected within the next year ($10.9 million before taxes, or $6.5
million after taxes), (c) a write-down of the goodwill associated with HVAC
businesses ($35.6 million before taxes, or $29.1 million after taxes) and (d)
additional costs related to the Merger, impairments of certain other assets, and
other items ($15.4 million before taxes, or $9.3 million after taxes).
Conectiv's operating results for the nine months ended September 30, 1998
include special charges of $27.1 million before taxes ($16.4 million after
taxes) for the cost of DPL employee separations associated with the Merger-
related workforce reduction and other Merger-related costs. The 1998 employee
separation, relocation, and other Merger-related costs for Atlantic and its
former subsidiaries were capitalized as costs of the Merger.
Operation and Maintenance Expenses
For the third quarter of 1999, operation and maintenance expenses increased by
$17.8 million due to a $12.9 million increase for the regulated utility
businesses, including higher power plant maintenance expenses, and a $4.9
million increase for non-regulated businesses, primarily due to expansion of the
telecommunications business.
After excluding the $35.5 million of operation and maintenance expenses
attributed to the two additional months of ACE's operations in 1999, operation
and maintenance expenses increased by $38.6 million for the nine-month period
due to $15.7 million of increased costs associated with expanding Conectiv's
telecommunications business, an $11.9 million increase for various other non-
regulated businesses, and an $11.0 million increase for the regulated utility
businesses, which included higher power plant maintenance expenses.
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<PAGE>
Depreciation and Taxes Other than Income Taxes
After excluding the two additional months of operating results of ACE and other
former Atlantic-owned businesses in 1999, depreciation expense increased $9.4
million. This increase was primarily due to depreciation of new computer
networks, customer service systems, and other shared infrastructure assets, as
well as increased depreciation for non-regulated businesses due to expansion of
the telecommunications and HVAC businesses.
The $8.5 million increase in taxes other than income taxes for the nine-month
period was principally due to inclusion of the two additional months of
operating results of ACE and other former Atlantic-owned businesses in 1999.
Other Income
- -------------
Other income increased $26.3 million for the nine-month period primarily due to
$18.0 million ($10.6 million after-taxes or $0.11 per share of common stock)
equity in earnings of an investment partnership (Enertech). Due to the nature of
Enertech's investments, which include Internet service companies, its earnings
may be volatile from period to period. The remaining $8.3 million increase in
other income for the nine-month period was mainly due to a prior-year write-off
of a non-utility investment, current-year interest income related to a
successful tax appeal, the additional two months of ACE's operating results in
1999, and implementation of mark-to-market accounting for energy trading
activities in January 1999.
Financing Costs
- ----------------
Financing costs reflected in the Consolidated Statements of Income include
interest charges, allowance for funds used during construction, and preferred
stock dividend requirements of subsidiaries. Financing costs increased $7.2
million in the third quarter mainly due to approximately $5.8 million of
interest expense attributed to debt which was issued to finance the Offer.
After excluding the financing costs from the two additional months of operating
results of ACE and other former Atlantic-owned businesses included in the
current nine-month period, financing costs increased $11.4 million for the nine
month period due to $6.7 million of interest expense from debt financing for the
Offer and $4.7 million of interest expense on debt issued to finance nonutility
businesses.
Income Taxes
- ------------
The effective income tax rate on "Income Before Income Taxes and Extraordinary
Item" increased for the three-month and nine-month periods primarily due to the
write-off of goodwill (as discussed in Note 4 to the Consolidated Financial
Statements) which is not deductible for income tax purposes.
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 during and 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 managing Conectiv's response
to this situation. A Conectiv corporate officer, reporting directly to the
Chief Executive Officer, is coordinating all Year 2000 activities. Conectiv has
met substantial challenges in identifying and correcting the computer and
embedded systems critical to generating and delivering power, delivering natural
gas and providing other services to customers.
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<PAGE>
The project team is using a phased approach to managing its activities. The
first phase was inventory and assessment of all systems, equipment, and
processes. Each identified item was given a criticality rating of high, medium
or low. Those items rated as high or medium were then subject to the second
phase of the project. The second phase -- determining and implementing
corrective action for the identified systems, equipment and processes --
concludes with a test of the unit being remediated. The third phase involves
system testing and compliance certification.
Overall, Conectiv's Year 2000 Project covers approximately 140 different systems
(some with numerous components) that had been originally identified as high or
medium in criticality. However, only 21 of those 140 systems are essential for
continued operations and customer response across Conectiv's several businesses;
these are regarded as "mission critical." The Year 2000 Project team has
focused on these 21 systems, with work on the other systems continuing based on
their relative importance to Conectiv's businesses.
Additionally, Conectiv has developed and tested contingency plans in the event
that Year 2000 outages do occur. Contingency plans are in place for all mission
critical systems and have been coordinated into a detailed overall Year 2000
restoration plan under the direction of a senior-level engineering and
operations manager. Contingency plans have also been developed for non-mission
critical systems. The Year 2000 plans build on Conectiv's existing expertise in
service restorations. Conectiv has also coordinated these efforts with state and
local emergency management agencies.
The following chart sets forth the current estimated completion percentage of
the 140 different systems in the Year 2000 Project by major business group, and
for the information technology systems used in managing Conectiv's businesses.
Inventory and assessment, corrective action/unit testing and system
testing/compliance in the 21 mission critical systems is 99% complete.
<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
- ------------------------- --------------- ------------------ ---------------
<S> <C> <C> <C>
Business systems 100% 98% 95%
Power production 100% 95% 95%
Electricity distribution 100% 93% 90%
Gas delivery 100% 99% 99%
Competitive services 100% 75%-100% 88%
</TABLE>
Conectiv has also contacted vendors and service providers to review their Year
2000 efforts. Many aspects of Conectiv's businesses are dependent on third
parties. For example, fuel suppliers must be able to provide coal or gas for
DPL or ACE to generate electricity.
Distribution of electricity is dependent on the overall reliability of the
electric grid. ACE and DPL have been cooperating with the North American
Electric Reliability Council (NERC) and the PJM Interconnection in Year 2000
remediation, contingency planning and restoration planning efforts. Recent
reports issued by NERC indicate a small risk of disruption to the electric grid
caused by Year 2000 issues. Conectiv's Year 2000 Project timeline and status
are in line with the recommendations of those groups, with limited exceptions.
-39-
<PAGE>
As requested by NERC, ACE and DPL filed their Year 2000 Readiness Statement with
NERC stating that as of June 30, 1999, 96% of work on mission critical systems
had been completed. The remaining 4% of work constituted three exceptions to
full readiness status and were reported to NERC in the regular monthly filing
made on June 30, 1999. On the basis of Conectiv's filings, NERC has designated
Conectiv as "Ready with Limited Exceptions." NERC regards exceptions as
"limited" only if they "do not pose a measurable risk to reliable electric
operations into the Year 2000." NERC, in its report to the Department of Energy
dated August 3, 1999, stated that the factors it considers in making this
evaluation include the number of facilities in a reporting company, the percent
of that company's capacity included in the exception, expected completion date,
importance of the facilities included in the exception and steps taken to
mitigate risks. In that report, NERC stated that based "on data received through
June 30, 1999, NERC believes that the electric power industry will operate
reliably into the Year 2000 with the resources that are Y2k Ready today."
Since Conectiv's June 30, 1999 NERC filing, Conectiv has addressed two of the
three exceptions and they have been reported as complete to NERC. Mission
critical work is now 99% complete. The outstanding work on the sole remaining
exception is completion of changes to Conectiv's customer information and
billing system, including system changes made necessary by state legislation
authorizing energy choice programs. Remediation efforts are now complete; the
remaining work consists of final integration testing of the system. That testing
is scheduled to be complete by the end of November 1999.
In addition, on October 13, 1999, the NJBPU found that the electric industry in
New Jersey, including ACE, was Year 2000 ready with regard to mission critical
systems that assure the capability to continue to provide safe, adequate service
into the Year 2000. The only further action required of ACE by the NJBPU's
order is continued monthly reporting of project status.
Conectiv participated in the two NERC drills on April 9, 1999 and September 9,
1999; a small number of manageable issues similar to those found by other
utilities were identified during those drills and have been addressed. In
addition, Conectiv conducted its own drill on October 28, 1999 where it
successfully tested its contingency plans and communications with customers and
emergency management agencies. All of these drills were exercises only and did
not result in service interruptions.
Conectiv has incurred approximately $12.4 million in costs for the Year 2000
Project. The current budget for the Year 2000 Project is $10 million to $15
million. The costs set forth above do not include significant expenditures
covering new systems, such as Conectiv's SAP business, financial and human
resources management systems, an energy control system, and a customer
information system. While these new systems effectively remediated Year 2000
problems in the systems they replaced, Conectiv is not reporting the
expenditures on these systems in its costs for the Year 2000 Project, because
the new systems were installed principally for other reasons. The total cost of
these other projects over several years exceeds $87 million.
During July 1999, President Clinton signed the Year 2000 litigation reform bill,
known as the "Y2K Act." The Y2K Act provides some new partial liability and
damages protections to defendants in Year 2000 failure-related cases. It also
establishes new litigation procedures that plaintiffs and defendants must
follow. In general, the Y2K Act provides a pre-litigation notice period,
proportionate liability among defendants in Year 2000 cases, a requirement that
plaintiffs mitigate damages from Year 2000-related failures, and federal court
jurisdiction for Year 2000 claims. The law covers many types of civil actions
that allege harm or injury related to an actual or potential Year 2000-related
failure, or a claim or defense arising or related to such a failure. The Y2K
Act does not, however, cover civil actions for personal injury or wrongful death
or most actions brought by a government entity acting in a regulatory,
supervisory or enforcement capacity. The law governs actions brought after
January 1, 1999 for a Year
-40-
<PAGE>
2000-related failure occurring before January 1, 2003. Although the Y2K Act will
not afford Conectiv complete protection from Year 2000-related claims, it should
help limit any liability related to any Year 2000-related failures. Conectiv
cannot predict the extent to which such liability will be limited by the Y2K
Act.
Until the century change actually occurs, Conectiv will not with certainty be
able to determine whether the Year 2000 issue might cause disruptions to its
operations and impact related costs and revenues. Conectiv continues to assess
the status of the Year 2000 Project on at least a semi-monthly basis to
determine the likelihood of disruption. Based on its own Year 2000 program, as
well as reports from NERC and other utilities, Conectiv's management believes it
is unlikely that significant Year 2000-related disruptions will occur. However,
any substantial disruption to Conectiv's operations could negatively impact
Conectiv's revenues, significantly impact its customers and 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
- -------------------------------
Due to $399.1 million of cash provided by operating activities, $256.6 million
of cash used by investing activities, and $68.8 million of cash used by
financing activities, cash and cash equivalents increased by $73.7 million
during the first nine months of 1999.
Net cash provided by operating activities for the first nine months of 1999
increased by $111.8 million from the first nine months of 1998. The increase
was primarily due to the two additional months of ACE's operations included in
the consolidated financial statements, a lower prepayment of New Jersey Sales
and Excise taxes during the second quarter, and the absence of last year's
payments for employee separation and other Merger-related costs.
The current liability for taxes accrued increased by $56.4 million from December
31, 1998 to September 30, 1999 primarily due to taxable income for the first
nine months of 1999; the items included in the special and extraordinary charges
to earnings for the first nine months of 1999 generally are not currently
deductible for income tax purposes, but instead result in a deferred tax
benefit.
The $28.3 million balance of "Dividends payable" as of September 30, 1999 in
comparison to the $47.7 million balance as of December 31, 1998, primarily
reflects lower dividends declared per share of common stock ($0.22 compared to
$0.385) and decreases of 12.8 million and 0.8 million in the number of shares
outstanding of common stock and Class A common stock, respectively, due to the
Offer.
The $22.7 million current asset for deferred energy costs as of September 30,
1999 is mainly for DPL's electric business, and will be recovered from DPL
ratepayers within a year after customer choice of electricity suppliers begins
in Delaware and Maryland. The $53.4 million current liability for deferred
energy costs as of September 30, 1999 is for ACE's electric business and will be
offset by any under-recoveries of BGS and certain other costs after August 1,
1999. ACE's customers rates are to be adjusted for the deferred balance which
remains as of July 31, 2003.
The liabilities for "Above-market purchased energy contracts" and "Excess
Merrill Creek Reservoir capacity and other electric restructuring liabilities"
resulted from the extraordinary charge to earnings discussed in Note 5 to the
Consolidated Financial Statements. The accrual of these liabilities had no
effect on current period cash flow and also will not alter future operating cash
flows.
-41-
<PAGE>
The $17.1 million use of cash for acquisitions of businesses during the nine
months ended September 30, 1999 was primarily due to purchases of HVAC
businesses, and also includes CCI's purchase of an Internet service company.
Acquisitions of businesses during the first nine months of last year provided a
net $4.3 million source of cash due to the Merger-related consolidation of the
cash balances of the formerly Atlantic-owned companies, partly offset by cash
paid for the acquisition of HVAC businesses, a gas marketing company, and a fuel
oil and gasoline distributor.
Capital expenditures for the first nine months of 1999 were $221.5 million
compared to $130.7 million for the same period last year. The $90.8 million
increase in capital expenditures was primarily due to construction of a new
customer service center, higher expenditures for computer networks, customer
service systems, and other shared infrastructure assets, and expansion of CCI's
telecommunications system.
"Investments in partnerships" of $21.1 million and $20.0 million for the nine
months ended September 30, 1999 and 1998, respectively, were primarily due to
Conectiv Thermal Systems' share of funding for construction of the "Venetian"
project in Las Vegas, Nevada, and investments in Enertech.
Common dividends paid increased to $112.4 million for the first nine months of
1999 from $110.3 million for the first nine months of 1998. Higher common
dividends paid in the first quarter were largely offset by a decrease in third
quarter common dividend payments, which decreased due to lower dividends
declared per share of common stock ($0.22 compared to $0.385) and fewer shares
outstanding of common stock and Class A common stock due to the Offer. The
common dividends paid in the first quarter increased because common dividends
paid in the first quarter of 1998 were for the December 1997 dividend
declaration, which was based on the number of shares of common stock outstanding
prior to the Merger.
Conectiv's capital structure including short-term debt and current maturities of
long-term debt, expressed as a percentage of total capitalization, is shown
below as of September 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Common stockholders' equity 28.6% 41.4%
Preferred stock of subsidiaries 6.7% 6.4%
Long-term debt and variable rate demand bonds 48.5% 42.0%
Short-term debt and
current maturities of long-term debt 16.2% 10.2%
</TABLE>
The decrease in common stockholders' equity and increases in long-term debt and
short-term debt as a percent of total capitalization were primarily due to the
special and extraordinary charges recorded in the third quarter of 1999 and
financing the purchase of common stock pursuant to the Offer by issuing long-
term debt and short-term debt.
Conectiv's short-term borrowings as of September 30, 1999, compared to
December 31, 1998, increased $247.5 million due primarily to funding Conectiv's
nonutility businesses and subsidiary service company (including capital
expenditures) and financing part of the common stock purchased pursuant to the
Offer.
The balance of variable rate demand bonds (VRDB) outstanding increased from
$125.1 million as of December 31, 1998 to $158.43 million as of September 30,
1999 due to the issuance of $33.33 million of VRDB in July 1999 by the Delaware
Economic Development Authority on behalf of DPL. The proceeds from the VRDB
were used by DPL to refinance $22.33 million of 7.3% long-term debt in September
1999 and $11.0 million of 7.5% long-term debt in October 1999.
-42-
<PAGE>
The net $161.3 million increase in the long-term debt balance as of September
30, 1999, as compared to the balance as of December 31, 1998, was principally
due to (a) Conectiv's issuance of $250 million of 6.73% Medium Term Notes in May
1999 in connection with the Offer, less (b) $46 million of ACE's Medium Term
Notes reclassified to "Long-term debt due within one year" due to scheduled
maturity, (c) redemption of $18.9 million of ACE's First Mortgage Bonds (6.88%
average interest rate) prior to maturity in June 1999, and (d) redemption of
$22.33 million of 7.3% fixed rate long-term debt of DPL prior to maturity in
September 1999. "Long-term debt due within one year" decreased $13.8 million
mainly due to repayment at maturity in May 1999 of $60 million of Medium Term
Notes (7.51% average interest rate), substantially offset by the $46 million
increase for reclassification of ACE's Medium Term Notes which became current
after December 31, 1998.
On October 15, 1999, Conectiv filed an application with the SEC to increase its
authorized short-term borrowing capacity from $800 million to $1.3 billion,
excluding ACE's short-term borrowings. The request for authorization to issue
up to $500 million of additional short-term debt is due to increased working
capital and capital expenditure needs of Conectiv and its subsidiaries. The
filing also requested authorization for Conectiv to issue up to $500 million of
additional long-term debt and use the proceeds to pay down short-term debt.
Conectiv's filing with the SEC on October 15, 1999 also requested authorization
to issue securities as long as consolidated common equity as a percent of total
capitalization (common equity ratio) is 20% or higher. Conectiv's request
anticipated the decrease in the common equity ratio that resulted from the
special and extraordinary charges to earnings in the third quarter of 1999 and
that an additional decrease may occur due to planned expenditures, potential
payments to buy out contracts with NUGs, and securitization of recoverable
stranded costs. Also, the parties to the agreements for Conectiv's $800 million
short-term credit facilities agreed to an amendment permitting a ratio of total
indebtedness to total capitalization of 70% through December 31, 2000. As of
September 30, 1999, the ratio of total indebtedness to total capitalization
computed in accordance with the terms of the credit agreements, which allow for
an adjustment to increase common equity by the extraordinary item, was 61.7%.
Conectiv's ratio of earnings to fixed charges under the SEC Method are shown
below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional
information.
12 Months
Ended Year Ended December 31,
September 30, -----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratio of Earnings to Fixed
Charges (SEC Method) 2.04 2.38 2.63 2.83 2.92
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," "believe," and similar expressions are intended to
identify forward-looking statements. In addition to any assumptions
-43-
<PAGE>
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 of energy supply and the unbundling of delivery
services; an increasingly competitive marketplace; results of any asset
dispositions; 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 list of factors pursuant to the Litigation Reform Act should not
be construed as exhaustive or as any admission regarding the adequacy of
disclosures made prior to the effective date of the Litigation Reform Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
As of September 30, 1999, there were no material changes in the information
previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-14 and II-15 of Conectiv's 1998 Annual Report on Form
10-K.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Update of "Air Quality Regulations" included on page I-15 of Conectiv's 1998
- ----------------------------------------------------------------------------
Report on Form 10-K
- -------------------
DPL and the Delaware Department of Natural Resources and Environmental Control
(DNREC) have reached a settlement regarding DPL's challenge, in Delaware
Superior Court, to DNREC's post-Reasonably Available Control Technology oxides
of nitrogen (NOx) emission regulations. The regulations, which require
attainment of summer seasonal emission reductions of up to 65% below 1990 levels
through reduced emission or the procurement of NOx emission allowances beginning
in 1999, failed to take into account uncertainties regarding the ability of
existing technologies to accomplish emission reductions and included stringent
penalty provisions which could hinder development of a NOx allowance market. In
reaching settlement, DNREC agreed to revise the regulations to clarify the
factors to be considered in undertaking enforcement for noncompliance despite
all reasonable efforts to comply and revised the penalty provisions for the
years 1999 and 2000 to eliminate provisions tending to interfere with creation
of a viable NOx allowance market. Through the installation of post-combustion
control technology, DPL is making efforts to achieve compliance with the revised
regulations.
NUG Contract Fuel Costs
- -----------------------
ACE and a NUG with which it has a power contract are currently arbitrating a
dispute over the calculation of the fuel costs ACE pays to the NUG. ACE has
asserted that fuel costs are overstated by approximately $2 million a year. ACE
has asked for relief that includes a refund of past overpayments and a
prospective change to the calculation of fuel costs over the remaining 25 years
of the power contract. The case will likely be heard in early-2000.
-44-
<PAGE>
Item 5. Other Information
- --------------------------
Electric System Outages
- -----------------------
As previously reported, after customers experienced electric service outages in
early July during an extended period of hot and humid weather and high demand
for electricity, (i) the NJBPU initiated an investigation of outages occurring
in the service territories of ACE and other New Jersey electric utilities; (ii)
the DPSC initiated an investigation of outages occurring in DPL's Delaware
service territory (as well as an examination of post-Merger DPL customer service
levels); and (iii) the MPSC initiated an investigation of outages occurring in
the service territories of DPL and other Maryland electric utilities. ACE and
DPL have responded to, and expect to continue to respond to, information
requests during the pendency of these investigations.
In November 1999, the NJBPU expanded its July outage investigation to include a
general reliability investigation of ACE and all other New Jersey utilities.
On October 13, 1999, the DPSC initiated a formal proceeding to investigate the
adequacy of DPL's facilities and services, including the remedies and incentives
(if any) to be imposed or offered, respectively, to ensure the continued
adequacy of DPL's facilities and services. That proceeding also will consider
the effects (if any) of electric industry restructuring in Delaware on the
reliability of electric service. The DPSC's order requires that DPL give the
DPSC at least 30 days' notice upon entering any contract for the sale of any
generating facility on the Delmarva Peninsula to any third party. DPL is
actively involved in defending actions taken (including rotating load-shedding)
during early-July and explaining its view that electric industry restructuring
is unlikely to affect DPL electric system reliability. This DPSC proceeding is
scheduled to conclude by May 2000.
On November 4-5, 1999, the MPSC held hearings on outages occurring during 1999
in the service territories of DPL and other Maryland utilities.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
Exhibits
- --------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
-45-
<PAGE>
Reports on Form 8-K
- --------------------
Conectiv filed a Report on Form 8-K dated July 15, 1999 reporting on Item 5,
Other Events, and Item 7 (c), Exhibits.
Conectiv filed a Report on Form 8-K dated July 27, 1999 reporting on Item 5,
Other Events.
Conectiv filed a Report on Form 8-K dated August 31, 1999 reporting on Item 5,
Other Events.
Conectiv filed a Report on Form 8-K dated September 7, 1999 reporting on Item 5,
Other Events.
Conectiv filed a Report on Form 8-K dated September 30, 1999 reporting on Item
5, Other Events, and Item 7 (c), Exhibits.
Conectiv filed a Report on Form 8-K dated October 26, 1999 reporting on Item 5,
Other Events.
-46-
<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, 1999 /s/ John C. van Roden
----------------- ---------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-47-
<PAGE>
EXHIBIT INDEX
Exhibit
Title of Exhibit Number
---------------- ------
Ratio of earnings to fixed charges 12
Financial Data Schedule 27
<PAGE>
Exhibit 12
----------
Conectiv
--------
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Ended December 31,
Ended ----------------------------------------------
September 30, 1999 1998 1997 1996 1995
------------------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income before extraordinary item $124,460 $153,201 $101,218 $107,251 $107,546
------------------- --------- ----------- ---------- ----------
Income taxes 101,554 105,817 72,155 78,340 75,540
------------------- --------- ----------- ---------- ----------
Fixed charges:
Interest on long-term debt 146,104 133,796 78,350 69,329 65,572
Other interest 38,237 26,199 12,835 12,516 10,353
Preferred stock dividend
requirements of subsidiaries 19,650 17,871 10,178 10,326 9,942
------------------- --------- ----------- ---------- ----------
Total fixed charges 203,991 177,866 101,363 92,171 85,867
------------------- --------- ----------- ---------- ----------
Nonutility capitalized interest (2,924) (1,444) (208) (311) (304)
------------------- --------- ----------- ---------- ----------
Earnings before income taxes
and fixed charges $427,081 $435,440 $274,528 $277,451 $268,649
=================== ========= =========== ========== ==========
Total fixed charges shown above $203,991 $177,866 $101,363 $ 92,171 $ 85,867
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 5,315 4,901 3,065 6,025 6,243
------------------- --------- ----------- ---------- ----------
Fixed charges for ratio computation $209,306 $182,767 $104,428 $ 98,196 $ 92,110
=================== ========= =========== ========== ==========
Ratio of earnings to fixed charges 2.04 2.38 2.63 2.83 2.92
------------------- --------- ----------- ---------- ----------
</TABLE>
For purposes of computing the ratio, earnings are income before extraordinary
item 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.
<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 3RD QUARTER
1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,869,791
<OTHER-PROPERTY-AND-INVEST> 635,800
<TOTAL-CURRENT-ASSETS> 860,552
<TOTAL-DEFERRED-CHARGES> 1,029,519
<OTHER-ASSETS> 636,483
<TOTAL-ASSETS> 6,032,145
<COMMON> 1,077
<CAPITAL-SURPLUS-PAID-IN> 1,566,877
<RETAINED-EARNINGS> 14,389
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,218,110
188,950
95,933
<LONG-TERM-DEBT-NET> 1,907,866
<SHORT-TERM-NOTES> 623,532
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 67,019
0
<CAPITAL-LEASE-OBLIGATIONS> 28,452
<LEASES-CURRENT> 28,033
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,874,250
<TOT-CAPITALIZATION-AND-LIAB> 6,032,145
<GROSS-OPERATING-REVENUE> 2,829,477
<INCOME-TAX-EXPENSE> 92,106
<OTHER-OPERATING-EXPENSES> 2,533,748
<TOTAL-OPERATING-EXPENSES> 2,625,854
<OPERATING-INCOME-LOSS> 203,623
<OTHER-INCOME-NET> 38,551
<INCOME-BEFORE-INTEREST-EXPEN> 242,174
<TOTAL-INTEREST-EXPENSE> 141,881
<NET-INCOME> (170,813)
0
<EARNINGS-AVAILABLE-FOR-COMM> (170,813)
<COMMON-STOCK-DIVIDENDS> 91,737
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 399,068
<EPS-BASIC> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
