CONECTIV INC, 10-K, 1999-03-26

CONECTIV INC
10-K, 1999-03-26
ELECTRIC & OTHER SERVICES COMBINED

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 1998

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 1-13895

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CONECTIV
(Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
Delaware 51- 0377417
<S> <C>
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>

800 King Street, P. O. Box 231
Wilmington, Delaware 19899
(Address of principal executive offices)

Registrant's telephone number (302) 429-3114

----------------

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common stock, $0.01 par value New York Stock Exchange
Class A common stock, $0.01 par
value New York Stock Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

----------------

Indicate by check mark whether the registrant (1) has filed all reports re-
quired 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 reg-
istrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]

The aggregate market value of Conectiv common stock and Conectiv Class A
common stock held by non-affiliates as of January 20, 1999, was $2,522.5 mil-
lion based on the New York Stock Exchange Composite Transaction closing pric-
es.

The number of shares outstanding of each class of Conectiv's common stock,
as of the latest practicable date, was as follows:

<TABLE>
<CAPTION>
Class Outstanding at January 31, 1999
----- -------------------------------
<S> <C>
Common stock, $0.01 par value 100,516,768 shares
Class A common stock, $0.01 par value 6,560,612 shares
</TABLE>

Documents Incorporated by Reference

<TABLE>
<CAPTION>
Part of Form 10-K Documents Incorporated by Reference
----------------- --------------------------------------------------------------
<S> <C>
III Portions of the Definitive Proxy Statement for the Annual
Meeting of Stockholders of Conectiv to be held March 30, 1999,
which Definitive Proxy Statement was filed with the Securities
and Exchange Commission on February 24, 1999.
</TABLE>
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Glossary................................................................... iii
</TABLE>

PART I
<TABLE>
<S> <C>
Item 1. Business
</TABLE>
<TABLE>
<S> <C>
General.................................................................. I-1
Competition and Electric Utility Industry Restructuring.................. I-2
Business Lines........................................................... I-2
Electric Delivery and Gas Delivery...................................... I-2
Generation.............................................................. I-3
Merchant................................................................ I-3
Retail Energy........................................................... I-3
Solutions............................................................... I-3
Conectiv Services, Inc.................................................. I-3
Conectiv Communications, Inc............................................ I-4
Conectiv Thermal Systems, Inc........................................... I-4
Electric Business........................................................ I-5
Installed Capacity...................................................... I-5
Electricity Supply...................................................... I-5
Pennsylvania-New Jersey-Maryland Interconnection Association............ I-6
Purchased Power......................................................... I-6
Nuclear Power Plants.................................................... I-7
Fuel Supply for Electric Generation..................................... I-9
Coal................................................................... I-9
Oil.................................................................... I-9
Gas.................................................................... I-9
Nuclear................................................................ I-9
Electric Regulatory Matters............................................. I-10
Electric Retail Rates.................................................. I-10
Off-Tariff Rates....................................................... I-10
Electric Energy Adjustment Clauses..................................... I-11
New Jersey Electric Distribution Service Reliability and Quality
Standards............................................................. I-12
New Jersey Demand Side Management...................................... I-12
New Jersey Public Utility Fault Determination Act...................... I-12
Gas Business............................................................. I-12
Deregulation............................................................ I-12
Gas Operations.......................................................... I-13
Gas Regulatory Matters.................................................. I-13
Other Regulatory Matters................................................. I-13
Special Contract Rate Tariffs........................................... I-13
Cost Accounting Manual/Code of Conduct.................................. I-13
Affiliated Transactions................................................. I-14
Federal Decontamination & Decommissioning Fund.......................... I-14
Capital Spending and Financing Program................................... I-14
Environmental Matters.................................................... I-15
Air Quality Regulations................................................. I-15
Water Quality Regulations............................................... I-16
Hazardous Substances.................................................... I-17
Executive Officers....................................................... I-17
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
Item 2. Properties................................................................. I-18
Item 3. Legal Proceedings.......................................................... I-20
Item 4. Submission of Matters to a Vote of Security Holders........................ I-20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... II-1
Item 6. Selected Financial Data.................................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ II-3
Item 8. Financial Statements and Supplementary Data................................ II-16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... II-55
PART III
Item 10. Directors and Executive Officers of the Registrant......................... III-1
Item 11. Executive Compensation..................................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and Management............. III-1
Item 13. Certain Relationships and Related Transactions............................. III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... IV-1
</TABLE>

<TABLE>
<S> <C>
Signatures........................................................................... IV-5
</TABLE>

ii
<PAGE>

GLOSSARY

The following glossary lists the abbreviations used in this report.

<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
1992 Energy Act............ National Energy Policy Act of 1992
ACE........................ Atlantic City Electric Company
the Act.................... The Electric Discount and Energy Competition Act
AFUDC...................... Allowance For Funds Used During Construction
Atlantic................... Atlantic Energy, Inc.
ALJ........................ Administrative Law Judge
APB........................ Accounting Principles Board
Bcf........................ Billion Cubic Feet
BGS........................ Basic Generation Service
CAM........................ Cost Accounting Manual
CCI........................ Conectiv Communications, Inc.
CICP....................... Conectiv Incentive Compensation Plan
Clean Water Act............ Federal Water Pollution Control Act
CRP........................ Conectiv Resource Partners, Inc.
CES........................ Conectiv Energy Supply, Inc.
CSI........................ Conectiv Services, Inc.
CTS........................ Conectiv Thermal Systems, Inc.
CLEC....................... Competitive Local Exchange Carrier
Conectiv Charter........... Conectiv's Restated Certificate of Incorporation
Debentures................. Junior Subordinated Debentures
D&D Fund................... Decontamination & Decommissioning Fund
DNREC...................... Delaware Department of Natural Resources and
Environmental Control
DOE........................ United States Department of Energy
DPL........................ Delmarva Power & Light Company
DPSC....................... Delaware Public Service Commission
DRIP....................... Dividend Reinvestment and Common Share Purchase Plan
DSM........................ Demand Side Management Plan
EITF....................... Emerging Issues Task Force
FASB....................... Financial Accounting Standards Board
FERC....................... Federal Energy Regulatory Commission
GAAP....................... Generally Accepted Accounting Principles
Hope Creek................. Hope Creek Nuclear Generating Station
HVAC....................... Heating, ventilation, and air conditioning
ILEC....................... Incumbent Local Exchange Carrier
IPP........................ Independent Power Producer
kWh........................ Kilowatt-hour
Litigation Reform Act...... The Private Securities Litigation Reform Act of 1995
LLRW....................... Low Level Radioactive Waste
LMP........................ Locational Marginal Pricing
LTIP....................... Long-Term Incentive Plan
Mcf........................ Thousand Cubic Feet
</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
MD&A.................... Management's Discussion and Analysis of Financial Condition
and Results of Operations
Merger.................. A series of merger transactions by which DPL and ACE became
subsidiaries of Conectiv
Mortgage................ Mortgage and Deed of Trust
MTCC.................... Midtown Thermal Control Center
MPSC.................... Maryland Public Service Commission
MW...................... Megawatt
MWH..................... Megawatt-hour
NERC.................... North American Electric Reliability Council
NJBPU................... New Jersey Board of Public Utilities
NJDEP................... New Jersey Department of Environmental Protection
NJPDES.................. New Jersey Pollution Discharge Elimination System
NOTR.................... Northeast Ozone Transport Region
NOx..................... Oxides of Nitrogen
NPDES................... National Pollution Discharge Elimination System
NRC..................... Nuclear Regulatory Commission
NWPA.................... Nuclear Waste Policy Act of 1982
ODEC.................... Old Dominion Electric Cooperative
PARS.................... Performance Accelerated Restricted Stock
PASO.................... Performance Accelerated Stock Options
Peach Bottom............ Peach Bottom Atomic Power Station
PECO.................... PECO Energy Company
Petron.................. Petron Oil Corporation
PJM Interconnection..... Pennsylvania-New Jersey-Maryland Interconnection Association
the Plan................ Conectiv Stockholder Rights Plan
PPPP.................... Power Plant Performance Program
PSE&G................... Public Service Electric and Gas Company
PUHCA................... Public Utility Holding Company Act of 1935
PURPA................... Public Utility Regulatory Policy Act of 1978
Ratepayer Advocate...... Division of the Ratepayer Advocate
RACT.................... Reasonably Available Control Technology
RISC.................... Rate Intervention Steering Committee
RTP..................... Real Time Pricing
Salem................... Salem Nuclear Generating Station
SALP.................... Systematic Assessment of Licensee Performance
SEC..................... Securities and Exchange Commission
SFAS.................... Statement of Financial Accounting Standards
SFAS No. 71............. SFAS No. 71, "Accounting For the Effects of Certain Types of
Regulation"
SFAS No. 88............. SFAS No. 88, "Employers' Accounting For Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits"
SFAS No. 128............ SFAS No. 128, "Earnings Per Share"
SFAS No. 131............ SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information"
SFAS No. 133............ SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"
SO/2/ .................. Sulfur Dioxide
</TABLE>

iv
<PAGE>

<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
TEFA.............................. Transitional Energy Facility Assessment Tax
USEPA............................. United States Environmental Protection Agency
Vienna............................ Vienna Generating Station
VRDB.............................. Variable Rate Demand Bonds
VSCC.............................. Virginia State Corporation Commission
Westinghouse...................... Westinghouse Electric Corporation
</TABLE>

v
<PAGE>

PART I

Item 1. Business

General

On March 1, 1998, Conectiv became a holding company after a series of merger
transactions between Delmarva Power & Light Company (DPL), Atlantic Energy,
Inc. (Atlantic), Conectiv, Inc., and DS Sub, Inc. (the Merger). As a result of
the Merger, Atlantic ceased to exist and DPL, Atlantic City Electric Company
(ACE), and the nonutility subsidiaries formerly held separately by DPL and At-
lantic became wholly-owned subsidiaries of Conectiv. (For additional informa-
tion about the Merger, refer to Note 4 to Conectiv's 1998 Consolidated Finan-
cial Statements included in Item 8 of Part II.) DPL and ACE are regulated pub-
lic utilities which supply and deliver electricity to their customers; DPL
also supplies and delivers natural gas to its customers. DPL and ACE hold the
franchises necessary to provide regulated utility services in their service
territories. As used in this document, references to Conectiv may mean the ac-
tivities of one or more subsidiaries.

Conectiv is a registered holding company under the Public Utility Holding
Company Act of 1935, as amended (PUHCA). PUHCA imposes certain restrictions on
the operations of registered holding companies and their subsidiaries. Pursu-
ant to PUHCA regulations, Conectiv formed a subsidiary service company,
Conectiv Resource Partners, Inc. (CRP). CRP provides a variety of support
services to Conectiv subsidiaries, and its employees are primarily former DPL
and ACE employees. The costs of CRP are directly assigned, distributed and al-
located to the Conectiv subsidiaries using CRP's services, including DPL and
ACE.

DPL and ACE generate, purchase, deliver and sell electricity in connection
with serving approximately 944,100 customers within their regulated service
territories. DPL serves approximately 455,300 electric customers within its
service territory, which has a population of approximately 1.2 million and
covers an area of about 6,000 square miles on the Delmarva Peninsula (Delaware
and portions of Maryland and Virginia). DPL also sells electricity outside its
service territory (off-system), and in markets that are not subject to price
regulation. ACE serves approximately 488,800 customers within its service ter-
ritory, which covers an area of about 2,700 square miles in the southern one-
third of New Jersey and has a population of approximately 850,000.

DPL provides regulated gas service (supply and/or transportation) to approx-
imately 105,700 customers located in a service territory which has a popula-
tion of approximately 485,000 and covers an area of about 275 square miles in
northern Delaware, including the City of Wilmington. DPL also sells gas off-
system and in markets which are not subject to price regulation.

DPL's utility business is subject to regulation with respect to its retail
electric sales by the Delaware Public Service Commission (DPSC), Maryland Pub-
lic Service Commission (MPSC), and the Virginia State Corporation Commission
(VSCC). ACE's utility business is subject to regulation with respect to its
retail electric sales by the New Jersey Board of Public Utilities (NJBPU). The
Federal Energy Regulatory Commission (FERC) also has regulatory authority over
certain aspects of DPL's and ACE's electric utility businesses, including the
transmission of electricity, the sale of electricity to municipalities and
electric cooperatives, and interchange and other purchases and sales of elec-
tricity involving other utilities. DPL and ACE are also subject to regulation
by the Pennsylvania Public Utility Commission in limited respects concerning
property and operations in Pennsylvania.

Conectiv's nonutility subsidiaries' principal businesses are as follows:
heating, ventilation, and air conditioning (HVAC) construction and services;
telecommunications, including local and long-distance phone services; con-
struction and operation of thermal energy systems; power plant operations; and
sales of petroleum products. In addition, the nonutility subsidiaries are in-
volved in cogeneration power projects, real estate, leveraged leases, invest-
ments in energy-related technology growth companies, and gas marketing. The
net assets of Conectiv's nonutility subsidiaries represented approximately
9.5% of Conectiv's common stockholders' equity as of December 31, 1998.

I-1
<PAGE>

The sources of Conectiv's 1998 consolidated revenues were as follows: regu-
lated electricity sales-62.5%; non-regulated electricity sales-9.3%; regulated
gas sales-3.5%; non-regulated gas sales-13.9%; and other services-10.8%. The
regulated electric retail business currently provides most of Conectiv's earn-
ings. In 1998, Conectiv's consolidated regulated electric retail revenues were
earned from the following customer classes: residential-45.0%; commercial-
38.1%; industrial-15.9%; and other-1.0%.

At December 31, 1998, Conectiv had 4,565 employees, including 1,677 employ-
ees represented by collective bargaining labor organizations. About 1,190 of
Conectiv's 4,565 employees work in Conectiv's HVAC and telecommunications
businesses.

For information concerning Conectiv's business segments, see Note 20 to
Conectiv's 1998 Consolidated Financial Statements included in Item 8 of Part
II.

Competition and Electric Utility Industry Restructuring

For information concerning restructuring the electric utility industry in
New Jersey, Delaware, Maryland, and Virginia, see Note 6 to Conectiv's 1998
Consolidated Financial Statements included in Item 8 of Part II.

Generally, with restructuring, the supply component of the price charged to
a customer for electricity will be deregulated, and electricity suppliers will
compete to supply electricity to customers. Customers will continue to pay the
local utility a regulated price for delivery of electricity over the transmis-
sion and distribution system. As electric utility industry restructuring is
implemented in DPL's, ACE's, and other utilities' service territories, gross
margins earned from supplying electricity are expected to decrease as competi-
tion to supply customers with electricity increases. Electric utility custom-
ers in New Jersey may choose an electric supplier beginning August 1, 1999,
based on the recently enacted Electric Discount and Energy Competition Act
(the Act). Delaware legislation is expected to be enacted which would begin
phasing-in choice of electricity suppliers to customers beginning October 1,
1999. In Maryland, competition to supply electric customers is expected to be
phased in beginning July 3, 2000, over a 3 year period. In Virginia, retail
electric competition is expected to be phased-in beginning January 1, 2002.

Concurrent with the transition caused by electric utility industry restruc-
turing, Conectiv has invested in the establishment and growth of new business-
es, with the objective of providing new sources of earnings. Conectiv and its
subsidiaries have also gained valuable business experience by participation in
non-regulated energy markets during the past several years. In the future, a
larger percentage of Conectiv's revenues are expected to be earned from busi-
nesses not subject to price regulation. As the unregulated component of
Conectiv's businesses grows, financial risks and rewards, and the volatility
of earnings are expected to increase. Conectiv's ability to continue reducing
costs by streamlining operations, regulatory decisions pursuant to state re-
structuring initiatives, success of Conectiv's new businesses, retention of
existing customers and the ability to gain new customers are significant de-
terminants of Conectiv's future success.

Business Lines

Conectiv's internal organization is organized around the business lines de-
scribed below.

Electric Delivery and Gas Delivery

The Electric Delivery and Gas Delivery business lines are responsible for
the transmission and distribution of electricity and natural gas to customers
within Conectiv's service territories. Delivery services are structured into
various forms of price regulated offers, some including energy supply, so that
customers may choose the combination that provides the best value. As restruc-
turing of the electric utility industry is implemented, there will be opportu-
nities to serve new customers in the form of intermediate marketers, wholesal-
ers, bundled services providers, and energy service companies. As delivery
service providers, Electric Delivery and Gas Delivery will contract with en-
ergy suppliers to deliver energy across Conectiv's electric and natural gas
transmission and distribution systems.

I-2
<PAGE>

Generation

The Generation business line manages the operations of Conectiv's wholly-
owned electric generating units and Conectiv's interests in jointly-owned
electric generating units. Generation's primary business activities are power
plant operations, planned and unplanned maintenance, outage planning and exe-
cution, capital project planning and execution, and assurance of environmental
compliance.

As restructuring of the electric utility industry is implemented across the
region in which Conectiv operates, Conectiv expects to sell some of its gener-
ating units. Conectiv has identified certain generating assets that may be
sold, but has not determined when such sale, or sales, would occur.

Merchant

The Merchant business line manages the output of Conectiv's energy supply
assets, primarily through energy trading, including risk management and bulk
energy-marketing activities. The Merchant business buys and sells electricity,
natural gas, and petroleum products. Most of the Merchant business' customers
are located in the Mid-Atlantic region.

The Merchant business actively participates in the wholesale energy markets
to support wholesale utility and competitive retail marketing activities. En-
ergy market participation results in exposure to commodity market risk when,
at times, net open energy commodity positions are created or allowed to con-
tinue. To the extent that the Merchant business has net open positions, con-
trols are in place that are intended to keep risk exposures within certain
management approved risk tolerance levels.

Retail Energy

During 1998 and 1997, the retail energy business was conducted through DPL
under the tradename, "Conectiv Energy." The retail energy business involves
the sale of natural gas, electricity and energy-related products and services
to residential and commercial customers in competitive markets within the Mid-
Atlantic region. Retail customers' favorable response to the Conectiv brand
coupled with competitive commodity prices have been a key to acquiring new
customers in competitive markets. In 1998, Conectiv Energy added over 45,000
new customers, primarily located in Southeast Pennsylvania and the Maryland
suburbs of Washington D.C. Close to 15,000 of these new customers are small
commercial enterprises. The costs associated with acquiring new customers, the
timing of the opening of new markets, the gross margin on commodity sales and
the regulations governing the transition to competition are all critical to
the success of this business.

Solutions

Solutions provides large commercial and industrial customers with energy and
energy-related products and services designed to satisfy customer needs for
occupant comfort, reliability, and cost effectiveness. Solutions also provides
electric consulting services, mechanical consulting services, energy manage-
ment and controls services, and energy procurement services.

Conectiv Services, Inc. (CSI)

CSI is a full-service HVAC business operating in the Mid-Atlantic region.
Since CSI was formed in 1996 it has developed its HVAC business by acquiring
other established HVAC businesses. CSI provides commercial customers with me-
chanical HVAC/piping construction and installation, design services, sheet
metal fabrication, refrigeration services, preventative maintenance and repair
services. CSI offers residential services such as HVAC installation, mainte-
nance, repair and related plumbing services. The regional HVAC and plumbing
industry is highly competitive, fragmented, and rapidly consolidating. The
sales and earnings of the HVAC businesses are affected by construction cycles
and weather conditions.

I-3
<PAGE>

Conectiv Communications, Inc. (CCI)

During 1998, CCI operated as a full service telecommunications company pro-
viding local, regional and long distance voice and data services to business
and residential customers in a 100-mile region around Wilmington, Delaware.
CCI launched its services in Pennsylvania and Delaware in November 1997 and in
New Jersey and Maryland in May 1998. CCI owns and operates a fiber optic net-
work of more than 600 miles, and has collacted its equipment in 35 Bell Atlan-
tic Central Offices in order to provide facilities-based services through a
65,000 line Nortel DMS-500 switch. In the areas where CCI does not yet have
its own facilities, CCI resells Bell Atlantic local and Frontier long distance
services.

In 1998, over 20,000 new customers signed up for service with CCI. CCI be-
lieves that consumers are choosing CCI because of CCI's promise of superior
customer care, product flexibility, ability to provide local and long distance
services, and lower pricing. Most residential and business customers ordering
service from CCI have chosen local and long distance service.

CCI has general tariffs on file in Delaware, Maryland, Pennsylvania, and New
Jersey which detail the pricing and descriptions of each service offering.
These tariffs are based on a market pricing system rather than the traditional
cost-of-service based model. Tariff filings have also been made with the Fed-
eral Communications Commission for the provision of domestic and international
long distance services.

Conectiv Thermal Systems, Inc. (CTS)

CTS develops, constructs, and operates thermal energy systems which provide
heating, cooling, and other energy services to large commercial, industrial,
and institutional consumers. CTS enters into long-term contracts with its cus-
tomers who pay CTS for the heating, cooling, and other energy services pro-
vided by the thermal energy systems constructed, owned, and operated by CTS.
CTS believes that the potential market for thermal energy projects in the con-
tinental United States is extensive. Targeted customer segments include
hotels/casinos, convention centers, commercial real estate, large retail
malls, industrials, hospitals, universities, and governmental entities.

CTS owns and operates the Midtown Thermal Control Center (MTCC), a district
heating and cooling system built by CTS which serves eight customers, princi-
pally hotels/casinos, located in the midtown region of Atlantic City. The MTCC
began commercial operations on January 1, 1998. CTS also has 50% interests in
two other thermal energy system projects. The "Venetian" project, currently
under construction, will provide heating, cooling, and back-up electric gener-
ation to a 3000-room hotel/casino, exposition center, and retail mall and en-
tertainment complex in Las Vegas, Nevada. The other 50%-owned project has been
operational for over a year, providing heating, cooling, and other energy
services to the Dreamworks Animation Studio located in Glendale, California.
CTS is also currently negotiating a comprehensive energy services agreement
with the Griffis Air Force Base Redevelopment Authority, is involved in devel-
oping a central energy plant which would serve a planned large exposition and
entertainment complex, and is soliciting various other proposals to the
targeted customer segments discussed above.

I-4
<PAGE>

Electric Business

Installed Capacity

The megawatts (MW) of net installed summer electric generating capacity
available to DPL and ACE to serve their peak loads as of December 31, 1998,
are presented below. See Item 2, Properties, for additional information.

<TABLE>
<CAPTION>
Consolidated
Sources of Capacity DPL ACE Conectiv
------------------- ----- ----- ------------
<S> <C> <C> <C>
Coal-fired generating units...................... 1,153 471 1,624
Oil-fired generating units....................... 598 295 893
Combustion turbines/combined cycle generating
units........................................... 674 524 1,198
Nuclear generating units......................... 328 380 708
Diesel units..................................... 23 9 32
Long-term purchased capacity..................... 237 828 1,065
Customer-owned capacity.......................... 57 -- 57
----- ----- -----
Subtotal......................................... 3,070 2,507 5,577
Short-term purchased capacity.................... 449 9 458
----- ----- -----
Total............................................ 3,519 2,516 6,035
===== ===== =====
</TABLE>

The net generating capacity available for operations at any time may be less
than the total net installed generating capacity due to generating units being
out of service for inspection, maintenance, repairs, or unforeseen circum-
stances.

DPL's and ACE's demand-side management programs provide peak load reduction
capability of 302 MW in total.

Electricity Supply

As members of the Pennsylvania-New Jersey-Maryland Interconnection Associa-
tion (PJM Interconnection), DPL and ACE are obligated to maintain capacity
levels based on their allocated shares of estimated aggregate PJM Interconnec-
tion capacity requirements. (The PJM Interconnection is discussed on page I-
6.) DPL and ACE periodically update their forecasts of peak demand and PJM In-
terconnection reserve requirements, and re-evaluate resources available to
supply projected growth. Any short-term capacity deficiencies related to obli-
gations to the PJM Interconnection are expected to be satisfied through short-
term capacity-only purchases. Incremental energy supply needs are expected to
be filled through purchased power.

DPL's peak load in 1998 was 3,085 MW on July 23, an 8.0% increase from DPL's
previous historical peak demand of 2,857 MW which occurred on July 15, 1997.
ACE experienced its highest historical peak demand of 2,162 MW on July 22,
1998, which was 1.6% above the previous peak demand of 2,127 MW recorded on
August 16, 1997. The capacity obligation to the PJM Interconnection, including
a reserve margin, is based on normal weather conditions and full implementa-
tion of demand-side management programs. Under these conditions, DPL's and
ACE's 1998 peak demands would have been approximately 2,952 MW and 2,115 MW,
respectively. Installed capacities at the time of their peaks were 3,481 MW
for DPL and 2,501 for ACE, which resulted in reserve margins (computed under
PJM Interconnection guidelines) of 18% for DPL and ACE. DPL's and ACE's re-
serve obligations to the PJM Interconnection are approximately 18% and 20%,
respectively.

In 1998, kilowatt-hour (kWh) output for load within ACE's and DPL's combined
service territories was provided by 35% net purchased power, 31% coal genera-
tion, 21% nuclear generation, and 13% oil and gas generation.

I-5
<PAGE>

Pennsylvania-New Jersey-Maryland Interconnection Association

As members of the PJM Interconnection, DPL's and ACE's generation and trans-
mission facilities are operated on an integrated basis with other electricity
suppliers in Pennsylvania, New Jersey, Maryland, and the District of Columbia,
and are interconnected with other major utilities in the United States. This
power pool improves the reliability and operating economies of the systems in
the group and provides capital economies by permitting shared reserve require-
ments. The PJM Interconnection's installed capacity as of December 31, 1998,
was 57,551 MW. The PJM Interconnection's peak demand during 1998 was 48,663 MW
on August 15, which resulted in a summer reserve margin of 18.2% (based on in-
stalled capacity of 57,511 MW on that date).

On October 15, 1998, the PJM Interconnection began operating a centralized
capacity credit market, providing a new option to participants for procuring
and selling surplus capacity to meet reliability obligations within the PJM
Interconnection region. Capacity is the capability to produce electric power,
typically from owned generation or third-party purchase contracts and differs
from the electric energy markets, which trade the actual energy being generat-
ed. This market facilitates the selling and buying of capacity for partici-
pants by providing a single point of contact for market participants and a
published capacity market clearing price.

Effective April 1, 1998, the PJM Interconnection implemented locational mar-
ginal pricing (LMP) to establish the market clearing prices for electric en-
ergy and to price electric transmission usage based upon costs associated with
transmission system congestion. When there is no congestion on the power sys-
tem and energy is flowing on the grid in an unconstrained manner, energy
prices are cleared at the highest bid accepted by the PJM Interconnection for
the entire PJM Interconnection region. When a limit is reached on the trans-
mission grid, the PJM Interconnection will operate generators to preserve sys-
tem reliability. LMP allows the PJM Interconnection to send price signals to
raise and lower generator output when the power flows are constrained. Differ-
ent energy market clearing prices are paid by wholesale power buyers and sell-
ers on the power grid that reflect the value relative to a system constraint.
LMP provides for an efficient allocation of congestion costs to transmission
users within the PJM Interconnection region. The FERC has approved the use of
the LMP congestion management system to allow electric energy market partici-
pants with power contracts on neighboring electric systems to compensate the
PJM Interconnection for any unintended flows on the PJM Interconnection sys-
tem, rather than forcing those participants to curtail their contracts.

Currently, the PJM Interconnection Operating Agreement requires bids to sell
electricity received from generation located within the PJM Interconnection
control area not to exceed the variable cost of producing such electricity.
Transactions that are bid into the PJM pool from generation located outside
the PJM Interconnection control area are capped at $1,000 per megawatt hour.
All power providers are paid the LMP set through power providers' bids. Cer-
tain PJM Interconnection members have requested that FERC revise the PJM In-
terconnection Operating Agreement to allow the submission of market based bids
to the PJM Interconnection energy market.

Purchased Power

In conjunction with its acquisition of Conowingo Power Company in 1995, DPL
purchases from PECO Energy Company (PECO) 237 MW of base-load capacity and as-
sociated energy, which increases to 279 MW by 2006 when the contract expires.
DPL is also currently purchasing 105 MW of capacity under one-year contracts
and 344 MW of capacity through agreements with terms of less than one year.

The Public Utility Regulatory Policy Act of 1978 (PURPA) established a class
of nonutility power suppliers, known as independent power producers (IPPs),
and required electric utilities to purchase the excess power from IPPs. As a
result of PURPA, ACE has long-term contracts with four IPPs for the purchase
of 659 MW of capacity and energy. In view of electric utility industry re-
structuring, various parties continue to seek the repeal of PURPA; however,
federal action with regard to PURPA is not likely to affect ACE's IPP con-
tracts.

I-6
<PAGE>

ACE's NJBPU-approved IPP contracts are shown below.

<TABLE>
<CAPTION>
MW Date of
Project Location Fuel Type Provided Commercial Operation
---------------- ----------- -------- --------------------
<S> <C> <C> <C>
Chester, Pennsylvania............. solid waste 75 September 1991
Pedricktown, New Jersey........... gas 116 March 1992
Carney's Point, New Jersey........ coal 249 March 1994
Logan Township, New Jersey........ coal 219 September 1994
---
Total......................... 659
===
</TABLE>

ACE is also currently purchasing 125 MW of capacity and energy from PECO un-
der a contract which ends May 31, 2000. This agreement replaced a terminated
agreement with Pennsylvania Power & Light Company, effective March 1998. ACE
also contracts with other electric suppliers on an as-needed basis for the
purchase of short-term generating capacity, energy and transmission capacity.

Nuclear Power Plants

DPL's nuclear capacity is provided by Peach Bottom Atomic Power Station
(Peach Bottom) Units 2 and 3 and by Salem Nuclear Generating Station (Salem)
Units 1 and 2. ACE's nuclear capacity is provided by Peach Bottom, Salem, and
the Hope Creek Nuclear Generating Station (Hope Creek). Peach Bottom is lo-
cated in York County, Pennsylvania, is operated by PECO, and has a summer ca-
pacity of 2,186 MW. Public Service Electric and Gas (PSE&G) operates Salem and
Hope Creek, which are located adjacent to each other in Salem County, New Jer-
sey, and have summer capacities of 2,212 MW and 1,031 MW, respectively.

DPL's and ACE's shares of MW capacity and ownership interests in the nuclear
power plants are shown below.

<TABLE>
<CAPTION>
Consolidated
Plant DPL ACE Conectiv
----- ---- ---- ------------
<S> <C> <C> <C>
Peach Bottom
Share of MW....................................... 164 164 328
Ownership %....................................... 7.51% 7.51% 15.02%
Salem
Share of MW....................................... 164 164 328
Ownership %....................................... 7.41% 7.41% 14.82%
Hope Creek
Share of MW....................................... -- 52 52
Ownership %....................................... -- 5.00% 5.00%
</TABLE>

DPL's and ACE's ownership interests in nuclear power plants provided approx-
imately 12% of Conectiv's total installed capacity as of December 31, 1998. In
1998, output from the jointly-owned nuclear power plants provided 21% of the
electricity used by Conectiv's customers. See Note 22 to Conectiv's 1998 Con-
solidated Financial Statements, included in Item 8 of Part II, for information
about its investment in jointly-owned generating stations.

The operation of nuclear generating units is regulated by the Nuclear Regu-
latory Commission (NRC). Such regulation requires that all aspects of plant
operation be conducted in accordance with NRC safety and environmental re-
quirements and that continuous demonstrations be made to the NRC that plant
operations meet applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating unit may operate.

I-7
<PAGE>

As a by-product of nuclear operations, nuclear generating units produce low-
level radioactive waste (LLRW). LLRW is accumulated on-site until shipped to a
federally licensed permanent disposal facility. Salem, Hope Creek, and Peach
Bottom have on-site interim storage facilities with five-year storage capaci-
ties.

For a discussion of the cycle of production, use and disposal of nuclear fu-
el, see "Nuclear" on page I-9.

For a discussion of funding DPL's and ACE's shares of the estimated future
cost of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear reac-
tors, see Note 9 to Conectiv's 1998 Consolidated Financial Statements included
in Part II, Item 8.

The NRC is requiring nuclear plant operators to report by July 1, 1999, that
their nuclear power plants are Year 2000 ready, or will be Year 2000 ready, by
January 1, 2000. PSE&G and PECO have informed DPL and ACE that they are on
schedule to meet the July 1, 1999 response date and that their nuclear opera-
tions' Year 2000 programs will make Salem, Hope Creek, and Peach Bottom Year
2000 ready by January 1, 2000.

Salem Units 1 and 2 were removed from operation by PSE&G in the second quar-
ter of 1995 due to operational problems, and maintenance and safety concerns.
Due to degradation of a significant number of tubes in the Unit 1 steam gener-
ators, PSE&G replaced the Unit 1 steam generators. After receiving NRC autho-
rization, PSE&G returned Unit 2 to service on August 30, 1997, and Unit 1 to
service on April 17, 1998. On July 29, 1998, the NRC removed Salem from its
"watch list" of troubled nuclear plants. The Salem Unit 2 steam generators
will be inspected for tube degradation in upcoming outages.

See Note 18 to Conectiv's 1998 Consolidated Financial Statements included in
Part II, Item 8, for information concerning DPL's and ACE's lawsuit against
Westinghouse Electric Corporation, the designer and manufacturer of the Salem
steam generators, and the financial impact of the outages.

Systematic Assessment of Licensee Performance (SALP) reports issued by the
NRC rate licensee performance in four assessment areas: Operations, Mainte-
nance, Engineering and Plant Support. Ratings range from a high of "1" to a
low of "3." In September 1998, the NRC issued a SALP Report on the performance
of activities at Salem for the period March 1, 1997, to August 1, 1998. Salem
received a rating of 1 in Operations, a 2 in Maintenance, a 2 in Engineering,
and a 1 in Plant Support. The NRC noted that the overall performance at Salem
improved, as demonstrated by a nearly event-free return of both units to oper-
ation following the extended outage.

On June 8, 1998, the NRC issued a SALP report on Hope Creek for the period
November 10, 1996, to May 16, 1998. Hope Creek received a rating of 2 in the
areas of Operations, Maintenance, and Engineering, and a rating of 1 in the
area of plant support. The NRC noted improved performance in all functional
areas during the period.

On July 17, 1997, the NRC issued a SALP report on Peach Bottom for the pe-
riod October 15, 1995, to June 7, 1997. Peach Bottom received a rating of 1 in
the areas of Operations, Maintenance, and Plant Support, and 2 in Engineering.

On September 16, 1998, the NRC announced that it was suspending the SALP re-
port process until it completes a review of its nuclear power plant perfor-
mance assessment process. The SALP process has not yet been resumed or re-
placed.

I-8
<PAGE>

Fuel Supply for Electric Generation

DPL's and ACE's electric generating capacity by fuel type are shown under
"Installed Capacity" on page I-5. To facilitate the purchase of adequate
amounts of fuel at reasonable prices, DPL and ACE contract with various sup-
pliers of coal, oil, and natural gas on both a long- and short-term basis.
DPL's long-term coal contracts generally contain provisions for periodic and
limited price adjustments, which are based on current market prices. Oil and
natural gas contracts generally are of shorter term with prices determined by
market-based indices.

Coal

Conectiv's coal fired generation includes DPL's wholly-owned Edge Moor Units
3 and 4 and the Indian River Station, and ACE's wholly-owned B.L. England
Units 1 and 2 and Deepwater Unit 6. Coal is also the fuel source for the Key-
stone and Conemaugh generating plants, in which DPL and ACE have ownership in-
terests. During 1998, 47% of DPL's coal supply was purchased under contracts
less than three years in duration, 48% under long-term contracts (up to ten
years), and the balance on the spot market. During 1998, 92% of ACE's coal
supply was purchased under long-term contracts (up to ten years) and the bal-
ance was purchased on the spot market. Approximately 69% and 56% of DPL's and
ACE's respective projected coal requirements are expected to be provided under
supply contracts. DPL and ACE do not anticipate any difficulty in obtaining
adequate amounts of coal at reasonable prices.

Oil

Currently, 100% of the residual oil used in DPL's Edge Moor Unit 5 is pur-
chased on a spot basis. Natural gas is used when economically feasible. A two-
year residual oil supply contract that expires in 1999 provides 90% to 100% of
the fuel supply requirements for DPL's Vienna Generating Station (Vienna). Any
amount over 90% of Vienna's requirements may be purchased in the spot market.
All of the residual oil used in ACE's B.L. England Unit 3 and Deepwater Unit 1
is supplied under a three-year contract that expires October 31, 2000. Another
three-year contract which expires October 31, 2000, provides all of the dis-
tillate oil supply for ACE's combustion turbines.

Gas

Natural gas is the primary fuel for the three combustion turbines for DPL's
Hay Road combustion turbines and a secondary fuel for DPL's Edge Moor Units 3,
4, and 5. Natural gas for these DPL generating units is purchased on a firm or
interruptible basis from suppliers such as marketers, producers, and utili-
ties. The secondary fuel for DPL's Hay Road combustion turbines is low-sulfur
diesel fuel, which is purchased in the spot market. Six of ACE's combustion
turbines use natural gas as a primary fuel source and ACE's Deepwater Units 1
and 6 use natural gas as secondary fuel. Natural gas for ACE's gas-fired gen-
erating units is primarily purchased from the local gas distribution company
on a firm basis and is also purchased from other suppliers such as marketers,
producers, and utilities. Natural gas is delivered to both DPL and ACE through
the interstate pipeline system under contracts that are a mix of long-term
firm, short-term firm, and interruptible contracts.

Nuclear

The supply of fuel for nuclear generating units involves the mining and
milling of uranium ore to uranium concentrate, conversion of the uranium con-
centrate to uranium hexaflouride, enrichment of the uranium hexaflouride gas,
conversion of the enriched gas to fuel pellets, and fabrication of fuel assem-
blies. After spent fuel is removed from a nuclear reactor, it is placed in
temporary storage for cooling in a spent fuel pool at the nuclear station
site. The federal government has an obligation for the transportation and ul-
timate disposal of the spent fuel, as discussed below.

I-9
<PAGE>

PSE&G has informed DPL and ACE that it has several long-term contracts with
uranium ore operators, converters, enrichers and fabricators to process ura-
nium ore to uranium concentrate to meet the currently projected requirements
for Salem. PSE&G has also informed ACE that it has similar contracts to sat-
isfy the fuel requirements of Hope Creek. DPL and ACE have also been advised
by PECO that it has contracts similar to PSE&G's contracts to satisfy the fuel
requirements of Peach Bottom. Currently, there is an adequate supply of nu-
clear fuel for Salem, Hope Creek, and Peach Bottom.

In conformity with the Nuclear Waste Policy Act of 1982 (NWPA), PSE&G and
PECO have entered into contracts with the United States Department of Energy
(DOE) on behalf of the joint owners providing that the federal government
shall for a fee take title to, transport, and dispose of spent nuclear fuel
and high level radioactive waste from the Salem, Hope Creek, and Peach Bottom
reactors. In accordance with the NWPA, DPL and ACE pay the DOE one-tenth of
one cent per kWh of nuclear generation (net of station use) for the future
cost of spent nuclear fuel disposal. Under the NWPA, the DOE was to begin ac-
cepting spent fuel for permanent off-site storage no later than January 1998.
However, no such repositories are in service or under construction. The DOE
has stated that it would not be able to open a permanent, high level nuclear
waste storage facility until 2010, at the earliest.

Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be
stored in reactor facility storage pools or in independent spent nuclear fuel
storage installations located at or away from reactor sites for at least 30
years beyond the licensed life for operation (which may include the term of a
revised or renewed license).

PSE&G has advised DPL and ACE that, as a result of reracking the two spent
fuel storage pools at Salem, the availability of spent fuel storage capacity
is estimated to be adequate through 2012 for Unit 1 and 2016 for Unit 2. PSE&G
has also advised ACE that the Hope Creek pool is also fully racked and it is
expected to provide adequate storage capacity until 2006. PECO has advised DPL
and ACE that spent fuel racks at Peach Bottom have storage capacity until 2000
for Unit 2 and until 2001 for Unit 3. PECO has also advised DPL and ACE that
it is constructing an on-site dry storage facility, which is expected to be
operational in 2000, to provide additional storage capacity.

Electric Regulatory Matters

Electric Retail Rates

DPL's base rates for retail electric service are subject to the approval of
the DPSC, MPSC, and VSCC. ACE's base rates for retail electric service are
subject to the approval of the NJBPU. However, the utility ratemaking process
is changing in New Jersey, Delaware, Maryland, and Virginia as discussed in
Note 6 to Conectiv's 1998 Consolidated Financial Statements included in Item 8
of Part II.

For information concerning base rate decreases related to the Merger and
base rate decreases expected in connection with electric utility industry re-
structuring, see Note 6 to Conectiv's 1998 Consolidated Financial Statements
included in Part II, Item 8. Information concerning lower New Jersey customer
rates due to corresponding New Jersey tax reductions is discussed in Note 3 to
Conectiv's 1998 Consolidated Financial Statements included in Part II, Item 8.

Off-Tariff Rates

Legislation enacted in New Jersey in July 1995 allows the NJBPU, upon peti-
tion from any electric or gas utility, to adopt a plan of regulation other
than the traditional rate-base/rate-of-return regulation. In addition, on a
case-by-case basis, the law allows utilities to petition the NJBPU for the
right to offer customers, who meet certain conditions, off-tariff, discounted
rates. Off-tariff pricing arrangements with certain ACE customers have been
arranged.

I-10
<PAGE>

For information concerning DPL's "Special Contract Rate Tariffs," see page
I-13 herein.

Electric Energy Adjustment Clauses

DPL's and ACE's regulated retail electric tariffs include energy adjustment
clauses that provide for collection from customers of fuel costs and the en-
ergy costs of purchased and net interchange power. ACE's energy adjustment
clause also provides for the collection of capacity costs incurred under pur-
chased power contracts with IPPs, which are discussed under Purchased Power on
page I-6. DPL's purchased capacity costs are generally subject to base rate
recovery. Any under- or over-collection of energy adjustment clause costs in
the current period is generally deferred until customers' rates are adjusted
to collect or return the under- or over-collection.

In January 1999, ACE filed with the NJBPU a petition requesting that the es-
timated cost of oxides of nitrogen (NOx) allowances in 1999 of $4.8 million be
included in energy adjustment clause rates. A ruling on this matter is ex-
pected during 1999. For information concerning NOx emission regulations, see
"Air Quality Regulations" on page I-15.

On April 11, 1997, the Rate Intervention Steering Committee (RISC) submitted
its brief on its appeal to the Superior Court of New Jersey in response to the
NJBPU's decision which provided for ACE's recovery (through energy adjustment
clause rates) of the cost of power purchased from IPPs. In May 1998, the Supe-
rior Court of New Jersey rejected RISC's appeal and upheld the NJBPU's deci-
sion providing for recovery of IPP purchased power costs through energy ad-
justment clause rates. In May 1998, RISC appealed the Superior Court's deci-
sion to the Supreme Court of New Jersey, which denied RISC's appeal in July
1998.

The current status or results of significant energy adjustment clause rate
issues are discussed below. As of December 31, 1998, DPL's and ACE's accrued
liabilities included amounts which are expected to adequately provide for dis-
allowances of energy adjustment clause costs and penalties related to the is-
sues discussed below.

Both Delaware and Maryland have programs that assess the overall performance
of DPL's 15 major generating units. Under the DPSC's Power Plant Performance
Program (PPPP), DPL can receive financial rewards or penalties, which will not
exceed an estimated cap of $1.7 million in 1998. The 1996 and 1997 PPPP re-
sults were not material to DPL's financial position or results of operations.
If DPL does not meet an overall system performance standard set by Maryland's
Generating Unit Performance Program, the MPSC can disallow certain fuel costs
of units that operated below their individual performance standards. DPL did
not meet the 1996 or 1997 overall system standards due principally to the Sa-
lem outage.

DPL's long-term purchased power agreement with PECO has previously been the
subject of regulatory litigation in Delaware as the result of disallowances
proposed by DPSC Staff and the Delaware Division of the Public Advocate. No
such disallowances were ordered for 1996 or 1997. Delaware's Division of the
Public Advocate has proposed a total disallowance of $17.7 million for 1998
and 1999. DPL will contest the proposed disallowance.

For information concerning ACE's nuclear performance standard, see "Other
Rate Matters" in Note 6 to Conectiv's 1998 Consolidated Financial Statements
included in Item 8 of Part II.

For information concerning replacement power costs not recovered through
customer rates due to a prolonged outage at Salem, see Note 18 to Conectiv's
1998 Consolidated Financial Statements included in Item 8 of Part II.

Energy adjustment clauses are expected to be eliminated under state electric
industry restructuring initiatives. Based on existing restructuring
initiatives in Delaware, Maryland, and Virginia, profits or losses on the en-
ergy portion of electricity sales may affect DPL's earnings after restructur-
ing becomes effective. The New Jersey energy adjustment clause is expected to
be superceded by provisions contained in the Act which permit Basic Generation
Service (BGS) suppliers full and timely recovery of their costs. The Act also
authorizes the NJBPU to allow the deferral and subsequent recovery of BGS
costs if necessary for attainment of the rate

I-11
<PAGE>

reductions required by the Act. Regulations governing BGS are expected to be
promulgated by the NJBPU prior to beginning retail choice of electricity sup-
pliers in New Jersey. For additional information concerning the Act, see Note
6 to Conectiv's 1998 Consolidated Financial Statements included in Item 8 of
Part II.

New Jersey Electric Distribution Service Reliability and Quality Standards

On December 30, 1997, the NJBPU directed its Staff to initiate an inquiry
into establishing measurable performance and reliability standards for New
Jersey electric and gas utilities. The Staff's most recent draft proposal does
not propose monetary penalties, but does require establishment of utility spe-
cific standards and contains potentially costly and burdensome reporting re-
quirements. The NJBPU is expected to review this matter in 1999.

New Jersey Demand Side Management

ACE submitted its second Demand Side Management (DSM) Plan for the period
from September 1997 through August 1998 in April 1997. The DSM Plan includes
programs that address energy conservation needs of the residential, commercial
and industrial markets. During the course of DSM Plan proceedings, New Jer-
sey's Division of the Ratepayer Advocate (Ratepayer Advocate) alleged that ACE
has been recovering more in rates for DSM programs than it is spending on such
programs. ACE's position is that the level of DSM expenditures cannot be
viewed in isolation, but must be considered in light of both the overall his-
tory of DSM expenditures under current rates, as well as ACE's overall revenue
requirement needs in a rate proceeding. The Ratepayer Advocate contends that
any over-recovery and treatment of such over-recovery should be addressed out-
side the context of a base rate proceeding. The NJBPU has not yet taken any
action on this matter. ACE cannot predict the outcome of this matter.

New Jersey Public Utility Fault Determination Act

The New Jersey Public Utility Fault Determination Act requires the NJBPU to
make a determination of fault with regard to any past or future accident at
any electric generating or transmission facility, prior to granting a
utility's request for a rate increase to cover accident-related costs in ex-
cess of $10 million. However, the law allows a utility to file for non-acci-
dent related rate increases during such fault determination hearings and to
recover contributions to federally mandated or voluntary cost-sharing plans.
The law further allows the NJBPU to authorize the recovery of certain fault-
related repair, cleanup, replacement power or damage costs, if appropriate.

Gas Business

Deregulation

Effective April 1, 1996, a restructuring of natural gas pricing and service
options enabled DPL's large and medium volume commercial and industrial cus-
tomers to purchase gas from DPL, or directly from other suppliers and make ar-
rangements for transporting gas purchased from these suppliers to their facil-
ities. DPL's transportation customers pay a fee, which may be either fixed or
negotiated, for the use of DPL's gas transmission and distribution facilities.

The restructuring mentioned above also authorized off-system gas sales and
other "nonjurisdictional merchant sales and services." Earnings from gas sales
which are off the Delmarva Peninsula and do not use DPL's gas system assets
are not required to be shared with regulated customers through lower rates.
For other off-system gas sales and nonjurisdictional merchant sales and serv-
ices, 80% of the margin (revenues net of fuel costs) earned reduces energy
rates charged to DPL's firm gas customers.

On December 1, 1998, DPL filed an application with the DPSC, seeking ap-
proval of a pilot program to provide transportation service and a choice of
gas suppliers to a group of retail customers. DPL proposed a one-year pilot
program, starting November 1, 1999, open to 15% of residential customers and
15% of small commercial customers. DPL and intervening parties are engaged in
settlement discussions about the proposed pilot program.

I-12
<PAGE>

Gas Operations

DPL purchases gas supplies from marketers and producers under spot market,
short-term, and long-term agreements. As shown in the table below, DPL's maxi-
mum 24-hour system capability, including natural gas purchases, storage deliv-
eries, and the emergency sendout capability of its peak shaving plant, is
187,074 Mcf (thousand cubic feet).

<TABLE>
<CAPTION>
Number of Expiration Daily
Contracts Dates Mcf
--------- ---------- -------
<S> <C> <C> <C>
Supply......................................... 1 2001 9,180
Transportation................................. 5 2004-2016 82,810
Storage........................................ 6 1999-2011 50,084
Local Peak Shaving (emergency capability)...... 45,000
-------
Total........................................ 187,074
=======
</TABLE>

DPL experienced an all-time daily peak in combined firm sales and transpor-
tation sendout of 158,810 Mcf on January 17, 1997. DPL's peak shaving plant
liquefies, stores, and re-gasifies natural gas in order to provide supplemen-
tal gas in the event of pipeline supply shortfalls or system emergencies.

Gas Regulatory Matters

Similar to DPL's Delaware electric energy adjustment clause, a gas cost rate
clause provides for the recovery of gas costs from DPL's regulated gas custom-
ers. Gas costs for regulated, on-system customers are charged to operations
based on costs billed to customers under the gas cost rate clause. Any under-
or over-collection of gas costs in a current period is generally deferred un-
til customers' rates are adjusted to collect or return the under- or over-col-
lection.

In 1998, DPL implemented a DPSC-approved gas price hedging/risk management
program with respect to gas supply for regulated customers. The program seeks
to limit regulated customers exposure to commodity price uncertainty. Costs
and benefits of the program are included in the gas cost rate clause, result-
ing in no effect on DPL's earnings.

Other Regulatory Matters

Special Contract Rate Tariffs

Under programs approved by the MPSC and DPSC, DPL may enter into negotiated
contracts with retail electric customers in Maryland and retail electric and
natural gas customers in Delaware. Also, "Real Time Pricing" (RTP) tariffs are
available to customers in Maryland and in Delaware, and an experimental RTP
tariff is effective in Virginia. The RTP tariffs provide additional flexibil-
ity in providing pricing and service to certain large customers.

Cost Accounting Manual/Code of Conduct

Conectiv and its subsidiaries have cost allocation and direct charging mech-
anisms in place to ensure that there is no cross-subsidization of competitive
activities by regulated utility activities. In 1998, DPL made filings with the
DPSC, the MPSC and VSCC to update and revise its Cost Accounting Manual (CAM)
to reflect the holding company structure created in 1998. The CAM is subject
to review and audit.

DPL is also subject to various Codes of Conduct that affect the relationship
between DPL's regulated and non-regulated activities. In general, these Codes
of Conduct limit information obtained through utility activities from being
disseminated to employees engaged in non-regulated activities, require sepa-
rate telephone numbers for competitive activities and restrict or prohibit
sales leads, joint sales calls, or joint promotions.

I-13
<PAGE>

Requirements that separate operational and managerial employees be main-
tained, as required by the MPSC for non-regulated activities making retail
sales of electricity or gas, could impact the way DPL and the Conectiv system
of companies are organized and DPL's ability to capture economies of common
management and deploy personnel efficiently, without duplicating personnel
functions. Prohibitions or restrictions on joint promotions may adversely im-
pact Conectiv's competitive businesses.

ACE has cost allocation and direct charging mechanisms in place to ensure
that there is no cross-subsidization of its competitive activities by regu-
lated utility activities. In accordance with the NJBPU's order which approved
the Merger, ACE filed Conectiv's CAM and the Service Agreement between ACE and
CRP with the NJBPU on October 28, 1998.

Affiliated Transactions

Certain types of transactions between DPL and ACE and their affiliates may
require the prior approval of the VSCC and the NJBPU.

Federal Decontamination & Decommissioning Fund

The Energy Policy Act of 1992 provided for creation of a Decontamination &
Decommissioning (D&D) Fund to pay for the future clean-up of DOE gaseous dif-
fusion enrichment facilities. Domestic utilities and the federal government
are required to make payments to the D&D Fund until 2008 or $2.25 billion, ad-
justed annually for inflation, is collected. The liability accrued for DPL's
and ACE's shares of the D&D Fund was $11.0 million as of December 31, 1998.
DPL and ACE are recovering this cost through energy adjustment clause reve-
nues.

Capital Spending and Financing Program

For financial information concerning Conectiv's capital spending and financ-
ing program, refer to "Liquidity and Capital Resources" in Management's Dis-
cussion and Analysis of Financial Condition and Results of Operations, in-
cluded in Item 7 of Part II, and Notes 12 to 14 to Conectiv's 1998 Consoli-
dated Financial Statements, included in Item 8 of Part II.

Conectiv's ratios of earnings to fixed charges under the SEC Method for
1994-1998 are shown below.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Conectiv's Ratio of Earnings to Fixed Charges
(SEC Method).................................... 2.38 2.63 2.83 2.92 2.85
</TABLE>

Under the SEC Method, earnings, including Allowance For Funds Used During
Construction (AFUDC), have been computed by adding income taxes and fixed
charges to net income. Fixed charges include gross interest expense, the
estimated interest component of rentals, and preferred stock dividend
requirements of subsidiaries. Preferred stock dividend requirements of
subsidiaries 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. Excluding the Merger-related pre-tax charge to
operating expenses of $27.7 million, primarily attributable to DPL and
discussed in Note 5 to Conectiv's 1998 Consolidated Financial Statements
included in Item 8 of Part II, Conectiv's 1998 ratio of earnings to fixed
charges was 2.53.

I-14
<PAGE>

DPL's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1994-1998 are shown below.
Excluding DPL's Merger-related pre-tax charge of $27.4 million, DPL's 1998
ratio of earnings to fixed charges was 3.21 and its 1998 ratio of earnings to
fixed charges and preferred stock dividends was 2.98.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
DPL's Ratio of Earnings to Fixed Charges (SEC
Method).......................................... 2.92 2.83 3.33 3.54 3.49
DPL's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method)........... 2.72 2.63 2.83 2.92 2.85
</TABLE>

ACE's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1994-1998 are shown below.
Excluding ACE's Merger-related pre-tax charges of $79.1 million in 1998 and
$22.2 million in 1997, ACE's Ratio of Earnings to Fixed Charges was 2.74 in
1998 and 3.15 in 1997, and ACE's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends was 2.55 in 1998 and 2.86 in 1997.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ACE's Ratio of Earnings to Fixed Charges (SEC
Method).......................................... 1.66 2.84 2.59 3.19 3.07
ACE's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method)........... 1.55 2.58 2.16 2.43 2.26
</TABLE>

Environmental Matters

Conectiv and its regulated utility subsidiaries, DPL and ACE, are subject to
various federal, regional, state, and local environmental regulations, includ-
ing air and water quality control, oil pollution control, solid and hazardous
waste disposal, and limitation on land use. Permits are required for construc-
tion projects and the operation of existing facilities. Conectiv has incurred,
and expects to continue to incur, capital expenditures and operating costs be-
cause of environmental considerations and requirements. Conectiv has a contin-
uing program to assure compliance with the environmental standards adopted by
various regulatory authorities.

Included in Conectiv's forecasted capital requirements are construction ex-
penditures for compliance with environmental regulations, which are estimated
to be $12 million in 1999.

Air Quality Regulations

The federal Clean Air Act requires utilities and other industries to signif-
icantly reduce emissions of air pollutants such as sulfur dioxide (SO/2/) and
oxides of nitrogen (NOx). Title IV of the Clean Air Act, the acid rain provi-
sions, established a two-phase program which mandated reductions of SO/2/ and
NOx emissions from certain utility units by 1995 (Phase I) and required other
utility units to begin reducing SO/2/ and NOx emissions in the year 2000
(Phase II). Phase I emission reduction requirements have been achieved by the
jointly-owned Conemaugh generating station and ACE's B.L. England Units 1 and
2. The remainder of DPL's and ACE's wholly- and jointly-owned fossil-fuel
units are required to comply with Phase II emission limits.

DPL's and ACE's facilities also must comply with Title I of the Clean Air
Act, the ozone nonattainment provisions, which require states to promulgate
Reasonably Available Control Technology (RACT) regulations for existing
sources located within ozone nonattainment areas or within the Northeast Ozone
Transport Region (NOTR). To comply with RACT regulations, DPL has installed
low NOx burner technology on six of its generating units. DPL's RACT compli-
ance program has not yet received final regulatory approvals by Delaware and
Maryland. The New Jersey Department of Environmental Protection (NJDEP) has
approved ACE's RACT compliance plan.

Additional "post-RACT" NOx emission regulations are being pursued by states
in the NOTR. Delaware has proposed post-RACT NOx control regulations requiring
attainment of summer seasonal emission reductions of up to 65% below 1990 lev-
els by May 1999 through reduced emissions or the procurement of NOx emission

I-15
<PAGE>

allowances. DPL 's post-RACT compliance plan for its Delaware generating units
includes capital expenditures of approximately $12 million. In New Jersey,
post-RACT NOx control regulations require attainment of summer seasonal emis-
sion reductions, of up to 65% below 1990 levels by May 1999 and 90% by 2003.
ACE anticipates spending approximately $5 to $8 million over the next five
years to achieve compliance with New Jersey's post-RACT NOx regulations.

In addition to the above requirements, the United States Environmental Pro-
tection Agency (USEPA) has proposed summer seasonal NOx controls commensurate
with reductions of up to 85% below baseline years by the year 2003 for a 22
state region, including Delaware and New Jersey. Since New Jersey will require
a greater percent reduction than the USEPA, the ACE facilities will most
likely achieve compliance with the USEPA requirement by 2003. Because Delaware
has not yet promulgated regulations to implement the reductions that the USEPA
has mandated by 2003, DPL currently cannot determine the additional operating
and capital costs that will be incurred to comply with these initiatives.

In July 1997, the USEPA adopted new federal air quality standards for par-
ticulate matter and ozone. The new particulate matter standard addresses fine
particulate matter. Attainment of the fine particulate matter standard may re-
quire reductions in NOx and SO/2/. However, under the time schedule announced
by the USEPA, particulate matter non-attainment areas will not be designated
until 2002 and control measures to meet this standard will not be identified
until 2005.

Water Quality Regulations

The federal Water Pollution Control Act, as amended (the Clean Water Act)
provides for the imposition of effluent limitations to regulate the discharge
of pollutants, including heat, into the waters of the United States. National
Pollution Discharge Elimination System (NPDES) permits issued by state envi-
ronmental regulatory agencies specify effluent limitations, monitoring re-
quirements, and special conditions with which facilities discharging
wastewaters must comply. To ensure that water quality is maintained, permits
are issued for a term of five years and are modified as necessary to reflect
requirements of new or revised regulations or changes in facility operations.

ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits
issued by the NJDEP for the Deepwater and B.L. England power stations. The
NJDEP has issued a draft revised NJPDES permit for the Deepwater station which
is currently under review. The NJPDES permit for the B.L. England station will
expire in December 1999. Application for renewal will be submitted, as re-
quired, in June 1999.

The Clean Water Act also requires that cooling water intake structures be
designed to minimize adverse environmental impact. The USEPA is required by a
consent order to propose regulations in 1999 for determining whether cooling
water intake structures represent the best technology available for minimizing
adverse environmental impacts. Final action on the proposed regulations is re-
quired in 2001.

Between 1976 and 1979, DPL submitted to the Delaware Department of Natural
Resources and Environmental Control (DNREC) the results of environmental im-
pact studies which demonstrated compliance with the Clean Water Act. DNREC has
required DPL to update its earlier studies to determine if the Indian River
and Edge Moor power plants are still in compliance. In addition, in 1993,
DNREC promulgated increased restrictions on thermal discharges. Studies as-
sessing thermal water quality standards compliance will be completed in 1999
and studies assessing impacts of the cooling water intake structures will be
completed in 2001. If the studies indicate an adverse environmental impact,
then upgrades to the intake structures and/or environmental enhancement pro-
jects to offset adverse impacts will be required. Impact studies would cost up
to $2 million per plant. Costs for intake structure upgrades and enhancement
projects would range from approximately $1 million if little adverse impact is
found, to $45 million if cooling towers are required, which DPL considers to
be an unlikely potential outcome.

PSE&G is implementing the 1994 NJPDES permit issued for the jointly-owned
Salem facility, which requires, among other things, water intake screen modi-
fications and wetlands restoration. Under the 1994 permit, PSE&G is continuing
to restore wetlands and conduct the requisite management and monitoring asso-
ciated with the special conditions of the 1994 permit. In 1999, PSE&G must ap-
ply to renew Salem's NJPDES permit.

I-16
<PAGE>

Hazardous Substances

The nature of the electric and gas utility businesses results in the produc-
tion, or handling, of various by-products and substances which may contain
substances defined as hazardous under federal or state statutes. The disposal
of hazardous substances can result in costs to clean up facilities found to be
contaminated due to past disposal practices. Federal and state statutes autho-
rize governmental agencies to compel responsible parties to clean up certain
abandoned or uncontrolled hazardous waste sites. Conectiv's exposure is mini-
mized by adherence to environmental standards for Conectiv-owned facilities
and through a waste disposal contractor screening and audit process.

As of December 31, 1998, Conectiv's other accrued liabilities included $3
million for clean-up and other potential costs related to federal and state
superfund sites. Conectiv does not expect such future costs to have a material
effect on Conectiv's financial position or results of operations. For addi-
tional information, see Note 19 to Conectiv's 1998 Consolidated Financial
Statements included in Item 8 of Part II.

Executive Officers

The names, ages, and positions of all of the executive officers of Conectiv
as of December 31, 1998, are listed below, along with their business experi-
ences during the past five years. Officers are elected annually by the Board
of Directors. There are no family relationships among these officers, nor any
arrangement or understanding between any officer and any other person pursuant
to which the officer was selected.

Executive Officers of Conectiv
(As of December 31, 1998)

<TABLE>
<CAPTION>
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
<S> <C>
Howard E. Cosgrove, 55..................... Elected 1998 as Chairman of the Board and
Chairman of the Board and Chief Chief Executive Officer of Conectiv,
Executive Officer Delmarva Power & Light Company, and
Atlantic City Electric Company. Elected
1992 as Chairman of the Board, President
and Chief Executive Officer and Director of
Delmarva Power & Light Company.
Meredith I. Harlacher, Jr., 56............. Elected 1998 as President and Chief
President Operating Officer of Conectiv, and
President and Chief Operating Officer and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1993 as Senior Vice President of Atlantic
Energy, Inc.
Barry R. Elson, 57......................... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1997 as Executive Vice President, Delmarva
Power & Light Company. Executive Vice
President, Cox Communications, Inc.,
Atlanta, Georgia, from 1995 to 1996. Senior
Vice President, Cox Enterprises/Cox
Communications, Inc., Atlanta, Georgia,
from 1984 to 1995.
Thomas S. Shaw, 51......................... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1992 as Senior Vice President, Delmarva
Power & Light Company.
</TABLE>
(continued on following page)

I-17
<PAGE>

Executive Officers of Conectiv (continued)

<TABLE>
<CAPTION>
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
<S> <C>
Barbara S. Graham, 50...................... Elected 1998 as Senior Vice President and
Senior Vice President and Chief Financial Officer of Conectiv, and
Chief Financial Officer Senior Vice President and Chief Financial
Officer and Director of Delmarva Power &
Light Company and Atlantic City Electric
Company. Elected 1994 as Senior Vice
President, Treasurer and Chief Financial
Officer, Delmarva Power & Light Company.
Vice President and Chief Financial Officer
from 1992 to 1994.

James P. Lavin, 51......................... Elected 1998 as Controller of Conectiv,
Controller and Chief Accounting Officer Delmarva Power & Light Company and Atlantic
City Electric Company. Elected 1993 as
Comptroller, Delmarva Power & Light
Company.

John C. van Roden, 49...................... Elected 1998 as Senior Vice President and
Senior Vice President and Chief Financial Officer, effective January
Chief Financial Officer* 1999, of Conectiv, Delmarva Power & Light
Company, and Atlantic City Electric
Company. Principal, Cook and Belier, Inc.,
in 1998. Senior Vice President/Chief
Financial Officer and Vice
President/Treasurer, Lukens, Inc. from 1987
to 1998.
</TABLE>
- --------
*Effective January 1999

Item 2. Properties

Substantially all utility plant and properties of DPL and ACE are subject to
liens of the Mortgages under which First Mortgage Bonds are issued.

DPL's and ACE's electric properties are located in New Jersey, Delaware,
Maryland, Virginia, and Pennsylvania. The following table sets forth the net
installed summer electric capacity available to DPL and ACE on a combined ba-
sis to serve their peak loads as of December 31, 1998.

<TABLE>
<CAPTION>
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
<S> <C> <C>
Coal-Fired
Edge Moor....................... Wilmington, DE...................... 260,000
Indian River.................... Millsboro, DE....................... 767,000
B L England..................... Beesley's Pt., NJ................... 284,000
Conemaugh....................... New Florence, PA.................... 128,000 (A)
Keystone........................ Shelocta, PA........................ 105,000 (A)
Deepwater....................... Pennsville, NJ...................... 80,000
---------
1,624,000
---------
Oil-Fired
Edge Moor....................... Wilmington, DE...................... 445,000
B L England..................... Beesley's Pt., NJ................... 155,000
Vienna.......................... Vienna, MD.......................... 153,000
Deepwater....................... Pennsville, NJ...................... 140,000
---------
893,000
---------
Combustion Turbines/Combined Cycle
Hay Road........................ Wilmington, DE...................... 511,000
Cumberland...................... Millville, NJ....................... 84,000
Sherman Avenue.................. Vineland, NJ........................ 81,000
Middle.......................... Rio Grande, NJ...................... 77,000
Carll's Corner.................. Upper Deerfield Twp, NJ............. 73,000
Cedar........................... Cedar Run, NJ....................... 68,000
</TABLE>

I-18
<PAGE>

<TABLE>
<CAPTION>
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
<S> <C> <C>
Missouri Avenue....... Atlantic City, NJ................... 60,000
Mickleton............. Mickleton, NJ....................... 59,000
Christiana............ Wilmington, DE...................... 45,000
Deepwater............. Pennsville, NJ...................... 19,000
Edge Moor............. Wilmington, DE...................... 13,000
Madison Street........ Wilmington, DE...................... 11,000
West.................. Marshallton, DE..................... 15,000
Delaware City......... Delaware City, DE................... 16,000
Indian River.......... Millsboro, DE....................... 17,000
Vienna................ Vienna, MD.......................... 17,000
Tasley................ Tasley, VA.......................... 26,000
Salem................. Lower Alloways Creek Twp., NJ....... 6,000 (A)
---------
1,198,000
---------
Nuclear
Peach Bottom.......... Peach Bottom Twp., PA............... 328,000 (A)
Salem................. Lower Alloways Creek Twp., NJ....... 328,000 (A)
Hope Creek............ Lower Alloways Creek Twp., NJ....... 52,000 (A)
---------
708,000
---------
Diesel Units
Crisfield............. Crisfield, MD....................... 10,000
Bayview............... Bayview, VA......................... 12,000
B L England........... Beesley's Pt., NJ................... 8,000
Keystone.............. Shelocta, PA........................ 700 (A)
Conemaugh............. New Florence, PA.................... 800 (A)
---------
31,500
---------
Customer-Owned Capacity Delaware City, DE 57,000 (B)
Long-term Capacity Purchases................................. 1,065,000
---------
Subtotal................................................... 5,576,500
---------
Short-term Capacity Purchases................................ 458,500
---------
Total...................................................... 6,035,000
=========
</TABLE>

(A)DPL's and ACE's portion of jointly-owned plants.
(B) Represents capacity owned by a refinery customer of DPL which is available
to DPL to serve its peak load.

On a combined basis, DPL's and ACE's electric transmission and distribution
systems includes 2,622 transmission poleline miles of overhead lines, 5 trans-
mission cable miles of underground cables, 16,350 distribution poleline miles
of overhead lines, and 6,738 distribution cable miles of underground cables.

DPL has a liquefied natural gas plant located in Wilmington, Delaware, with
a storage capacity of 3.045 million gallons and an emergency sendout capabil-
ity of 45,000 Mcf per day. DPL also owns four natural gas city gate stations
at various locations in its gas service territory. These stations have a total
sendout capacity of 125,000 Mcf per day.

I-19
<PAGE>

The following table sets forth DPL's gas pipeline miles:

<TABLE>
<S> <C>
Transmission Mains................................................. 114*
Distribution Mains................................................. 1,492
Service Lines...................................................... 1,104
</TABLE>
- --------
* Includes 11 miles of joint-use gas pipeline that is used 10% for gas opera-
tions and 90% for electric operations.

DPL, ACE, and other Conectiv subsidiaries also own and occupy a number of
properties and buildings that are used for office, service, and other purpos-
es.

Under New Jersey law, the State of New Jersey owns in fee simple for the
benefit of the public schools all lands now or formerly flowed by the tide up
to the mean high-water line, unless it has made a valid conveyance of its in-
terests in such property. In 1981, because of uncertainties raised as to pos-
sible claims of State ownership, the New Jersey Constitution was amended to
provide that lands formerly tidal-flowed, but which were not then tidal-flowed
at any time for a period of 40 years, were not to be subject to State claim
unless the State has specifically defined and asserted a claim within one year
period ending November 2, 1982. As a result, the State published maps of the
eastern (Atlantic) coast of New Jersey depicting claims to portions of many
properties, including certain properties owned by ACE. ACE believes it has
good title to such properties and will defend its title, or will obtain such
grants from the State as may ultimately be required. The cost to acquire any
such grants may be covered by title insurance policies. Assuming that all of
such State claims were determined adversely to ACE, they would relate to land,
which, together with the improvements thereon, would amount to less than 1% of
net utility plant. No maps depicting State claims to property owned by ACE on
the western (Delaware River) side of New Jersey were published within the one
year period mandated by the constitutional amendment. Nevertheless, ACE be-
lieves it has obtained all necessary grants from the State for its improved
properties along the Delaware River.

Item 3. Legal Proceedings

See Note 18 to Conectiv's 1998 Consolidated Financial Statements included in
Part II, Item 8 for information concerning DPL's and ACE's lawsuits against
Westinghouse Electric Corporation, the designer and manufacturer of the Salem
steam generators.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of the security holders of Conectiv (the holding com-
pany), through the solicitation of proxies or otherwise.

On October 14, 1998, ACE shareholders approved an amendment to ACE's Char-
ter, removing a restriction on the amount of securities representing unsecured
indebtedness issuable by ACE. For additional information, see Item 4 of ACE's
1998 Report on Form 10-K.

I-20
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Conectiv common stock and Conectiv Class A common stock are listed on the
New York Stock Exchange.

As of December 31, 1998, there were 78,600 holders of Conectiv's common
stock and 35,133 holders of Conectiv's Class A common stock.

<TABLE>
<CAPTION>
Conectiv Common stock
(1)
---------------------
1998 1997
------------------------ ------------------------
Price Price
Dividend ------------- Dividend -------------
Declared High Low Declared High Low
-------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter........... $0.38 1/2 $22 3/4 $20 7/8 $0.38 1/2 $20 3/8 $18 3/8
Second Quarter.......... 0.38 1/2 22 9/16 19 7/8 0.38 1/2 19 3/8 16 7/8
Third Quarter........... 0.38 1/2 23 1/4 19 11/16 0.38 1/2 19 17 3/16
Fourth Quarter.......... 0.38 1/2 24 1/2 21 7/8 0.38 1/2 23 7/16 18 9/16
</TABLE>

<TABLE>
<CAPTION>
Conectiv Class A common stock (2)
---------------------------------
1998
---------------------
Price
Dividend ------------
Declared High Low
-------- ---- ----
<S> <C> <C> <C>
First Quarter.................................... $0.80 $34 1/2 $29 9/16
Second Quarter................................... 0.80 36 7/8 31 11/16
Third Quarter.................................... 0.80 37 3/8 34
Fourth Quarter................................... 0.80 39 7/8 35 3/8
</TABLE>

(1) Due to the Merger, the 1998 stock price represents DPL for January and
February, and Conectiv for March through December. The 1997 stock price
represents DPL.
(2) Conectiv Class A common stock began trading on March 3, 1998.

Conectiv is in a transition caused by electric utility restructuring in New
Jersey, Delaware, Maryland, Virginia and elsewhere in the region. Conectiv
continues to invest in the establishment and growth of new businesses, with
the objective of providing new sources of earnings in anticipation of the re-
alization of lower margins on electricity sales as the generation portion of
the utility business is restructured.

During this transition, management will remain focused on maximizing total
shareholder return -- the combination of common stock price appreciation and
dividends paid. Conectiv's financial policies will continue to be reviewed pe-
riodically throughout this transition and will reflect results of operations,
financial condition, capital requirements, and other relevant considerations,
such as the progress and outcome of restructuring activities in various states
and the financial requirements of Conectiv's new competitive businesses.

II-1
<PAGE>

CONECTIV

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Operating Results and
Data
Operating Revenues...... $ 3,071,606 $ 1,415,367 $ 1,168,664 $ 1,055,725 $ 1,033,442
Operating Income........ $ 386,915(2) $ 226,294 $ 250,389 $ 254,425 $ 233,244(3)
Net Income.............. $ 153,201(2) $ 101,218 $ 107,251 $ 107,546 $ 98,940(3)
On System Electric Sales
(kWh 000)(4)........... 20,687,653 13,231,766 12,925,716 12,310,921 12,505,082
On System Gas Sold and
Transported (Mcf 000).. 21,587 22,855 22,424 21,371 20,342
Common Stock Information
Basic and Diluted
Earnings Applicable to:
Common Stock.......... $ 141,292(2) $ 101,218 $ 107,251 $ 107,546 $ 98,940(3)
Class A Common Stock.. $ 11,909 -- -- -- --
Earnings Per Share of:
Common Stock.......... $ 1.50(2) $ 1.66 $ 1.77 $ 1.79 $ 1.67(3)
Class A Common Stock.. $ 1.82 -- -- -- --
Dividends Declared Per
Share of:
Common Stock.......... $ 1.54 $ 1.54 $ 1.54 $ 1.54 $ 1.54
Class A Common Stock.. $ 3.20 -- -- -- --
Average Shares
Outstanding (000):
Common Stock.......... 94,338 61,122 60,698 60,217 59,377
Class A Common Stock.. 6,561 -- -- -- --
Year-End Stock Price:
Common Stock.......... $ 24 1/2 $ 23 1/16 $ 20 3/8 $ 22 3/4 $ 18 9/64
Class A Common Stock.. $ 39 1/2 -- -- -- --
Book Value Per Common
Share(5)................ $ 17.21 $ 15.59 $ 15.41 $ 15.20 $ 14.85
Return on Average Common
Equity.................. 8.3% 10.6% 11.4% 11.7% 11.1%
Capitalization
Variable Rate Demand
Bonds
(VRDB)(6).............. $ 125,100 $ 71,500 $ 85,000 $ 86,500 $ 71,500
Long-Term Debt.......... 1,746,562 983,672 904,033 853,904 774,558
Preferred Stock of
Subsidiaries:
Subject to Mandatory
Redemption........... 188,950 70,000 70,000 -- --
Not Subject to
Mandatory
Redemption........... 95,933 89,703 89,703 168,085 168,085
Common Stockholders'
Equity.................. 1,843,161 954,496 934,913 923,440 884,169
----------- ----------- ----------- ----------- -----------
Total Capitalization
with VRDB............... $ 3,999,706 $ 2,169,371 $ 2,083,649 $ 2,031,929 $ 1,898,312
=========== =========== =========== =========== ===========
Other Information
Total Assets............ $ 6,087,674 $ 3,015,481 $ 2,931,855 $ 2,866,685 $ 2,669,785
Long-Term Capital Lease
Obligation.............. $ 36,603 $ 19,877 $ 20,552 $ 20,768 $ 19,660
Capital Expenditures.... $ 224,831 $ 156,808 $ 165,595 $ 142,833 $ 166,938
</TABLE>
- --------
(1) As discussed in Note 4 to the Consolidated Financial Statements, Delmarva
Power & Light Company (DPL) and Atlantic City Electric Company (ACE) be-
came wholly-owned subsidiaries of Conectiv (the Merger) on March 1, 1998.
The Merger was accounted for under the purchase method of accounting, with
DPL as the acquirer. Accordingly, the 1998 Consolidated Statement of In-
come includes 10 months of operating results for ACE and other former sub-
sidiaries of Atlantic Energy, Inc.
(2) Employee separation and other Merger-related costs in 1998 decreased oper-
ating income, net income, and earnings per share by $27.7 million, $16.8
million, and $0.18, respectively.
(3) An early retirement offer in 1994 decreased operating income, net income,
and earnings per share by $17.5 million, $10.7 million, and $0.18, respec-
tively.
(4) Excludes interchange deliveries.
(5) Conectiv common stock and Conectiv Class A common stock have the same book
value per common share.
(6) Although Variable Rate Demand Bonds are classified as current liabilities,
Conectiv intends to use the bonds as a source of long-term financing as
discussed in Note 14 to the Consolidated Financial Statements.

II-2
<PAGE>

CONECTIV

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

MERGER WITH ATLANTIC

On March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic City
Electric Company (ACE) became wholly-owned subsidiaries of Conectiv (the Merg-
er). DPL common stockholders received one share of Conectiv common stock in
exchange for one share of DPL common stock, and Atlantic Energy, Inc. (Atlan-
tic) common stockholders received 0.75 of one share of Conectiv common stock
and 0.125 of one share of Conectiv Class A common stock in exchange for one
share of Atlantic common stock. Effective with the Merger, Atlantic, which
owned ACE and nonutility subsidiaries prior to the Merger, ceased to exist.
The Merger also resulted in Conectiv owning (directly or indirectly) the non-
utility subsidiaries formerly held separately by Atlantic and DPL.

As used in this document, references to Conectiv may mean the activities of
one or more subsidiary companies.

Under the purchase method of accounting, with DPL as the acquirer as of
March 1, 1998, the 1998 Consolidated Statement of Income includes ten months
of results of operations for ACE and the nonutility subsidiaries formerly
owned by Atlantic.

See Note 4 to the Consolidated Financial Statements for additional informa-
tion concerning the Merger.

EARNINGS RESULTS SUMMARY

Results of operations for 1998 include a charge for DPL employee separation
costs and other Merger-related costs of $27.7 million before taxes, $16.8 mil-
lion after taxes, or $0.18 per share. The Merger-related charge reflects cer-
tain costs associated with projected Merger-related cost savings of $500 mil-
lion over the next 10 years. Prior to the merger, DPL, Atlantic and their sub-
sidiaries had approximately 4,600 employees. Employee separation programs re-
duced the number of employees by 785.

Reported earnings applicable to Conectiv common stock were $141.3 million,
or $1.50 per average common share (94,338,000 average common shares) in 1998,
compared to $101.2 million, or $1.66 per average common share (61,122,000 av-
erage common shares) in 1997. Excluding the impact of DPL employee separation
costs and other Merger-related costs, earnings per common share for 1998 were
$1.68 versus $1.66 in 1997. The dilution resulting from Conectiv common shares
issued to Atlantic stockholders was about equal to the net earnings contrib-
uted by the former Atlantic companies. The $0.02 increase in earnings per com-
mon share (as adjusted) was attributed to 2.5% higher DPL retail electric kil-
owatt-hour (kWh) sales and lower DPL utility operating and maintenance ex-
penses, offset substantially by losses from Conectiv's investments in new
businesses and participation in the competitive retail energy markets. These
business activities resulted in a net loss of $38.3 million after taxes in
1998 compared to a net loss of $22.7 million after taxes in 1997. Earnings in
1997 also included a gain of $13.7 million after taxes from the sale of a
landfill and waste-hauling company.

Earnings applicable to Conectiv Class A common stock were $11.9 million or
$1.82 per Conectiv Class A common share in 1998. For additional information,
see Note 12 to the Consolidated Financial Statements.

Earnings per common share for 1997 were $1.66 compared to $1.77 for 1996.
The $0.11 per share earnings decrease was primarily attributed to losses from
investments in new businesses and participation in the competitive energy mar-
kets (including branding expenditures), partly offset by the gain on the sale
of the landfill and waste-hauling company. Regulated utility earnings were
relatively flat in 1997 primarily because higher net electric revenues and
lower outage expenses for the Salem nuclear generating units were offset by
anticipated higher capital costs.

II-3
<PAGE>

DIVIDENDS ON COMMON STOCK

In 1998, the Board of Directors declared a dividend on Conectiv common stock
of $1.54 per share ($0.38 1/2 per quarter) and a dividend on Conectiv Class A
common stock of $3.20 per share ($0.80 per quarter).

As discussed below, Conectiv is in a transition caused by electric utility
industry restructuring in New Jersey, Delaware, Maryland, and elsewhere in the
region. Conectiv continues to invest in the establishment and growth of new
businesses, with the objective of providing new sources of earnings in antici-
pation of the realization of lower margins on electricity sales as the genera-
tion portion of the utility business is restructured.

During this transition, management will remain focused on maximizing total
shareholder return--the combination of common stock price appreciation and
dividends paid. Conectiv's financial policies will continue to be reviewed pe-
riodically throughout this transition and will reflect results of operations,
financial condition, capital requirements, and other relevant considerations,
such as the progress and outcome of restructuring activities in various states
and the financial requirements of Conectiv's new competitive businesses.

ELECTRIC UTILITY INDUSTRY RESTRUCTURING

As discussed below, deregulation of the electric utility industry is under-
way in New Jersey, Delaware, Maryland, and Virginia. Generally, with restruc-
turing, the supply component of the price charged to a customer for electric-
ity would be deregulated, and electricity suppliers would compete to supply
electricity to customers. Customers would continue to pay the local utility a
regulated price for the delivery of the electricity over the transmission and
distribution system.

Stranded costs are costs which may not be recoverable in a competitive en-
ergy supply market due to lower prices or customers choosing a different sup-
plier. Stranded costs generally include above-market costs associated with
generation facilities or long-term purchased power agreements, and regulatory
assets. DPL and ACE have quantified stranded costs in Maryland and New Jersey
regulatory filings, respectively, and have proposed plans seeking approval for
recovery of those costs from customers during the transition to a competitive
market.

When a specific plan that deregulates electricity supply becomes final, ACE
or DPL, as appropriate, would cease applying SFAS No. 71 to its electricity
supply business in the regulatory jurisdiction to which the plan applies. To
the extent that a deregulation plan provides for recovery of stranded costs
through cash flows from the regulated transmission and distribution business,
the stranded costs would continue to be recognized as assets under SFAS No.
71. Any stranded costs (including regulatory assets) for which cost recovery
is not provided would be expensed.

The amount of stranded costs ultimately recovered from utility customers, if
any, and the full impact of legislation deregulating the electric utility in-
dustry in any of the jurisdictions in which Conectiv operates cannot be pre-
dicted. Also, the quantification of stranded costs under existing generally
accepted accounting principles (GAAP) differs from methods used in regulatory
filings. Among other differences, GAAP precludes recognition of the gains on
plants (or purchased power contracts) not impaired, but requires write down of
the plants that are impaired. Due to these considerations, market conditions,
timing, and other factors, Conectiv's management currently cannot predict the
ultimate effects that electric utility industry deregulation may have on the
financial statements of Conectiv and its subsidiaries, although deregulation
may have a material adverse effect on Conectiv's results of operations.

New Jersey

The "Electric Discount and Energy Competition Act" (the Act) was signed into
law by the Governor of New Jersey on February 9, 1999. The Act provides for
retail choice of electricity suppliers; deregulation of electric rates and
other competitive services, such as metering and billing; separation of com-
petitive and regulated services; unbundling of rates for electric service; and
licensing of electric and gas suppliers. August 1, 1999 is the effective
starting date for each utility to provide retail choice of electricity suppli-
ers to all of its customers.

II-4
<PAGE>

The Act requires each electric utility to reduce its rates by at least 5% at
the start of retail choice and by 10% within 36 months of the start of choice.
If the New Jersey Board of Public Utilities (NJBPU) determines that a rate de-
crease of more than 10% is warranted, a "just and reasonable" financial test
is applied. The mandated rate reductions must be sustained through the end of
the 48th month after choice begins. The Act requires that the rate reductions
be measured against the rates in effect on April 30, 1997. The rate reductions
mandated by the Act could have a material adverse effect upon the results of
operations of ACE and Conectiv.

In connection with the deregulation of electric rates, the Act authorizes
the NJBPU to permit electric public utilities to recover the full amount of
their stranded costs through a non-bypassable market transition charge, as
long as the mandated rate reductions are achieved. The NJBPU will determine
the utility's stranded cost amount. The NJBPU--determined stranded cost amount
will be subject to periodic recalculation and true-up over the recovery
period. The Act establishes an 8-year recovery period for stranded costs asso-
ciated with owned generation. The recovery period can be extended by the NJBPU
so as to allow for the full recovery of the stranded costs and the meeting of
mandated rate reductions. The recovery period for stranded costs associated
with purchased power contracts is to be the remainder of the contract term. In
addition, the Act would allow for the issuance of transition bonds to finance
portions of a given utility's stranded costs, as determined to be appropriate
by the NJBPU. All savings generated through the use of such transition bonds
are to be provided to the customers through rate reductions.

The Act establishes the current incumbent utility as the provider of "de-
fault service" or Basic Generation Service (BGS) for a period of 3 years. Fu-
ture proceedings will be held to determine if the provision of BGS should be
made competitive. The Act contains numerous provisions regarding the providing
of competitive services by each utility. The primary focus is to ensure that
there is no cross subsidization from the utility to competitive entities. The
NJBPU also is required to develop fair competition standards and conduct an
audit to determine that the utilities are in compliance with those standards.
The Act gives the NJBPU the authority to order a utility to divest its gener-
ating assets if it is determined through a hearing that competition or custom-
ers are being adversely affected by plant location, market power or non-com-
petitive rates. The NJBPU may require that the generation function be sepa-
rated from a utility's non-competitive functions.

The NJBPU is authorized to establish standards for the licensing of energy
suppliers, standards for switching customers from one supplier to another, and
standards for issues such as credit and collections. The Act also contains
provisions for protecting workers displaced by the impacts of the restructur-
ing of the utility industry.

Electric utilities in New Jersey, including ACE, previously filed stranded
cost estimates and unbundled rates, as required by the NJBPU. On August 19,
1998, an Administrative Law Judge (ALJ) from the New Jersey Office of Adminis-
trative Law issued an initial decision on ACE's stranded costs and unbundled
rate filing. The ALJ, in reviewing ACE's filing, recognized that ACE's
stranded costs were $812 million for nonutility generation contracts and $397
million for owned generation. The ALJ made no specific recommendations on rate
issues. A final NJBPU decision on this filing is expected by mid-1999.

Delaware

The Alliance for Fair Electric Competition Today, which includes DPL, worked
with Delaware executive branch representatives and representatives of the Del-
aware Public Service Commission (DPSC) Staff to develop consensus restructur-
ing legislation. House Bill No. 10, with several amendments, passed the Dela-
ware House of Representatives, and the Delaware Senate. The Governor of Dela-
ware is expected to sign the legislation.

House Bill No. 10 would allow DPL's Delaware customers to choose their elec-
tricity suppliers beginning on October 1, 1999 (for customers with peak de-
mands of 1,000 kilowatts or more), January 15, 2000 (for customers with peak
demands of 300 kilowatts or more), and 18 months after the legislation is en-
acted (for all other customers). House Bill No. 10 also provides for a resi-
dential rate reduction of 7.5% beginning October 1, 1999. Thereafter, except
for a deferred fuel balance "true-up" and increases for extraordinary costs,
residential rates may not be changed for four years; rates for customers in
commercial and industrial rate classes may not

II-5
<PAGE>

be changed for three years. Under House Bill No. 10, certain low-income energy
assistance and environmental programs are funded at an annual level of about
$1.6 million by a charge in electric rates.

Among other matters, unbundled rates to be charged by DPL during these "rate
freeze" periods have been agreed upon by a number of participants in the re-
structuring plan proceeding contemplated by House Bill No. 10. Included within
the agreement on unbundled rates, DPL would recover $16 million (Delaware re-
tail basis) of stranded costs, and electric rates would not be changed in the
event DPL sells or transfers generating assets.

Maryland

In 1997, the Maryland Public Service Commission (MPSC) issued two orders
which provide for retail electric competition to begin July 3, 2000, and be
phased-in over a three-year period (one-third of the customers per year). En-
abling legislation and resolution of complex issues such as stranded costs and
utility taxation will be necessary for implementation of retail competition in
Maryland.

On July 1, 1998, DPL filed with the MPSC its quantification of stranded
costs and computation of unbundled rates, which are being considered in Case
No. 8795. Stranded costs were estimated to be $217 million on a DPL system-
wide basis ($69 million Maryland retail portion), including $123 million at-
tributable to generating units, $54 million associated with purchased power
contracts, $21 million related to fuel inventory financing costs, and $19 mil-
lion of regulatory assets. DPL proposed full recovery of the Maryland portion
of the stranded costs over a three-year period, starting with the commencement
of retail competition on July 3, 2000.

The MPSC Staff and other parties contend that the market value of DPL gener-
ating assets exceeds their book value and thus that DPL has negative stranded
costs, or so-called "stranded benefits." Proposals for rate reductions based
on a sharing of these alleged benefits and other factors have been submitted
to the MPSC in Case No. 8795. The proposed rate reductions vary widely, from
3% up to levels which, if adopted, would have a material adverse impact on
Conectiv's results of operations.

Maryland's electric utilities, including DPL, continue to meet with the MPSC
Staff and others to develop consensus enabling restructuring and related tax
legislation for possible passage in the 1999 legislative session.

The MPSC is expected to issue its order on DPL's stranded cost recovery and
unbundled rates by October 1, 1999.

Virginia

Comprehensive electric utility restructuring legislation has been introduced
in the Virginia General Assembly. Senate Bill No. 1269 and identical House
Bill No. 2615, introduced on January 21, 1999, were drafted by a joint House-
Senate study committee created in 1996 to consider restructuring issues. Sig-
nificant provisions of these Bills provide for:

. Phase-in of retail electric competition beginning January 1, 2002

. Rates in effect on January 1, 2001 to become "capped rates" to continue
in effect through July 1, 2007, except for adjustments for changes in
fuel costs and state tax rates

. Customers choosing an electricity supplier other than their incumbent
utility continue to pay capped transmission and distribution rates but,
instead of the capped generation rate, they would pay a "wires" charge
which would be the difference between the capped generation rate and
projected market prices for electricity

. Just and reasonable net stranded costs are to be recovered through
capped rates and wires charges during the period January 1, 2001 through
July 1, 2007

II-6
<PAGE>

PRICE REGULATION OF ENERGY REVENUES

Through 1998, customer rates for non-energy costs have been established in
past base rate proceedings before utility regulatory commissions. Changes in
non-energy (or base rate) revenues due to volume, or rate changes, generally
affect the earnings of Conectiv.

Energy costs, including fuel and purchased energy, are currently billed to
rate-regulated customers under regulated energy adjustment clause rates. These
energy rates are adjusted periodically for cost changes and are subject to re-
view by regulatory commissions. "Energy revenues," or energy costs billed to
customers, do not generally affect net income, because the amount of under- or
over-recovered energy costs is generally deferred until it is subsequently re-
covered from or returned to utility customers.

Energy adjustment clauses are expected to be eliminated under electric in-
dustry restructuring initiatives. Thus, profits or losses on the energy por-
tion of electricity sales are expected to affect the earnings of electric
utilities, after restructuring becomes effective.

Electric revenues also include interchange delivery revenues, which result
primarily from the sale of electricity to other electricity suppliers in the
Pennsylvania-New Jersey-Maryland (PJM) Interconnection, which is an electric
power pool. Interchange delivery revenues are currently reflected in the cal-
culation of rates charged to customers under energy adjustment clauses and,
thus, do not affect net income. Margins from interchange delivery revenues
will impact earnings after deregulation due to elimination of energy adjust-
ment clauses.

Revenues are also earned from sales not subject to price regulation. These
sales include off-system bulk commodity sales and retail energy sales.

ELECTRIC REVENUES AND SALES

Conectiv's sources of electric revenues as a percentage of total electric
revenues are shown in the table below. The percentage of Conectiv's consoli-
dated electric revenues earned from sales not subject to price regulation has
increased as Conectiv's participation in unregulated electricity markets has
grown. Gross margin percentages earned in markets not subject to price regula-
tion are generally lower than the gross margin percentages earned in regulated
retail markets due to product differences, greater volume per customer, and
unregulated pricing. However, incremental amounts of gross margin earned from
sales not subject to price regulation enhance Conectiv's profitability.

Sources of Consolidated Electric Revenues

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Regulated retail revenues............................... 76.7% 81.0% 85.7%
Resale revenues......................................... 3.1% 6.3% 6.7%
Interchange delivery revenues........................... 7.3% 3.3% 7.6%
Revenues from sales not subject to price regulation..... 12.9% 9.4% --
</TABLE>

The percentages of consolidated regulated retail electric revenues earned by
customer sales class are shown in the table below. The addition of ACE's cus-
tomer base in 1998 increased the percentages of revenues earned from residen-
tial and commercial customers.

Sources of Consolidated Regulated Retail Electric Revenues

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Residential.............................................. 45.0% 44.0% 45.7%
Commercial............................................... 38.1% 34.9% 34.6%
Industrial............................................... 15.9% 20.2% 18.9%
Other.................................................... 1.0% 0.9% 0.8%
</TABLE>

II-7
<PAGE>

Changes in the various components of electric revenues are shown below.

Comparative Increase (Decrease) from Prior Year in Consolidated Electric
Revenues

<TABLE>
<CAPTION>
1998 1997
-------------------------- ------
Consolidated
Conectiv ACE DPL DPL
------------ ------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Retail and Resale Revenues
Non-Energy (Base Rate) Revenues..... $ 509.1 $490.4 $ 18.7 $ 8.9
Energy Revenues..................... 294.9 311.0 (16.1) 32.7
Interchange Delivery Revenues........ 124.9 62.1 62.8 (38.8)
Revenues from sales not subject to
price regulation.................... 182.7 10.6 172.1 102.4
-------- ------ ------ ------
$1,111.6 $874.1 $237.5 $105.2
======== ====== ====== ======
</TABLE>

As shown above, $874.1 million of the $1,111.6 million increase in
Conectiv's consolidated 1998 electric revenues was due to the Merger. The ad-
dition of ACE's customer base doubled the number of electric customers served.
On a pro forma basis, as though Conectiv's operating results included ACE's
operations beginning January 1, 1997, regulated electric retail kWh sales and
customers increased 2.9% and 1.3%, respectively. The pro forma sales increase
was primarily due to favorable economic conditions, as reflected by a 5.0% in-
crease in kWh sold to commercial customers, partly offset by the unfavorable
effect of milder winter weather on residential heating sales. Conectiv's in-
crease in non-energy (or base rate) revenues was reduced by approximately
$18.9 million due to the Merger-related customer base rate decreases discussed
in Note 6 to the Consolidated Financial Statements.

For 1997 compared to 1996, DPL's regulated electric non-energy (base rate)
revenues increased $8.9 million due to a 2.6% retail kWh sales increase,
mainly attributed to favorable economic conditions and a 1.4% increase in the
number of regulated retail customers. Milder weather limited the sales in-
crease.

In 1998 and 1997, revenues from electric sales not subject to price regula-
tion increased $182.7 million and $102.4 million, respectively, mainly because
DPL sold more output off-system through the Merchant business. Conectiv ac-
tively participates in the wholesale energy markets to support wholesale util-
ity and competitive retail marketing activities. Energy market participation
results in exposure to commodity market risk when, at times, net open energy
commodity positions are created or allowed to continue. To the extent that
Conectiv has net open positions, controls are in place that are intended to
keep risk exposures within certain management approved risk tolerance levels.

As discussed under "Price Regulation of Energy Revenues," energy and inter-
change delivery revenues generally do not affect net income.

Electric Resale Business

The ability of electric resale customers to choose their electric supplier
has created a competitive electric resale market. If an electric resale cus-
tomer selects a supplier other than the local utility, then the local utility
receives a fee for delivering the electricity to the resale customer. DPL's
contract with its largest electric resale customer, Old Dominion Electric Co-
operative (ODEC), is discussed below. Other electric resale customers of DPL
have electricity supply contracts with DPL which expire in 2001 to 2004.

Under notice provisions in its electricity supply contract, ODEC reduced its
load by 60 megawatts (MW) on September 1, 1998, from approximately 200 MW to
140 MW. ODEC has also notified DPL that it will reduce its load to zero on
September 1, 2001. The annualized reduction in Conectiv's earnings per common
share expected to result from ODEC's 60 MW load reduction is approximately
$0.02 to $0.03. If ODEC further

II-8
<PAGE>

reduces its load to zero on September 1, 2001, then annualized earnings per
share would decrease by approximately an additional $0.07 to $0.08. These pro-
jected earnings decreases are net of the expected savings from avoided capac-
ity costs.

GAS REVENUES, SALES AND TRANSPORTATION

DPL earns gas revenues from on-system sales which generally are subject to
price regulation, off-system sales which are not subject to price regulation,
and from the transportation of gas for customers. Transportation customers may
purchase gas from DPL or other suppliers.

Details of the changes in the various components of gas revenues are shown
below.

Comparative Increase (Decrease) from Prior Year in Gas Revenues

<TABLE>
<CAPTION>
1998 1997
----------- ----------
(Dollars in Millions)
<S> <C> <C>
Non-Energy (Base Rate) Revenues................. $ (4.0) $ (1.2)
Energy Revenues................................. (6.0) 8.8
Revenues from sales not subject to price
regulation..................................... 341.0 82.2
----------- ----------
$ 331.0 $ 89.8
=========== ==========
</TABLE>

As shown in the above table, total gas revenues increased $331.0 million in
1998 and $89.8 million in 1997 primarily due to higher volumes of gas sold in
markets not subject to price regulation. The margin earned from non-price reg-
ulated gas sales in excess of related purchased gas costs is relatively small
due to the competitive nature of bulk commodity sales.

The decreases in non-energy (base rate) gas revenues for 1998 and 1997 were
primarily due to milder weather during the heating seasons of both years,
which resulted in lower residential gas sales (based on cubic feet sold) of
13.2% and 9.8%, respectively. The weather-related gas revenue decrease was
partly offset by additional gas revenues from new customers. The number of
regulated gas customers served increased 2.4% in 1998 and 2.3% in 1997.

As discussed under "Price Regulation of Energy Revenues" energy revenues
generally do not affect net income.

OTHER SERVICES REVENUES

Other service revenues were comprised of the following:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in millions)
<S> <C> <C> <C>
Fuel oil and gasoline.............................. $ 145.0 $ -- $ --
HVAC............................................... 93.5 62.8 7.1
Thermal systems.................................... 22.0 -- --
Operation of power plants.......................... 24.9 23.5 21.5
Telecommunications................................. 7.2 0.7 --
Landfill and waste hauling(1)...................... -- 12.7 14.1
Other.............................................. 40.2 19.5 24.8
------- ------- ------
Total............................................ $ 332.8 $ 119.2 $ 67.5
======= ======= ======
</TABLE>
- --------
(1) Landfill and waste hauling operations were sold in the fourth quarter of
1997.

II-9
<PAGE>

As shown in the preceding table, other services revenues increased to $332.8
million in 1998 from $119.2 million in 1997, mainly due to sales of fuel oil
and gasoline by Petron Oil Corporation (Petron), which was acquired by
Conectiv in March 1998. Acquisitions of HVAC businesses, revenues from the
district heating and cooling business of Conectiv Thermal Systems, Inc.,
start-up of Conectiv's telecommunications and energy solutions businesses, and
other new businesses also contributed to revenue growth.

Fourth quarter 1998 revenues from Conectiv's telecommunications subsidiary,
Conectiv Communications, Inc. (CCI), reached $3.6 million. CCI began offering
local and long distance service in November 1997. CCI has sold about 32,000
access line equivalents in Delaware, Maryland, New Jersey, and Pennsylvania.

In 1997, other services revenues increased to $119.2 million from $67.5 mil-
lion in 1996, mainly due to HVAC business acquisitions.

ELECTRIC FUEL AND PURCHASED ENERGY EXPENSES

Electric fuel and purchased energy increased $459.2 million in 1998. Inclu-
sion of ACE's operations in the consolidated financial statements beginning
March 1, 1998 accounted for $254.8 million of the increase, and the remaining
increase was due to more energy supplied for greater volumes of electricity
sold off-system and within DPL's service territory. In 1997, DPL's electric
fuel and purchased energy expenses increased $89.2 million compared to 1996
primarily due to greater volumes of energy sold off-system and lower amounts
of energy expenses deferred under energy adjustment clauses.

For information concerning the Salem outage's impact on electric fuel and
purchased energy expenses, see Note 18 to the Consolidated Financial State-
ments.

The kWh output required to serve load within ACE's and DPL's service terri-
tories is substantially equivalent to total output less interchange deliveries
and off-system sales. In 1998, kWh output for load within ACE's and DPL's
service territories was provided by 35% net purchased power, 31% coal genera-
tion, 21% nuclear generation and 13% oil and gas generation.

GAS PURCHASED

Primarily due to larger volumes of gas purchased for resale off-system, gas
purchased increased $333.4 million in 1998 and $91.8 million in 1997.

OTHER SERVICES' COST OF SALES

Other services cost of sales increased by $178.1 million in 1998 and $29.9
million in 1997 primarily due to the business acquisitions discussed under
"Other Services Revenues."

PURCHASED ELECTRIC CAPACITY

Purchased electric capacity costs increased $154.2 million in 1998 primarily
due to ACE's purchased electric capacity costs which are recovered through an
energy adjustment clause.

OPERATION AND MAINTENANCE EXPENSES

Excluding $191.0 million of operation and maintenance expenses of the former
Atlantic-owned companies, which are included only in the 1998 reporting peri-
od, consolidated Conectiv operation and maintenance expenses increased $9.6
million in 1998. This increase reflects a $54.9 million increase due to expan-
sion of telecommunication, HVAC, and other new, nonutility businesses, sub-
stantially offset by lower utility operating expenses. Utility operating ex-
penses decreased due to fewer employees and the absence of last year's re-
start activities at the Salem nuclear power plant.

II-10
<PAGE>

In 1997, DPL's operation and maintenance expenses increased $53.9 million
mainly due to the start-up of the HVAC, telecommunications, retail energy, and
merchant businesses, and costs associated with establishing the Conectiv brand
name and gaining new customers. Lower pension cost and Salem outage expenses
mitigated the total increase in operation and maintenance expenses.

DEPRECIATION AND TAXES OTHER THAN INCOME TAXES

In 1998, depreciation and taxes other than income taxes increased mainly due
to the ten months of 1998 operating results for the former Atlantic-owned com-
panies. Depreciation expense for 1998 also reflects an increase of $6.2 mil-
lion from amortization of goodwill associated with the Merger. In 1997, DPL's
depreciation expense increased $7.8 million due to completion of on-going con-
struction projects and installation of new systems.

OTHER INCOME

Other income for 1998 includes $17.7 million of equity in earnings of a non-
utility generation joint venture. Other income for 1997 includes a $22.9 mil-
lion pre-tax gain on the sale of the Pine Grove landfill and related waste-
hauling operations.

FINANCING COSTS

Financing costs reflected in the consolidated income statement include in-
terest charges, allowance for funds used during construction (AFUDC), and pre-
ferred stock dividend requirements of subsidiaries.

Financing costs increased $7.0 million in 1998 (excluding increases attrib-
uted to the operating results of ACE and former Atlantic-owned nonutility sub-
sidiaries for 1998) mainly due to financing requirements associated with in-
vestments in new nonutility businesses. In 1997, financing costs increased
$9.9 million mainly due to financing requirements related to the utility
business.

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 inter-
pret 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 assisting line management in addressing
the issue of computer programs and embedded systems not properly recognizing
the Year 2000. A Conectiv corporate officer, reporting directly to the Chief
Executive Officer, is coordinating all Year 2000 activities. There are sub-
stantial challenges in identifying and correcting the many computer and embed-
ded systems critical to generating and delivering power, delivering natural
gas and providing other services to customers.

The project team is using a phased approach to managing its activities. The
first phase is inventory and assessment of all systems, equipment, and
processes. Each identified item is given a criticality rating of high, medium
or low. Those items rated as high or medium are then subject to the second
phase of the project. The second phase is determining and implementing correc-
tive action for the systems, equipment and processes, and concludes with a
test of the unit being remediated. The third phase is system testing and com-
pliance certification. Additionally, the project team will be updating exist-
ing outage contingency plans to address Year 2000 issues.

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 es-
sential for Conectiv to provide electric and gas service to its customers. The
Year 2000 Project team will be focusing on these 21 systems, with additional
work on the other systems continuing based on their relative importance to
Conectiv's businesses.

II-11
<PAGE>

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 busi-
ness. Conectiv expects significant progress in remediation and testing over
the next quarter based on work that is in process and material that is being
ordered.

<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
-------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Business systems........ 95% 85% 65%
Power production........ 95% 30% 30%
Electricity
distribution........... 95% 10% 5%
Gas delivery............ 95% 60% 60%
Competitive services.... 90% - 95% 30% - 80% 30% - 80%
</TABLE>

Conectiv is also contacting vendors and service providers to review
remediation of their Year 2000 issues. Many aspects of Conectiv's businesses
are dependent on third parties. For example, fuel suppliers must be able to
provide coal or gas to allow Conectiv's subsidiaries to generate electricity.

Distribution of electricity is dependent on the overall reliability of the
electric grid. ACE and DPL are cooperating with the North American Electric
Reliability Council (NERC) and the PJM Interconnection in Year 2000
remediation and remediation planning efforts, and have accelerated their Year
2000 Project timeline to be generally in-line with the recommendations of
those groups. At this time, a few generating units are scheduled for
remediation and testing in September to coincide with previously scheduled
outages. Recent reports issued by NERC indicate a diminished risk of disrup-
tion to the electric grid caused by Year 2000 issues.

Conectiv has incurred approximately $3 million in costs for the Year 2000
Project. Current estimates of the costs for the Year 2000 Project range from
$10 million to $15 million. These estimates could change significantly as the
Year 2000 Project progresses. The costs set forth above do not include several
significant expenditures covering new systems, such as Conectiv's SAP busi-
ness, financial and human resources management system and an Energy Control
System. While the introduction of these new systems effectively remediated
Year 2000 problems in the systems they replaced, Conectiv has not previously
reported the expenditures on these systems in its costs for the Year 2000
Project.

Since the project team is still in the process of assessing and correcting
impacted systems, equipment and processes, Conectiv cannot with certainty de-
termine whether the Year 2000 issue might cause disruptions to its operations
and have impacts on related costs and revenues. Conectiv assesses the status
of the Year 2000 Project on at least a monthly basis to determine the likeli-
hood of business disruptions. 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 could generate le-
gal claims against Conectiv. Conectiv's results of operations and financial
position would likely suffer an adverse impact if other entities, such as sup-
pliers, customers and service providers do not effectively address their Year
2000 issues.

LIQUIDITY AND CAPITAL RESOURCES

Conectiv's primary sources of capital are internally generated funds (net
cash provided by operating activities less common dividends) and external
financings. Capital requirements generally include utility construction expen-
ditures, expansion of new businesses, and repayment of debt and capital lease
obligations. In the foreseeable future, Conectiv's management expects that in-
cremental demand for electricity will be supplied with purchased power.

Net cash inflows from operating activities increased to $372.3 million in
1998 from $217.0 million in 1997, mainly due to cash flow provided by ACE's
operations (from March 1998 to December 1998), partly offset by

II-12
<PAGE>

more cash used by the operations of Conectiv's new businesses. Cash inflows
from operating activities in 1997 remained at about the same level as in 1996.
In 1997, cash used by new businesses offset higher cash flows from regulated
energy revenues, net of amounts paid for energy.

Total assets as of December 31, 1998 reflect an increase of $2.9 billion,
which resulted from the Merger. The Merger-related increase in assets included
$1.9 billion of property, plant, and equipment and $289 million of goodwill,
which is being amortized over 40 years. Total long-term capitalization in-
creased from $2.1 billion as of December 31, 1997 to $3.9 billion as of Decem-
ber 31, 1998, primarily due to the Merger. Dividends payable increased from
$23.8 million to $47.7 million, due to declared dividends payable on common
stock which was issued to Atlantic stockholders in conjunction with the Merg-
er.

The amount of cash used for business acquisitions (net of cash acquired) was
$2.6 million in 1998, $32.0 million in 1997, and $8.3 million in 1996. In
1998, business acquisition expenditures were net of $34.5 million of cash ac-
quired in the Merger. The 1998 nonutility businesses acquired by Conectiv in-
cluded HVAC businesses, a fuel oil distributor (Petron), and a gas marketing
enterprise (Enerval LLC). Business acquisition expenditures in 1997 and 1996
resulted primarily from the purchase of HVAC businesses and direct Merger
costs.

Capital expenditures increased to $224.8 million in 1998 from $156.8 million
in 1997 mainly due to ACE's utility capital expenditures from March 1998 to
December 1998. In 1997, capital expenditures decreased $8.8 million from 1996
principally due to a $40.5 million decrease in utility construction expendi-
tures, partly offset by $35.2 million of capital expenditures for expansion of
Conectiv Communications, Inc.'s fiber optic network.

"Investments in partnerships" of $28.6 million in 1998 included an invest-
ment by Conectiv Thermal Systems, Inc. in a thermal energy system being con-
structed for a Las Vegas casino, investments in new joint ventures involving
gas marketing and operation of a liquefied natural gas storage facility, and
other investments.

"Sales of nonutility assets" in 1997 included $33.4 million of pre-tax pro-
ceeds from the sale of Pine Grove Inc.'s landfill and related waste-hauling
operations.

Common dividend payments were $154.1 million in 1998, $93.8 million in 1997,
and $93.3 million in 1996. Common dividend payments increased in 1998 due to
common stock issued to Atlantic stockholders in conjunction with the Merger.
After subtracting common dividend payments from operating activities' net cash
in-flows, internally generated funds were $218.2 million in 1998, $123.2 mil-
lion in 1997, and $120.3 million in 1996. Internally generated funds provided
119%, 107%, and 77% of the cash required for utility construction in 1998,
1997, and 1996, respectively.

During 1996-1998, short-term debt provided $266.7 million of funds, and
long-term financing activities (debt, preferred equity, and common equity)
used net cash of $59.0 million ($371.6 million of redemptions net of $312.6
million of issuances). Short-term debt outstanding increased from $23.3 mil-
lion as of December 31, 1997 to $376.1 million as of December 31, 1998. The
$352.8 million increase was primarily due to refinancing $158.2 million of
nonutility revolving credit facilities of Atlantic and its former subsidiar-
ies, and nonutility business expansions and acquisitions. By early- to mid-
1999, Conectiv plans to refinance a significant portion of its short-term debt
balance with long-term debt. On a consolidated basis, Conectiv had $590 mil-
lion in short-term credit lines as of December 31, 1998, of which $235 million
was available for borrowing.

Long-term debt issued during 1996 to 1998 amounted to $199.2 million, which
consisted entirely of Medium Term Notes with interest rates ranging from 6.6%
to 7.72% and maturities ranging from 5 to 30 years. Redemptions of long-term
debt during 1996 to 1998 amounted to $230.1 million, which included $158.2
million of nonutility revolving credit facilities of Atlantic and its former
subsidiaries, $31.0 million of Medium Term Notes (5.5%-5.69%), $25.0 million
of 6 3/8% First Mortgage Bonds, and $15.9 million of other debt.

Scheduled maturities of long-term debt over the next five years are as fol-
lows: 1999--$80.8 million; 2000--$48.7 million; 2001--$43.7 million; 2002--
$99.3 million; 2003--$162.4 million.

II-13
<PAGE>

Preferred securities issued through subsidiaries included $25 million of 7
3/8% preferred securities in 1998 and $70 million of 8.125% preferred securi-
ties in 1996. On a consolidated basis, these preferred securities provide a
tax benefit equivalent to the tax effect of a deduction for distributions on
the preferred securities. Redemptions of preferred stock of subsidiaries were
$33.8 million (average dividend rate of 5.5%) in 1998 and $78.4 million (aver-
age dividend rate of 6.9%) in 1996. A gain of $2.5 million was realized on re-
demption of preferred stock in 1998 and is reflected in the 1998 Consolidated
Statement of Income as a reduction of preferred dividends.

Depending on its financing needs, Conectiv periodically raises cash by issu-
ing common stock through its Dividend Reinvestment and Common Share Purchase
Plan (DRIP). Alternatively, Conectiv at times provides DRIP shares to invest-
ing stockholders by purchasing its common shares in the open market.

Conectiv's capital structure as of December 31, 1998 and 1997, expressed as
a percentage of total capitalization is shown below.

<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Long-term debt and variable rate demand bonds.................. 46.8% 48.6%
Preferred stock of subsidiaries................................ 7.1% 7.4%
Common stockholders' equity.................................... 46.1% 44.0%
</TABLE>

Conectiv's estimated requirements during 1999 for capital expenditures and
business acquisitions are $327 million. The uncertainty of the impact of elec-
tric utility industry restructuring, and the extent to which Conectiv retains
or divests certain of its assets, including generating plants, will affect the
ultimate amount of capital expenditures and the amount of external funds re-
quired in excess of internally generated funds. Conectiv's management expects
that external funds will be derived from the sale of long-term debt, as re-
quired.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The following discussion contains "forward looking statements." These pro-
jected results have been prepared based upon certain assumptions considered
reasonable given the information currently available to Conectiv. Neverthe-
less, because of the inherent unpredictability of interest rates, equity mar-
ket prices, and energy commodity prices as well as other factors, actual re-
sults could differ materially from those projected in such forward-looking in-
formation. For a description of Conectiv's significant accounting policies as-
sociated with these activities see Notes 1 and 8 to the Consolidated Financial
Statements.

Interest Rate Risk

Conectiv is subject to the risk of fluctuating interest rates in the normal
course of business. Conectiv manages interest rates through the use of fixed
and, to a lesser extent, variable rate debt. As of December 31, 1998, a hypo-
thetical 10% change in interest rates would result in a $2.7 million change in
interest costs and earnings before taxes related to short-term and variable
rate debt.

Equity Price Risk

ACE and DPL maintain trust funds, as required by the Nuclear Regulatory Com-
mission, to fund certain costs of nuclear decommissioning (See Note 9 to the
Consolidated Financial Statements). These funds are invested primarily in do-
mestic and international equity securities, fixed-rate, fixed income securi-
ties, and cash and cash equivalents. By maintaining a portfolio that includes
long-term equity investments, ACE and DPL are maximizing the returns to be
utilized to fund nuclear decommissioning costs. However, the equity securities
included in ACE's and DPL's portfolios are exposed to price fluctuations in
equity markets, and the fixed-rate, fixed income securities are exposed to
changes in interest rates. ACE and DPL actively monitor their portfolios by
benchmarking the performance of their investments against certain indexes and
by maintaining, and periodically reviewing, established target asset alloca-
tion percentages of the assets in their trusts. Because the account-

II-14
<PAGE>

ing for nuclear decommissioning recognizes that costs are recovered through
electric rates, fluctuations in equity prices and interest rates do not affect
the earnings of ACE and DPL.

Commodity Price Risk

Conectiv is exposed to the impact of market fluctuations in the price and
transportation costs of natural gas, electricity, and petroleum products.
Conectiv engages in commodity hedging activities to minimize the risk of mar-
ket fluctuations associated with the purchase and sale of energy commodities
(natural gas, petroleum and electricity). Some hedging activities are
conducted using energy derivatives (futures, option, and swaps). The remainder
of Conectiv's hedging activity is conducted by backing physical transactions
with offsetting physical positions. The hedging objectives include the assur-
ance of stable and known minimum cash flows and the fixing of favorable prices
and margins when they become available. Conectiv also engages in energy com-
modity trading and arbitrage activities, which expose Conectiv to commodity
market risk when, at times, Conectiv creates net open energy commodity posi-
tions or allows net open positions to continue. To the extent that Conectiv
has net open positions, controls are in place that are intended to keep risk
exposures within management-approved risk tolerance levels.

Conectiv uses a value-at-risk model to assess the market risk of its elec-
tricity, gas, and petroleum commodity activities. The model includes fixed
price sales commitments, physical forward contracts, and commodity derivative
instruments. Value at risk represents the potential gain or loss on instru-
ments or portfolios due to changes in market factors, for a specified time pe-
riod and confidence level. Conectiv estimates value-at-risk across its power,
gas, and petroleum commodity business using a delta-normal variance/covariance
model with a 95 percent confidence level and assuming a five-day holding peri-
od. At December 31, 1998, Conectiv's calculated value at risk with respect to
its commodity price exposure was approximately $0.7 million.

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 dis-
closures without the threat of litigation, provided those statements are iden-
tified as forward-looking and are accompanied by meaningful, cautionary state-
ments 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 manage-
ment's beliefs as well as assumptions made by and information currently avail-
able to management. When used herein, the words "will," "anticipate," "esti-
mate," "expect," "objective," and similar expressions are intended to identify
forward-looking statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking statements,
factors that could cause actual results to differ materially from those con-
templated in any forward-looking statements include, among others, the follow-
ing: deregulation and the unbundling of energy supplies and services; an in-
creasingly competitive energy marketplace; sales retention and growth; federal
and state regulatory actions; future litigation results; costs of construc-
tion; operating restrictions; increased costs and construction delays attrib-
utable to environmental regulations; nuclear decommissioning and the avail-
ability 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 informa-
tion, future events or otherwise. The foregoing review of factors pursuant to
the Litigation Reform Act should not be construed as exhaustive or as any ad-
mission regarding the adequacy of disclosures made by Conectiv prior to the
effective date of the Litigation Reform Act.

II-15
<PAGE>

CONECTIV

ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA

REPORT OF MANAGEMENT

Management is responsible for the information and representations contained
in Conectiv's consolidated financial statements. Our consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles, based upon currently available facts and circumstances and manage-
ment's best estimates and judgments of the expected effects of events and
transactions.

Conectiv and its subsidiary companies maintain a system of internal controls
designed to provide reasonable, but not absolute, assurance of the reliability
of the financial records and the protection of assets. The internal control
system is supported by written administrative policies, a program of internal
audits, and procedures to assure the selection and training of qualified per-
sonnel.

PricewaterhouseCoopers LLP, independent accountants, are engaged to audit
the financial statements and express their opinion thereon. Their audits are
conducted in accordance with generally accepted auditing standards which in-
clude a review of selected internal controls to determine the nature, timing,
and extent of audit tests to be applied.

The Audit Committee of the Board of Directors, composed of outside directors
only, meets with management, internal auditors, and independent accountants to
review accounting, auditing, and financial reporting matters. The independent
accountants are appointed by the Board on recommendation of the Audit Commit-
tee, subject to stockholder approval.

/s/ Howard E. Cosgrove /s/ John C. van Roden
_______________________________ _______________________________
Howard E. Cosgrove John C. van Roden
Chairman of the Board Senior Vice President
and Chief Executive Officer and Chief Financial Officer

February 5, 1999

II-16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Conectiv
Wilmington, Delaware

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in common stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Conectiv and subsidiary companies as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Conectiv's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall fi-
nancial statement presentation. We believe that our audits provide a reason-
able basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
_______________________________
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 5, 1999

II-17
<PAGE>

CONECTIV

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
OPERATING REVENUES
Electric................................. $2,203,748 $1,092,144 $ 986,921
Gas...................................... 535,082 204,057 114,284
Other services........................... 332,776 119,166 67,459
---------- ---------- ----------
3,071,606 1,415,367 1,168,664
---------- ---------- ----------
OPERATING EXPENSES
Electric fuel and purchased power........ 875,816 416,640 327,464
Gas purchased............................ 486,411 153,027 61,208
Other services' cost of sales............ 263,319 85,192 55,276
Purchased electric capacity.............. 182,676 28,470 32,126
Employee separation and other merger-
related costs........................... 27,704 -- --
Operation and maintenance................ 532,419 331,770 277,893
Depreciation............................. 241,420 136,340 128,571
Taxes other than income taxes............ 74,926 37,634 35,737
---------- ---------- ----------
2,684,691 1,189,073 918,275
---------- ---------- ----------
OPERATING INCOME........................... 386,915 226,294 250,389
---------- ---------- ----------
OTHER INCOME
Allowance for equity funds used during
construction............................ 2,609 1,337 1,338
Other income............................. 34,251 36,322 14,506
---------- ---------- ----------
36,860 37,659 15,844
---------- ---------- ----------
INTEREST EXPENSE
Interest charges......................... 153,644 83,398 74,242
Allowance for borrowed funds used during
construction and capitalized interest... (4,213) (2,996) (3,926)
---------- ---------- ----------
149,431 80,402 70,316
---------- ---------- ----------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES.............. 15,326 10,178 10,326
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 259,018 173,373 185,591
INCOME TAXES............................... 105,817 72,155 78,340
---------- ---------- ----------
NET INCOME................................. $ 153,201 $ 101,218 $ 107,251
========== ========== ==========
EARNINGS APPLICABLE TO COMMON STOCK
Common stock............................. $ 141,292 $ 101,218 $ 107,251
Class A common stock..................... 11,909 -- --
========== ========== ==========
$ 153,201 $ 101,218 $ 107,251
========== ========== ==========
Common Stock
Average Shares Outstanding (000)
Common stock........................... 94,338 61,122 60,698
Class A common stock................... 6,561 -- --
Earnings per average share--basic and
diluted
Common stock........................... $ 1.50 $ 1.66 $ 1.77
Class A common stock................... $ 1.82 -- --
Dividends declared per share
Common stock........................... $ 1.54 $ 1.54 $ 1.54
Class A common stock................... $ 3.20 -- --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.

II-18
<PAGE>

CONECTIV

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
Thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 65,884 $ 35,339
Accounts receivable, net............................... 455,088 197,561
Inventories, at average cost
Fuel (coal, oil and gas)............................. 71,701 37,425
Materials and supplies............................... 73,047 40,518
Prepaid New Jersey sales and excise taxes.............. 20,078 --
Prepayments............................................ 17,278 11,255
Deferred energy costs.................................. -- 18,017
Deferred income taxes, net............................. 20,796 776
---------- ----------
723,872 340,891
---------- ----------
Investments
Investment in leveraged leases......................... 122,256 46,375
Funds held by trustee.................................. 174,509 48,086
Other investments...................................... 90,913 9,500
---------- ----------
387,678 103,961
---------- ----------
Property, Plant and Equipment
Electric utility plant................................. 5,649,827 3,010,060
Gas utility plant...................................... 249,383 241,580
Common utility plant................................... 169,883 154,791
---------- ----------
6,069,093 3,406,431
Less: Accumulated depreciation......................... 2,499,915 1,373,676
---------- ----------
Net utility plant in service........................... 3,569,178 2,032,755
Utility construction work-in-progress.................. 236,830 93,017
Leased nuclear fuel, at amortized cost................. 63,328 31,031
Nonutility property, net............................... 208,215 74,811
Goodwill, net.......................................... 402,836 92,602
---------- ----------
4,480,387 2,324,216
---------- ----------
Deferred Charges and Other Assets
Unrecovered purchased power costs...................... 48,274 --
Deferred recoverable income taxes...................... 184,434 88,683
Unrecovered New Jersey state excise tax................ 35,594 --
Deferred debt refinancing costs........................ 44,223 18,760
Deferred other postretirement benefit costs............ 34,978 --
Prepaid employee benefits costs........................ 16,132 58,111
Unamortized debt expense............................... 27,375 12,911
License fees........................................... 24,706 --
Other.................................................. 80,021 67,948
---------- ----------
495,737 246,413
---------- ----------
Total Assets............................................. $6,087,674 $3,015,481
========== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

II-19
<PAGE>

CONECTIV

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
As of December 31,
----------------------
1998 1997
---------- ----------
(Dollars in
Thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt...................................... $ 376,061 $ 23,254
Long-term debt due within one year................... 80,822 33,318
Variable rate demand bonds........................... 125,100 71,500
Accounts payable..................................... 240,775 103,607
Taxes accrued........................................ 41,299 10,723
Interest accrued..................................... 37,346 19,902
Dividends payable.................................... 47,743 23,775
Deferred energy costs................................ 15,990 --
Current capital lease obligation..................... 28,314 12,516
Accrued employee separation and other merger-related
costs............................................... 12,173 --
Other................................................ 76,168 35,819
---------- ----------
1,081,791 334,414
---------- ----------
Deferred Credits and Other Liabilities
Other postretirement benefits obligation............. 102,268 --
Deferred income taxes, net........................... 862,179 492,792
Deferred investment tax credits...................... 79,525 39,942
Long-term capital lease obligation................... 36,603 19,877
Other................................................ 50,702 30,585
---------- ----------
1,131,277 583,196
---------- ----------
Capitalization
Common stock: per share par value--$0.01 in 1998, and
$2.25 in 1997; 150,000,000 shares authorized; shares
outstanding--100,516,768 in 1998, and 61,210,262 in
1997................................................ 1,007 139,116
Class A common stock, $0.01 par value;10,000,000
shares authorized; shares outstanding--6,560,612 in
1998, None in 1997.................................. 66 --
Additional paid-in capital--common stock............. 1,462,675 526,812
Additional paid-in capital--Class A common stock..... 107,095 --
Retained earnings.................................... 276,939 300,757
---------- ----------
1,847,782 966,685
Treasury shares, at cost:
185,030 shares in 1998; 619,237 shares in 1997..... (3,797) (11,687)
Unearned compensation................................ (824) (502)
---------- ----------
Total common stockholders' equity.................. 1,843,161 954,496
Preferred stock of subsidiaires:
Not subject to mandatory redemption................ 95,933 89,703
Subject to mandatory redemption.................... 188,950 70,000
Long-term debt....................................... 1,746,562 983,672
---------- ----------
3,874,606 2,097,871
---------- ----------
Commitments and Contingencies (Notes 16 and 19)
---------- ----------
Total Capitalization and Liabilities................... $6,087,674 $3,015,481
========== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

II-20
<PAGE>

CONECTIV

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income.................................. $ 153,201 $ 101,218 $ 107,251
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization............. 261,457 142,734 134,109
Allowance for equity funds used during
construction............................. (2,609) (1,337) (1,338)
Investment tax credit adjustments, net.... (4,002) (2,560) (2,560)
Deferred income taxes, net................ 4,620 7,169 33,218
Net change in:
Accounts receivable..................... (118,578) (53,911) (5,030)
Inventories............................. (9,691) 4,763 (4,489)
Prepaid New Jersey sales and excise tax-
es..................................... (20,078) -- --
Accounts payable........................ 107,005 16,394 18,418
Other current assets & liabilities(1)... 26,996 43,708 (48,549)
Gains on sales of assets.................. (2,795) (22,896) (380)
Other, net................................ (23,217) (18,250) (17,100)
--------- --------- ---------
Net cash provided by operating activities..... 372,309 217,032 213,550
--------- --------- ---------
Cash Flows From Investing Activities
Acquisition of businesses, net of cash ac-
quired..................................... (2,590) (31,994) (8,301)
Capital expenditures........................ (224,831) (156,808) (165,595)
Investments in partnerships................. (28,594) (1,800) --
Sales of nonutility assets.................. 5,617 34,880 793
Sales of utility assets..................... 3,804 -- --
Deposits to nuclear decommissioning trust
funds...................................... (10,676) (4,240) (4,238)
Other, net.................................. (2,082) 3,189 3,478
--------- --------- ---------
Net cash used by investing activities......... (259,352) (156,773) (173,863)
--------- --------- ---------
Cash Flows From Financing Activities
Common dividends paid....................... (154,101) (93,811) (93,290)
Issuances: Long-term debt................. 33,000 166,200 --
Common stock................... 63 17,807 486
Preferred stock................ 25,000 -- 70,000
Redemptions: Long-term debt................. (200,078) (28,540) (1,504)
Variable rate demand bonds..... -- (1,800) (1,500)
Common stock................... (13,232) (7,323) (5,466)
Preferred stock................ (33,769) -- (78,383)
Principal portion of capital lease pay-
ments...................................... (20,037) (6,813) (5,538)
Net change in short-term debt............... 282,889 (102,671) 86,498
Cost of issuances and refinancings.......... (2,147) (4,502) (3,408)
--------- --------- ---------
Net cash used by financing activities......... (82,412) (61,453) (32,105)
--------- --------- ---------
Net change in cash and cash equivalents....... 30,545 (1,194) 7,582
Beginning of year cash and cash equivalents... 35,339 36,533 28,951
--------- --------- ---------
End of year cash and cash equivalents......... $ 65,884 $ 35,339 $ 36,533
========= ========= =========
</TABLE>
- --------
(1) Other than debt and deferred income taxes classified as current.

See accompanying Notes to Consolidated Financial Statements.

II-21
<PAGE>

CONECTIV

CONSOLIDATED STATEMENTS OF CHANGES IN
COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Additional Paid-in
Par Value Capital
------------------ --------------------
Common Class A Class A Unearned
Shares Common Common Common Common Retained Treasury Compen-
Outstanding Stock(1) Stock(1) Stock Stock Earnings Stock sation Total
----------- -------- -------- ---------- -------- -------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1995............... 60,759,365 $136,713 $ 506,328 $281,862 $ (30) $(1,433) $ 923,440
Net income.............. 107,251 107,251
Cash dividends declared
Common stock ($1.54 per
share)................ (93,294) (93,294)
Issuance of common stock
Business acquisitions.. 212,350 4,396 4,396
DRIP(2)................ 21,465 47 388 435
LTIP(3)................ 2,400 5 45 50
Expenses............... (72) (72)
Reacquired common
stock.................. (312,861) 532 (6,504) 363 (5,609)
Amortization of unearned
compensation........... 687 (548) 139
Refinancing of preferred
stock.................. 392 (2,215) (1,823)
----------- -------- ----- ---------- -------- -------- ------- ------- ----------
Balance as of December
31, 1996............... 60,682,719 136,765 -- 508,300 -- 293,604 (2,138) (1,618) 934,913
Net income.............. 101,218 101,218
Cash dividends declared
Common stock ($1.54 per
share)................ (94,065) (94,065)
Issuance of common stock
DRIP(2)................ 965,655 2,173 15,485 17,658
LTIP(3)................ 76,553 172 1,288 (1,360) 100
Other issuance......... 2,741 6 47 53
Reacquired common
stock.................. (517,406) 230 (9,549) 2,162 (7,157)
Amortization of unearned
compensation........... 1,462 314 1,776
----------- -------- ----- ---------- -------- -------- ------- ------- ----------
Balance as of December
31, 1997............... 61,210,262 139,116 -- 526,812 -- 300,757 (11,687) (502) 954,496
Net income.............. 153,201 153,201
Cash dividends declared
Common stock ($1.54 per
share)................ (155,302) (155,302)
Class A common stock
($3.20 per share)..... (20,994) (20,994)
Issuance of common stock
Business acquisitions.. 488,473 9,090 9,090
LTIP(3)................ 78,381 7 (427) 1,613 (1,130) 63
Atlantic common
stockholders(4)(5).... 45,924,284 394 66 813,135 107,095 920,690
DPL common
stockholders(5)....... 61,832,699 618 665,423 (4,580) (502) 660,959
Expenses............... (4,836) (4,836)
DPL common stock
canceled(5)............ (61,832,699) (139,123) (526,918) 4,580 502 (660,959)
Reacquired common
stock.................. (598,862) (5) (10,947) (2,280) (13,232)
Redemption of preferred
stock.................. 136 (723) (587)
Incentive compensation
Expense recognition.... 309 263 572
Forfeited common
shares................ (25,158) (12) (533) 545 --
----------- -------- ----- ---------- -------- -------- ------- ------- ----------
Balance as of December
31, 1998(4)............ 107,077,380 $ 1,007 $66 $1,462,675 $107,095 $276,939 $(3,797) $ (824) $1,843,161
=========== ======== ===== ========== ======== ======== ======= ======= ==========
</TABLE>
- --------
(1) 150,000,000 and 10,000,000 shares of Conectiv common stock and Conectiv
Class A common stock, respectively, are authorized. The common stock had a
par value of $2.25 per share prior to the Merger and $0.01 per share after
the Merger on March 1, 1998.
(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)--As of Decem-
ber 31, 1998, 4,077,300 shares remained available under Conectiv's regis-
tration statement filed with the Securities and Exchange Commission for
issuance of shares through the DRIP.
(3) Long-term Incentive Plan (LTIP)--includes restricted common shares granted
and stock options exercised.
(4) Includes 6,560,612 shares of Conectiv Class A common stock.
(5) Conectiv common stock and Conectiv Class A common stock were issued to
former Atlantic and DPL common stockholders pursuant to the Merger dis-
cussed in Note 4 to the Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

II-22
<PAGE>

CONECTIV

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

As discussed in Note 4 to the Consolidated Financial Statements, effective
March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc.
(Atlantic) consummated a series of merger transactions (the Merger) by which
DPL and Atlantic City Electric Company (ACE) became wholly-owned subsidiaries
of Conectiv.

As used in this document, references to Conectiv may mean the activities of
one or more subsidiary companies.

Conectiv's utility businesses are conducted by DPL and ACE. Conectiv also
conducts nonutility businesses primarily through subsidiaries which include
Conectiv Services, Inc. (CSI), Conectiv Communications, Inc. (CCI), Conectiv
Energy Supply, Inc. (CES), Conectiv Thermal Systems, Inc. (CTS), and other
subsidiaries.

DPL and ACE provide regulated electric service (supply and delivery) to ap-
proximately 944,100 customers located on the Delmarva Peninsula (Delaware and
portions of Maryland and Virginia) and in Southern New Jersey. Their electric
service territory covers an area consisting of about 8,700 square miles with a
population of approximately 2.0 million. Conectiv also sells electricity out-
side its service territory (off-system) and in markets which are not subject
to price regulation.

DPL provides regulated gas service (supply and/or transportation) to approx-
imately 105,700 customers located in a service territory that covers about 275
square miles with a population of approximately 485,000 in northern Delaware.
Conectiv also sells gas off-system and in markets which are not subject to
price regulation.

Other services, which are not subject to price regulation, are provided pri-
marily by Conectiv's nonutility subsidiaries and, to a lesser extent, by DPL
and ACE. Other services include: sales of petroleum products; heating, venti-
lation, and air-conditioning (HVAC) construction and services; construction
and operation of thermal energy systems; power plant operations; local and
long-distance phone service; and various other services.

Regulation of Utility Operations

Conectiv's utility business is subject to regulation with respect to retail
electric sales by the Delaware and Maryland Public Service Commissions (DPSC
and MPSC, respectively), the New Jersey Board of Public Utilities (NJBPU) and
the Virginia State Corporation Commission (VSCC), which have authority over
rate matters, accounting, and terms of service. Retail gas sales are subject
to regulation by the DPSC. The Federal Energy Regulatory Commission (FERC)
also has regulatory authority over certain aspects of Conectiv's utility busi-
ness, including the transmission of electricity and gas, the sale of electric-
ity to municipalities and electric cooperatives, and interchange and other
purchases and sales of electricity involving other utilities. Excluding off-
system sales not subject to price regulation, the percentage of electric and
gas utility operating revenues regulated by each regulatory commission for the
year ended December 31, 1998, was as follows: NJBPU, 41.8%; DPSC, 38.9%; MPSC,
14.5%; VSCC, 1.4%; and FERC, 3.4%.

DPL and ACE are subject to the requirements of Statement of Financial Ac-
counting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." Regulatory commissions occasionally provide for future recov-
ery from customers of current period expenses. When this happens, the expenses
are deferred as regulatory assets and subsequently recognized in the Consoli-
dated 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 regulatory commissions.

II-23
<PAGE>

Refer to Note 10 to the Consolidated Financial Statements for a discussion
of regulatory assets arising from the financial effects of rate regulation and
Note 6 to the Consolidated Financial Statements for a discussion on the impact
and current status of electric utility industry restructuring.

Financial Statement Presentation

The consolidated financial statements include the accounts of Conectiv and
its majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.

Ownership interests of 20% to 50% in other entities are accounted for by the
equity method of accounting. Investments in entities accounted for under the
equity method are included in "Other investments" on the Consolidated Balance
Sheets. Earnings from equity method investees are included in "Other income"
in the Consolidated Statements of Income.

Dividends on preferred stock of DPL for 1997 and 1996 have been reclassified
to Preferred Stock Dividend Requirements of Subsidiaries, resulting in a de-
duction before (rather than after) net income. This reclassification reflects
the current organizational structure in which DPL is a subsidiary of Conectiv.
Certain other prior year amounts have been reclassified to conform with the
current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the re-
porting period. Actual results could differ from those estimates and assump-
tions.

Revenue Recognition

At the end of each month, there is an amount of electric and gas service
rendered from the last meter reading to the month-end which has not yet been
billed to customers. The revenues associated with such unbilled services are
accrued by Conectiv.

When interim utility rates are placed in effect subject to refund, Conectiv
recognizes utility revenues based on expected final rates.

Revenues from "Other services" are recognized when services are performed or
products are delivered.

Deferred Energy Costs

Energy costs charged to Conectiv's results of operations generally are ad-
justed to match energy costs billed to customers (energy revenues) under tar-
iffs for regulated energy sales. The difference between energy revenues and
actual energy costs incurred is reported on the Consolidated Balance Sheets as
"Deferred energy costs." The deferred balance is subsequently recovered from
or returned to utility customers.

Nuclear Fuel

Conectiv's share of nuclear fuel at the Peach Bottom Atomic Power Station
(Peach Bottom), the Salem Nuclear Generating Station (Salem), and the Hope
Creek Nuclear Generating Station (Hope Creek) is financed through contracts
accounted for as capital leases. Nuclear fuel costs, including a provision for
the future disposal of spent nuclear fuel, are charged to fuel expense on a
unit-of-production basis.

II-24
<PAGE>

Energy Trading and Risk Management Activities

In December 1998, the Emerging Issues Task Force (EITF), which evaluates ac-
counting issues under the direction of the Financial Accounting Standards
Board (FASB), concluded that, effective for financial statements issued for
fiscal years beginning after December 15, 1998, contracts entered into in con-
nection with energy trading activities should be marked to market, with gains
and losses (unrealized and realized) included in earnings (EITF No. 98-10).

Conectiv uses futures, options and swap agreements to hedge firm commitments
or anticipated transactions of energy commodities and also creates net open
energy commodity positions. Conectiv used "hedge accounting" as subsequently
described, to account for certain energy trading activities during 1996 to
1998. As discussed above, beginning January 1, 1999, EITF No. 98-10 requires
mark to market accounting for energy trading contracts, including derivatives.
Conectiv currently uses derivatives mainly in conjunction with energy trading
activities.

Under hedge accounting, a derivative, at its inception and on an ongoing ba-
sis, is expected to substantially offset adverse price movements in the firm
commitment or anticipated transaction that it is hedging. Gains and losses re-
lated to qualifying hedges are deferred and are recognized in income when the
underlying transaction occurs. If, subsequent to being hedged, underlying
transactions are no longer likely to occur or the hedge is no longer effec-
tive, the related derivatives gains or losses are recognized currently in
earnings. Gains and losses on derivatives that do not qualify for hedge ac-
counting are recognized currently in revenues.

Premiums paid for options are included as current assets in the consolidated
balance sheet until they are exercised or expire. Margin requirements for
futures contracts are also recorded as current assets. Under hedge accounting,
unrealized gains and losses on all futures contracts are deferred on the con-
solidated balance sheet as either current assets or deferred credits. The cash
flows from derivatives are included in the cash flows from operations section
of the cash flow statement.

In June 1998, the FASB issued SFAS No. 133, which becomes effective in the
first quarter of fiscal years beginning after June 15, 1999, unless early
adoption is elected. SFAS No. 133 establishes accounting and reporting stan-
dards for derivative instruments and for hedging activities. It requires that
all derivatives be recognized as assets or liabilities in the balance sheet
and be measured at fair value. Under specified conditions, a derivative may be
designated as a hedge. The change in the fair value of derivatives which are
not designated as hedges is recognized in earnings. For derivatives designated
as hedges of changes in the fair value of an asset or liability, or as a hedge
of exposure to variable cash flows of a forecasted transaction, earnings are
affected to the extent the hedge does not match offsetting changes in the
hedged item.

Conectiv currently cannot determine the effect that SFAS No. 133 will have
on its financial statements. However, the adoption of EITF 98-10 prior to the
implementation of SFAS No. 133 is expected to reduce the impact of SFAS No.
133.

Depreciation Expense

The annual provision for depreciation on utility property is computed on the
straight-line basis using composite rates by classes of depreciable property.
Accumulated depreciation is charged with the cost of depreciable property re-
tired, including removal costs less salvage and other recoveries. The rela-
tionship of the annual provision for depreciation for financial accounting
purposes to average depreciable property was 3.8% for 1998, 3.7% for 1997, and
3.6% for 1996. Depreciation expense includes a provision for Conectiv's share
of the estimated cost of decommissioning nuclear power plant reactors based on
amounts billed to customers for such costs. Refer to Note 9 to the Consoli-
dated Financial Statements for additional information on nuclear
decommissioning.

Nonutility property is generally depreciated on a straight-line basis over
the useful lives of the assets.

II-25
<PAGE>

Income Taxes

The consolidated financial statements include two categories of income tax-
es--current and deferred. Current income taxes represent the amounts of tax
expected to be reported on Conectiv's federal and state income tax returns.
Deferred income taxes are discussed below.

Deferred income tax assets and liabilities represent the tax effects of tem-
porary differences between the financial statement and tax bases of existing
assets and liabilities and are measured using presently enacted tax rates. The
portion of Conectiv's deferred tax liability applicable to utility operations
that has not been recovered from utility customers represents income taxes re-
coverable in the future and is shown on the Consolidated Balance Sheets as
"Deferred recoverable income taxes." Deferred recoverable income taxes were
$184.4 million and $88.7 million as of December 31, 1998, and 1997, respec-
tively.

Deferred income tax expense represents the net change during the reporting
period in the net deferred tax liability and deferred recoverable income tax-
es.

Investment tax credits from utility plant purchased in prior years are re-
ported on the Consolidated Balance Sheets as "Deferred investment tax cred-
its." These investment tax credits are being amortized to income over the use-
ful lives of the related utility plant. Investment tax credits associated with
leveraged leases are being amortized over the lives of the related leases dur-
ing the periods in which the net investment is positive.

Deferred Debt Refinancing Costs

Costs of refinancing debt of DPL and ACE are deferred and amortized over the
period during which the refinancing costs are recovered in utility rates.

License Fees

License fees represent the unamortized balance of amounts previously paid by
Atlantic Thermal Systems (CTS' predecessor) for the right to operate heating
and cooling systems of certain hotel casinos in Atlantic City, New Jersey,
over a 20-year period. These fees are classified as License Fees on the bal-
ance sheet and are being amortized over 20 years.

Interest Expense

The amortization of debt discount, premium, and expense, including refinanc-
ing expenses, is included in interest expense.

Utility Plant and Allowance for Funds Used During Construction

Utility plant is generally stated at original cost, including property addi-
tions. Utility plant is generally subject to a first mortgage lien. Allowance
for Funds Used During Construction (AFUDC) is included in the cost of utility
plant and represents the cost of borrowed and equity funds used to finance
construction of new utility facilities. In the Consolidated Statements of In-
come, the borrowed funds component of AFUDC is reported as a reduction of in-
terest expense and the equity funds component of AFUDC is reported as other
income. AFUDC was capitalized on utility plant construction at the rates of
8.8% in 1998, 7.5% in 1997, and 6.7% in 1996.

Stock-based Employee Compensation

Refer to Note 11 to the Consolidated Financial Statements for Conectiv's ac-
counting policy on stock-based employee compensation.

II-26
<PAGE>

Cash Equivalents

In the consolidated financial statements, Conectiv considers highly liquid
marketable securities and debt instruments purchased with a maturity of three
months or less to be cash equivalents.

Goodwill

Conectiv amortizes goodwill arising from business acquisitions over the
shorter of the estimated useful life or 40 years.

Leveraged Leases

Conectiv's investment in leveraged leases includes the aggregate of rentals
receivable (net of principal and interest on nonrecourse indebtedness) and es-
timated residual values of the leased equipment less unearned and deferred in-
come (including investment tax credits). Unearned and deferred income is rec-
ognized at a level rate of return during the periods in which the net invest-
ment is positive. Refer to Note 16 to the Consolidated Financial Statements
for additional information on leveraged leases.

Funds Held By Trustee

Funds held by trustee are stated at fair market value and primarily include
deposits in Conectiv's external nuclear decommissioning trusts and unexpended,
restricted, tax-exempt bond proceeds.

Earnings Per Share

Earnings per share has been computed in accordance with SFAS No. 128, "Earn-
ings Per Share." Under SFAS No. 128, basic earnings per share are computed
based on earnings applicable to common stock divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
are computed based on earnings applicable to common stock divided by the
weighted average number of shares of common stock outstanding during the pe-
riod after giving effect to securities considered to be dilutive common stock
equivalents. The effect of dilutive common stock equivalents was not signifi-
cant, and thus, for 1998, 1997, and 1996, Conectiv's basic and diluted earn-
ings per share were the same amounts.

2. SUPPLEMENTAL CASH FLOW INFORMATION

See the Consolidated Statement of Changes in Common Stockholders' Equity and
Note 4 to the Consolidated Financial Statements for information concerning the
issuance of Conectiv common stock and Conectiv Class A common stock in ex-
change for DPL and Atlantic common stock.

Cash Paid During the Year

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest, net of capitalized amount................... $112,549 $73,211 $67,596
Income taxes, net of refunds.......................... $107,755 $53,550 $56,582
</TABLE>

3. INCOME TAXES

Conectiv files a consolidated federal income tax return which includes its
wholly-owned subsidiaries. Income taxes are allocated to Conectiv's subsidiar-
ies based upon the taxable income or loss of each subsidiary.

II-27
<PAGE>

Components of Consolidated Income Tax Expense

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal:Current..................................... $ 80,408 $58,737 $40,953
Deferred....................................... 7,387 6,589 26,131
State:Current....................................... 24,791 8,810 6,729
Deferred....................................... (2,767) 579 7,087
Investment tax credit adjustments, net.............. (4,002) (2,560) (2,560)
-------- ------- -------
$105,817 $72,155 $78,340
-------- ------- -------
</TABLE>

Reconciliation of Effective Income Tax Rate

The amount computed by multiplying income before tax by the federal statutory
rate is reconciled below to the total income tax expense.

<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
Amount Rate Amount Rate Amount Rate
-------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax expense.. $ 90,656 35% $60,681 35% $64,957 35%
Increase due to State income taxes,
net of federal tax benefit........... 14,316 6 6,102 4 8,980 5
Other, net............................ 845 -- 5,372 3 4,403 2
-------- --- ------- --- ------- ---
Total income tax expense.............. $105,817 41% $72,155 42% $78,340 42%
======== === ======= === ======= ===
</TABLE>

Components of Deferred Income Taxes

The tax effects of temporary differences that give rise to Conectiv's net de-
ferred tax liability are shown below.

<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1997
---------- --------
(Dollars in
Thousands)
<S> <C> <C>
Deferred Tax Liabilities
Plant basis differences............................ $ 692,780 $409,861
Leveraged leases................................... 116,481 38,288
Deferred recoverable income taxes.................. 72,448 41,061
Deferred energy costs.............................. (1,931) 7,054
Other.............................................. 134,678 81,482
---------- --------
Total deferred tax liabilities..................... 1,014,456 577,746
---------- --------
Deferred Tax Assets
Deferred investment tax credits.................... 36,494 14,815
Other.............................................. 136,579 70,915
---------- --------
Total deferred tax assets.......................... 173,073 85,730
---------- --------
Total deferred taxes, net............................ $ 841,383 $492,016
========== ========
</TABLE>

Valuation allowances for deferred tax assets were not material as of December
31, 1998 and 1997.

Effective January 1, 1998, New Jersey eliminated the Gross Receipts and Fran-
chise Tax paid by electric, natural gas and telecommunication public utilities.
In its place, utilities are now subject to the state's corporate business tax.
In addition, the state's existing sales and use tax was expanded to include re-
tail sales of electricity

II-28
<PAGE>

and gas. A transitional energy facility assessment tax (TEFA) will be applied
for a limited time to electric and natural gas utilities and will be phased-
out over a five-year period. On January 1, 1999, and each of the four years
thereafter, the TEFA will be reduced by 20%. When fully implemented, this will
reduce ACE's effective state tax rate from 13% to approximately 7%. Savings
from these changes in New Jersey tax law will be passed through to ACE's cus-
tomers.

4. MERGERS AND ACQUISITIONS

Merger with Atlantic

On March 1, 1998, DPL and ACE became wholly-owned subsidiaries of Conectiv.
Before the Merger, Atlantic owned ACE, an electric utility serving the south-
ern one-third of New Jersey, and nonutility subsidiaries. As a result of the
Merger, Atlantic ceased to exist, and Conectiv owns (directly or indirectly)
ACE, DPL, and the nonutility subsidiaries formerly held separately by Atlantic
and DPL. Conectiv is a registered holding company under the Public Utility
Holding Company Act of 1935 (PUHCA).

In accordance with the terms of the Merger, DPL common stockholders received
one share of Conectiv common stock in exchange for each share of DPL common
stock, and Atlantic common stockholders received 0.75 of one share of Conectiv
common stock and 0.125 of one share of Conectiv Class A common stock in ex-
change for each share of Atlantic common stock. Atlantic stockholders and DPL
stockholders received 39,363,672 and 61,832,699 shares of Conectiv common
stock, respectively. Atlantic stockholders received 6,560,612 shares of
Conectiv Class A common stock. See Note 12 to the Consolidated Financial
Statements for information concerning Conectiv Class A common stock and the
apportionment of earnings between Conectiv Class A common stock and Conectiv
common stock.

The Merger was accounted for under the purchase method of accounting, with
DPL as the acquirer. Based on the Merger date of March 1, 1998, the Consoli-
dated Statement of Income for the year ended December 31, 1998, includes ten
months of results of operations for ACE and the formerly Atlantic-owned non-
utility subsidiaries.

The total consideration paid to Atlantic's common stockholders, measured by
the average daily closing market price of Atlantic's common stock for the
three trading days immediately preceding and the three trading days immedi-
ately following the public announcement of the Merger, was $920.7 million. In
connection with the Merger, $289.0 million of goodwill was recorded, which is
being amortized over 40 years. As a result of the Merger, the following in-
creases occurred in the Consolidated Balance Sheet.

Balance Sheet Increases Due to Merger

<TABLE>
<CAPTION>
(Dollars
in
Thousands)
<S> <C>
Current assets................................................. $ 223,577
Investments.................................................... 226,251
Property, plant and equipment.................................. 2,151,251
Deferred charges............................................... 257,977
----------
Total assets................................................... $2,859,056
==========
Current liabilities............................................ $ 215,447
Noncurrent liabilities......................................... 582,108
Capitalization................................................. 2,061,501
----------
Total capitalization and liabilities........................... $2,859,056
==========
</TABLE>

II-29
<PAGE>

Pro Forma Information (unaudited)

Pro forma unaudited financial information for Conectiv on a consolidated ba-
sis, giving effect to the Merger as if it had occurred on January 1, 1997, is
shown below. The pro forma information presented below is not necessarily in-
dicative of the results that would have occurred, or that will occur in the
future.

<TABLE>
<CAPTION>
For the Year Ended
December 31
---------------------
1998 1997
---------- ----------
(Dollars in Thousands
except per share
amounts)
<S> <C> <C>
Operating Revenues...................................... $3,236,791 $2,525,862
Operating Income........................................ $ 407,949 $ 442,550
Net Income.............................................. $ 155,332 $ 186,466
Earnings Applicable to Common Stock:
Common stock.......................................... $ 143,270 $ 170,548
Class A common stock.................................. $ 12,062 $ 15,918
Average common shares outstanding (000)
Common stock.......................................... 100,918 101,005
Class A common stock.................................. 6,561 6,561
Basic and Diluted Earnings per average share outstanding
of:
Common stock.......................................... $1.42 $1.69
Class A common stock.................................. $1.84 $2.43
</TABLE>

The pro forma information shown above has not been adjusted to exclude the
effects of employee separation and other Merger-related costs incurred by DPL.
For the year ended December 31, 1998, these costs reduced operating income,
net income, and earnings applicable to common stock by $27.7 million, $16.8
million, and $16.8 million, respectively. See Note 5 to the Consolidated Fi-
nancial Statements for additional information.

Acquisition of Other Service Companies

Conectiv's expenditures to acquire HVAC and Other Service businesses in
1998, 1997, and 1996 were $15.3 million, $17.6 million and $9.3 million (in-
cluding non-cash consideration), respectively.

5. EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS

To reduce the workforce by 785 employees in conjunction with the Merger,
Conectiv utilized enhanced retirement offers and other employee separation
programs. Prior to the Merger, DPL, Atlantic, and their subsidiaries had ap-
proximately 4,600 employees. The costs of the workforce reduction programs
were determined in accordance with SFAS No. 88, "Employers' Accounting for
Settlement and Curtailments of Defined Benefit Pension Plans and for Termina-
tion Benefits." The SFAS No. 88 costs for separated DPL employees and other
Merger-related costs expensed in 1998 were $27.7 million before taxes, reduc-
ing net income and earnings per common share by $16.8 million and $0.18, re-
spectively. The $27.7 million pre-tax charge was reduced by a net $45.5 mil-
lion gain from curtailments and settlements of pension and other
postretirement benefits.

Employee separation, relocation, and other Merger-related costs for
Atlantic's former subsidiaries in 1998 were $80.8 million before taxes ($48.3
million after taxes) and were capitalized as costs of the Merger.

Of the $108.5 million of costs discussed above for DPL and Atlantic's former
subsidiaries, $57.5 million were paid as of December 31, 1998, $38.8 million
will not require the use of operating funds, and $12.2 million remains to be
paid from operating funds.

II-30
<PAGE>

6. RATE MATTERS

Merger Rate Decrease

ACE and DPL are sharing a portion of the net cost savings expected to result
from the Merger with their customers through reduced electric and gas retail
customer base rates. ACE's total Merger-related electric base rate decrease of
$15.7 million was phased-in as follows: (1) $5.0 million effective January 1,
1998 coincident with a $5.0 million increase for recovery of deferred other
postretirement benefit costs; (2) $9.9 million effective March 1, 1998, and
(3) $0.8 million effective January 1, 1999. DPL's total Merger-related base
rate decrease of $13.0 million is being phased-in as follows: (1) $11.5 mil-
lion effective March 1, 1998, (2) $1.1 million effective March 1, 1999, and
(3) $0.4 million effective March 1, 2000.

Electric Utility Industry Restructuring

The amount of stranded costs ultimately recovered from utility customers, if
any, and the full impact of legislation deregulating the electric utility in-
dustry in any of the jurisdictions in which Conectiv operates cannot be pre-
dicted. Also, the quantification of stranded costs under existing generally
accepted accounting principles (GAAP) differs from methods used in regulatory
filings. Among other differences, GAAP precludes recognition of the gains on
plants (or purchased power contracts) not impaired, but requires write down of
the plants that are impaired. Due to these considerations, market conditions,
timing and other factors, Conectiv's management currently cannot predict the
ultimate effects that electric utility industry deregulation may have on the
financial statements of Conectiv and its subsidiaries, although deregulation
may have a material adverse effect on Conectiv's results of operations.

New Jersey

The Act requires each electric utility to reduce its rates by at least 5% at
the start of retail choice and by 10% within 36 months of the start of choice.
If the NJBPU determines that a rate decrease of more than 10% is warranted, a
"just and reasonable" financial test is applied. The mandated rate reductions
must be sustained

II-31
<PAGE>

through the end of the 48th month after choice begins. The Act requires that
the rate reductions be measured against the rates in effect on April 30, 1997.
The rate reductions mandated by the Act could have a material adverse effect
upon the results of operations of ACE and Conectiv.

In connection with the deregulation of electric rates, the Act authorizes
the NJBPU to permit electric public utilities to recover the full amount of
their stranded costs through a non-bypassable market transition charge, as
long as the mandated rate reductions are achieved. The NJBPU will determine
the utility's stranded cost amount. The NJBPU determined stranded cost amount
will be subject to periodic recalculation and true-up over the recovery
period. The Act establishes an 8-year recovery period for stranded costs
associated with owned generation. The recovery period can be extended by the
NJBPU so as to allow for the full recovery of the stranded costs and the
meeting of mandated rate reductions. The recovery period for stranded costs
associated with purchased power contracts is to be the remainder of the
contract term. In addition, the Act would allow for the issuance of transition
bonds to finance portions of a given utility's stranded costs, as determined
to be appropriate by the NJBPU. All savings generated through the use of such
transition bonds are to be provided to the customers through rate reductions.

Delaware

The Alliance for Fair Electric Competition Today, which includes DPL, worked
with Delaware executive branch representatives and representatives of the DPSC
Staff to develop consensus restructuring legislation. House Bill No. 10, with
several amendments, passed the Delaware House of Representatives, and the Del-
aware Senate. The Governor of Delaware is expected to sign the legislation.

II-32
<PAGE>

Among other matters, unbundled rates to be charged by DPL during these "rate
freeze" periods have been agreed upon by a number of participants in the
restructuring plan proceeding contemplated by House Bill No. 10. Included
within the agreement on unbundled rates, DPL would recover $16 million
(Delaware retail basis) of stranded costs, and electric rates would not be
changed in the event DPL sells or transfers generating assets.

Maryland

In 1997, the MPSC issued two orders which provide for retail electric compe-
tition to begin July 3, 2000, and be phased-in over a three-year period (one-
third of the customers per year). Enabling legislation and resolution of com-
plex issues such as stranded costs and utility taxation will be necessary for
implementation of retail competition in Maryland.

The MPSC is expected to issue its order on DPL's stranded cost recovery and
unbundled rates by October 1, 1999.

Virginia

. Phase-in of retail electric competition beginning January 1, 2002

. Rates in effect on January 1, 2001 to become "capped rates" to continue
in effect through July 1, 2007, except for adjustments for changes in
fuel costs and state tax rates

. Just and reasonable net stranded costs are to be recovered through
capped rates and wires charges during the period January 1, 2001 through
July 1, 2007

Other Rate Matters

ACE is subject to a performance standard for its five jointly-owned nuclear
units. Under the standard, the composite target capacity factor for such units
is 70%, based upon the maximum dependable capacity of the

II-33
<PAGE>

units. The zone of reasonable performance (deadband) is between 65% and 75%.
Penalties or rewards are based on graduated percentages of estimated costs of
replacement power. LEC rates are adjusted annually to include any penalty or
reward resulting from the nuclear unit performance standard. Pursuant to a De-
cember 1996 stipulation agreement, the performance of Salem Units 1 and 2,
during prolonged outages which began in the second quarter of 1995, is not in-
cluded in the calculation of a nuclear performance penalty. ACE was not sub-
ject to a nuclear performance penalty in 1996, 1997 or 1998.

7. SALE OF PINE GROVE LANDFILL AND WASTE HAULING COMPANIES

In the fourth quarter 1997, a subsidiary of Conectiv sold the Pine Grove
Landfill and a related waste-hauling company. The subsidiaries, which were
sold, had a net book value of approximately $11.3 million and reported reve-
nues in 1997 of approximately $12.7 million. Pre-tax proceeds received from
the sale were $34.2 million ($33.4 million net of cash sold), resulting in a
pre-tax gain of $22.9 million ($13.7 million after income taxes) or $0.22 per
common share.

8. ENERGY HEDGING AND TRADING ACTIVITIES

Conectiv actively participates in the wholesale energy markets to support
its wholesale utility and competitive retail marketing activities. Conectiv
engages in commodity hedging activities to minimize the risk of market fluctu-
ations associated with the purchase and sale of energy commodities (natural
gas, petroleum and electricity). Some hedging activities are conducted using
energy derivatives. The remainder of Conectiv's hedging activity is conducted
by backing physical transactions with offsetting physical positions. The hedg-
ing objectives include the assurance of stable and known minimum cash flows
and the fixing of favorable prices and margins when they become available.
Conectiv also engages in energy commodity trading and arbitrage activities,
which expose Conectiv to commodity market risk when, at times, Conectiv cre-
ates net open energy commodity positions or allows net open positions to con-
tinue. To the extent that Conectiv has net open positions, controls are in
place that are intended to keep risk exposures within management-approved risk
tolerance levels.

Conectiv utilizes futures, options and swap agreements to manage risk.
Futures help manage commodity price risk by fixing purchase or sales prices.
Options provide a floor or ceiling on future purchases or sales prices while
allowing Conectiv to benefit from favorable price movements. Swaps are struc-
tured to provide the same risk protection as futures and options. Basis swaps
are used to manage risk by fixing the basis differential that exists between a
delivery location index and the commodity futures price.

Exposed commodity positions may be "long" or "short." A long position indi-
cates that Conectiv has an excess of the commodity available for sale. A short
position means Conectiv will have to obtain additional commodity to fulfill
its sales requirements. A "delta" position is the conversion of an option into
futures contract equivalents. The option delta is dependent upon the strike
price, volatility, current market price and time-value of the option.

Natural Gas Activities

At December 31, 1998, Conectiv had 1,314 (2,697 long, 1,383 short) net open
futures contracts, representing a notional quantity of 13.1 billion cubic feet
(Bcf) through February of 2001. In addition, Conectiv had a net long commodity
swap position equivalent to 459 futures contracts (4.6 Bcf) and a net long ba-
sis swaps position equivalent to 531 futures contracts (5.3 Bcf).

Conectiv entered into 1,474 of the net long open futures contracts in order
to hedge the gas marketing activities of various Conectiv business units.
Other gas commodity hedges at December 31, 1998, included a net long commodity
swap position equivalent to 262 futures contracts and a net long basis swap
position equivalent to 471 futures contracts. During the year ended December
31, 1998, $4.0 million of losses were recognized on the settlement of natural
gas futures, swaps and options hedging contracts for the unregulated business
units. These losses were offset by gains on the physical commodity
transactions being hedged. A total of $8.6 million

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<PAGE>

of unrealized losses were deferred in the Consolidated Balance Sheet as of
December 31, 1998. These losses are offset by gains on the physical commodity
transactions being hedged.

During the year ended December 31, 1998, a trading gain of $0.2 million was
realized on natural gas financial derivative activities that were not classi-
fied as hedges. Unrealized gains in forward gas trading positions (physical
and financial) totaled $0.8 million at December 31, 1998. The annual average
unrealized loss on trading activities, based on month-end averages, was
$0.1 million.

At December 31, 1997, there were 220 open futures contracts and 30 open
options contracts to purchase natural gas, representing a notional quantity of
2.5 Bcf through October 1999 and 60 open options contracts, to sell natural
gas, representing a notional quantity of 0.6 Bcf through July 1998. A total of
$0.5 million of unrealized losses were deferred in the Consolidated Balance
Sheet as of December 31, 1997.

Electricity Activities

At December 31, 1998, Conectiv had a total short exposure of 102,400 mega-
watt-hours (MWH) (84,700 on peak, 17,700 off-peak) through December 1999. The
overall position included a long option delta exposure of 2,300 MWH. The re-
maining exposure was comprised of forward contracts.

During the year ended December 31, 1998, a net gain of $0.1 million was rec-
ognized on the settlement of electric hedging options and swaps. This gain was
offset by losses on the physical commodity transactions being hedged. A total
of $0.3 million of unrealized losses were deferred in the Consolidated Balance
Sheet as of December 31, 1998. During the year ended December 31, 1998, real-
ized gains of $10.2 million were recorded on power trading activities (physi-
cal and financial) not classified as hedges. At December 31, 1998, unrealized
gains on power trading activities amounted to $1.2 million. The annual average
unrealized gain on trading activities, based on month-end averages, was $1.3
million.

At December 31, 1997, there was one swap contract to sell electricity, rep-
resenting a notional quantity of 68,000 MWH, through August 1998. A total of
$0.2 million of unrealized losses were deferred on the Consolidated Balance
Sheet as of December 31, 1997.

Petroleum Activities

Conectiv markets petroleum products through its subsidiary, Petron Oil Cor-
poration. Total petroleum exposure (all grades) at December 31, 1998 was
222,500 barrels (short) extending through December 31, 2000, with an
unrealized gain of $2.3 million. Conectiv was net long 315 petroleum futures
contracts (234 Heating Oil & 81 Unleaded Gasoline) on December 31, 1998, ex-
tending through May 2000. $3.1 million of unrealized losses on petroleum fi-
nancial derivatives were offset by a combination of physical forward contracts
and inventory amounting to 537.5 contracts (short) at an unrealized gain of
$5.4 million.

Credit Exposure

Counterparties to its various hedging and trading contracts expose Conectiv
to credit losses in the event of nonperformance. Management has evaluated such
risk and implemented credit checks and has established reserves for credit
losses. A large portion of the hedging and trading activities are conducted on
national exchanges backed by exchange clearinghouses. Management believes that
the overall business risk is minimized as a result of these procedures.

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<PAGE>

9. NUCLEAR DECOMMISSIONING

Conectiv's subsidiaries, DPL and ACE, record liabilities for their share of
the estimated cost of decommissioning the Peach Bottom, Salem, and Hope Creek
nuclear reactors over the remaining lives of the plants based on amounts col-
lected in rates charged to electric customers. For utility rate-setting pur-
poses, ACE estimates its share of future nuclear decommissioning costs ($185
million) based on site specific studies filed with and approved by the NJBPU.
DPL estimates its share of future nuclear decommissioning costs ($157 million)
based on Nuclear Regulatory Commission (NRC) regulations concerning the mini-
mum financial assurance amount for nuclear decommissioning.

Conectiv's consolidated accrued nuclear decommissioning liability, which is
reflected in the accumulated reserve for depreciation, was $167.7 million as
of December 31, 1998. The provision reflected in depreciation expense for nu-
clear decommissioning was $10.6 million in 1998, $4.2 million in 1997, and
$4.2 million in 1996. External trust funds established by DPL and ACE for the
purpose of funding nuclear decommissioning costs had an aggregate book balance
(stated at fair market value) of $155.9 million as of December 31, 1998. Earn-
ings on the trust funds are recorded as an increase to the accrued nuclear
decommissioning liability, which, in effect, reduces the expense recorded for
nuclear decommissioning.

The ultimate cost of nuclear decommissioning for the Peach Bottom, Salem,
and Hope Creek reactors may exceed the current estimates, which are updated
periodically.

The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry, includ-
ing Conectiv, regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations in the financial state-
ments of electric utilities. In February 1996, the FASB issued the Exposure
Draft, "Accounting for Certain Liabilities Related to Closure or Removal of
Long-Lived Assets," which proposed changes in the accounting for closure and
removal costs of long-lived assets, including the recognition, measurement,
and classification of decommissioning costs for nuclear generating stations.
If the proposed changes were adopted: (1) annual provisions for
decommissioning would increase, (2) the estimated cost for decommissioning
would be recorded as a liability rather than as accumulated depreciation, and
(3) trust fund income from the external decommissioning trusts would be re-
ported as investment income rather than as a reduction of decommissioning ex-
pense. The FASB plans to issue a revised Exposure Draft in the second quarter
of 1999.

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<PAGE>

10. REGULATORY ASSETS

In conformity with generally accepted accounting principles, Conectiv's ac-
counting policies reflect the financial effects of rate regulation and deci-
sions by regulatory commissions having jurisdiction over Conectiv's utility
business. In accordance with the provisions of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation," Conectiv defers expense recogni-
tion of certain costs and records an asset, a result of the effects of rate
regulation. Except for deferred energy costs, which are classified as a cur-
rent asset (or liability), these regulatory assets are included on Conectiv's
Consolidated Balance Sheets under "Deferred Charges and Other Assets." The
costs of these assets are either being recovered or are probable of being re-
covered through customer rates. Generally, the costs of these assets are rec-
ognized in operating expenses over the period the cost is recovered from cus-
tomers. See Note 6 to the Consolidated Financial Statements for information
about the impact of electric utility restructuring on the accounting for regu-
latory assets. The table shown below details total regulatory assets (liabili-
ties), at December 31, 1998, and 1997.

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Dollars in millions)
<S> <C> <C>
Deferred recoverable income taxes................... $ 184.4 $ 88.7
Deferred debt refinancing costs..................... 44.2 18.8
Unrecovered state excise taxes...................... 35.6 --
Deferred other postretirement benefit costs......... 35.0 --
Unrecovered purchased power capacity costs.......... 30.6 --
Unrecovered purchased power contract renegotiation
costs.............................................. 17.7 --
Deferred costs for nuclear
decommissioning/decontamination.................... 11.9 6.3
Asbestos removal costs.............................. 8.5 --
Deferred recoverable plant costs.................... 7.6 7.8
Deferred demand-side management costs............... 5.7 6.2
Deferred energy costs............................... (16.0) 18.0
Other............................................... 12.5 1.9
---------- ----------
Total............................................... $ 377.7 $ 147.7
========== ==========
</TABLE>

Deferred Recoverable Income Taxes: Represents the portion of Conectiv's
deferred tax liability applicable to utility operations that has not been
recovered from utility customers and is recoverable in the future. As
temporary differences between the financial statement and tax bases of assets
reverse, deferred recoverable income taxes are amortized.

Unrecovered State Excise Taxes: Represents additional amounts paid, by ACE,
as a result of prior legislative changes in the computation of New Jersey
state excise taxes. These costs are included in current customer rates, with
the remaining balance scheduled for full recovery over the next 4 years.

Deferred Other Postretirement Benefit Costs: Represents the non-cash portion
of other postretirement benefit costs deferred by ACE during 1993 through
1997. This cost is being recovered over a 15-year period which began on Janu-
ary 1, 1998.

Unrecovered Purchased Power Capacity Costs: Represents prior deferrals by
ACE of capacity costs which had exceeded the related recovery from customers.
These costs are included in current customer rates and are scheduled for full
recovery over the next 2 years.

Unrecovered Purchased Power Contract Renegotiation Costs: Represents costs
incurred by ACE through renegotiation of a long-term capacity and energy con-
tract. These costs are included in current customer rates with the balance
scheduled for full recovery over the next 16 years.

Deferred Energy Costs: Represents the difference between energy revenues and
actual energy costs incurred. The deferred balance is generally recovered from
or returned to utility customers within one year.

II-37
<PAGE>

Deferred Debt Refinancing Costs: The costs of refinancing debt of the util-
ity business are deferred and amortized over the period during which the costs
are recovered in rates, which is generally the life of the new debt.

Deferred Recoverable Plant Costs: Represents utility plant construction
costs excluded from plant in-service which are being recovered in customer
rates over the next 21 years.

Deferred Costs for Nuclear Decontamination/Decommissioning: Represents
amounts being amortized through fuel adjustment clause revenues for Conectiv's
liability under the Energy Policy Act of 1992 for clean-up of gaseous diffu-
sion enrichment facilities of the U.S. government.

Asbestos Removal Costs: Represents costs incurred by ACE to remove asbestos
insulation from a wholly-owned generating station. These costs are included in
current customer rates with the balance scheduled for full recovery over the
next 31 years.

Deferred Demand-Side Management Costs: Represents deferred costs of programs
which allow DPL to reduce the peak demand for power. These costs are being re-
covered over 5 years.

11. CONECTIV COMMON STOCK

In conjunction with the Merger, DPL common stockholders received one share
of Conectiv common stock in exchange for each share of DPL common stock, and
Atlantic common stockholders received 0.75 of one share of Conectiv common
stock and 0.125 of one share of Conectiv Class A common stock in exchange for
each share of Atlantic common stock. See Note 4 to the Consolidated Financial
Statements for additional information concerning the Merger.

For additional information concerning issuances and redemptions of common
stock during 1996 through 1998, see the Consolidated Statements of Changes in
Common Stockholders' Equity.

Conectiv's common dividends paid to public stockholders are funded from the
common dividends DPL and ACE pay to Conectiv. DPL's and ACE's certificates of
incorporation require payment of all preferred dividends in arrears (if any)
prior to payment of common dividends to Conectiv, and have certain other
limitations on the payment of common dividends to Conectiv.

Through the effective date of the Merger (March 1, 1998), DPL's Long-Term
Incentive Plan (LTIP) provided long-term incentives to key employees through
contingent awards of performance-based restricted stock, dividend rights, and
stock options. The DPL common stock options outstanding as of the Merger date
were converted to Conectiv common stock options and included in the Conectiv
Incentive Compensation Plan (CICP). The restricted common stock previously
granted under DPL's LTIP is earned and payable at the end of a four-year pe-
riod to the extent that stock performance compares favorably with the stock
performance of a peer group of utility companies. The 1994 awards were for-
feited in early 1998 when the required performance targets were not met. Re-
strictions on shares contingently granted in 1995 and 1996 lapsed upon the
Merger and the shares became fully vested. The restricted DPL common stock
contingently granted in 1997 was exchanged for Conectiv common stock upon the
Merger and is included in the CICP. As of December 31, 1998, there were 97,455
shares of the 1997 awards outstanding which had a $19 1/8 per share fair value
on the date of grant.

The CICP provides long-term awards to key employees and directors through
awards of stock-based compensation. Up to 5,000,000 shares of common stock may
be issued under the CICP during the ten-year period from March 1, 1998,
through February 28, 2008. Awards granted in 1998 under the CICP, which can be
settled in common stock, include performance accelerated restricted stock
(PARS), stock options, and performance accelerated stock options (PASO's).

In 1998, Conectiv granted 30,700 shares of PARS, which are earned by partic-
ipants over a seven-year vesting period. Conectiv also granted participants
22,000 additional shares of PARS, which are earned over seven

II-38
<PAGE>

years if a total stockholder return of 8% is achieved. Vesting of the 22,000
shares granted may be accelerated after three years, in whole or in part,
based on Conectiv's stock price reaching certain levels. All 52,700 shares of
the PARS had a $22.84 per share fair value on the grant date.

In 1998, Conectiv issued 289,000 stock options, which do not contain
performance acceleration features and have an exercise price of $22.84 per
share. These stock options have a ten-year life. 50% of the options vest after
two years and the remaining 50% vest after three years. Conectiv also issued
750,000 PASO's in 1998 which have an exercise price of $22.84 per share. The
PASO's have a ten-year life and vest after nine and a half years. One third of
the PASO's will vest if Conectiv's common stock price closes at or above $26
per share for ten consecutive days, two thirds will vest if the stock price
closes at or above $28 per share for ten consecutive days, and all of the
PASO's will vest if the stock price closes at or above $30 per share for ten
consecutive days.

Changes in stock options are summarized below.

<TABLE>
<CAPTION>
1998 1997 1996
------------------ --------------- ---------------
Weighted Number Weighted Number Weighted
Number of Average of Average of Average
Shares Price Shares Price Shares Price
--------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Beginning-of-year
balance................ 38,500 $20.55 43,950 $20.19 46,350 $20.16
Options exercised....... 3,200 $19.89 5,450 $17.61 2,400 $19.69
Options forfeited....... 2,150 $19.73 -- -- -- --
Options issued.......... 1,039,000 $22.84 -- -- -- --
End-of-year balance..... 1,072,150 $22.77 38,500 $20.55 43,950 $20.19
Exercisable............. 33,150 $20.67 38,500 $20.55 43,950 $20.19
</TABLE>

For options outstanding as of December 31, 1998, the range of exercise
prices was $18.13 to $22.84, and the weighted average remaining contractual
life was 8.8 years.

Conectiv recognizes compensation costs for its stock-based employee compen-
sation plans based on the accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Stock-based
employee compensation costs charged to expense were $0.9 million in 1998, $2.2
million in 1997, and $0.3 million in 1996. Pro forma net income, based on the
application of SFAS No. 123, "Accounting for Stock-Based Compensation," would
have changed by $0.6 million or less in 1998, 1997 and 1996. Earnings per
share would have changed by less than $0.01 per share in 1998, 1997 and 1996.

The fair value of each option and PASO granted in 1998 was estimated on the
date of grant using the Black Scholes option pricing model. The weighted-aver-
age fair value of the options was $2.64 based on the following weighted-aver-
age assumptions: risk-free interest rate of 5.59 percent; dividend yield of
6.0 percent; expected volatility of 20.0 percent; and a weighted average ex-
pected life of 3.5 years. The weighted-average fair value of the PASOs was
$2.87 based on the following weighted-average assumptions: risk-free interest
rate of 5.55 percent; dividend yield of 6.0 percent; expected volatility of
20.0 percent; and a weighted average expected life of 5.33 years.

On April 23, 1998, Conectiv's Board of Directors adopted a Stockholders
Rights Plan (the Plan). Under the Plan, holders of Conectiv common stock and
holders of Conectiv Class A common stock were granted preferred stock purchase
rights on May 11, 1998, by means of a dividend at the rate of one Right for
each share of common stock and one Right for each share of Class A common
stock held. The Rights expire in 10 years.

The purpose of the Plan is to guard against partial tender offers or abusive
or unfair tactics that might be used in an attempt to gain control of Conectiv
without paying all stockholders a fair price for their shares. The Plan will
not prevent takeovers, but is designed to deter coercive, abusive, or unfair
takeover tactics and to encourage individuals or entities attempting to ac-
quire Conectiv to first negotiate with the Board of Directors.

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<PAGE>

Each Right would, after the Rights become exercisable, entitle the holder to
purchase from Conectiv one one-hundredth of one share of Series One Junior
Preferred Stock or one one-hundredth of one share of Series Two Junior
Preferred Stock at an initial price of $65. The Rights will be exercisable
only if a person or group acquires beneficial ownership of 15% or more of the
aggregate voting power represented by Conectiv's outstanding securities (i.e.,
becomes an "Acquiring Person" as defined in the Plan) or commences a tender or
exchange offer to acquire beneficial ownership of 15% or more of the aggregate
voting power represented by Conectiv's outstanding securities. Conectiv
generally will be entitled to redeem the Rights at $.01 per Right at any time
before a person or group becomes an Acquiring Person.

12. CONECTIV CLASS A COMMON STOCK

Conectiv Class A common stock provides its holders a proportionately greater
opportunity to share in the growth prospects of, and a proportionately greater
exposure to the uncertainties associated with, the electric utility business
of ACE. Earnings applicable to Conectiv Class A common stock are equal to 30%
of the net of (1) earnings attributable to ACE's regulated electric utility
business, as the business existed on August 9, 1996, less (2) $40 million per
year. Earnings applicable to Conectiv common stock are the consolidated earn-
ings of Conectiv less earnings applicable to Conectiv Class A common stock.

Presented below and on the following page are summarized ACE financial in-
formation and the calculation of earnings applicable to Conectiv Class A com-
mon stock. The ACE income statement amounts are for the ten months ended De-
cember 31, 1998, which is the period included in the 1998 Consolidated State-
ment of Income under the purchase method of accounting.

Summarized Financial Information of ACE

<TABLE>
<CAPTION>
Ten Months Ended
Income Statement Information December 31, 1998
---------------------------- ----------------------
(Dollars in Thousands)
<S> <C>
Operating Revenues................................. $ 875,741
Operating Income(1)................................ $ 105,099
Net Income(1)...................................... $ 23,742
<CAPTION>
December 31,
Balance Sheet Information 1998
------------------------- ----------------------
<S> <C>
Current assets..................................... $ 236,177
Noncurrent assets.................................. 2,131,045
----------
Total assets....................................... $2,367,222
==========
Current liabilities................................ $ 247,023
Noncurrent liabilities............................. 1,264,925
Preferred stock.................................... 125,181
Common stockholders' equity........................ 730,093
----------
Total capitalization and liabilities............... $2,367,222
==========
</TABLE>

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<PAGE>

Computation of Earnings Applicable to Conectiv Class A Common Stock

<TABLE>
<CAPTION>
Ten Months Ended
December 31, 1998
----------------------
(Dollars in Thousands)
<S> <C>
Net Income of ACE(1).............................. $ 23,742
Exclude:
Employee separation and other Merger-related
costs(1)....................................... 47,886
Net loss of nonutility activities............... 1,402
Pro-rata portion of fixed amount of $40 million
per year....................................... (33,333)
--------
Subtotal.......................................... 39,697
Percentage applicable to Conectiv Class A common
stock............................................ 30%
--------
Earnings applicable to Conectiv Class A common
stock............................................ $ 11,909
========
</TABLE>
- --------
(1) The amounts shown above and on the prior page reflect employee separation
and other Merger-related costs for ACE, which reduced ACE's operating in-
come and net income for the ten months ended December 31, 1998, by $80.1
million and $47.9 million, respectively. In the Conectiv Consolidated Fi-
nancial Statements, these costs were capitalized as costs of the Merger,
as discussed in Note 5 to the Consolidated Financial Statements.

Conversion and Redemption Provisions Relating to Class A Common Stock

Conversion at the Option of Conectiv

Conectiv may at any time convert each share of Conectiv Class A common stock
into the number of shares of Conectiv common stock equal to the specified per-
centage set forth in Conectiv's Restated Certificate of Incorporation
(Conectiv Charter) of the Market Value Ratio of the Conectiv Class A common
stock to the Conectiv common stock (as defined in the Conectiv Charter).

Redemption or Conversion Following a Tender or Exchange Offer

In the case of a tender offer by Conectiv for all of the Conectiv Class A
common stock for cash (as defined in the Conectiv Charter) or an offer to ex-
change each share of Conectiv Class A common stock into a number of shares of
Conectiv common stock equal to at least 110% of the Market Value Ratio of the
Class A common stock to Conectiv common stock (as of the trading day immedi-
ately preceding the date of such offer) which is accepted by the holders of
more than 50% of the Conectiv Class A common stock, Conectiv may either (1)
redeem each share of Conectiv Class A common stock remaining outstanding in
exchange for cash (in an amount equal to the highest cash price paid per share
by Conectiv pursuant to such tender offer or to the value of the highest num-
ber of shares of Conectiv common stock per share issued in exchange for any
share of Conectiv Class A common stock pursuant to such exchange offer (as
such value is determined in accordance with the Conectiv Charter), as the case
may be,) or (2) convert each share of Conectiv Class A common stock remaining
outstanding into shares of Conectiv common stock on the basis set forth in the
Conectiv Charter.

If any person (including Conectiv) makes a tender offer for all of the out-
standing shares of Conectiv common stock at an all cash price that is accepted
by the holders of more than 50% of Conectiv common stock, Conectiv may either
redeem each share of Conectiv Class A common stock for cash in an amount cal-
culated pursuant to a formula set forth in the Conectiv Charter, or convert
each share of Conectiv Class A common stock into shares of Conectiv common
stock on the basis set forth in the Conectiv Charter.

Participation in a Tender Offer

If any person (including Conectiv) makes a tender offer to purchase shares
of Conectiv common stock for cash, property, or other securities, any holder
of Conectiv Class A common stock may elect to convert shares of

II-41
<PAGE>

Conectiv Class A common stock into shares of Conectiv common stock on the ba-
sis set forth in the Conectiv Charter.

Dividend, Redemption, or Conversion upon Disposition of All or Substantially
All Assets Attributed to the Atlantic Utility Group

The Conectiv Charter also provides for the payment of dividends with respect
to, and/or the redemption or conversion of, the Conectiv Class A common stock
upon the disposition, by Conectiv and/or its subsidiaries of all or substan-
tially all of the assets attributed to the Atlantic Utility Group to one or
more entities.

Conectiv may, if there are assets of Conectiv legally available therefor and
the Atlantic Utility Group Available Dividend Amount (as defined in the
Conectiv Charter) is sufficient therefor, pay to the holders of Conectiv Class
A common stock a dividend in cash and/or in securities as defined in the
Conectiv Charter, or; subject to certain limitations set forth in the Conectiv
Charter, if such disposition involves all of the assets attributed to the At-
lantic Utility Group, redeem all of the Conectiv Class A common stock for cash
and/or for securities, Conectiv common stock or other property as defined in
the Conectiv Charter, or redeem a number of whole shares of Conectiv Class A
common stock (which may be all of such shares outstanding) on the basis set
forth in the Conectiv Charter, or convert each share of Conectiv Class A com-
mon stock into shares of Conectiv common stock on the basis set forth in the
Conectiv Charter.

In the event of a dividend or redemption as described in the preceding
clauses, the Board of Directors of Conectiv may convert the remaining Conectiv
Class A common stock into shares of Conectiv common stock on the basis set
forth in the Conectiv Charter. If less than all of the outstanding shares of
Conectiv Class A common stock are to be redeemed in connection with a disposi-
tion of substantially all (but less than all) of the assets attributed to the
Atlantic Utility Group, the shares to be redeemed by Conectiv will be selected
on a pro rata basis or by lot or by such other method as the Board of Direc-
tors of Conectiv may determine to be equitable.

13. PREFERRED STOCK

Conectiv (the parent holding company), ACE, and DPL are each authorized to
separately issue preferred stock. Conectiv is authorized to issue 20,000,000
shares of $0.01 per share par value preferred stock, none of which has been
issued. ACE is authorized to issue 799,979 shares of $100 par value Cumulative
Preferred Stock, 2,000,000 shares of No Par Preferred Stock, and 3,000,000
shares of Preference Stock. DPL has $1, $25, and $100 par value per share pre-
ferred stock for which 10,000,000, 3,000,000, and 1,800,000 shares are autho-
rized, respectively. Dividends on ACE and DPL preferred stock are cumulative.
Information concerning shares of preferred stock outstanding is shown on the
following page.

II-42
<PAGE>

Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption

The amounts outstanding as of December 31, 1998, and 1997 of Conectiv's sub-
sidiaries preferred stock not subject to mandatory redemption are presented
below.

<TABLE>
<CAPTION>
Shares
Current Outstanding Amount
Redemption --------------- -----------------------
Issuer Series Price 1998 1997 1998 1997
- ------ ------------------------ --------------- ------- ------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ACE(1) $100 per share par value $100.00-$105.50 62,305 -- $ 6,230 --
4.00%-5.00%
DPL $25 per share par value (2) 316,500 316,500 7,913 7,913
7 3/4%
DPL $100 per share par value $103.00-$105.00 181,698 181,698 18,170 18,170
3.70%-5.00%
DPL 6 3/4% (3) 35,000 35,000 3,500 3,500
DPL Adjustable rate(4) $100 151,200 151,200 15,120 15,120
DPL Auction rate(5) $100 450,000 450,000 45,000 45,000
----------- -----------
$ 95,933 $ 89,703
=========== ===========
</TABLE>
- --------
(1) Under purchase accounting for the Merger, ACE and its wholly-owned trusts
were consolidated in Conectiv's financial statements beginning March 1,
1998. In the fourth quarter of 1998, ACE purchased and retired 237,695
shares, or $23.77 million, of various series of preferred stock, which had
an average dividend rate of 4.4%. A $2.5 million gain on the redemption is
presented in the Consolidated Statement of Income as a reduction of Pre-
ferred Stock Dividend Requirements of Subsidiaries.
(2) Redeemable beginning September 30, 2002, at $25 per share.
(3) Redeemable beginning November 1, 2003, at $100 per share.
(4) Average dividend rates were 5.5% during 1998 and 1997.
(5) Average dividend rates were 4.2% during 1998 and 4.1% during 1997.

Preferred Stock of Subsidiaries Subject to Mandatory Redemption

The amounts outstanding as of December 31, 1998, and 1997 of Conectiv's sub-
sidiaries preferred stock subject to mandatory redemption are presented below.

<TABLE>
<CAPTION>
Issuing Company Series Shares Outstanding Amount
- --------------- --------------------- ------------------- ----------------
1998 1997 1998 1997
--------- --------- -------- -------
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C>
DPL financing trust(1) $25 per share, 8.125% 2,800,000 2,800,000 $ 70,000 $70,000
ACE(2),(3) $100 per share, $7.80 239,500 -- 23,950 --
ACE financing
trust(1),(3) $25 per share, 8.25% 2,800,000 -- 70,000 --
ACE financing trust(1) $25 per share, 7.375% 1,000,000 -- 25,000 --
-------- -------
$188,950 $70,000
======== =======
</TABLE>
- --------
(1) Per share value is stated liquidation value. See additional information on
the following page.
(2) No par value; stated value is $100 per share. Beginning May 1, 2001,
115,000 shares are subject to mandatory redemption annually.
(3) Under purchase accounting for the Merger, ACE and its wholly-owned trusts
were consolidated in Conectiv's financial statements beginning March 1,
1998.

On August 3, 1998, ACE redeemed the remaining 100,000 shares of its $8.20 No
Par Preferred Stock at $100 per share or $10.0 million in total (the book
value of the preferred stock).

II-43
<PAGE>

DPL and ACE have established wholly-owned subsidiary trusts for the purposes
of issuing common and preferred trust securities and holding Junior Subordi-
nated Debentures (the Debentures). The Debentures held by the trusts are their
only assets. The trusts use interest payments received on the Debentures they
hold to make cash distributions on the trust securities.

DPL and ACE's obligations pursuant to the Debentures and guarantees of dis-
tributions with respect to the trusts' securities, to the extent the trusts
have funds available therefor, constitute full and unconditional guarantees of
the obligations of the trusts under the trust securities the trusts have is-
sued. DPL and ACE own all of the common securities of the trusts, which con-
stitute approximately 3% of the liquidation amount of all of the trust securi-
ties issued by the trusts.

For consolidated financial reporting purposes, the Debentures are eliminated
in consolidation against the trust's investment in the Debentures. The pre-
ferred trust securities are subject to mandatory redemption upon payment of
the Debentures at maturity or upon redemption. The Debentures mature in 2026
to 2036. The Debentures are subject to redemption, in whole or in part, at the
option of DPL and/or ACE, at 100% of their principal amount plus accrued in-
terest, after an initial period during which they may not be redeemed and at
any time upon the occurrence of certain events.

In November 1998, Atlantic Capital II issued $25 million (1,000,000 shares)
of 7 3/8% preferred stock.

In October 1996, Delmarva Power Financing I issued $70 million (2,800,000
shares) of 8.125% preferred stock. DPL used part of the proceeds received from
the trust to purchase and retire $32.1 million of its $25 par value, 7.75% se-
ries preferred stock, and $31.3 million of various series of its $100 par
value preferred stock which had an average dividend rate of 5.68%. In December
1996, DPL redeemed its entire 7.52% preferred stock series which had a total
par value of $15.0 million.

14. DEBT

Substantially all utility plant of DPL and ACE are subject to the liens of
the Mortgages collateralizing DPL and ACE's First Mortgage Bonds.

As of December 31, 1998, Conectiv and its subsidiaries had $590 million of
bank lines of credit, of which $235 million was available for borrowing. At
December 31, 1998, Conectiv's short-term debt balance was comprised of commer-
cial paper and lines of credit. The weighted average interest rates on short-
term debt outstanding as of December 31, 1998, and 1997, were 6.0% and 6.6%,
respectively.

Maturities of long-term debt and sinking fund requirements during the next
five years are as follows: 1999--$80.8 million; 2000--$48.7 million; 2001--
$43.7 million; 2002--$99.3 million; 2003--$162.4 million.

In December 1998, DPL redeemed $6.0 million of 5.75% pollution Control Bonds
at maturity.

In June 1998, DPL repaid at maturity $25.0 million of 5.69% Medium-Term
Notes and $1.0 million of 6.95% Amortizing First Mortgage Bonds.

In May 1998, ACE repaid at maturity $6.0 million of 5.5% Medium-Term Notes
and $2.5 million of 7.25% Debentures.

In March 1998, borrowings under Conectiv's revolving credit facilities were
primarily used for repayment of debt as follows: (1) $53.5 million was used to
repay the balance outstanding under Atlantic's revolving credit and term loan
facility; (2) $92.2 million was used to repay the balance outstanding under
the revolving credit and term loan facility of Atlantic Thermal Systems, Inc.
(now CTS) and (3) $12.5 million was used to repay the balance outstanding un-
der the revolving credit and term loan facility of ATE Investments Inc.

II-44
<PAGE>

In January 1998, DPL issued $33.0 million of 6.81% unsecured Medium-Term
Notes which mature in 20 years. DPL used $25.4 million of the proceeds to re-
finance short-term debt. In recognition of this refinancing, $25.4 million of
short-term debt was reclassified to long-term debt on the consolidated balance
sheet as of December 31, 1997.

In the fourth quarter of 1997, DPL issued $42 million of unsecured Medium-
Term Notes with maturities of 5 to 9 years and interest rates of 6.6% to 6.8%.
The proceeds were used to refinance short-term debt.

In September 1997, DPL redeemed $25 million of 6 3/8% First Mortgage Bonds
at maturity through the issuance of short-term debt.

In February 1997, DPL issued $124.2 million of unsecured Medium-Term Notes
with maturities of 10 to 30 years and interest rates of 7.06% to 7.72%. The
proceeds were used to refinance short-term debt.

II-45
<PAGE>

Long-term debt outstanding as of December 31, 1998, and 1997 is presented be-
low:

<TABLE>
<CAPTION>
Interest
Rates Due 1998 1997
----------- --------- ---------- ----------
(Dollars in
Thousands)
<S> <C> <C> <C> <C>
First Mortgage Bonds:....... 6.95% 2002 $ 30,000 $ 30,000
6.40% 2003 90,000 90,000
6.625%-8.15% 2011-2015 190,500 115,500
5.90%-7.60% 2017-2021 163,200 163,200
6.85%-8.50% 2022-2025 240,000 165,000
6.05%-7.00% 2028-2032 90,000 15,000
Amortizing First Mortgage
Bonds...................... 6.95% 1999-2008 24,149 25,103
----------- --------- ---------- ----------
827,849 603,803
----------- --------- ---------- ----------
Pollution Control Bonds and
Notes:..................... 5.75% 1998 -- 6,000
7.125%-7.25% 1999-2006 2,800 2,900
6.375% 2006 2,350 --
6.80% 2021 38,865 --
5.60%-7.20% 2025-2029 58,650 --
----------- --------- ---------- ----------
102,665 8,900
----------- --------- ---------- ----------
Medium-Term Notes (se-
cured):.................... 7.52% 1999 30,000 --
6.83% 2000 46,000 --
6.86% 2001 40,000 --
7.02% 2002 30,000 --
6.00%-7.18% 2003 40,000 --
6.19%-7.98% 2004-2008 223,000 --
7.25%-7.63% 2010-2014 8,000 --
7.68% 2015-2016 17,000 --
----------- --------- ---------- ----------
434,000 --
----------- --------- ---------- ----------
Medium-Term Notes
(unsecured):............... 5.69% 1998 -- 25,000
7.50% 1999 30,000 30,000
6.46%-9.29% 2002 36,000 16,000
6.63% 2003 30,000 --
8.30% 2004 35,000 35,000
6.84% 2005 10,000 10,000
6.75% 2006 20,000 20,000
7.06%-8.125% 2007 106,500 91,500
7.54%-7.62% 2017 40,700 40,700
6.59%-6.84% 2018 33,000 25,430
7.61%-9.95% 2019-2021 73,000 73,000
7.72% 2027 30,000 30,000
----------- --------- ---------- ----------
444,200 396,630
----------- --------- ---------- ----------
Other Obligations:.......... 7.44% 1999 15,000 --
8.00% 1999 3,351 3,660
6.00%-9.50% 1999-2002 193 232
9.65% 2002(1) 4,441 5,354
Unamortized premium and
discount, net.............. (4,315) (1,589)
Current maturities of long-
term debt.................. (80,822) (33,318)
---------- ----------
Total long-term debt........ 1,746,562 983,672
Variable Rate Demand
Bonds(2)................... 125,100 71,500
---------- ----------
Total long-term debt and
Variable Rate Demand
Bonds...................... $1,871,662 $1,055,172
========== ==========
</TABLE>
- --------
(1) Repaid through monthly payments of principal and interest over 15 years
ending November 2002.

II-46
<PAGE>

(2) Conectiv's debt obligations included Variable Rate Demand Bonds (VRDB) in
the amounts of $125.1 million and $71.5 million as of December 31, 1998
and 1997, respectively. The VRDB are classified as current liabilities be-
cause the VRDB are due on demand by the bondholder. However, bonds submit-
ted to Conectiv for purchase are remarketed by a remarketing agent on a
best efforts basis. Conectiv expects that bonds submitted for purchase
will continue to be remarketed successfully due to Conectiv's credit wor-
thiness and the bonds' interest rates being set at market. Conectiv also
may utilize one of the fixed rate/fixed term conversion options of the
bonds. Thus, Conectiv considers the VRDB to be a source of long-term fi-
nancing. The $125.1 million balance of VRDB outstanding as of December 31,
1998, matures in 2009 ($12.5 million), 2014 ($18.2 million), 2017 ($30.4
million), 2028 ($15.5 million), 2029 ($30.0 million) and 2031 ($18.5 mil-
lion). Average annual interest rates on the VRDB were 3.4% in 1998 and
3.8% in 1997.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The year-end fair values of certain financial instruments are listed below.
The fair values were based on quoted market prices of Conectiv's securities or
securities with similar characteristics.

<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Funds held by trustee............... $ 174,509 $ 174,509 $ 48,086 $ 48,086
Preferred stock of subsidiaries
subject to mandatory redemption.... $ 188,950 $ 194,178 $ 70,000 $ 72,464
Long-term debt...................... $1,746,562 $1,878,044 $983,672 $1,053,810
</TABLE>

16. COMMITMENTS

Conectiv's expected capital and acquisition expenditures are estimated to be
approximately $327 million in 1999.

As of December 31, 1998, ACE and DPL's commitments under long-term purchased
power contracts were as follows: ACE-828 megawatts(MW) of capacity; DPL-237 MW
of capacity; and DPL-100 MW of energy. Currently, most of ACE's capacity
charges are recovered under the Levelized Energy Clause and DPL's capacity
charges are recovered through base rates. Historical information is presented
below for these contracts, including ACE from March 1, 1998, forward and a 48
MW capacity contract which was suspended in October 1996.

<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Percent of system capacity........................... 17.6% 6.4% 6.4%
Percent of energy output............................. 26.2% 12.1% 10.6%
Capacity charges ($ in millions)..................... $182.7 $28.5 $32.1
Energy charges ($ in millions)....................... $166.5 $38.1 $32.5
</TABLE>

Based on existing contracts as of December 31, 1998, Conectiv's future
commitments for capacity and energy under long-term purchased power contracts
are estimated to be $353.1 million in 1999; $365.8 million in 2000; $360.4
million in 2001; $363.4 million in 2002; and $367.5 million in 2003. Due to
uncertainties surrounding the restructuring of the electric utility industry,
Conectiv has not forecasted its long-term power purchase commitments beyond
2003.

Conectiv's share of nuclear fuel at Peach Bottom, Salem, and Hope Creek is
financed through a nuclear fuel energy contract, which is accounted for as a
capital lease. Payments under the contract are based on the quantity of nu-
clear fuel burned by the plants. Conectiv's obligation under the contract is
generally the net book value of the nuclear fuel financed, which was $63.3
million as of December 31, 1998.

II-47
<PAGE>

Conectiv leases an 11.9% interest in the Merrill Creek Reservoir. The lease
is considered an operating lease and payments over the remaining lease term,
which ends in 2032, are $150.5 million in aggregate. Conectiv also has long-
term leases for certain other facilities and equipment. Minimum commitments as
of December 31, 1998, under all such lease agreements (excluding payments un-
der the nuclear fuel energy contracts, which cannot be reasonably estimated)
are as follows: 1999--$10.2 million; 2000--$9.0 million; 2001--$8.8 million;
2002--$7.9 million; 2003--$9.7 million; after 2003--$131.5 million; total--
$177.1 million. Approximately 85% of the minimum lease commitments shown above
are payments due under the Merrill Creek Reservoir lease.

Rentals Charged To Operating Expenses

The following amounts were charged to operating expenses for rental payments
under both capital and operating leases.

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest on capital leases........................ $ 2,468 $ 1,548 $ 1,628
Amortization of capital leases.................... 19,554 6,499 5,653
Operating leases.................................. 17,443 11,590 13,795
------- ------- -------
$39,465 $19,637 $21,076
======= ======= =======
</TABLE>

Leveraged Leases

The leveraged leases of Conectiv's subsidiaries included eight aircraft
leases and two containership leases as of December 31, 1998 and five aircraft
leases as of December 31, 1997. The net investment in leveraged leases as of
December 31, 1998, and 1997 was as follows:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Rentals receivable (net of principal and
interest on nonrecourse debt).................. $ 46,312 $ 19,588
Estimated residual value........................ 75,944 26,787
----------- -----------
Investment in leveraged leases.................. 122,256 46,375
Deferred income taxes........................... 116,481 38,288
----------- -----------
Net investment in leveraged leases.............. $ 5,775 $ 8,087
=========== ===========
</TABLE>

17. PENSION and OTHER POSTRETIREMENT BENEFITS

Assumptions

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount rates used to determine projected benefit
obligation as of December 31......................... 6.75% 7.00% 7.50%
Expected long-term rates of return on assets.......... 9.00% 9.00% 9.00%
Rates of increase in compensation levels.............. 4.50% 5.00% 5.00%
Health care cost trend rate on covered charges........ 7.00% 7.50% 8.00%
</TABLE>

The health-care cost trend rate, or the expected rate of increase in health-
care costs, is assumed to gradually decrease to 5.0% by 2002. Increasing the
health-care cost trend rates of future years by one percentage point would in-
crease the accumulated postretirement benefit obligation by $20.3 million and
would increase annual aggregate service and interest costs by $2.1 million.
Decreasing the health-care cost trend rates of future years by one percentage
point would decrease the accumulated postretirement benefit obligation by
$17.9 million and would decrease annual aggregate service and interest costs
by $1.8 million.

II-48
<PAGE>

The following schedules reconcile the beginning and ending balances of the
pension and other postretirement benefit obligations and related plan assets
for Conectiv. Other postretirement benefits include medical benefits for re-
tirees and their spouses and retiree life insurance.

Change in Benefit Obligation

<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------- ----------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year............ $ 515,590 $450,640 $ 80,500 $ 73,841
Merger with Atlantic.......... 316,700 -- 125,300 --
Service cost.................. 20,193 12,779 5,828 2,393
Interest cost................. 51,721 34,173 15,105 5,547
Plan participants'
contributions................ -- -- 497 304
Plan amendments............... (21,392) -- -- --
Actuarial (gain) loss......... 59,046 40,492 (2,863) 4,781
Special termination benefits.. 59,610 -- 2,682 --
Curtailment (gain) loss....... (10,256) -- 6,614 --
Settlement (gain) loss........ (45,291) -- 6,457 --
Benefits paid................. (197,232) (22,494) (7,746) (6,366)
--------- -------- ---------- ---------
Benefit obligation at end of
year......................... $ 748,689 $515,590 $ 232,374 $ 80,500
========= ======== ========== =========
</TABLE>

Change in Plan Assets

<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fair value of assets at
beginning of year............ $771,257 $676,189 $ 48,591 $ 36,075
Merger with Atlantic.......... 260,200 -- 19,700 --
Actual return on plan assets.. 117,249 117,562 6,263 9,984
Employer contributions........ -- -- 27,859 8,594
Plan participant
contributions................ -- -- 497 304
Benefits paid................. (197,232) (22,494) (7,746) (6,366)
-------- -------- ---------- ----------
Fair value of assets at end of
year......................... $951,474 $771,257 $ 95,164 $ 48,591
======== ======== ========== ==========
</TABLE>

Reconciliation of Funded Status of the Plans

<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Funded status at end of year.... $202,785 $255,667 $ (137,210) $ (31,909)
Unrecognized net actuarial
(gain)......................... (173,243) (205,732) (9,094) (18,238)
Unrecognized prior service
cost........................... 2,361 26,945 248 317
Unrecognized net transition
(asset) obligation............. (15,773) (23,199) 43,787 54,259
-------- -------- ---------- ---------
Net amount recognized at end of
year........................... $ 16,130 $ 53,681 $ (102,269) $ 4,429
======== ======== ========== =========
</TABLE>

Based on fair values as of December 31, 1998, the pension plan assets were
comprised of publicly traded equity securities ($637.5 million or 67%) and
fixed income obligations ($314.0 million or 33%). Based on fair values as of
December 31, 1998, the other postretirement benefit plan assets included eq-
uity securities ($43.4 million or 46%) and fixed income obligations ($51.8
million or 54%).

II-49
<PAGE>

Components of Net Periodic Benefit Cost

<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------- -------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 18,933 $ 12,779 $ 13,172 $ 5,221 $ 2,393 $ 2,512
Interest cost........... 48,291 34,173 32,531 13,636 5,547 5,213
Expected return on
assets................. (81,259) (60,020) (54,485) (4,845) (2,580) (1,722)
Amortization of:
Transition obligation
(asset)............... (2,764) (3,314) (3,314) 3,244 3,617 3,617
Prior service cost..... 1,911 2,035 2,048 50 53 53
Actuarial (gain)....... (9,165) (7,814) (4,573) (567) (712) (500)
-------- -------- -------- ------- ------- -------
Benefit cost before
items below.......... $(24,053) $(22,161) $(14,621) $16,739 $ 8,318 $ 9,173
Special termination
benefits............... 59,610 -- -- 2,682 -- --
Curtailment (gain)
loss................... (10,256) -- -- 6,614 -- --
Settlement (gain) loss.. (45,291) -- -- 6,457 -- --
-------- -------- -------- ------- ------- -------
Total net periodic
benefit cost........... $(19,990) $(22,161) $(14,621) $32,492 $ 8,318 $ 9,173
======== ======== ======== ======= ======= =======
Portion of net periodic
benefit cost included
in results of
operations............. $(22,258) $(16,621) $(10,966) $20,440 $ 6,239 $ 6,880
======== ======== ======== ======= ======= =======
</TABLE>

The special termination benefits and curtailment and settlement gains and
losses shown above for 1998 resulted from Merger-related employee separation
programs discussed in Note 5 to the Consolidated Financial Statements.

Effective January 1, 1999, Conectiv adopted a "cash balance" pension plan
for covered employees. Conectiv will make contributions, which vary based on a
covered employee's age and years of service, to individual employee accounts
provided for under the plan. The "cash balance" of each employee's account in-
creases based on Conectiv's contributions and interest income credited to the
accounts. The aggregate of the employee's accounts will be Conectiv's pension
obligation.

Conectiv also maintains 401(k) savings plans for covered employees. Conectiv
contributes to the plan, in the form of Conectiv stock, at varying levels up
to $0.50 for each dollar contributed by employees, for up to 6% of employee
base pay. The amount expensed for Conectiv's matching contributions was $4.9
million in 1998, $3.0 million in 1997, and $2.4 million in 1996.

18. SALEM NUCLEAR GENERATING STATION

Conectiv, through DPL and ACE, owns 14.82% of Salem, which consists of two
pressurized water nuclear reactors operated by Public Service Electric & Gas
Company (PSE&G). Salem Units 1 and 2 were removed from operation by PSE&G in
the second quarter of 1995 due to operational problems, and maintenance and
safety concerns. After receiving NRC authorization, PSE&G returned Unit 2 to
service on August 30, 1997, and Unit 1 to service on April 17, 1998. The net
increase in fuel expenses due to unrecovered replacement power and other
costs, net of the benefit of lawsuit settlement proceeds received in 1997, was
$3.1 million in 1998, $3.1 million in 1997, and $10.1 million in 1996. The Sa-
lem outages also caused increases in operation and maintenance costs of ap-
proximately $4 million in 1997 and $9 million in 1996.

As previously reported, on February 27, 1996, the co-owners of Salem, in-
cluding DPL and ACE, filed a complaint in the United States District Court for
New Jersey against Westinghouse Electric Corporation (Westinghouse), the de-
signer and manufacturer of the Salem steam generators. The complaint, which
sought to recover from Westinghouse the costs associated with and resulting
from the cracks discovered in Salem's steam generators and with replacing such
steam generators, alleged violations of federal and New Jersey Racketeer In-
fluenced

II-50
<PAGE>

and Corrupt Organizations Acts, fraud, negligent misrepresentation and breach
of contract. On November 4, 1998, the Court granted Westinghouse's motion for
summary judgment with regard to the federal Racketeer Influenced and Corrupt
Organizations Act claim, and dismissed the remaining state law claims without
prejudice. On November 18, 1998, the co-owners re-filed their state law claims
against Westinghouse in the Superior Court of New Jersey. The co-owners also
filed an appeal of the District Court's dismissal with the United States Court
of Appeals for the Third Circuit.

19. CONTINGENCIES

Environmental Matters

Conectiv's subsidiaries are subject to regulation with respect to the envi-
ronmental effects of their operations, including air and water quality con-
trol, solid and hazardous waste disposal, and limitations on land use by vari-
ous federal, regional, state, and local authorities. Federal and state stat-
utes 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 practic-
es. Conectiv's current liabilities include $3.0 million and $2.0 million as of
December 31, 1998, and 1997, respectively, for potential clean-up and other
costs related to sites at which a Conectiv subsidiary is a potentially respon-
sible party or alleged to be a third party contributor. Conectiv does not ex-
pect such future costs to have a material effect on its financial position or
results of operations.

Nuclear Insurance

In conjunction with DPL and ACE's ownership interests in Peach Bottom, Sa-
lem, and Hope Creek , they 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), they could be assessed up to $57.0 million on an aggregate
basis for such third-party claims. In addition, Congress could impose a reve-
nue-raising measure on the nuclear industry to pay such claims.

The co-owners of Peach Bottom, Salem, and Hope Creek maintain property in-
surance coverage of approximately $2.8 billion for each unit for loss or dam-
age to the units, including coverage for decontamination expense and premature
decommissioning. In addition, Conectiv is a member of an industry mutual in-
surance 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.

20. BUSINESS SEGMENTS

The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In ac-
cordance with SFAS No. 131, Conectiv's business segments were determined from
Conectiv's internal organization and management reporting, which are based
primarily on differences in products and services. Conectiv's business seg-
ments under SFAS No. 131 are as follows: Generation--produces electricity and
operates power plants; Merchant--purchases and sells bulk energy; Power Deliv-
ery--delivers electricity and gas to customers at regulated prices over trans-
mission and distribution systems; Other--includes HVAC, plumbing, telephone
and other services provided to homes and businesses; thermal heating and cool-
ing systems for large commercial and industrial customers; and various other
businesses which are not subject to price regulation. All revenues of
Conectiv's business segments are from customers located in the United States.
Also, all assets of Conectiv's business segments are located in the United
States. Segment information for 1997 and 1996 has been restated to conform
with the current presentation.

Billings to electric and gas customers under regulated tariffs include
amounts for services provided by the Generation, Merchant, and Power Delivery
business segments. These revenues are allocated directly to the

II-51
<PAGE>

Generation, Merchant, and Power Delivery business segments based on the cost
of services provided. The Merchant business segment's revenues also include
revenues from bulk energy sales to off-system customers in markets not subject
to price regulation.

The services provided by one business segment to another business segment
are recorded as a transfer of costs, based on the fully-distributed cost of
the service provided. Common services which are shared by the business units
(shared services) are assigned directly or allocated based on various cost
causative factors, depending on the nature of the service provided. The depre-
ciation associated with shared services' assets is allocated to the business
segments; however, the assets and related capital expenditures are not allo-
cated.

The business segments' operating results are evaluated based on a profit
measure called "contribution to corporate," which is equal to operating reve-
nues and other income less operating expenses, excluding corporate expenses.
Contribution to corporate for 1998 includes the January and February 1998 op-
erating results of the former Atlantic-owned companies and excludes Merger-re-
lated costs. Contribution to corporate in 1997 excludes the gain on the sale
of the Pine Grove landfill and its related waste-hauling company.

For internal management reporting purposes, Investments and Property, Plant
and Equipment are assigned to business segments, but Current Assets and De-
ferred Charges and Other Assets are not.

<TABLE>
<CAPTION>
As of
December 31,
Year Ended December 31, 1998 1998
------------------------------------------------------ ---------------
Investments and
Contribution Capital Property, Plant
Business Segments Revenues Depreciation to Corporate Expenditures & Equipment
- ----------------- ---------- ------------ ------------ ------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Energy:
Generation............ $ 917,636 $127,536 $316,184 $ 40,845 $1,976,335
Merchant.............. 1,473,513 267 3,703 -- 9,621
Power Delivery.......... 666,163 88,612 319,860 102,651 2,139,111
All Other............... 169,764 8,039 (47,189) 41,097 428,637
---------- -------- -------- -------- ----------
$3,227,076(1) $224,454(2) $592,558(3) $184,593(4) $4,553,704(5)
========== ======== ======== ======== ==========
</TABLE>
- --------
(1) Includes $155,470 of revenues for January to February 1998 of the formerly
Atlantic-owned companies which are excluded from consolidated revenues of
$3,071,606.
(2) Includes $14,629 of depreciation for January to February 1998 of the for-
merly Atlantic-owned companies which is excluded from consolidated depre-
ciation expense of $241,420. Excludes $6,174 of goodwill amortization pur-
suant to the Merger and $25,421 of depreciation classified in business
segment operating expenses which are included in consolidated depreciation
expense.
(3) The following items are subtracted from contribution to corporate to ar-
rive at consolidated income before income taxes: $20,914 for the January
to February 1998 contribution to corporate of the formerly Atlantic-owned
companies; $27,704 of employee separation and other Merger-related costs;
$124,704 of corporate expenses; $6,174 of goodwill amortization associated
with the Merger; and $154,044 of interest expense and preferred dividends
deducted after contribution to corporate.
(4) Consolidated capital expenditures of $224,831 include $53,862 of shared
services' capital expenditures which are excluded above and exclude
$13,624 of January to February 1998 capital expenditures of the formerly
Atlantic-owned companies which are included above.
(5) Excludes $314,361 of shared services' property, plant & equipment and cer-
tain investments, all Current Assets ($723,872), and all Deferred Charges
and Other Assets ($495,737) which are included in total consolidated as-
sets of $6,087,674. Amounts invested in equity method investees as of De-
cember 31, 1998 were $27,004 by Generation, $5,353 by Merchant, and
$47,448 by All Other business segments.

II-52
<PAGE>

<TABLE>
<CAPTION>
As of
December 31,
Year Ended December 31, 1997 1997
--------------------------------------------------- ---------------
Investments and
Contribution Capital Property, Plant
Business Segments Revenues Depreciation to Corporate Expenditures & Equipment
- ----------------- ---------- ------------ ------------ ------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Energy:
Generation............ $ 527,998 $ 63,554 $144,765 $ 27,579 $ 968,115
Merchant.............. 426,848 -- 3,046 -- 1,782
Power Delivery.......... 351,454 49,292 167,763 76,581 1,145,872
All Other............... 109,067 8,148 (18,898) 41,980 130,973
---------- -------- -------- -------- ----------
$1,415,367 $120,994(1) $296,676(2) $146,140(3) $2,246,742(4)
========== ======== ======== ======== ==========
</TABLE>
- --------
(1) Excludes $15,346 of depreciation expense classified in business segment
operating expenses which is included in total consolidated depreciation
expense of $136,340.
(2) Excludes the following items which are reflected in consolidated income
before income taxes of $173,373: $55,633 of corporate expenses; a $22,910
pre-tax gain on the sale of the Pine Grove landfill and waste-hauling com-
pany; $80,402 of interest expense; and $10,178 of preferred stock divi-
dends.
(3) Excludes $10,668 of shared services' capital expenditures included in con-
solidated capital expenditures of $156,808.
(4) Excludes $181,435 of shared services' property, plant & equipment and cer-
tain investments, all Current Assets ($340,891), and all Deferred Charges
and Other Assets ($246,413) which are included in total consolidated as-
sets of $3,015,481.

<TABLE>
<CAPTION>
As of
December 31,
Year Ended December 31, 1996 1996
--------------------------------------------------- ---------------
Investments and
Contribution Capital Property, Plant
Business Segments Revenues Depreciation to Corporate Expenditures & Equipment
- ----------------- ---------- ------------ ------------ ------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Energy:
Generation............ $ 528,998 $ 58,522 $144,646 $ 50,504 $ 981,629
Merchant.............. 242,652 -- -- -- --
Power Delivery.......... 351,012 50,612 170,242 78,033 1,140,864
All Other............... 46,002 4,826 6,142 10,252 97,323
---------- -------- -------- -------- ----------
$1,168,664 $113,960(1) $321,030(2) $138,789(3) $2,219,816(4)
========== ======== ======== ======== ==========
</TABLE>
- --------
(1) Excludes $14,611 of depreciation expense classified in business segment
operating expenses which is included in total consolidated depreciation
expense of $128,571.
(2) Excludes the following items which are reflected in consolidated income
before income taxes of $185,591: $54,797 of corporate expenses; $70,316 of
interest expense; and $10,326 of preferred stock dividends.
(3) Excludes $26,806 of shared services' capital expenditures included in con-
solidated capital expenditures of $165,595.
(4) Excludes $190,543 of shared services' property, plant & equipment and cer-
tain investments, all Current Assets ($308,200), and all Deferred Charges
and Other Assets ($213,296) which are included in total consolidated as-
sets of $2,931,855.

II-53
<PAGE>

21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The quarterly data presented below reflect all adjustments necessary in the
opinion of Conectiv management for a fair presentation of the interim results.
Quarterly data normally vary seasonally because of temperature variations,
differences between summer and winter rates, the timing of rate orders, and
the scheduled downtime and maintenance of electric generating units.

<TABLE>
<CAPTION>
Earnings per Earnings per
Operating Operating Net Common Class A
Quarter Ended Revenue Income Income Share(1) Share(2)
------------- ---------- --------- -------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1998
March 31......... $ 503,591 $ 22,163 $ (3,978) $(0.06) $0.02
June 30.......... 684,039 109,429 39,344 0.37 0.31
September 30..... 1,012,479 200,755 93,668 0.83 1.44
December 31...... 871,497 54,568 24,167 0.24 0.04
---------- -------- -------- ------ -----
$3,071,606 $386,915 $153,201 $ 1.50 $1.82
========== ======== ======== ====== =====
1997
March 31......... $ 346,079 $ 63,150 $ 24,578 $ 0.40 --
June 30.......... 310,968 51,376 16,913 0.28 --
September 30..... 400,502 85,509 38,319 0.63 --
December 31...... 357,818 26,259 21,408 0.35 --
---------- -------- -------- ------ -----
$1,415,367 $226,294 $101,218 $ 1.66 --
========== ======== ======== ====== =====
</TABLE>
- --------
(1) The total of 1998 quarterly earnings per share does not equal annual earn-
ings per share for 1998 due to different amounts for average quarterly
common shares outstanding. Average Conectiv common shares outstanding by
quarter in 1998 were as follows: first quarter-- 74,684,396; second quar-
ter--101,063,174; third quarter--101,011,261; and fourth quarter--
100,591,529.
(2) Due to rounding, the sum of the quarterly earnings per share does not
equal the annual earnings per share.

Employee separation programs for DPL employees and other Merger-related
costs expensed in 1998 (as discussed in Note 5 to the Consolidated Financial
Statements) had the effects shown below on 1998 quarterly operating results.

<TABLE>
<CAPTION>
Earnings Per
Operating Net Common
Quarter Ended Income Income Share(*)
------------- --------- ------ ------------
(Dollars in
millions)
<S> <C> <C> <C>
March 31.................................... $(40.6) $(24.6) $(0.33)
June 30..................................... 14.3 8.6 0.09
September 30................................ (0.7) (0.4) --
December 31................................. (0.7) (0.4) --
------ ------ ------
$(27.7) $(16.8) $(0.18)
====== ====== ======
</TABLE>
- --------
* See note 1 above.

As discussed in Note 7 to the Consolidated Financial Statements, in the
fourth quarter of 1997, net income was increased by $13.7 million ($0.22 per
average common share) due to the sale of the Pine Grove Landfill and its re-
lated waste-hauling company.

II-54
<PAGE>

22. JOINTLY OWNED PLANT

Conectiv's Consolidated Balance Sheets include its proportionate share of as-
sets and liabilities related to jointly owned plant. Conectiv's share of oper-
ating and maintenance expenses of the jointly owned plant is included in the
corresponding expenses in the Consolidated Statements of Income. Conectiv is
responsible for providing its share of financing for the jointly owned facili-
ties. Information with respect to Conectiv's share of jointly owned plant as
of December 31, 1998 was as follows:

<TABLE>
<CAPTION>
Megawatt Construction
Ownership Capability Plant in Accumulated Work in
Share Owned Service Depreciation Progress
--------- ---------- ---------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nuclear
Peach Bottom.......... 15.02% 328 MW $ 271,819 $125,728* $26,987
Salem................. 14.82% 328 MW 492,723 179,145* 12,310
Hope Creek............ 5.00% 52 MW 241,062 82,854* 1,251
Coal-Fired
Keystone.............. 6.17% 105 MW 34,421 13,060 122
Conemaugh............. 7.55% 128 MW 67,163 20,020 701
Transmission
Facilities............. Various 4,567 2,407 --
Other Facilities........ Various 2,159 295 4,340
---------- --------- -------
Total................... $1,113,914 $ 423,509 $45,711
========== ========= =======
</TABLE>
- --------
* Excludes nuclear decommissioning reserve.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

None.

II-55
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

"Proposal No. 1--Election of Directors" is incorporated by reference herein
from the Definitive Proxy Statement which was filed with the SEC on February
24, 1999.

Information about Conectiv's executive officers is included under Item 1.

Information about late filings of Form 3, Initial Statement of Beneficial
Ownership of Securities, is incorporated by reference herein from the "Section
16(a) Beneficial Ownership Compliance" section of the Definitive Proxy State-
ment which was filed with the SEC on February 24, 1999.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated herein by
reference from Conectiv's Definitive Proxy Statement, which was filed with the
SEC on February 24, 1999, except that the Report of the Compensation Committee
and the Stock Performance Chart are specifically excluded.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 of Form 10-K is set forth under the
headings "Security Ownership of Directors and Executive Officers" and "Secu-
rity Ownership of Certain Beneficial Owners" in the Definitive Proxy Statement
which was filed with the SEC on February 24, 1999, and is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 of Form 10-K is set forth under the
heading "Personnel & Compensation Committee Interlocks and Insider Participa-
tion" in the Definitive Proxy Statement which was filed with the SEC on Febru-
ary 24, 1999, and is incorporated herein by reference.

III-1
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements--The following financial statements are contained in
Item 8 of Part II.

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants II-17
Consolidated Statements of Income for the years ended December 31,
1998, 1997, and 1996 II-18
Consolidated Balance Sheets as of December 31, 1998 and 1997 II-19
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997, and 1996 II-21
Consolidated Statements of Changes in Common Stockholders' Equity for
the years ended December 31, 1998, 1997, and 1996. II-22
Notes to Consolidated Financial Statements II-23
</TABLE>

2. Financial Statement Schedules--No financial statement schedules have been
filed since the required information is not present in amounts sufficient to
require submission of the schedule or because the information required is in-
cluded in the respective financial statements or the notes thereto.

3. Schedule of Operating Statistics for the three years ended December 31,
1998 can be found on pages IV-3 and IV-4 of this report.

4. Exhibits

Exhibit Number
- ------

2 Amended and Restated Agreement and Plan of Merger, dated as of Decem-
ber 26, 1996 between DPL, Atlantic Energy, Inc., Conectiv and DS Sub,
Inc. (Filed with Registration Statement No. 333-18843.)

3-A Restated Certificate of Incorporation of Conectiv, filed with Delaware
Secretary of State, effective as of March 2, 1998(filed with
Conectiv's Current Report on Form 8-K dated March 6, 1998)

3-B Certificate to change name from Conectiv, Inc. to Conectiv filed with
the Delaware Secretary of State pursuant to Section 102(a) of the Del-
aware General Corporation Law(filed with Conectiv's Current Report on
Form 8-K dated March 6, 1998)

3-C Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv,
Inc., filed with the Delaware Secretary of State, effective as of
March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated
March 6, 1998)

3-D Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv,
Inc. filed with the New Jersey Secretary of State, effective as of
March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated
March 6, 1998)

3-E Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and
into Delmarva Power & Light Company, filed with the Delaware Secretary
of State, effective as of March 1, 1998 (filed with Conectiv's Current
Report on Form 8-K dated March 6, 1998)

IV-1
<PAGE>

3-F Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and
into Delmarva Power & Light Company, effective as of March 1, 1998,
filed with the Virginia State Corporation Commission, effective as of
March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated
March 6, 1998)

3-G Conectiv's By-Laws as amended February 16, 1999, filed herewith

10-A Conectiv Incentive Compensation Plan (filed with Conectiv, Inc. Regis-
tration Statement No. 333-18843)

10-B Conectiv Deferred Compensation Plan, effective January 1, 1999, filed
herewith

10-C Change-in-Control Severance Agreement between Conectiv and certain ex-
ecutive employees, filed herewith

10-D Change-in-Control Severance Agreement between Conectiv and certain se-
lect employees, filed herewith

12 Computation of ratio of earnings to fixed charges

21 Subsidiaries of the registrant (filed with Form U5A, Notification of
Registration, on March 30, 1998).

23 Consent of Independent Public Accountants

27 Financial Data Schedule

(b) Reports on Form 8-K

On November 2, 1998, Conectiv filed a Report on Form 8-K under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits, concerning its press
release on third quarter 1998 earnings results.

On December 8, 1998, Conectiv filed a report on Form 8-K under Item 5, Other
Events, regarding proposed legislation for restructuring the electric utility
industry in New Jersey.

On January 26, 1999, Conectiv filed a Report on Form 8-K under Item 5, Other
Events, concerning proposed legislation to restructure the electric utility
industry in Delaware.

On February 17, 1999, Conectiv filed a report on Form 8-K under Item 5,
Other Events, regarding the New Jersey Electric Discount and Energy Competi-
tion Act.

IV-2
<PAGE>

CONECTIV

SCHEDULE OF OPERATING STATISTICS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998

The table below sets forth selected financial and operating statistics for
Conectiv's electric and gas businesses for the three years ended December 31,
1998.

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
ELECTRIC:
Electricity generated and purchased
(MWH):
Generated............................. 14,365,717 9,067,236 10,307,299
Purchased............................. 9,696,026 5,908,796 6,195,720
Interchange deliveries................ (1,982,999) (1,078,471) (2,855,109)
----------- ----------- -----------
Total system output for load........ 22,078,744 13,897,561 13,647,910
Nonregulated purchases.............. 7,324,399 4,201,619 --
----------- ----------- -----------
Total output.......................... 29,403,143 18,099,180 13,647,910
=========== =========== ===========
Electric sales (MWH):
Residential........................... 7,118,304 4,097,773 4,262,710
Commercial............................ 7,460,504 4,091,636 4,018,120
Industrial............................ 4,761,578 3,598,006 3,331,175
Resale................................ 1,236,489 1,335,226 1,333,268
Other sales(1)........................ 121,025 109,124 (19,557)
----------- ----------- -----------
Total service territory sales....... 20,697,900 13,231,765 12,925,716
Merchant sales(2)..................... 7,977,418 4,201,619 --
----------- ----------- -----------
Total sales excluding interchange... 28,675,318 17,433,384 12,925,716
Losses and miscellaneous system uses.. 727,825 665,796 722,194
----------- ----------- -----------
Total disposition of energy......... 29,403,143 18,099,180 13,647,910
=========== =========== ===========
Operating revenue (thousands):
Residential........................... $ 741,798 $ 377,528 $ 378,520
Commercial............................ 627,995 299,649 286,438
Industrial............................ 261,559 173,413 156,329
Resale................................ 68,412 68,315 65,989
Miscellaneous revenues(3)............. 57,559 34,451 24,344
----------- ----------- -----------
Total service territory............. 1,757,323 953,356 911,620
Interchange deliveries................ 161,235 36,430 75,301
Merchant revenues(2).................. 285,190 102,358 --
----------- ----------- -----------
Total revenues...................... $ 2,203,748 $ 1,092,144 $ 986,921
=========== =========== ===========
Number of customers (end of period):
Residential........................... 832,256 396,798 391,611
Commercial............................ 108,953 50,216 49,165
Industrial............................ 1,660 672 683
Resale................................ 12 12 12
Other................................. 1,169 624 645
----------- ----------- -----------
Total customers(4).................. 944,050 448,322 442,116
=========== =========== ===========
</TABLE>

IV-3
<PAGE>

CONECTIV

SCHEDULE OF OPERATING STATISTICS-(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
GAS:
Gas sales and gas transported (Mcf):
Residential..................................... 6,812 7,844 8,692
Commercial...................................... 4,705 5,313 5,724
Industrial...................................... 2,751 2,772 2,696
Interruptible, transportation and other......... 7,319 6,926 5,312
-------- -------- --------
Total service territory....................... 21,587 22,855 22,424
Merchant sales.................................. 156,741 27,216 1,733
-------- -------- --------
Total......................................... 178,328 50,071 24,157
======== ======== ========
Operating revenue (thousands):
Residential..................................... $ 57,809 $ 63,937 $ 60,017
Commercial...................................... 31,954 34,895 32,191
Industrial...................................... 11,311 12,582 12,349
Interruptible, transportation and other......... 6,113 5,776 5,085
-------- -------- --------
Total service territory....................... 107,187 117,190 109,642
Merchant revenues............................... 427,895 86,867 4,642
-------- -------- --------
Total......................................... $535,082 $204,057 $114,284
======== ======== ========
Number of customers (end of period):
Residential..................................... 97,558 95,295 93,149
Commercial...................................... 7,975 7,793 7,615
Industrial...................................... 123 128 139
Interruptible, transportation and other......... -- -- 1
-------- -------- --------
Total customers(4)............................ 105,656 103,216 100,904
======== ======== ========
</TABLE>
- --------
(1)Includes unbilled sales.
(2)Offsystem, competitive sales and other services.
(3)Includes unbilled revenues and other miscellaneous revenues.
(4)Service territory only.

IV-4
<PAGE>

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex-
change Act of 1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 26, 1999.

Conectiv (Registrant)

/s/ John C. van Roden
By: __________________________________
John C. van Roden Senior Vice
President and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this re-
port has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated, on March 26, 1999.

Signature Title

/s/ Howard E. Cosgrove Chairman of the Board and
____________________________________ Chief Executive Officer
(Howard E. Cosgrove)

/s/ John C. van Roden Senior Vice President and
____________________________________ Chief Financial Officer
(John C. van Roden)

/s/ James P. Lavin Controller and Chief
____________________________________ Accounting Officer
(James P. Lavin)

/s/ Michael G. Abercrombie Director
____________________________________
(Michael G. Abercrombie)

/s/ R. Franklin Balotti Director
____________________________________
(R. Franklin Balotti)

/s/ Robert D. Burris Director
____________________________________
(Robert D. Burris)

/s/ Audrey K. Doberstein Director
____________________________________
(Audrey K. Doberstein)

/s/ Michael B. Emery Director
____________________________________
(Michael B. Emery)

/s/ Jerrold L. Jacobs Director
____________________________________
(Jerrold L. Jacobs)

/s/ Richard B. McGlynn Director
____________________________________
(Richard B. McGlynn)

/s/ Weston E. Nellius Director
____________________________________
(Weston E. Nellius)

/s/ Harold J. Raveche Director
____________________________________
(Harold J. Raveche)

IV-5

<PAGE>

EXHIBIT 3-G
-----------

CONNECTIV'S BY-LAWS, AS AMENDED FEBRUARY 16, 1999
-------------------------------------------------
<PAGE>

B Y L A W S
OF
CONECTIV

1. OFFICES.
-------

1.1 Offices. In addition to its registered office in the State
-------
of Delaware, the Corporation shall have a corporate office in Wilmington,
Delaware and a significant presence in New Jersey, and such other offices,
either within or without the State of Delaware, at such locations as the Board
of Directors may from time to time determine or the business of the Corporation
may require.

2. SEAL.
----

2.1 Seal. The Corporation shall have a seal, which shall have
----
inscribed thereon its name and year of incorporation and the words, "Corporate
Seal Delaware."

3. MEETINGS OF STOCKHOLDERS.
------------------------

3.1 Annual Meetings. The annual meeting of stockholders of the
---------------
Corporation shall be held on such date, at such time and at such place within or
without the State of Delaware as shall be determined by the Board of Directors
from time to time.

3.2 Special Meetings. Special meetings of the stockholders of
----------------
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Chairman of
the Board or by the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors.

3.3 Notice of Meetings. (a) Notices of meetings of stockholders
------------------
shall be in writing and shall state the place, date and hour of the meeting,
and, in the case of a special meeting, the purpose or purposes for which a
meeting is called. No business other than that specified in the notice thereof
shall be transacted at any special meeting.

(b) Such notice shall either be delivered personally, mailed,
postage prepaid, or by any other lawful means, to each stockholder entitled to
vote at such meeting not less than 10 nor more than 60 days before the date of
the meeting. If mailed, the notice shall be directed to the stockholder at his
or her address as it appears on the records of the Corporation. Personal
delivery of any such notice to any officer of a corporation or association or to
any member of a partnership shall constitute delivery of such notice to such
corporation, association or partnership.
<PAGE>

(c) Notice of any meeting of stockholders need not be given
to any stockholder if waived by such stockholder in writing, whether before or
after such meeting is held, or if such stockholder shall sign the minutes or
attend the meeting, except that if such stockholder attends a meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened, such
stockholder shall not be deemed to have waived notice of such meeting.

3.4 Adjourned Meetings. When a meeting is adjourned to another
------------------
time or place, unless otherwise provided by these Bylaws, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting the
stockholders may transact any business which might have been transacted at the
original meeting. If an adjournment is for more than 30 days, or if after an
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.

3.5 Quorum and Adjournment. Except as otherwise provided by law,
----------------------
by the Certificate of Incorporation of the Corporation or by these Bylaws, the
presence, in person or by proxy, of the holders of a majority of the aggregate
voting power of the stock issued and outstanding, entitled to vote thereat,
shall constitute a quorum for the transaction of business at all meetings of
stockholders. If such majority shall not be present or represented at any
meeting of stockholders, the stockholders present, although less than a quorum,
shall have the power to adjourn the meeting.

3.6 Vote Required. Except as otherwise provided by law or by the
-------------
Certificate of Incorporation:

(a) Directors shall be elected by a plurality of the votes
present in person or represented by proxy at a meeting of stockholders and
entitled to vote in the election of directors, and

(b) whenever any corporate action other than the election of
Directors is to be taken, it shall be authorized by a majority in voting power
of the shares present in person or by proxy at a meeting of stockholders and
entitled to vote on the subject matter.

3.7 Manner of Voting. At each meeting of stockholders, each
----------------
stockholder having the right to vote shall be entitled to vote in person or by
proxy. Proxies need not be filed with the Secretary of the Corporation until
the meeting is called to order, but shall be filed before being voted. Each
stockholder shall be entitled to vote each share of stock having voting power
registered in his name on the books of the Corporation on the record date fixed
for determination of stockholders entitled to vote at such meeting. All
elections of Directors by stockholders shall be by written ballot.

3.8 Proxies. (a) At any meeting of stockholders, any
-------
stockholder may be

2
<PAGE>

represented and vote by proxy or proxies. In the event that any form of proxy
shall designate two or more persons to act as proxies, a majority of such
persons present at the meeting or, if only one shall be present, then that one
shall have and may exercise all of the powers conferred by the form of proxy
upon all of the persons so designated unless the form of proxy shall otherwise
provide.

(b) The Board of Directors may, in advance of any annual or
special meeting of the stockholders, prescribe additional regulations concerning
proxies and the validation of the same, which are intended to be voted at any
such meeting.

3.9 Presiding Officer and Secretary. The Chairman of the Board
-------------------------------
shall act as chairman of all meetings of the stockholders. In the absence of
the Chairman of the Board, the Vice Chairman of the Board or, in his or her
absence, the Chief Executive Officer or, in his or her absence, the President
or, in his or her absence, any Vice President designated by the Board of
Directors shall act as chairman of the meeting.

The Secretary of the Corporation shall act as secretary of all
meetings of the stockholders, but, in the absence of the Secretary, the
Assistant Secretary designated in accordance with Section 5.11(b) of these
Bylaws shall act as secretary of all meetings of the stockholders, but in the
absence of a designated Assistant Secretary, the chairman of the meeting may
appoint any person to act as secretary of the meeting.

3.10 Procedure. At each meeting of stockholders, the chairman of
---------
the meeting shall fix and announce the date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at
the meeting and shall determine the order of business and all other matters of
procedure. Except to the extent inconsistent with any such rules and
regulations as adopted by the Board of Directors, the chairman of the meeting
may establish rules, which need not be in writing, to maintain order and safety
and for the conduct of the meeting. Without limiting the foregoing, he or she
may:

(a) restrict attendance at any time to bona fide
stockholders of record and their proxies and other persons in attendance at the
invitation of the chairman;

(b) restrict dissemination of solicitation materials and use
of audio or visual recording devices at the meeting;

(d) make rules governing speeches and debate, including time
limits and access to microphones.

The chairman of the meeting acts in his or her absolute discretion and his or
her rulings are not subject to appeal.

3
<PAGE>

4. DIRECTORS.
---------

4.1 Powers. The Board of Directors shall exercise all of the
------
powers of the Corporation except such as are by law, or by the Certificate of
Incorporation of this Corporation or by these Bylaws conferred upon or reserved
to the stockholders of any class or classes.

4.2 Resignations. Any Director may resign at any time by giving
------------
written notice to the Board of Directors or the Secretary. Such resignation
shall take effect at the date of receipt of such notice or at any later time
specified therein. Acceptance of such resignation shall not be necessary to
make it effective.

4.3 Presiding Officer and Secretary. The Chairman of the Board
-------------------------------
shall act as chairman of all meetings of the Board of Directors. In the absence
of the Chairman of the Board, the Vice Chairman of the Board, or in his absence,
the Chief Executive Officer or other person designated by the Board of Directors
shall act as chairman of the meeting.

The Secretary of the Corporation shall act as secretary of all
meetings of the Board of Directors, but, in the absence of the Secretary, the
Assistant Secretary designated in accordance with Section 5.11(b) of these
Bylaws shall act as secretary of all meetings of the Board of Directors, but in
the absence of a designated Assistant Secretary, the chairman of the meeting may
appoint any person to act as secretary of the meeting.

4.4 Annual Meetings. The Board of Directors shall meet each year
---------------
immediately following the annual meeting of stockholders, at the place where
such meeting of stockholders has been held, or at such other place as shall be
fixed by the person presiding over the meeting of the stockholders, for the
purpose of election of officers and consideration of such other business as the
Board of Directors considers relevant to the management of the Corporation.

4.5 Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held on such dates and at such times and places, within or without the
state of Delaware, as shall from time to time be determined by the Board of
Directors. In the absence of any such determination, such meetings shall be
held at such times and places, within or without the State of Delaware, as shall
be designated by the Chairman of the Board on not less than twelve hours notice
to each Director, given verbally or in writing either personally, by telephone
(including by message or recording device), by facsimile transmission, by
telegram or by telex or on not less than three (3) calendar days' notice to each
Director given by mail.

4.6 Special Meetings. Special meetings of the Board of Directors
----------------
shall be held at the call of the Chairman of the Board at such times and places,
within or without the State of Delaware, as he or she shall designate, on not
less than twelve hours notice to each

4
<PAGE>

Director, given verbally or in writing either personally, by telephone
(including by message or recording device), by facsimile transmission, by
telegram or by telex or on not less than three (3) calendar days' notice to each
Director given by mail. Special meetings shall be called by the Secretary on
like notice at the written request of a majority of the Directors then in
office.

4.7 Quorum and Powers of a Majority. At all meetings of the
-------------------------------
Board of Directors and of each committee thereof, a majority of the members
shall be necessary and sufficient to constitute a quorum for the transaction of
business, and the act of a majority of the members present at any meeting at
which a quorum is present shall be the act of the Board of Directors or such
committee, unless by express provision of law, of the Certificate of
Incorporation or these Bylaws, a different vote is required, in which case such
express provision shall govern and control. In the absence of a quorum, a
majority of the members present at any meeting may, without notice other than
announcement at the meeting, adjourn such meeting from time to time until a
quorum is present.

4.8 Waiver of Notice. Notice of any meeting of the Board of
----------------
Directors, or any committee thereof, need not be given to any member if waived
by him or her in writing, whether before or after such meeting is held, or if he
or she shall sign the minutes or attend the meeting, except that if such
Director attends a meeting for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting is not
lawfully called or convened, then such Director shall not be deemed to have
waived notice of such meeting.

4.9 Manner of Acting. (a) Members of the Board of Directors, or
----------------
any committee thereof, may participate in any meeting of the Board of Directors
or such committee by means of conference telephone or similar communications
equipment by means of which all persons participating therein can hear each
other, and participation in a meeting by such means shall constitute presence in
person at such meeting.

(b) Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board of Directors or such committee, as the
case may be, consent thereto in writing, and the writings are filed with the
minutes of proceedings of the Board of Directors or such committee.

4.10 Compensation. (a) The Board of Directors, by a resolution
------------
or resolutions, may fix, and from time to time change, the compensation of
Directors.

(b) Each Director shall be entitled to reimbursement from
the Corporation for his or her reasonable expenses incurred with respect to
duties as a member of the Board of Directors or any committee thereof.

5
<PAGE>

any Director from serving the Corporation in any other capacity and from
receiving compensation from the Corporation for service rendered to it in such
other capacity.

4.11 Committees. The Board of Directors may designate one or
----------
more committees, each committee to consist of one or more Directors, which to
the extent provided in said resolution or resolutions shall have and may
exercise the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation; provided, however, that no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the General Corporation Law of Delaware
(the "GCLD") to be submitted to stockholders for approval or (ii) adopting,
amending, or repealing any bylaw of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member of the committee. In the absence or
disqualification of a member of a committee, the member or members present at
any meeting of such committee and not disqualified from voting, whether or not
such member of members constitute a quorum, may unanimously appoint another
member of the board of directors to act at the meeting in place of such absent
or disqualified director.

4.12 Committee Procedure, Limitations of Committee Powers. (a)
----------------------------------------------------
Except as otherwise provided by these Bylaws, each committee shall adopt its own
rules governing the time, place and method of holding its meetings and the
conduct of its proceedings and shall meet as provided by such rules or by
resolution of the Board of Directors. Unless otherwise provided by these Bylaws
or any such rules or resolutions, notice of the time and place of each meeting
of a committee shall be given to each member of such committee as provided in
Section 4.6 of these Bylaws with respect to notices of special meetings of the
Board of Directors.

(b) Each committee shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required.

(c) Any member of any committee may be removed from such
committee either with or without cause, at any time, by the Board of Directors
at any meeting thereof. Any vacancy in any committee shall be filled by the
Board of Directors in the manner prescribed by the Certificate of Incorporation
or these Bylaws for the original appointment of the members of such committee.

6
<PAGE>

5. OFFICERS.
--------

5.1 Number. (a) The officers of the Corporation shall include a
------
Chief Executive Officer, a President, one or more Vice Presidents (including one
or more Executive Vice Presidents and one or more Senior Vice Presidents if
deemed appropriate by the Board of Directors), a Secretary and a Treasurer. The
Board of Directors shall also elect a Chairman of the Board and may elect a Vice
Chairman of the Board. The Board of Directors may also elect such other
officers as the Board of Directors may from time to time deem appropriate or
necessary. Except for the Chairman of the Board, the Vice Chairman of the Board
and the Chief Executive Officer, none of the officers of the Corporation needs
to be a director of the Corporation. Any two or more offices may be held by the
same person to the extent permitted by the GCLD.

(b) The Board of Directors may delegate to the Chief
Executive Officer or President the power to appoint one or more employees of the
Corporation as divisional or departmental vice presidents and fix the duties of
such appointees. However, no such divisional or departmental vice president
shall be considered as an officer of the Corporation, the officers of the
Corporation being limited to those officers elected by the Board of Directors.

5.2 Election of Officers, Qualification and Term. The officers
--------------------------------------------
of the Corporation shall be elected from time to time by the Board of Directors
and, except as may otherwise be expressly provided in a contract of employment
duly authorized by the Board of Directors or the Merger Agreement, shall hold
office at the pleasure of the Board of Directors.

5.3 Removal. Except as otherwise expressly provided in the
-------
Merger Agreement, any officer elected by the Board of Directors may be removed,
either with or without cause, by the Board of Directors at any meeting thereof,
or to the extent delegated to the Chairman of the Board or the Chief Executive
Officer, by the Chairman of the Board or the Chief Executive Officer.

5.4 Resignations. Any officer of the Corporation may resign at
------------
any time by giving written notice to the Board of Directors or to the Chairman
of the Board or to the Chief Executive Officer. Such resignation shall take
effect at the date of the receipt of such notice or at any later time specified
therein and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.

5.5 Salaries. The salaries of all officers of the Corporation
--------
shall be fixed by the Board of Directors from time to time, and no officer shall
be prevented from receiving such salary by reason of the fact that he or she is
also a Director of the Corporation.

5.6 The Chairman of the Board. The Chairman of the Board shall
-------------------------
have

7
<PAGE>

the powers and duties customarily and usually associated with the office of the
Chairman of the Board. The Chairman of the Board shall preside at meetings of
the stockholders and of the Board of Directors.

5.7 Vice Chairman of the Board. The Vice Chairman of the Board
--------------------------
shall have the powers and duties customarily and usually associated with the
office of the Vice Chairman of the Board.

5.8 Chief Executive Officer. The Chief Executive Officer shall
-----------------------
have, subject to the supervision, direction and control of the Board of
Directors, the general powers and duties of supervision, direction and
management of the affairs and business of the Corporation usually vested in the
chief executive officer of a corporation, including, without limitation, all
powers necessary to direct and control the organizational and reporting
relationships within the Corporation. If at any time the office of the Chairman
of the Board and the Vice Chairman of the Board shall not be filled, or in the
event of the temporary absence or disability of the Chairman of the Board and
the Vice Chairman of the Board, the Chief Executive Officer shall have the
powers and duties of the Chairman of the Board.

5.9 The President. The President shall serve as chief operating
-------------
officer and shall have such other powers and perform such other duties as may be
delegated to him or her from time to time by the Board of Directors or the Chief
Executive Officer.

5.10 The Vice Presidents. Each Vice President shall have such
-------------------
powers and perform such duties as may from time to time be assigned to him or
her by the Board of Directors, the Chief Executive Officer or the President.

5.11 The Secretary and the Assistant Secretary. (a) The
-----------------------------------------
Secretary shall attend meetings of the Board of Directors and meetings of the
stockholders and record all votes and minutes of all such proceedings in a book
kept for such purpose. He or she shall have all such further powers and duties
as generally are incident to the position of Secretary or as may from time to
time be assigned to him or her by the Board of Directors, the Chief Executive
Officer or the President.

(b) Each Assistant Secretary shall have such powers and
perform such duties as may from time to time be assigned to him or her by the
Board of Directors, the Chief Executive Officer, the President or the Secretary.
In case of the absence or disability of the Secretary, the Assistant Secretary
designated by the Chief Executive Officer (or, in the absence of such
designation, by the Secretary) shall perform the duties and exercise the powers
of the Secretary.

5.12 The Treasurer and the Assistant Treasurer. (a) The
-----------------------------------------
Treasurer shall have custody of the Corporation's funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall

8
<PAGE>

deposit or cause to be deposited moneys or other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Treasurer shall also maintain adequate records of
all assets, liabilities and transactions of the Corporation and shall see that
adequate audits thereof are currently and regularly made. The Treasurer shall
have such other powers and perform such other duties that generally are incident
to the position of Treasurer or as may from time to time be assigned to him or
her by the Board of Directors, the Chief Executive Officer or the President.

(b) Each Assistant Treasurer shall have such powers and
perform such duties as may from time to time be assigned to him or her by the
Board of Directors, the Chief Executive Officer, the President or the Treasurer.
In case of the absence or disability of the Treasurer, the Assistant Treasurer
designated by the Chief Executive Officer (or, in the absence of such
designation, by the Treasurer) shall perform the duties and exercise the powers
of the Treasurer.

6. STOCK
-----

6.1 Certificates. Certificates for shares of stock of the
------------
Corporation shall be issued under the seal of the Corporation, or a facsimile
thereof, and shall be numbered and shall be entered in the books of the
Corporation as they are issued. Each certificate shall bear a serial number,
shall exhibit the holder's name and the number of shares evidenced thereby, and
shall be signed by the Chairman of the Board or a Vice Chairman, if any, or the
Chief Executive Officer or the President or any Vice President, and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if such person or entity were such
officer, transfer agent or registrar at the date of issue.

6.2 Transfers. Transfers of stock of the Corporation shall be
---------
made on the books of the Corporation only upon surrender to the Corporation of a
certificate (if any) for the shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, provided such
--------
succession, assignment or transfer is not prohibited by the Certificate of
Incorporation, these Bylaws, applicable law or contract. Thereupon, the
Corporation shall issue a new certificate (if requested) to the person entitled
thereto, cancel the old certificate (if any) and record the transaction upon its
books.

6.3 Lost, Stolen or Destroyed Certificates. Any person claiming
--------------------------------------
a certificate of stock to be lost, stolen or destroyed shall make an affidavit
or an affirmation of that fact, and shall give the Corporation a bond of
indemnity in satisfactory form and with one or more satisfactory sureties,
whereupon a new certificate (if requested) may be issued of the same tenor and
for the same number of shares as the one alleged to be lost, stolen or

9
<PAGE>

destroyed.

6.4 Registered Stockholders. The Corporation shall be entitled
-----------------------
to recognize the exclusive right of a person registered on its books as the
owner of shares as the person entitled to exercise the rights of a stockholder
and shall not be bound to recognize any equitable or other claim to or interest
in any such shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise expressly provided by the
GCLD.

6.5 Additional Powers of the Board. (a) In addition to those
------------------------------
powers set forth in Section 4.1, the Board of Directors shall have power and
authority to make all such rules and regulations as it shall deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation, including the use of uncertificated shares of stock
subject to the provisions of the GCLD.

(b) The Board of Directors may appoint and remove transfer
agents and registrars of transfers, and may require all stock certificates to
bear the signature of any such transfer agent and/or any such registrar of
transfers.

7. MISCELLANEOUS
-------------

7.1 Place and Inspection of Books. (a) The books of the
-----------------------------
Corporation other than such books as are required by law to be kept within the
State of Delaware shall be kept in such place or places either within or without
the State of Delaware as the Board of Directors may from time to time determine.

(b) At least ten days before each meeting of stockholders,
the officer in charge of the stock ledger of the Corporation shall prepare a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

(c) The Board of Directors shall determine from time to time
whether and, if allowed, when and under what conditions and regulations the
accounts and books of the Corporation (except such as may be by law specifically
open to inspection or as otherwise provided by these Bylaws) or any of them
shall be open to the inspection of the stockholders and the stockholders' rights
in respect thereof.

10
<PAGE>

7.2 Voting Shares in Other Corporations. The Chief Executive
-----------------------------------
Officer, the President or any other officer of the Corporation designated by the
Board of Directors may vote any and all shares held by the Corporation in any
other corporation.

7.3 Fiscal Year. The fiscal year of the Corporation shall be
-----------
such fiscal year as the Board of Directors from time to time by resolution shall
determine.

7.4 Gender/Number. As used in these Bylaws, the masculine,
-------------
feminine or neuter gender, and the singular or plural number, shall each include
the others whenever the context so indicates.

7.5 Paragraph Titles. The titles of the paragraphs have been
----------------
inserted as a matter of reference only and shall not control or affect the
meaning or construction of any of the terms and provisions hereof.

7.6 Amendment. These Bylaws may be altered, amended or repealed
---------
by (a) the affirmative vote of 80% or more of the aggregate number of votes that
the holders of the then outstanding shares of common stock and preferred stock
are entitled to cast on the amendment, or (b) by resolution adopted by the
affirmative vote of not less than a majority of the Directors in office, at any
annual or regular meeting of the Board of Directors or at any special meeting of
the Board of Directors if notice of the proposed alteration, amendment or repeal
be contained in written notice of such special meeting. Notwithstanding the
foregoing, the amendment of any provision of these Bylaws requiring an
affirmative vote in excess of a majority of the Directors in office shall
require the affirmative vote of at least the number of directors the affirmative
vote of whom is required by such provision.

7.7 Certificate of Incorporation. Notwithstanding anything to
----------------------------
the contrary contained herein, if any provision contained in these Bylaws is
inconsistent with or conflicts with a provision of the Certificate of
Incorporation, such provision of these Bylaws shall be superseded by the
inconsistent provision in the Certificate of Incorporation to the extent
necessary to give effect to such provision in the Certificate of Incorporation.

1. Adopted by Unanimous Written Consent of the Conectiv Board of Directors,
3/1/98
2. Amended (Arts. 3.3(b), 3.8(a) and 3.8(b)) by resolution of the Conectiv
Board of Directors, 2/16/99

290268

<PAGE>

EXHIBIT 10-B
------------

Conectiv Deferred Compensation Plan, effective January 1, 1999
<PAGE>

CONECTIV

DEFERRED COMPENSATION PLAN

(As Amended and Restated, Effective January 1, 1999)
<PAGE>

CONECTIV
DEFERRED COMPENSATION PLAN

TABLE OF CONTENTS
-----------------

Page
----

ARTICLE 1 - PURPOSE................................................ 1

1.1. Name........................................................ 1
1.2. Effective Date.............................................. 1
1.3. Purpose..................................................... 1

ARTICLE 2 - DEFINITIONS............................................ 1

ARTICLE 3 - PARTICIPATION BY ELIGIBLE INDIVIDUALS.................. 12

3.1. Participation............................................... 12
3.2. Failure to Designate........................................ 12
3.3. Continuity of Participation................................. 12
3.4. Immediate Cash-Out of Ineligible Individuals................ 12

ARTICLE 4 - COMPENSATION DEFERRAL.................................. 12

4.1. Deferral Elections.......................................... 12
4.2. Period for Which Election is Effective...................... 14

ARTICLE 5 - EMPLOYER MATCHING CREDITS.............................. 14

5.1. Employer Matching Credit.................................... 14
5.2. Employer Matching Credit for Limited Participant............ 15

ARTICLE 6 - DISTRIBUTIONS.......................................... 15

6.1. Election of Distribution Date............................... 15
6.2. Election of Form of Payment................................. 15
6.3. Unforeseeable Emergency..................................... 16
6.4. Special Election for Early Distribution..................... 16
6.5. Distributions on Death...................................... 17
6.6. Acceleration of Payments.................................... 17
6.7. Valuation of Distributions.................................. 17

ARTICLE 7 - FORFEITURE FOR CAUSE................................... 17

7.1. Forfeiture for Cause........................................ 17

<PAGE>

ARTICLE 8 - ACCOUNTS............................................... 18

8.1. General..................................................... 18
8.2. Deferred Compensation Account............................... 18
8.3. Deferred Stock Account...................................... 18
8.4. Employer Matching Account................................... 19
8.5. Crediting of Earnings and Losses, and Statement of Account.. 19
8.6. Investment to Facilitate Payment of Benefits................ 19

ARTICLE 9 - FUNDING................................................ 20

9.1. Plan Unfunded............................................... 20

ARTICLE 10 - ADMINISTRATION AND INTERPRETATION..................... 20

10.1. Administration............................................. 20
10.2. Interpretation............................................. 20
10.3. Records and Reports........................................ 21
10.4. Payment of Expenses........................................ 21
10.5. Indemnification for Liability.............................. 21
10.6. Claims Procedure........................................... 21
10.7. Review Procedure........................................... 22

ARTICLE 11 - AMENDMENT AND TERMINATION............................. 22

11.1. Amendment and Termination.................................. 22
11.2. Deemed Amendment to Matching Formula....................... 22

ARTICLE 12 - MISCELLANEOUS PROVISIONS.............................. 22

12.1. Right of Employers to Take Employment Actions.............. 22
12.2. Alienation or Assignment of Benefits....................... 23
12.3. Right to Withhold.......................................... 23
12.4. Construction............................................... 23
12.5. Headings................................................... 23
12.6. Number and Gender.......................................... 23
12.7. Change in Control.......................................... 23

<PAGE>

CONECTIV
DEFERRED COMPENSATION PLAN

(As Amended and Restated, Effective January 1, 1999)

ARTICLE 1

PURPOSE
-------
1.1. Name. The name of this plan is the Conectiv Deferred Compensation
----
Plan.

1.2. Effective Date. The effective date of the Plan is July 1, 1998;
--------------
provided, however, that with respect to implementing various portions of the
Plan the Board or the Committee may specify a later effective date for one or
more components of the Plan. The Plan is amended and restated, effective January
1, 1999, to include rules governing the DSPP and the MSPP.

1.3. Purpose. The Plan is established effective July 1, 1998 by Conectiv
-------
for the purpose of providing deferred compensation benefits for non-employee
directors of Conectiv and providing supplemental retirement and deferred
compensation benefits for a select group of management and/or highly compensated
employees of the Employer. The Plan provides a means whereby Eligible
Individuals may defer:

1.3.1. A portion or all of their compensation in the form of
salary, bonus and/or Cash Awards they would otherwise receive for services
performed for the Employer;

1.3.2. Receipt of a portion or all of Stock Awards; and

1.3.3. Receipt of Shares and corresponding recognition of
compensation income upon the exercise of Options.

ARTICLE 2
DEFINITIONS
-----------

Whenever the following initially capitalized words and phrases are used
in the Plan, they shall have the meanings specified below unless the context
clearly indicates to the contrary:

1.4. "Account"means the Deferred Compensation Account, the Deferred
-------
Stock Account, the Employer Matching Account, the MSPP Account, the MSPP
Matching Account, the DSPP Account and the DSPP Matching Account of a
Participant.

-1-
<PAGE>

1.5. "Administrator" means the person or committee designated as the
-------------
administrator of the Plan by the Board, or such entity's duly-appointed
delegate.

1.6. "Beneficiary" means such person or legal entity as may be
-----------
designated by a Participant to receive benefits hereunder after such
Participant's death.

1.7. "Board" means the Board of Directors of Conectiv.
-----

1.8. "Cash Award(s)" means Annual Incentives, Performance Units, Stock
-------------
Appreciation Rights, and Dividend Equivalents awarded pursuant to the CICP (as
such terms are defined in that plan) that are payable in cash, as well as any
other awards pursuant to any other Incentive Plan that are payable in cash, as
determined by the Committee.

1.9. "Change in Control" shall mean the first to occur, after the
-----------------
effective date, of any of the following:

1.9.1. If any Person is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act), directly or
indirectly, of securities of Conectiv (not including in the securities
beneficially owned by such Person any securities acquired directly from Conectiv
or its subsidiaries) representing 25% or more of either the then-outstanding
shares of common stock of Conectiv or the combined voting power of Conectiv's
then outstanding securities; or

1.9.2. If during any period of 24 consecutive months during the
existence of the Plan commencing on or after the effective date, the individuals
who, at the beginning of such period, constitute the Board (the "Incumbent
Directors") cease for any reason other than death to constitute at least a
majority thereof; provided that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied such 24-
month requirement (and be an Incumbent Director) if such director was elected
by, or on the recommendation of or with the approval of, at least two-third of
the directors who then qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month period) or by prior
operation of this Section 2.6.2; or

1.9.3. The consummation of a merger or consolidation of Conectiv
with any other corporation other than (i) a merger or consolidation which would
result in the voting securities of Conectiv outstanding immediately prior to
such merger or consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity
or any parent thereof) at least 60% of the combined voting power of the voting
securities of Conectiv or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of Conectiv (or similar
transaction) in which no Person is or becomes the beneficial owner, as defined
in Section 2.6.1, directly or indirectly, of securities of Conectiv (not
including in the securities beneficially owned by such Person any securities
acquired directly from Conectiv or its subsidiaries) representing 40% or more of
either the then-outstanding shares of

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<PAGE>

common stock of Conectiv or the combined voting power of Conectiv's then-
outstanding securities; or

1.9.4. The stockholders of Conectiv approve a plan of complete
liquidation or dissolution of Conectiv, or there is consummated an agreement for
the sale or disposition by Conectiv of all or substantially all of Conectiv's
assets, other than a sale or disposition by Conectiv of all or substantially all
of Conectiv's assets to an entity, at least 60% of the combined voting power of
the voting securities of which are owned by Persons in substantially the same
proportion as their ownership of Conectiv immediately prior to such sale.

Upon the occurrence of a Change in Control as provided above, no subsequent
event or condition shall constitute a Change in Control for purposes of the
Plan, with the result that there can be no more than one Change in Control
hereunder.

For purposes of this Section, the term "Person" shall have the meaning given in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include: (i) Conectiv or any of
its subsidiaries; (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of Conectiv or any of its subsidiaries; (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities; (iv) a corporation owned directly or indirectly by the stockholders
of Conectiv in substantially the same proportions as their ownership of stock of
Conectiv; or (v) with respect to any particular Participant, such Participant or
any "group" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act) which includes such Participant).

1.10. "CICP" means the Conectiv, Inc. Incentive Compensation Plan.
----

1.11. "Code" means the Internal Revenue Code of 1986, as amended.
----

1.12. "Committee" means the Compensation Committee of the Board.
---------

1.13. "Compensation" means, as applicable:
------------

1.13.1. The base salary of a Participant for a Plan Year (before
any reduction to such salary is effected in accordance with the Election, or in
accordance with any salary reduction agreement effected under the terms of
Sections 125 or 401(k) of the Code);

1.13.2. The amount of bonus, if any, earned by an Eligible
Individual during the Plan Year;

1.13.3. Annual retainer, meeting fees, and any other cash payments
received by an Eligible Individual in his or her capacity as a non-employee
director;

1.13.4. Severance payments;

1.13.5. Cash Awards;

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<PAGE>

1.13.6. Stock Awards;

1.13.7. Dividend equivalents credited with respect to Deferred
Stock and Deferred Option Stock; and

1.13.8. Dividend equivalents credited with respect to Stock
Awards.

1.14. "Conectiv" means Conectiv.
--------

1.15. "Date of Grant" means the date as of which an Option is granted.
-------------

1.16. "Deferred Compensation Account" means the bookkeeping account
-----------------------------
established by the Administrator for each Participant to which the Participant's
cash Compensation deferred pursuant to Section 4.1 (and income thereon) is
credited and from which distributions to the Participant or to his or her
Beneficiary are debited. A Participant shall at all times be fully vested in the
balance of his or her Deferred Compensation Account which is attributable to
cash Compensation except to the extent that a Cash Award has not yet vested. The
Deferred Compensation Account, if applicable, shall also consist of a Transfer
Deferred Compensation Subaccount.

1.17. "Deferred Option Stock" means the number of hypothetical Shares
---------------------
determined as the excess of (a) the number of Option Shares over (b) the number
of Other Available Shares having a Fair Market Value as of the date of exercise
of an Option equal to the exercise price for such Option Shares as to which an
Eligible Individual provides to Conectiv evidence of ownership of sufficient
Shares to pay the exercise price for such Option Shares.

1.18. "Deferred Stock" means the number of hypothetical Shares
--------------
conditionally granted to a Participant pursuant to a Stock Award and deferred
pursuant to Section 4.1.

1.19. "Deferred Stock Account" means the bookkeeping account established
----------------------
by the Administrator for each Participant to which the Participant's Deferred
Stock and Deferred Option Stock is credited and from which distributions to the
Participant or to his or her Beneficiary are debited. A Participant shall at all
times be fully vested in the balance of his or her Deferred Stock Account,
except to the extent Shares with respect to a Stock Award have not yet vested.
The Deferred Stock Account, if applicable, shall also consist of a Transfer
Deferred Stock Subaccount.

1.20. "DSPP" means the Director Stock Purchase Program. The DSPP is
----
designed to allow and encourage Eligible Individuals who are non-employee
directors to purchase RSUs at a discount and to provide such individuals the
opportunity to manage their personal tax liability. All Eligible Individuals who
are non-employee directors of Conectiv are eligible to participate in the DSPP.
Under the DSPP, as further provided in this Plan:

-4-
<PAGE>

1.20.1. All RSUs are "acquired" at a 20% discount. Thus, RSUs
having a value (based on the closing price of Shares as of the date Compensation
subject to a DSPP Election would, but for such DSPP Election, be paid (the
"Initial Credit Date")) are credited to the DSPP Account of each DSPP
Participant. As of each Initial Credit Date, a number of RSUs equal to 25% of
the number of RSUs credited to the DSPP Account shall be credited to the DSPP
Matching Account.

1.20.2. RSU Dividends shall be deemed invested and reinvested in
RSUs based on the closing price of Shares as of the applicable dividend payment
date, and shall be credited to the DSPP Participant's DSPP Account or DSPP
Matching Account, as applicable.

1.20.3. Except as otherwise provided in this Section 2.17.3, as
soon as practicable following the completion of the second calendar year
beginning after the year to which a DSPP Election applies, Conectiv shall pay
the DSPP Participant (or his or her Beneficiary) a number of Shares equal to the
number of RSUs credited to the DSPP Participant's DSPP Account and DSPP Matching
Account attributable to the DSPP Election for such year. Any amount credited to
a DSPP Participant's DSPP Account or DSPP Matching Account which is not
distributable pursuant to this Section 2.17.3 shall be forfeited.

(1) If a DSPP Participant voluntarily resigns his or her
position as a non-employee director and does not continue in service to Conectiv
as an officer or employee, then, as soon as practicable following such
resignation, Conectiv shall pay such DSPP Participant (or his or her
Beneficiary) cash having a value equal to the lesser of (i) the sum of the
individual amounts credited to the DSPP Participant's DSPP Account as of each
Initial Credit Date, which has not been distributed nor deferred pursuant to the
general deferral provisions of the Plan or (ii) the fair market value of RSUs
credited to the DSPP Participant's DSPP Account and DSPP Matching Account as of
the effective date of the DSPP Participant's voluntary resignation.

(2) If a DSPP Participant is removed as a non-employee
director other than for cause (as determined by the Board in its sole
discretion), then, as soon as practicable following the effective date of such
removal, Conectiv shall pay such DSPP Participant (or his or her Beneficiary)
cash having a value equal to the sum of (i) the product of (x) the value of the
DSPP Participant's DSPP Account and DSPP Matching Account attributable to each
deferral year times (y) a fraction, the numerator of which is the number of days
from the beginning of such deferral year to the effective date of such removal,
and the denominator of which is 1095; plus (ii) the product of (x) the sum of
the individual amounts credited to the DSPP Participant's DSPP Account as of
each Initial Credit Date, which has not been distributed nor deferred pursuant
to the general deferral provisions of the Plan times (y) one minus the fraction
as determined under part (i)(y) of this paragraph (b).

(3) If a DSPP Participant is removed as a non-employee
director for cause (as determined by the Board in its sole discretion), then, as
soon as practicable following the effective date of such removal, Conectiv shall
pay such DSPP Participant (or his or her Beneficiary) cash having a value equal
to the sum of the individual amounts credited to the

-5-
<PAGE>

DSPP Participant's DSPP Account as of each Initial Credit Date, which has not
been distributed nor deferred pursuant to the general deferral provisions of the
Plan.

(4) If a DSPP Participant's service as a non-employee
director terminates because of the termination of the DSPP Participant's term as
a director and he has not been re-elected and does not continue in service to
Conectiv as an officer or employee, death, disability (as determined by the
Board in its sole discretion), or if there is a Change in Control, then, within
60 days following such termination or Change in Control, as applicable, Conectiv
(or its successor-in-interest) shall pay such DSPP Participant (or his or her
Beneficiary) cash having a value equal to the value of the RSUs credited to such
DSPP Participant's DSPP Account and DSPP Matching Account.

(5) Pursuant to the general deferral election provisions
of the Plan, a DSPP Participant may elect to defer the receipt of amounts
credited to his or her DSPP Account and his or her DSPP Matching Account for
periods following the end of the second calendar year beginning after the year
to which a DSPP Election applies. Upon the effective date of such general
deferral election, the applicable amounts credited to the Participant's DSPP
Account and DSPP Matching Account shall be credited to a sub-account of the
Participant's Deferral Account under the Plan, and shall continue to be credited
in the form of RSUs and subject to distribution in the form of Shares, in
accordance with, and except as otherwise provided by, the Plan.

1.21. "DSPP Account" means the bookkeeping account established by the
------------
Administrator for each Eligible Individual who is a non-employee director to
which annual retainer, meeting fees or any other cash payments of Compensation
payable to such Eligible Individual in such capacity, are credited in the form
of RSUs pursuant to the Director Stock Purchase Program (and income thereon) is
credited and from which distributions to the Participant or to his or her
Beneficiary are debited.

1.22. "DSPP Election" means an election on a form provided by the
-------------
Administrator by an Eligible Individual who is a non-employee director to
participate in the DSPP. The timing of DSPP Elections shall be governed by
Section 4.1.

1.23. "DSPP Matching Account" means the bookkeeping account established
---------------------
by the Administrator for a Participant to which the Participant's DSPP Matching
Contributions (and income thereon) are credited and from which distributions to
the Participant or his or her Beneficiary are debited.

1.24. "DSPP Participant" means an Eligible Individual who has elected to
----------------
participate in the DSPP, as described in Section 2.17.

1.25. "Election" means a written election on a form made available from
--------
time to time by the Administrator, whereby an Eligible Individual enrolls as a
Participant and elects to defer Compensation pursuant to Article 4 of the Plan.

-6-
<PAGE>

1.26. "Eligible Individual" means (a) an individual employed by the
-------------------
Employer who is a member of a select group of management and/or highly
compensated employees and is determined by the Committee to be eligible to
participate hereunder pursuant to Article 3; (b) non-employee directors of
Conectiv; and (c) if determined by the Committee to be eligible to participate
pursuant to Article 3, non-employee directors of any subsidiary or affiliate of
Conectiv.

1.27. "Employer" means each subsidiary or affiliate of Conectiv that
--------
employs or retains one or more Eligible Individuals who have become Participants
in accordance with Article 3 of the Plan.

1.28. "Employer Matching Account" means the bookkeeping account
-------------------------
established by the Administrator for a Participant to which the Participant's
Employer Matching Credit (and income thereon) is credited and from which
distributions to the Participant or his or her Beneficiary are debited. A
Participant shall be fully vested in the balance of his or her Employer Matching
Account, except as provided in Section 7.1.

1.29. "Employer Matching Credit" means an amount credited (if any) to
------------------------
the Participant's Employer Matching Account pursuant to Section 5.1 of the Plan.

1.30. "Fair Market Value."
-----------------

1.30.1. If Shares are listed on a stock exchange, Fair Market
Value shall be determined based on the closing market price of such stock as
reported in the New York Stock Exchange Composite Transactions, or, if Shares
are not traded on the New York Stock Exchange on the relevant valuation date,
the last closing market price reported prior to such date.

1.30.2. If Shares are not so listed, but trades of Shares are
reported on the Nasdaq National Market, the last quoted sale price of a Share on
the Nasdaq National Market on the last trading day prior to the date of
determination.

1.30.3. If Shares are not so listed nor trades of Shares so
reported, Fair Market Value shall be determined by the Committee in good faith.

1.31. "Incentive Plans" means the CICP, as well as, at the discretion of
---------------
the Committee, any other incentive or executive compensation plan of Conectiv or
any Employer, whether currently in effect or adopted after the effective date of
the Plan.

1.32. "Investment Alternatives" means the investment options made
-----------------------
available to employees under the Savings Plan, which shall be used as measuring
standards for credits to a Participant's Deferred Compensation Account. In the
case of the Participant's Employer Matching Account and Deferred Stock Account,
the only Investment Alternative shall be Shares as traded on the open market.

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<PAGE>

1.33. "MSPP" means the Management Stock Purchase Program. The MSPP is
----
designed to allow and encourage Eligible Individuals to purchase RSUs at a
discount and to provide such individuals the opportunity to manage their
personal tax liability. All Eligible Individuals who are designated as
participants in the annual incentive portion of the CICP are eligible to
participate in the MSPP. Under the MSPP, as further provided in this Plan:

1.33.1. All RSUs are "acquired" at a 20% discount. Thus, RSUs
having a value (based on the closing price of Shares as of the date Compensation
subject to the Mandatory MSPP Allocation (as described in Section 2.30.2) or to
an MSPP Election would, but for such Mandatory MSPP Allocation or MSPP Election,
be paid (the "Initial Credit Date")) are credited to the MSPP Account of each
MSPP Participant. As of each Initial Credit Date, a number of RSUs equal to 25%
of the number of RSUs credited to the MSPP Account shall be credited to the MSPP
Matching Account.

1.33.2. Twenty percent (20%) of an MSPP Participant's annual
incentive bonus declared under the CICP and payable after 1998 shall be
allocated as a Mandatory MSPP Allocation to the Participant's MSPP Account,
credited in the form of RSUs.

1.33.3. RSU Dividends shall be deemed invested and reinvested in
RSUs based on the closing price of Shares as of the applicable dividend payment
date, and shall be credited to the MSPP Participant's MSPP Account or MSPP
Matching Account, as applicable.

1.33.4. Except as otherwise provided in this Section 2.30.4, as
soon as practicable following the completion of the second calendar year
beginning after the year to which an MSPP Election applies, Conectiv shall pay
the MSPP Participant (or his or her Beneficiary) a number of Shares equal to the
number of RSUs credited to the MSPP Participant's MSPP Account and MSPP Matching
Account attributable to the MSPP Election for such year. Any amount credited to
an MSPP Participant's MSPP Account or MSPP Matching Account which is not
distributable pursuant to this Section 2.30.4 shall be forfeited.

(1) If an MSPP Participant voluntarily resigns his or her
employment (other than by retirement after having reached an age where benefits
under any tax-qualified pension plan maintained by Conectiv are immediately
distributable) and does not continue in service to Conectiv as an officer or
director, then, as soon as practicable following such resignation, Conectiv
shall pay such MSPP Participant (or his or her Beneficiary) cash having a value
equal to the lesser of (i) the sum of the individual amounts credited to the
MSPP Participant's MSPP Account as of each Initial Credit Date, which has not
been distributed nor deferred pursuant to the general deferral provisions of the
Plan or (ii) the fair market value of RSUs credited to the MSPP Participant's
MSPP Account and MSPP Matching Account as of the effective date of the MSPP
Participant's voluntary resignation.

(2) If an MSPP Participant's employment is terminated by
Conectiv other than for cause (as determined by the Administrator in its sole
discretion), then, as soon as practicable following the effective date of such
removal, Conectiv shall pay such MSPP Participant (or his or her Beneficiary)
cash having a value equal to the sum of (i) the product of

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<PAGE>

(x) the value of the MSPP Participant's MSPP Account and MSPP Matching Account
attributable to each deferral year times (y) a fraction, the numerator of which
is the number of days from the beginning of such deferral year to the effective
date of such removal, and the denominator of which is 1095; plus (ii) the
product of (x) the sum of the individual amounts credited to the MSPP
Participant's MSPP Account as of each Initial Credit Date, which has not been
distributed nor deferred pursuant to the general deferral provisions of the Plan
times (y) one minus the fraction as determined under part (i)(y) of this
paragraph (b).

(3) If an MSPP Participant's employment is terminated by
Conectiv for cause (as determined by the Administrator in its sole discretion),
then, as soon as practicable following the effective date of such termination,
Conectiv shall pay such MSPP Participant (or his or her Beneficiary) cash having
a value equal to the sum of the individual amounts voluntarily credited to the
MSPP Participant's MSPP Account as of each Initial Credit Date, which has not
been distributed nor deferred pursuant to the general deferral provisions of the
Plan.

(4) If an MSPP Participant retires after having reached an
age where benefits under any pension plan maintained by Conectiv are immediately
distributable and he does not continue in service to Conectiv as a director or
officer, dies in service, becomes disabled (as determined by the Administrator
in its sole discretion), or if there is a Change in Control, then, within 60
days following such retirement or Change in Control, as applicable, Conectiv (or
its successor-in-interest) shall pay such MSPP Participant (or his or her
Beneficiary) cash having a value equal to the value of the RSUs credited to such
MSPP Participant's MSPP Account and MSPP Matching Account.

(5) Pursuant to the general deferral election provisions
of the Plan, an MSPP Participant may elect to defer the receipt of amounts
credited to his or her MSPP Account and his or her MSPP Matching Account for
periods following the end of the second calendar year beginning after the year
to which a Mandatory MSPP Allocation applies. Upon the effective date of such
general deferral election, the applicable amounts credited to the Participant's
MSPP Account and MSPP Matching Account shall be credited to a sub-account of the
Participant's Deferral Account under the Plan, and shall continue to be credited
in the form of RSUs and subject to distribution in the form of Shares, in
accordance with, and except as otherwise provided by, the Plan.

1.34. "MSPP Account" means the bookkeeping account established by the
------------
Administrator for each Eligible Individual who is designated as a participant in
the annual incentive portion of the CICP to which the amount of Compensation
subject to the Mandatory MSPP Allocation and an MSPP Election are credited in
the form of RSUs pursuant to the Management Stock Purchase Program (and income
thereon) is credited and from which distributions to the Participant or to his
or her Beneficiary are debited.

1.35. "MSPP Election" means an election on a form provided by the
-------------
Administrator by an Eligible Individual who is an MSPP Participant to defer the
receipt of any whole percentage of annual incentive bonus declared under the
CICP and payable after 1998,

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<PAGE>

provided that an MSPP Participant may not elect to defer the receipt of more
than 30% of such annual incentive bonus. The timing of DSPP Elections shall be
governed by Section 4.1.

1.36. "MSPP Matching Account" means the bookkeeping account established
---------------------
by the Administrator for a Participant to which the Participant's MSPP Matching
Contributions (and income thereon) are credited and from which distributions to
the Participant or his or her Beneficiary are debited.

1.37. "MSPP Participant" means an Eligible Individual who is designated
----------------
as a participant in the annual incentive portion of the CICP.

1.38. "Option" means a non-qualified stock option to purchase Shares
------
granted pursuant to an Incentive Plan; provided that each Option with a
different Date of Grant shall be considered a separate Option.

1.39. "Option Shares" mean the Shares that are subject to the portion of
-------------
an Option as to which an Election is in effect.

1.40. "Other Available Shares" means, as of any date, the excess, if any
----------------------
of:

1.40.1. The total number of Shares owned by a Participant; over

1.40.2. The sum of:

(1) The number of Shares owned by such Participant for
less than six months; plus

(2) The number of Shares owned by such Participant that
has, within the preceding six months, been received in exchange for Shares
surrendered as payment, in full or in part, of the exercise price for an option
to purchase any securities of an Employer under any Incentive Plan, but only to
the extent of the number of Shares surrendered.

For purposes of this Section, a Share that is subject to a deferral election
pursuant to this Plan or an Incentive Plan shall not be treated as owned by such
Participant until all conditions to the delivery of such Share have lapsed.

1.41. "Participant" means an Eligible Individual designated as a
-----------
Participant by the Committee and who has amounts standing to his or her credit
under an Account. The Committee may designate an Eligible Individual as a
Participant for purposes of part, but not all, of the Plan.

1.42. "Plan" means the Conectiv Deferred Compensation Plan.
----

1.43. "Plan Year" means the calendar year.
---------

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<PAGE>

1.44. "Prior Plan(s)" means any executive compensation, stock option,
-------------
bonus or incentive compensation plan maintained by Delmarva Power & Light
Company or Atlantic City Electric Company or any affiliated company.

1.45. "RSU" means a hypothetical Share in which amounts credited to the
---
DSPP Account, DSPP Matching Account, MSPP Account and MSPP Matching Account are
deemed invested, subject to Section 2.17 and Section 2.30.

1.46. "RSU Dividends" means a hypothetical dividend payable with respect
-------------
to an RSU. An RSU Dividend shall be deemed paid at the same times and in the
same amounts as dividends are paid with respect to Shares.

1.47. "Savings Plan" means the Conectiv Savings and Investment Plan.
------------

1.48. "Share" or "Shares" means a share of common stock of Conectiv,
----- ------
and, if applicable, a share of Class A common stock of Conectiv, or such other
securities issued by Conectiv as may be subject to adjustment in the event that
Shares are changed into or exchanged for a different number or kind of shares of
stock or other securities of Conectiv, whether through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split-up or other
substitution of securities of Conectiv. In such event, the Committee shall make
appropriate equitable anti-dilution adjustments to the number and class of
Deferred Stock and Deferred Option Stock credited to Participants' Deferred
Stock Accounts. The Committee's adjustment shall be effective and binding for
all purposes of the Plan .

1.49. "Stock Award(s)" means (a) Annual Incentives, Performance Units,
--------------
Stock Appreciation Rights and Dividend Equivalents awarded pursuant to the CICP
(as such terms are defined in that plan) that are payable in Shares; (b) any
other awards that are payable in Shares pursuant to any other Incentive Plan, as
determined by the Committee; (c) with respect to an Option, the number of
Shares, that upon exercise of all or part of an Option, could be credited to a
Participant's Account as Deferred Option Stock; and (d) with respect to non-
employee directors, any payments made in the form of Shares.

1.50. "Transfer Deferred Compensation Subaccount" means the bookkeeping
-----------------------------------------
account established by the Administrator for each Participant to which the
Participant's cash compensation deferred pursuant to a Prior Plan is credited
and from which distributions to the Participant or to his or her Beneficiary are
debited. A Participant shall at all times be fully vested in the balance of his
or her Transfer Deferred Compensation Subaccount.

1.51. "Transfer Deferred Stock Subaccount" means the bookkeeping account
----------------------------------
established by the Administrator for each Participant to which the Participant's
Shares deferred pursuant to a Prior Plan are credited and from which
distributions to the Participant or to his or her Beneficiary are debited. A
Participant shall at all times be fully vested in the balance of his or her
Transfer Deferred Stock Subaccount, except to the extent Shares have not yet
vested pursuant to the terms of the Prior Plan.

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<PAGE>

1.52. "Transfer Employer Matching Subaccount" means the bookkeeping
-------------------------------------
account established by the Administrator for each Participant to which the
Participant's matching contributions pursuant to a Prior Plan are credited and
from which distributions to the Participant or to his or her Beneficiary are
debited. A Participant shall at all times be fully vested in the balance of his
Transfer Employer Matching Subaccount.

ARTICLE 3
PARTICIPATION BY ELIGIBLE INDIVIDUALS
-------------------------------------

1.53. Participation. Participation in the Plan is limited to Eligible
-------------
Individuals. An Eligible Individual shall participate in the Plan as determined
by the Committee in its sole discretion; provided, however, that for purposes of
individuals who first become Eligible Individuals during a Plan Year, such
Eligible Individuals shall participate in the Plan as determined by the
Administrator in his or her sole discretion.

1.54. Failure to Designate. If the Committee fails to designate the
--------------------
group of Eligible Individuals who shall be eligible to participate for any Plan
Year, each Eligible Individual who was designated in the prior Plan Year shall
be deemed to have been designated for the next succeeding Plan Year, provided
that any such person shall participate for purposes of the next succeeding Plan
Year only if he or she is actively employed by an Employer or serving as a non-
employee director of Conectiv on the first day of such succeeding Plan Year and
provided he or she is an Eligible Individual for such year.

1.55. Continuity of Participation. A Participant who separates from
---------------------------
service with all of the Employers or ceases to be a non-employee director of
Conectiv or a subsidiary or affiliate of Conectiv will cease active
participation hereunder. However, the separation from service of an Eligible
Individual with one Employer will not interrupt the continuity of his or her
active participation if, concurrently with or immediately after such separation,
he or she is employed by one or more of the other Employers.

1.56. Immediate Cash-Out of Ineligible Individuals. The Plan is intended
--------------------------------------------
to be an unfunded "top-hat" plan, maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees. Accordingly, if the Committee determines that any
Participant who is an employee does not qualify as a member of the select group,
the vested portion of such Participant's Account shall be paid to the
Participant immediately, and the unvested portion shall be returned to the
applicable Incentive Plan.

ARTICLE 4
COMPENSATION DEFERRAL
---------------------

1.57. Deferral Elections.
------------------

1.57.1. General. No later than the "Deferral Deadline" as shown in
Table 4.1, each Eligible Individual designated as eligible to participate for
purposes of this Article 4 may

-12-
<PAGE>

irrevocably elect, by completing and executing an Election and filing it with
the Administrator, to defer any portion of his or her Compensation to be paid in
the future.

TABLE 4.1
---------
<TABLE>
<CAPTION>
===============================================================================================
Type of Deferral Deferral Deadline
- ---------------- -----------------
- -----------------------------------------------------------------------------------------------
<S> <C>
Base Salary December 31 of the Plan Year preceding the Plan Year for
which the deferral is to be effective.
- -----------------------------------------------------------------------------------------------

Bonus June 30 of the performance year for which the award is
earned, provided that with respect to bonus awards declared
under the CICP for 1998 and which are subject to the MSPP
provisions of the Plan and which may become payable in 1999,
December 31, 1998.
- -----------------------------------------------------------------------------------------------

Cash Awards December 31 of the Plan Year preceding the Plan Year in which
such Cash Award vests, becomes payable, or is exercised (as
applicable); provided that such election is at least six (6)
months prior to vesting, payout, or exercise.
- -----------------------------------------------------------------------------------------------

Stock Awards, and December 31 of the Plan Year preceding the Plan Year in which
Amounts Credited to such Stock Award vests, becomes payable, or is exercised (as
the DSPP, DSPP applicable); provided that such election is at least six (6)
Matching, MSPP and months prior to vesting, payout, or exercise.
MSPP Matching
Accounts
- -----------------------------------------------------------------------------------------------

Dividend Equivalents December 31 of the Plan Year preceding the Plan Year in which
(with respect to the dividend equivalents are payable.
Stock Awards) With respect to Stock Options, Dividend Unit Equivalents and
Performance Accelerated Restricted Stock granted after
December 31, elections must be made within 30 days from the
effective date of grant.
- -----------------------------------------------------------------------------------------------

Dividend Equivalents (with Dividend equivalents are automatically credited to a
respect to Deferred Stock and Participant's Deferred Compensation Account once a deferral
Deferred Option Stock) election with respect to a Stock Award is made; provided,
however, that once a Stock Award vests, dividend equivalents
are credited to the Deferred Stock Account.
- -----------------------------------------------------------------------------------------------

Severance Payments December 31 of the second Plan Year preceding the payment of
any severance.
- -----------------------------------------------------------------------------------------------

Retainer and Meeting Last day of Plan Year prior to Plan Year for which retainer
Fees and meeting fees are paid.
===============================================================================================
</TABLE>

-13-
<PAGE>

1.57.2. Limit on Deferral of Base Salary. In the case of deferral
of base salary, a Participant may defer up to 100% of base pay, less any
applicable withholding.

1.57.3. Elections in First Year of Plan. Elections pursuant to
Section 4.1 by individuals who are identified as Eligible Individuals on July 1,
1998 must be filed with the Administrator on or before the later of (1) the
close of business on July 31, 1998 or (2) the deferral deadline specified in
Table 4.1 and shall be effective for payroll periods and payments, as
applicable, on and after the date the Election is filed; provided, however, that
if a later effective date for Section 4.1 is specified by the Board or the
Committee, Elections pursuant to Section 4.1 must be filed in accordance with
Section 4.1.4.

1.57.4. Elections for First Year as Eligible Individual.
Notwithstanding the foregoing provisions of Section 4.1, in the Plan Year an
individual first becomes an Eligible Individual, the Eligible Individual may
elect to defer all or a portion of his or her Compensation to be earned in such
Plan Year beginning with the later of the payroll period or payment date, as
applicable, next following the filing of an Election with the Administrator and
before the close of such Plan Year, by making and filing such Election with the
Administrator within 30 days of the date such individual becomes an Eligible
Individual; provided, however, that if the deferral deadline specified in Table
4.1 has not passed with respect to an element of Compensation, then the deferral
deadline in Table 4.1 shall apply. Elections by such Eligible Individual for
succeeding Plan Years shall otherwise be made in accordance with the foregoing
provisions of Section 4.1.

1.58. Period for Which Election is Effective. A Participant's Election
--------------------------------------
under Section 4.1 shall be effective only with respect to the Plan Year, or
portion thereof, specified in the Election, except that a deferral election that
provides for (a) regular deferrals of base salary as of each pay period, (b)
deferrals of Dividend Equivalents, and/or (c) meetings fees, shall be deemed to
continue for successive Plan Years unless and until amended by the Participant.
An amendment shall be effective only if it is filed by the December 31 of the
Plan Year preceding the Plan Year for which it is to be effective and shall be
effective as of the first day of such succeeding Plan Year. A Participant's
Election with respect to a Stock Award or a Cash Award shall be effective only
with respect to the portion of the Stock Award or a Cash Award specified
therein.

ARTICLE 5
EMPLOYER MATCHING CREDITS
-------------------------

1.59. Employer Matching Credit.
------------------------

1.59.1. The amount of the Employer Matching Credit credited to the
Employer Matching Account of each Eligible Individual designated as eligible to
participate in this Section 5.1 shall be equal to the "Employer Matching
Contributions" which would have been made to the Participant's "Thrift Fund
Account" under the Savings Plan but for statutory limitations. Generally, the
Employer Matching Credit shall be equal to the "matching percentage" (50%, as of
the effective date of this Plan) set forth in the Savings Plan, multiplied by
the first 6% of the Participant's base salary in excess of the Code
(S)401(a)(17) limit that is deferred under Section 4.1.

-14-
<PAGE>

1.59.2. In the event the dollar amount of the "Employer Matching
Contributions" under the Savings Plan for the Plan Year was limited due to the
application of the provisions of Section 401(m) of the Code, or the percentage
of the Participant's base salary that could be deferred under the Savings Plan
was limited to an amount less than 6% because of other Code limitations, an
additional Employer Matching Credit shall be contributed under the Plan equal to
the amount of "Employer Matching Contributions" that would have been made to the
Savings Plan but for such limitations, but only if and to the extent the
Participant has deferred additional amounts of base salary to the Plan at least
equal to the amount that would have been required to have been deferred under
the Savings Plan in order to support such additional "Employer Matching
Contributions" in the absence of such limitations.

1.60. Employer Matching Credit for Limited Participant. For any
------------------------------------------------
Participant whose right to receive "Employer Matching Contributions" under the
Savings Plan is limited by a specific Savings Plan provision to $10 or less
(without regard to the amount of salary deferrals elected by such Participant),
the Employer Matching Credit shall be equal to the matching percentage described
in Section 5.1, multiplied by the first 6% of the Participant's base salary that
is deferred under Section 4.1.

ARTICLE 6
DISTRIBUTIONS
-------------

1.61. Election of Distribution Date. At the time a Participant makes an
-----------------------------
election to defer Compensation under Article 4, such Participant shall also
specify in writing on the Election the date on which payment of the Account
attributable to that Election shall be made or commence. Such date must be a
specified date not less than two years from the end of the Plan Year of the
deferral and not later than the year in which the Participant will attain age
70; provided, however, that severance payments may be deferred for a shorter
period than two years from the end of the Plan Year of deferral.

Except as set forth hereinafter, the above distribution date, once
elected by the Participant, shall be irrevocable.

1.62. Election of Form of Payment.
---------------------------

1.62.1. Initial Election of Payment Form. At the time a
--------------------------------
Participant makes an election to defer Compensation under Section 4.1, such
Participant must also specify in writing on the Election the form in which
payment of the Deferred Compensation Account attributable to that Election shall
be made.

1.62.2. Changes in Election. If a payment form is not specified in
-------------------
the Election, or if a payment form is specified but a Participant wishes to
change the payment form, a change with respect to payment form may be effective
only if submitted to the Administrator no later than the last day of the
calendar year that ends at least one year before the distribution date, and
subject to approval by the Committee.

-15-
<PAGE>

1.62.3. Forms of Payment.
----------------

(1) General. A payment method shall be in the form of a
-------
lump sum payment or in equal annual installments over five, ten, or fifteen
years.

(2) Default Form. In the absence of a valid election,
------------
distribution shall be in the form of annual installments over a 10-year period.
Except as set forth herein, the form of payment, once elected by the
Participant, shall be irrevocable.

(3) Distributions in Shares. Distribution of a
-----------------------
Participant's Deferred Stock Account and/or Company Matching Account, including
the amount of any dividend equivalents credited to such Accounts pursuant to an
Election, shall, at the election of Conectiv, be in the form of cash or Shares,
which may be purchased by Conectiv or transferred from any grantor trust or
other treasury stock account maintained by Conectiv, and shall be distributed as
soon as administratively practicable. A Participant may elect to direct that a
portion of the Deferred Stock Account and/or Company Matching Account shall be
paid in cash for the purpose of satisfying applicable tax withholding
requirements.

1.63. Unforeseeable Emergency.
-----------------------

1.63.1. General. The Committee shall have the authority to
-------
determine, in its sole discretion, that payments should be made in any manner
the Committee deems appropriate, in whole or in part, on any other date or dates
in order to alleviate a financial hardship of a Participant or a Beneficiary.

1.63.2. Financial Hardship. "Financial hardship" shall mean a
------------------
severe financial hardship resulting from a sudden and unexpected illness or
accident of the Participant or Beneficiary, or of a dependent (as defined in
Section 152(a) of the Code) of the Participant or Beneficiary, loss of the
Participant's or Beneficiary's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Participant or Beneficiary. The circumstances that
will constitute an unforeseeable emergency will depend on the facts of each
case, but, in any case, payment may not be made to the extent that such hardship
is or may be relieved: (i) through reimbursement or compensation by insurance or
otherwise; (ii) by liquidation of the Participant's or Beneficiary's assets, to
the extent such liquidation would not itself cause severe financial hardship;
and (iii) by cessation of deferrals under the Plan. Any financial hardship
distribution approved by the Committee shall be limited to the amount necessary
to meet the emergency (including taxes that are expected to be imposed on the
distribution), and shall be made solely from the vested portion of the Deferred
Compensation Account and Deferred Stock Account.

1.64. Special Election for Early Distribution. A Participant may apply
---------------------------------------
to the Administrator for early distribution of all or any part of the vested
portion of his or her Deferred Compensation Account and/or Deferred Stock
Account. Such early distribution shall be made in a single lump sum and in
Shares with respect to Deferred Stock and Deferred Option Stock,

-16-
<PAGE>

provided that 10% of the amount withdrawn in such early distribution shall be
forfeited prior to payment of the remainder to the Participant. A Participant
may not elect an early distribution hereunder if he has received an early
distribution or hardship distribution within the previous twelve months. In the
event a Participant's early distribution election is submitted within 60 days
after a Change in Control or an elimination of Investment Alternatives that the
Committee determines is a substantial detriment to Participants, the early
distribution election may include amounts credited to the Employer Matching
Account, and the forfeiture penalty shall be reduced to 5%.

1.65. Distributions on Death. In the event of a Participant's death
----------------------
before his or her Account has been fully distributed, distribution(s) shall be
made to the Beneficiary selected by the Participant. The form of distribution
shall be in the form of a single lump sum with respect to Deferred Compensation,
and, with respect to Deferred Stock and Deferred Option Stock, at the election
of Conectiv, shall be in the form of Shares or cash, within 60 days after the
Administrator receives notice of the date of death (or, if later, after the
proper Beneficiary has been identified). A Participant may from time to time
change his or her designated Beneficiary without the consent of such Beneficiary
by filing a new designation in writing with the Administrator. If no Beneficiary
designation is in effect at the time of the Participant's death, or if the
designated Beneficiary is missing or has predeceased the Participant, payment
shall be made to the Participant's surviving spouse, or if none, to his or her
surviving children per stirpes, or, if none, to his or her estate.

1.66. Acceleration of Payments. Notwithstanding any other provision of
------------------------
the Plan to the contrary, the Committee, in its sole discretion, is empowered to
accelerate the payment of all or a portion of a Participant's Account, before or
after any termination of employment or service, including conversion to a
smaller number of installment payments or to a single lump sum payment, for any
reason the Committee may determine to be appropriate without premium or penalty.
None of the Employers, the Committee nor the Board shall have any obligation to
make any such acceleration for any reason whatsoever.

1.67. Valuation of Distributions. All distributions under the Plan shall
--------------------------
be: (a) based upon the value of the Participant's Deferred Compensation Account
as of the Investment Alternative valuation date immediately preceding the date
of the distribution; or (b) paid in the form of Shares or, where otherwise
permitted under the Plan, such Shares may be converted to cash at the fair
market price of such Shares as of the immediately preceding trading day. It is
understood that administrative requirements may lead to a delay between such
valuation date or trading day and the date of distribution.

ARTICLE 7
FORFEITURE FOR CAUSE
--------------------

1.68. Forfeiture for Cause. If any Participant entitled to an Employer
--------------------
Matching Credit under the Plan is discharged for cause, or enters into
competition with an Employer, or interferes with the relations between an
Employer and any customer, or engages in any activity that would result in
material damage to an Employer as determined in the sole discretion of the

-17-
<PAGE>

Committee, the rights of such Participant to an Employer Matching Credit under
the Plan, including the rights of a Beneficiary to such benefits, will be
forfeited, unless the Committee determines that such activity is not detrimental
to the best interests of the Employer. However, if the individual ceases such
activity and notifies the Committee of this cessation, then the Participant's
right to receive such benefits, and any right of a Beneficiary to such benefits,
may be restored if the Committee in its sole discretion determines that the
prior activity has not caused serious injury to the Employer and that the
restoration of the benefits would be in the best interest of the Employer. All
determinations by the Committee with respect to forfeiture or restoration of
such benefits shall be final and conclusive.

ARTICLE 8
ACCOUNTS
--------

1.69. General. The Administrator shall establish and maintain, or cause
-------
to be established and maintained, separate Accounts for each Participant
hereunder who executes an election pursuant to Section 4.1. Each such
Participant's Compensation deferred pursuant to an Election shall be separately
accounted for and credited, for bookkeeping purposes only, to his or her
Accounts. A Participant's Account shall be solely for the purposes of measuring
certain amounts to be paid under the Plan, and Conectiv shall not be required to
fund or secure such Account in any way, Conectiv's obligation to Participants
hereunder being purely contractual.

1.70. Deferred Compensation Account.
-----------------------------

1.70.1. The Deferred Compensation Account shall be credited with
cash Compensation deferred pursuant to an Election under Section 4.1.

1.70.2. The Transfer Deferred Compensation Subaccount shall be
governed by the Elections in effect with respect to amounts credited to such
subaccount, and, thereafter, shall be governed by the rules in effect under the
Plan.

1.71. Deferred Stock Account.
----------------------

1.71.1. The Deferred Stock Account shall be credited with Deferred
Stock and Deferred Option Stock. If, at the conclusion of the applicable
performance cycle pursuant to an Incentive Plan, specified performance goals
have not been met, the Deferred Stock Account shall reflect the forfeiture of
such Deferred Stock.

1.71.2. The Deferred Stock Account shall also be credited with the
number of Shares that could be purchased, as of the dividend payment date, by
the amount of any dividend equivalents deferred pursuant to Section 4.1.

1.71.3. The Transfer Deferred Stock Subaccount shall be governed
by the Elections in effect with respect to amounts credited to such subaccount,
and, thereafter, shall be governed by the rules in effect under the Plan.

-18-
<PAGE>

1.72. Employer Matching Account.
-------------------------

1.72.1. Employer Matching Credits are credited to the Employer
Matching Account.

1.72.2. The Employer Matching Account shall also be credited with
the number of Shares that could be purchased, as of the dividend payment date,
by the amount of any dividend equivalents deferred pursuant to Section 4.1.

1.72.3. The Transfer Employer Matching Subaccount shall be
governed by the rules in effect under the Plan.

1.73. Crediting of Earnings and Losses, and Statement of Account. At
----------------------------------------------------------
such times, with such frequency, and in such percentages as the Administrator
shall determine, each Participant may elect the Investment Alternatives in which
his or her Deferred Compensation Account may be deemed invested (subject to the
approval of the Committee). The Participant's Employer Matching Account and
Deferred Stock Account shall be deemed invested solely in Shares, shall be
denominated in numbers of Shares, and shall be valued at any time as the Shares
credited to such Account multiplied by the then-current market value of the
Shares. Amounts credited to the Deferred Compensation Account will be increased
by earnings (or decreased by losses) equal to the earnings or losses that would
be realized by such Account if it had been invested in the Investment
Alternatives specified by the Participant. As soon as practicable after the end
of each Plan Year (and at such additional times as the Administrator may
determine), the Administrator shall furnish each Participant with a statement of
the balance credited to the Participant's Account.

1.74. Investment to Facilitate Payment of Benefits. Although the
--------------------------------------------
Employers are not obligated to invest in any specific asset or fund, or purchase
any insurance contract in order to provide the means for the payment of any
liabilities under the Plan, an Employer may elect to do so. In the event an
Employer elects to invest in any specific asset or fund, the Committee may, but
is not required to, honor the investment request of the Participant described in
Section 8.4, with respect to any investment to facilitate payment.

In the event an Employer elects to purchase an insurance contract or
contracts on the life of a Participant as a means for the payment of any
liabilities under the Plan, the Participant shall cooperate in the securing of
such insurance contract or contracts by furnishing all information and taking
all actions as the Employer and the insurance carrier may require, including
without limitation providing the results and reports of previous Employer and
insurance carrier physical examinations and taking such additional physical
examinations as may be requested. The Employer shall be the sole owner of any
such insurance contract or contracts or fund or asset, with all incidents of
ownership therein, including without limitation the right to cash and loan
values, dividends, death benefits and the right to terminate any such contract
or contracts or to dispose of any such fund or asset.

-19-
<PAGE>

The Participant shall have no interest whatsoever in any contract or
contracts or fund or asset and shall exercise none of the incidents of ownership
thereof.

ARTICLE 9
FUNDING
-------

1.75. Plan Unfunded. The Plan shall be unfunded and no trust shall be
-------------
created by the Plan. The crediting to each Participant's Account shall be made
through bookkeeping entries. No actual funds shall be set aside; provided,
however, that nothing herein shall prevent the Employer from establishing one or
more grantor trusts from which benefits due under the Plan may be paid in
certain instances. All distributions shall be paid by the Employer from its
general assets and a Participant (or his or her Beneficiary) shall have the
rights of a general, unsecured creditor against the Employer for any
distributions due hereunder. The Plan constitutes a mere promise by the Employer
to make benefit payments in the future.

ARTICLE 10
ADMINISTRATION AND INTERPRETATION
---------------------------------

1.76. Administration. Except where certain duties are delegated to the
--------------
Administrator, the Committee shall be in charge of the operation and
administration of the Plan. The Committee has, to the extent appropriate and in
addition to the powers described elsewhere in the Plan, full discretionary
authority to construe and interpret the terms and provisions of the Plan; to
adopt, alter and repeal administrative rules, guidelines and practices governing
the Plan; to perform all acts, including the delegation of its administrative
responsibilities to advisors or other persons who may or may not be employees of
the Employers; and to rely upon the information or opinions of legal counsel or
experts selected to render advice with respect to the Plan, as it shall deem
advisable, with respect to the administration of the Plan.

1.77. Interpretation. The Committee may take any action, correct any
--------------
defect, supply any omission or reconcile any inconsistency in the Plan, or in
any election hereunder, in the manner and to the extent it shall deem necessary
to carry the Plan into effect or to carry out the Committee's purposes in
adopting the Plan. Conectiv reserves the right to interpret the Plan and any
decision, interpretation or other action made or taken in good faith by the
Board, the Committee, or the Administrator arising out of or in connection with
the Plan, shall be within the absolute discretion of all and each of them, as
the case may be, and shall be final, binding and conclusive on the Employers,
employees, non-employee directors of Conectiv, Participants and Beneficiaries
and their respective heirs, executors, administrators, successors and assigns.
The Committee's determinations hereunder need not be uniform, and may be made
selectively among Eligible Individuals, whether or not they are similarly
situated. Any actions to be taken by the Committee will require the consent of a
majority of the Committee members. If a member of the Committee is a Participant
in the Plan, such member may not decide or determine any matter or question
concerning his or her benefits under the Plan that such member would not have
the right to decide or determine if he or she were not a member.

-20-
<PAGE>

1.78. Records and Reports. The Administrator shall keep a record of
-------------------
proceedings and actions and shall maintain or cause to be maintained all such
books of account, records, and other data as shall be necessary for the proper
administration of the Plan. Such records shall contain all relevant data
pertaining to individual Participants and their rights under the Plan. The
Administrator shall have the duty to carry into effect all rights or benefits
provided hereunder to the extent assets of the Employers are properly available
therefor.

1.79. Payment of Expenses. The Employers, in such proportions as the
-------------------
Committee determines, shall bear all expenses incurred by them and by the
Committee in administering the Plan. If a claim or dispute arises concerning the
rights of a Participant or Beneficiary to amounts deferred under the Plan
(including interest or earnings thereon), regardless of the party by whom such
claim or dispute is initiated, the Employers shall (in such proportions as
between the Employers as the Committee determines), and upon presentation of
appropriate vouchers, pay all legal expenses, including reasonable attorneys'
fees, court costs, and ordinary and necessary out-of-pocket costs of attorneys,
billed to and payable by the Participant or by anyone claiming under or through
the Participant (such person being hereinafter referred to as the "Participant's
Claimant"), in connection with the bringing, prosecuting, defending, litigating,
negotiating, or settling of such claim or dispute; provided, that:

1.79.1. The Participant or the Participant's Claimant shall repay
to the Employers any such expenses theretofore paid or advanced by the Employers
if and to the extent that the party disputing the Participant's rights obtains a
judgment in its favor from a court of competent jurisdiction from which no
appeal may be taken, whether because the time to do so has expired or otherwise,
and it is determined by the court that such expenses were not incurred by the
Participant or the Participant's Claimant while acting in good faith; provided
further, that

1.79.2. In the case of any claim or dispute initiated by a
Participant or the Participant's Claimant, such claim shall be made, or notice
of such dispute given, with specific reference to the provisions of the Plan, to
the Committee within one year (two years, in the event of a Change in Control)
after the occurrence of the event giving rise to such claim or dispute.

1.80. Indemnification for Liability. The Employers shall indemnify the
-----------------------------
Administrator, the members of the Committee, and the employees of any Employer
to whom the Administrator delegates duties under the Plan, against any and all
claims, losses, damages, expenses and liabilities arising from their
responsibilities in connection with the Plan, unless the same is determined to
be due to gross negligence or willful misconduct.

1.81. Claims Procedure. If a claim for benefits or for participation
----------------
under the Plan is denied in whole or in part, an employee or non-employee
director will receive written notification. The notification will include
specific reasons for the denial, specific reference to pertinent provisions of
the Plan, a description of any additional material or information necessary to
process the claim and why such material or information is necessary, and an
explanation of the claims review procedure. If the Committee fails to respond
within 90 days, the claim is treated as denied.

-21-
<PAGE>

1.82. Review Procedure. Within 60 days after the claim is denied or, if
----------------
the claim is deemed denied, within 150 days after the claim is filed, an
employee or non-employee director (or his or her duly authorized representative)
may file a written request with the Committee for a review of his or her denied
claim. The employee may review pertinent documents that were used in processing
his or her claim, submit pertinent documents, and address issues and comments in
writing to the Committee. The Committee will notify the employee of its final
decision in writing. In its response, the Committee will explain the reason for
the decision, with specific references to pertinent Plan provisions on which the
decision was based. If the Committee fails to respond to the request for review
within 60 days, the review is treated as denied.

ARTICLE 11
AMENDMENT AND TERMINATION
-------------------------

1.83. Amendment and Termination. The Board shall have the right, at any
-------------------------
time, to amend or terminate the Plan in whole or in part provided that such
amendment or termination shall not adversely affect the right of any Participant
or Beneficiary to a payment under the Plan on the basis of deferred compensation
allocated to the Participant's Deferred Compensation Account or Deferred Stock
Account or on the basis of an Employer Matching Credit credited to the Employer
Matching Account prior to such amendment or termination. Conectiv reserves the
right, in its sole discretion, to discontinue deferrals under, or completely
terminate, the Plan at any time. If the Plan is discontinued with respect to
future deferrals, Participants' Account balances shall be distributed on the
distribution dates elected in accordance with Sections 6.1 and 6.2, unless the
Committee designates that distributions shall be made on an earlier date or
dates. If the Committee designates such earlier date or dates, each Participant
shall receive (or commence receiving) distribution of his or her entire Account
balance on such date or dates, as specified by the Committee. If the Plan is
completely terminated, each Participant shall receive distribution of his or her
entire Account balance in one lump sum payment as of the date of the Plan
termination designated by the Board.

1.84. Deemed Amendment to Matching Formula. In the event the matching
------------------------------------
contribution formula under the Savings Plan is modified to increase or reduce
the matching percentage or the percentage of base salary that is matched, the
formulae in Section 5.1 and Section 5.2 shall be deemed to be modified to equal
such matching percentage or percentage of base salary that is matched, unless
otherwise specified in the Board vote amending the Savings Plan.

ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------

1.85. Right of Employers to Take Employment Actions. The adoption and
---------------------------------------------
maintenance of the Plan shall not be deemed to constitute a contract between an
Employer and any employee or non-employee directors, or to be a consideration
for, or an inducement or condition of, the employment or engagement of any
person. Nothing herein contained, or any action taken hereunder, shall be deemed
to give any employee or non-employee director the right to be retained in the
employ or service of an Employer or to interfere with the right of an

-22-
<PAGE>

Employer to discharge any employee or non-employee director at any time or to
change any employee's or non-employee director's compensation or benefits, nor
shall it be deemed to give to an Employer the right to require the employee or
non-employee director to remain in its service, nor shall it interfere with the
employee's right to terminate his or her employment at any time or a non-
employee director's right to resign from service at any time. Nothing in the
Plan shall prevent an Employer from amending, modifying, or terminating any
other benefit plan, including the Savings Plan and the Incentive Plan(s).

1.86. Alienation or Assignment of Benefits. A Participant's rights and
------------------------------------
interest under the Plan shall not be assigned or transferred except as otherwise
provided herein, and the Participant's rights to benefit payments under the Plan
shall not be subject to alienation, pledge or garnishment by or on behalf of
creditors (including heirs, beneficiaries, or dependents) of the Participant or
of a Beneficiary, except for a qualified domestic relations order as defined in
Section 514(b)(7) of the Employee Retirement Income Security Act of 1974, as
amended.

1.87. Right to Withhold. To the extent required by law in effect at the
-----------------
time a distribution is made from the Plan, the Employer or its agents shall have
the right to withhold or deduct from any distributions or payments any taxes
required to be withheld by federal, state or local governments.

1.88. Construction. All legal questions pertaining to the Plan shall be
------------
determined in accordance with the laws of the State of Delaware (without regard
to otherwise-applicable conflict of law principles), to the extent such laws are
not superseded by the Employee Retirement Income Security Act of 1974, as
amended, or any other federal law.

1.89. Headings. The headings of the Articles and Sections of the Plan
--------
are for reference only. In the event of a conflict between a heading and the
contents of an Article or Section, the contents of the Article or Section shall
control.

1.90. Number and Gender. Whenever any words used herein are in the
-----------------
singular form, they shall be construed as though they were also used in the
plural form in all cases where they would so apply, and references to the male
gender shall be construed as applicable to the female gender where applicable,
and vice versa.

1.91. Change in Control. At the Committee's discretion, after
-----------------
consultation with all affected Participants, in the event of a Change in Control
and a termination of employment or service for any reason, each affected
Participant's Account shall either be distributed immediately to the Participant
in one lump sum payment, or paid in accordance with the distribution options
selected by the Participant, as determined by the Committee and made applicable
to all affected Participants. In the event distribution continues to be deferred
under the terms of the Plan, the affected Employer shall be required to
contribute cash or equivalent assets to a grantor trust (maintained by an
institutional trustee independent of the Employer) within 60 days after such
Change in Control, in an amount not less than the then-current value of all
Participant Accounts related to such Employer.

-23-

<PAGE>

EXHIBIT 10-C
------------

Change-in-Control Severance Agreement between Conectiv and certain executive
employees

<PAGE>

CONECTIV
CHANGE-IN-CONTROL SEVERANCE PLAN FOR
CERTAIN EXECUTIVE EMPLOYEES
---------------------------

Section 1

INTRODUCTION

The Plan is intended to provide severance benefits to certain selected
executive employees of the Employer in the event that their employment is
terminated under certain circumstances following a Change in Control. The Plan
shall be effective as of the Effective Date.

Section 2
DEFINITIONS

Except as may otherwise be specified or as the context may otherwise
require, the following terms shall have the respective meanings set forth below
whenever used herein:

"Base Salary" shall mean the annual base rate of regular compensation
of the Participant immediately before a Change in Control, or if greater, the
highest annual such rate at any time during the 12-month period immediately
preceding the Change in Control.

"Board" shall mean the Board of Directors of the Company.

"Cause" shall mean (i) the willful and continued failure by a
Participant substantially to perform his or her duties with the Employer (other
than any such failure resulting from incapacity due to physical or mental
illness of the Participant, or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason) or (ii) the willful
engaging by a Participant in conduct which is demonstrably and materially
injurious to the Employer, monetarily or otherwise. For purposes hereof, no
act, or failure to act, on the Participant's part, shall be deemed "willful"
unless done, or omitted to be done, by a Participant not in good faith and
without reasonable belief that any act or omission was in the best interest of
the Employer.

"Change in Control" shall mean the first to occur, after the Effective
Date hereof, of any of the following:

(i) if any Person is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act), directly or indirectly,
of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly
from the Company or its Subsidiaries) representing 25% or more of
either the then outstanding shares of Stock of the Company or the
combined voting power of the Company's then outstanding securities;

1
<PAGE>

(ii) if during any period of 24 consecutive months during the
existence of the Plan commencing on or after the Effective Date
hereof, the individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof; provided
that a director who was not a director at the beginning of such 24-
month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director was
elected by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent
Directors either actually (because they were directors at the
beginning of such 24-month period) or by prior operation of this
clause (ii);

(iii) the consummation of a merger or consolidation of the Company
with any other corporation other than (A) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof) at
least 60% of the combined voting power of the voting securities of the
Company or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no Person is or becomes the
beneficial owner, as defined in clause (i), directly or indirectly, of
securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly
from the Company or its Subsidiaries) representing 40% or more of
either the then outstanding shares of Stock of the Company or the
combined voting power of the Company's then outstanding securities; or

(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company, or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by Persons in
substantially the same proportion as their ownership of the Company
immediately prior to such sale.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Committee" shall mean such Committee as may be appointed and
constituted from time to time under Section 5.

"Company" shall mean, subject to Section 8.1(a), Conectiv, a Delaware
corporation.

"Covered Termination" shall mean, with respect to a Participant, if,
within the one-year period immediately following a Change in Control, the
Participant (i) is terminated by

2
<PAGE>

the Employer without Cause (other than on account of death or Disability), or
(ii) terminates his or her employment with the Employer for Good Reason. A
Participant shall not be deemed to have terminated for purposes of the Plan
merely because he or she ceases to be employed by the Employer and becomes
employed by a new employer involved in the Change in Control; provided that such
new employer shall be bound by the Plan as if it were the Employer hereunder
with respect to such Participant. It is expressly understood that no Covered
Termination shall be deemed to have occurred merely because, upon the occurrence
of a Change in Control, the Participant ceases to be employed by the Employer
and does not become employed by a successor to the Employer after the Change in
Control if the successor makes an offer to employ the Participant on terms and
conditions which, if imposed by the Employer, would not give the Participant a
basis on which to terminate employment for Good Reason.

"Date of Termination" shall mean the date on which a Covered
Termination occurs.

"Disability" shall mean the occurrence after a Change in Control of
the incapacity of a Participant due to physical or mental illness, whereby such
Participant shall have been absent from the full-time performance of his or her
duties with the Employer for six consecutive months.

"Effective Date" shall mean March 1, 1998.

"Employer" shall mean the Company and each Subsidiary designated by
the Board to adopt the Plan (and which so adopts the Plan ), or, where the
context so requires, the Company and such Subsidiaries collectively. The
adoption of the Plan by Subsidiary may be revoked only with the consent of the
Board, any such revocation to be subject to Section 7; provided that a
Subsidiary which ceases to be, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Company prior to a Change in Control (other than in connection with and as an
integral part of a series of transactions resulting in a Change in Control)
shall, automatically and without any further action, cease to be (or be part of)
the Employer for purposes hereof (and the provisions of Section 7.3 shall not
apply in such a case).

"Good Reason" shall mean, without the express written consent of the
Participant, the occurrence after a Change in Control of any of the following
circumstances, unless such circumstances are fully corrected prior to the Date
of Termination specified in the Notice of Termination given in respect thereof:

(i) assignment to the Participant of any duties inconsistent in any
materially adverse respect with his or her position, authority, duties
or responsibilities from those in effect immediately prior to the
Change in Control;

(ii) a reduction in the Participant's Base Salary as in effect
immediately before the Change in Control;

(iii) a material reduction in the Participant's aggregate
compensation opportunity, comprised only of (A) the Executive's Base
Salary, (B) bonus opportunity, if any, and (C) long-term or other
incentive compensation opportunity, if any (taking into account, in
the case of such bonus and incentive opportunities, without
limitation, any target, minimum and maximum amounts

3
<PAGE>

payable and the attainability and otherwise the reasonability of any
performance hurdles, goals and other measures);

(iv) the Company's requiring the Participant to be based at any office
or location more than 50 miles from that location at which he or she
performed his or her services immediately prior to the occurrence of a
Change in Control, except for travel reasonably required in the
performance of the Participant's responsibilities; or

(v) the failure of the Employer to obtain a reasonable agreement from
any successor to assume and agree to perform the Plan, as contemplated
in Section 8.1(a).

"Notice of Termination" shall mean a notice given by the Employer or
Participant, as applicable, which shall indicate the specific termination
provision in the Plan relied upon and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Participant's employment under the provisions so indicated.

"Participant" shall have the meaning ascribed thereto by Section 3.

"Person" shall have the meaning ascribed thereto by Section 3(a)(9) of
the Securities Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof (except that such term shall not include (i) the Company or any of its
Subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company, or (v) with respect to any particular
Participant, such Participant or any "group" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act) which includes the Participant).

"Plan" shall mean this Conectiv Change-in-Control Severance Plan for
Certain Executive Employees, as it may from time to time be amended in
accordance with Section 7.

"Potential Change in Control" shall mean the occurrence, before a
Change in Control, of any of the following:

(i) if the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control;

(ii) if the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;

(iii) if any Person becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act), directly or indirectly,
of securities of the Company (not including in the securities
beneficially owned by such Persons any securities acquired directly
from the Company or its Subsidiaries) representing 15% or more of
either the then outstanding shares of Stock of the Company or the
combined voting power of the Company's then outstanding securities; or

4
<PAGE>

(iv) if the Board adopts a resolution to the effect that, for purposes
of the Plan, a Potential Change in Control has occurred.

"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.

"Stock" shall mean the common stock, $.01 par value, of the Company.

"Subsidiary" shall mean any entity, directly or indirectly, through
one or more intermediaries, controlled by the Company and which has duly adopted
the Plan.

"Target Annual Bonus" shall mean a Participant's annual bonus for the
Employer's fiscal year in which the Date of Termination occurs, which bonus
would be paid or payable if the Participant and the Employer were to satisfy all
conditions to the Participant's receiving the annual bonus at target (although
not necessarily the maximum annual bonus); provided that such amount shall be
annualized for any fiscal year consisting of less than 12 full months; and
provided, further, that, if at the time of a Change in Control it is
substantially certain that a bonus at a level beyond target will be paid or
payable for the fiscal year, then the bonus which is substantially certain to be
paid or payable, rather than the target bonus, shall be used for these purposes.

Section 3

PARTICIPATION

The employees of the Employer who shall be "Participants" for purposes
hereof shall be, subject to Section 7, those executive employees of the Employer
as shall be proposed by the management of the Company for coverage hereby and
approved by the Board, as reflected in duly adopted resolutions of the Board
from time to time. The initial Participants shall be listed on Exhibit A hereto
(which is hereby incorporated herein by reference) as in effect as of the
Effective Date. The Company shall cause such Exhibit A to be amended to reflect
the Participants participating in the Plan from time to time.

Section 4
BENEFITS

4.1 If a Covered Termination occurs, with respect to Participant,
then such Participant shall be entitled hereunder to the following:

(a) the product of (i) the Participant's Target Annual Bonus for the
year in which the Date of Termination occurs (or, if higher, as in effect at the
time of the Change in Control) and (ii) a fraction, the numerator of which is
the number of days in the current fiscal year through the Date of Termination,
and the denominator of which is 365;

(b) an amount equal to two times the sum of (i) the Participant's
annual Base Salary for the year in which the Date of Termination occurs (or, if
higher, as in effect at the time of the Change in Control) and (ii) the
Participant's Target Annual Bonus for the year in which the Date of Termination
occurs (or, if higher, as in effect at the time of the Change in Control);

(c) for a period of three years after such termination, the Employer
shall arrange to make available to such Participant medical, dental, vision,
group life and disability benefits that are at least at a level (and cost to the
Participant) that is substantially similar in the

5
<PAGE>

aggregate to the level of such benefits which was available to such Participant
immediately prior to the Change in Control; provided that (i) the Employer shall
be required to provide group life and disability benefits only to the extent it
is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer
shall not be required to provide benefits under this Section 4.1(c) upon and
after the Change in Control which are in excess of those provided to a
significant number of employees of similar status who are employed by the
Employer from time to time upon and after the Change in Control, and (iii) no
type of benefit otherwise to be made available to a Participant pursuant to this
Section 4.1(c) shall be required to be made available to the extent that such
type of benefit is made available to the Participant by any subsequent employer
of the Participant; and

(d) in addition to the benefits to which the Participant is entitled
under the Company's tax-qualified defined benefit retirement plan (the
"Retirement Plan") and defined benefit supplemental executive retirement plan
(the "SERP"), including any successor plans thereto, the Employer shall pay to
each Participant in cash at the time and in the manner provided in Section 4.2:

(i) the present value of the retirement benefits (or, if available,
the lump-sum retirement benefits) which would have accrued under the
terms of the Retirement Plan and the SERP (without regard to any
amendment to the Retirement Plan or the SERP made subsequent to a
Change in Control and prior to the Date of Termination, which
amendment adversely affects in any manner the computation of
retirement benefits thereunder), determined as if such Participant was
24 months older than their actual age at the Date of Termination and
had accumulated (after the Date of Termination) 24 additional months
of service credit for vesting, benefit accrual and eligibility
purposes thereunder at their highest annual rate of compensation
during the 12 months immediately preceding the Date of Termination
(or, if higher, as in effect at the time of the Change in Control) and
as if any benefit indexing factors continued at the rate applicable at
the Date of Termination, minus

(ii) the present value of the vested retirement benefits (or, if
available, the lump-sum retirement benefits) which had then accrued
pursuant to the provisions of the Retirement Plan and the SERP;
provided, however, that any payment otherwise provided for under this
Section 4.1(d) shall be reduced by the present value of any retirement
(including early retirement) incentives offered for a limited time to,
and accepted by, the Participant (whether or not under a tax-qualified
plan).

4.2 (a) The payments provided for in Section 4.1 shall (except as
otherwise expressly provided therein or as provided in Section 4.2(b) or as
otherwise expressly provided hereunder) be made as soon as practicable, but in
no event later than 30 days, following the Date of Termination.

(b) Notwithstanding any other provision of the Plan to the contrary,
no payment or benefit otherwise provided for under or by virtue of the foregoing
provisions of the Plan shall be paid or otherwise made available unless and
until the Employer shall have first received from the applicable Participant (no
later than 60 days after the Employer has provided to the Participant estimates
relating to the payments to be made under the Plan) a valid, binding

6
<PAGE>

and irrevocable general release, in form and substance acceptable to the
Employer in its discretion; provided that the Employer shall be permitted to
defer any payment or benefit otherwise provided for in the Plan to the 15th day
after its receipt of such release and time at which it has become valid, binding
and irrevocable. The Employer may require that any such release contain an
agreement of the Participant to notify the Employer of any benefit made
available by a subsequent employer as contemplated by clause (iii) of the
provision to Section 4.1(c).

4.3 Notwithstanding any other provision of the Plan to the contrary,
to the extent permitted by the Worker Adjustment and Retraining Notification Act
("WARN"), any benefit payable hereunder to the Participant as a consequence of
the Participant's Covered Termination shall be reduced by any amounts required
to be paid under Section 2104 of WARN to such Participant in connection with
such Covered Termination.

Section 5

ADMINISTRATION

The Plan shall be administered by the Committee appointed by the Chief
Executive Officer, consisting of one or more individuals employed by the
Employer prior to the Change in Control. The acts of a majority of the members
present at any meeting of the Committee at which a quorum is present, or acts
approved in writing by a majority of the entire Committee, shall be the acts of
the Committee for purposes of the Plan. If and to the extent applicable, no
member of the Committee may act as to matters under the Plan specifically
relating to such member. If any member of the Committee is to be replaced or
otherwise ceases to be a member thereof upon the or after a Change in Control,
then the Chief Executive Officer of the Company (or, if he or she fails to act,
the President, the Chief Operating Officer and the Chief Financial Officer, in
that order) immediately prior to the Change in Control, and no other person,
shall be permitted to designate a successor member. If at any time there is no
Committee, the Chief Executive Officer shall have the rights and
responsibilities of the Committee hereunder. The Committee shall have the full
authority to employ and rely on such legal counsel, actuaries and accountants
(which may also be those of the Employer), and other agents, designees and
delegates, as it may deem advisable to assist in the administration of the Plan.
The Employer hereby indemnifies each member of the Committee for any liability
or expense relating to the administration of the Plan, to the maximum extent
permitted by law.

Section 6
PARACHUTE TAX PROVISIONS

6.1 If all, or any portion, of the payments and benefits provided
under the Plan, if any, either alone or together with other payments and
benefits which a Participant receives or is entitled to receive from the Company
or its affiliates, would constitute an excess "parachute payment" within the
meaning of Section 280G of the Code (whether or not under an existing plan,
arrangement or other agreement) (each such parachute payment, a "Parachute
Payment"), and would result in the imposition on the Participant of an excise
tax under Section 4999 of the Code, then, in addition to any other benefits to
which the Participant is entitled under the Plan or otherwise, the Participant
shall be paid an amount in cash equal to the sum of the

7
<PAGE>

excise taxes payable by the Participant by reason of receiving Parachute
Payments plus the amount necessary to place the Participant in the same after-
tax position (taking into account any and all applicable federal, state and
local excise, income or other taxes at the highest possible applicable rates on
such Parachute Payments (including, without limitation, any payments under this
Section 6.1)) as if no excise taxes had been imposed with respect to Parachute
Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required
by this Section 6.1 shall not be made later than the time of the corresponding
payment or benefit hereunder giving rise to the underlying Section 4999 excise
tax, even if the payment of the excise tax is not required under the Code until
a later time. Any Parachute Gross-up otherwise required under this Section 6.1
shall be made whether or not there is a Change in Control, whether or not
payments or benefits are payable under the Plan, whether or not the payments or
benefits giving rise to the Parachute Gross-up are made in respect of a Change
in Control and whether or not the Participant's employment with the Employer
shall have been terminated.

6.2 Except as may otherwise be agreed to by the Company and the
Participant, the amount or amounts (if any) payable under this Section 6 shall
be as conclusively determined by the Company's independent auditors (who served
in such capacity immediately prior to the Change in Control), whose
determination or determinations shall be final and binding on all parties. The
Participant shall agree to utilize such determination or determinations, as
applicable, in filing all of the Participant's tax returns with respect to the
excise tax imposed by Section 4999 of the Code. If such independent auditors
refuse to make the required determinations, then such determinations shall be
made by a comparable independent accounting firm of national reputation
reasonably selected by the Company. Notwithstanding any other provision of the
Plan to the contrary, as a condition to receiving any Parachute Gross-up
payment, the Participant shall agree, in form and substance acceptable to the
Company, to be bound by and comply with the provisions of this Section 6.2.

Section 7

AMENDMENT AND TERMINATION

7.1 Subject to Section 7.2, the Board shall have the right in its
discretion at any time to amend the Plan in any respect or to terminate the Plan
prior to a Change in Control; provided that Exhibit A hereto may be amended from
time to time as provided in Section 7.3(b) below.

7.2 Notwithstanding any other provision of the Plan to the contrary:

(a) The Plan (including, without limitation, this Section 7.2) as
applied to any particular Participant may not be amended or terminated at any
time on or after the occurrence of a Change in Control in any manner adverse to
the interests of such Participant, without the express written consent of such
Participant.

(b) The Plan (including, without limitation, this Section 7.2) as
applied to any particular Participant may not be amended or terminated at any
time on or after the occurrence of a Potential Change in Control in any manner
adverse to the interests of such Participant, without the prior written consent
of such Participant, until such time as the transaction or transactions
contemplated in connection with the Potential Change in Control, and all related
negotiations,

8
<PAGE>

are abandoned in their entirety as determined in good faith and reflected in
writing (before a Change in Control) by the Board.

(c) If material negotiations involving the Board or the Chief
Executive Officer of the Company have commenced regarding a transaction which,
if consummated, would constitute a Change in Control, and the Plan is amended or
terminated while such negotiations are continuing and actively being pursued by
the Board or the Chief Executive Officer, then such amendment or termination of
the Plan (including, without limitation this Section 7.2), to the extent adverse
to the interest of any particular Participant, shall be null and void as applied
to such Participant with respect to the Change in Control (if any) which
ultimately results directly from such negotiations, unless the written consent
of such Participant to the amendment or termination is or has been obtained; it
being expressly understood that this Section 7.2(c) shall not apply with respect
to any negotiations which at any time prior to a Change in Control have ceased
as determined in good faith and reflected in writing (prior to a Change in
Control) by the Board or Chief Executive Officer (or which otherwise have ceased
at a time prior to a Change in Control).

7.3 (a) If a subsidiary, with the consent of the Board, purports to
revoke its adoption of the Plan in accordance with the other terms of the Plan,
such revocation shall be considered to constitute a Plan amendment for purposes
of Section 7.2, and, therefore, any such purported revocation shall be subject
to the restrictions of Section 7.2.

(b) If after an individual has become a Participant, any attempt is
made in accordance with the other terms of the Plan not to include such
individual as one of the Participants hereunder, then such exclusion shall be
considered to constitute an amendment to the Plan for purposes of Section 7.2,
and, therefore, any such purported exclusion shall be subject to the
restrictions of Section 7.2.

Section 8
MISCELLANEOUS

8.1 (a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to assume
and agree to perform under the terms of the Plan in the same manner and to the
same extent that the Company and its affiliates would be required to perform it
if no such succession had taken place (provided that such a requirement to
perform which arises by operation of law shall be deemed to satisfy the
requirements for such an express assumption and agreement), and in such event
the Company (as constituted prior to such succession) shall have no further
obligation under or with respect to the Plan. Failure of the Company to obtain
such assumption and agreement with respect to any particular Participant prior
to the effectiveness of any such succession shall be a breach of the terms of
the Plan with respect to such Participant and shall entitle each such Particular
to compensation from the Employer (as constituted prior to such succession) in
the same amount and on the same terms as the Participant would be entitled to
hereunder were the Participant's employment terminated for Good Reason following
a Change in Control, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination. As used in the Plan, "Company" shall mean the Company as
hereinbefore defined and any successor to its business or assets as aforesaid
which assumes and agrees (or is otherwise required) to perform the Plan.
Nothing in this Section 8.1(a) shall be deemed to cause any event

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<PAGE>

or condition which would otherwise constitute a Change in Control not to
constitute a Change in Control.

(b) Notwithstanding Section 8.1(a), the Company shall remain liable to
those Participants upon a Covered Termination upon a Change in Control if (i)
they are not offered continuing employment by a successor to the Employer or
(ii) the Participant declines such an offer and the Participant's resulting
termination of employment otherwise constitutes a Covered Termination hereunder.

(c) To the maximum extent permitted by law, the right of any
Participant or other person to any amount under the Plan may not be subject to
voluntary or involuntary anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment or garnishment by creditors of the Participant
or such other person.

(d) The terms of the Plan shall inure to the benefit of and be
enforceable by the personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees of each Participant. If
a Participant shall die while an amount would still be payable to the
Participant hereunder if they had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of the
Plan to the Participant's devisee, legatee or other designee or, if there is no
such designee, their estate.

8.2 Except as expressly provided in Section 4.1, Participants shall
not be required to mitigate damages or the amount of any payment provided for
under the Plan by seeking other employment or otherwise, nor will any payments
or benefits hereunder be subject to offset in the event a Participant does
mitigate.

8.3 The Employer shall pay all legal fees and expenses incurred in a
legal proceeding by a Participant in seeking to obtain or enforce any right or
benefit provided by the Plan. Such payments are to be made within five days
after a Participant's request for payment accompanied with such evidence of fees
and expenses incurred as the Employer reasonably may require; provided that if
the Participant institutes a proceeding and the judge or other decision-maker
presiding over the proceeding affirmatively finds that such Participant has
failed to prevail substantially, he or she shall pay his or her own costs and
expenses (and, if applicable, return any amounts theretofore paid on the his or
her behalf under this Section 8.3).

8.4 (a) A Participant may file a claim for benefits under the Plan
by written communication to the Committee or its designee. A claim is not
considered filed until such communication is actually received by the Committee
or its designee. Within 90 days (or, if special circumstances require an
extension of time for processing, 180 days, in which case notice of such special
circumstances shall be provided within the initial 90-day period) after the
filing of the claim, the Committee shall:

(i) approve the claim and take appropriate steps for satisfaction of
the claim; or

10
<PAGE>

pertinent provisions of the Plan on which the denial is based and, if
the denial is based in whole or in part on any rule of construction or
interpretation adopted by the Committee, a reference to such rule, a
copy of which shall be provided to the claimant; (C) a description of
any additional material or information necessary for the claimant to
perfect the claim and an explanation of the reasons why such material
or information is necessary; and (D) a reference to this Section 8.4.

(b) The claimant may request a review of any denial of his or her
claim by written application to the Committee within 60 days after receipt of
the notice of denial of such claim. Within 60 days (or, if special circumstances
require an extension of time for processing. 120 days, in which case notice of
such special circumstances shall be provided within the initial 60-day period)
after receipt of written application for review, the Committee shall provide the
claimant with its decision in writing, including, if the claimant's claim is not
approved, specific reasons for the decisions and specific references to the
Plan's provisions on which the decision is based.

8.5 All notices under the Plan shall be in writing, and if to the
Company or the Committee, shall be delivered to the General Counsel of the
Company, or mailed to the Company's principal office, addressed to the attention
of the General Counsel of the Company; and if to a Participant (or the estate or
beneficiary thereof), shall be delivered personally or mailed to the Participant
at the address appearing in the records of the Company.

8.6 Unless otherwise determined by the Employer in an applicable plan
or arrangement, no amounts payable hereunder upon a Covered Termination shall be
deemed salary or compensation for the purpose of computing benefits under any
employee benefit plan or other arrangement of the Employer for the benefit of
its employees unless the Employer shall determine otherwise.

8.7 With respect to each Participant, the Plan is the exclusive
arrangement applicable to payments and benefits in connection with a change in
control of the Company (whether or not a Change in Control), and supersedes any
prior arrangements involving the Company or its predecessors or affiliates
(including, without limitation, Delmarva Power & Light Company and Atlantic
Energy, Inc.) relating to changes in control (whether or not Changes in
Control). Participation in the Plan shall not limit any right of a Participant
to receive any payments or benefits under an employee benefit or executive
compensation plan of the Employer, initially adopted as of or after the
Effective Date, or otherwise listed in Exhibit B hereto, which are expressly
contingent thereunder upon the occurrence of a change in control (including, but
not limited to, the acceleration of any rights or benefits thereunder); provided
that in no event shall any Participant be entitled to any payment or benefit
under the Plan which duplicates a payment or benefit received or receivable by
the Participant under any severance or similar plan or policy of the Employer.

8.8 Any payments hereunder shall be made out of the general assets of
the Employer. Each Participant shall have the status of general unsecured
creditor of the Employer, and the Plan constitutes a mere promise by the
Employer to make payments under the Plan in the future as and to the extent
provided herein.

8.9 Nothing in the Plan shall confer on any individual any right to
continue in the employ of the Employer or interfere in any way (other than by
virtue of requiring payments

11
<PAGE>

or benefits as may expressly be provided herein) with the right of the Employer
to terminate the individual's employment at any time.

8.10 The Employer shall be entitled to withhold from any payments or
deemed payments any amount of tax withholding required by law.

8.11 The invalidity or unenforceability of any provision of the Plan
shall not affect the validity or enforceability of any other provision of the
Plan which shall remain in full force and effect.

8.12 The use of captions in the Plan is for convenience. The
captions are not intended to and do not provide substantive rights.

8.13 THE PLAN SHALL BE CONSTRUED, ADMINISTERED AND ENFORCED ACCORDING
TO THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAW, EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW.

<PAGE>

EXHIBIT 10-D
------------

Change-in-Control Severance Agreement between Conectiv and certain select
employees

<PAGE>

CONECTIV
CHANGE-IN-CONTROL SEVERANCE PLAN FOR
CERTAIN SELECT EMPLOYEES
------------------------

Section 1

INTRODUCTION

The Plan is intended to provide severance benefits to certain selected
employees of the Employer in the event that their employment is terminated under
certain circumstances following a Change in Control. The Plan shall be
effective as of the Effective Date.

Section 2
DEFINITIONS

Except as may otherwise be specified or as the context may otherwise
require, the following terms shall have the respective meanings set forth below
whenever used herein:

"Board" shall mean the Board of Directors of the Company.

"Change in Control" shall mean the first to occur, after the Effective
Date hereof, of any of the following:

(ii) if during any period of 24 consecutive months during the
existence of the Plan commencing on or after the Effective Date, the
individuals who, at the

1
<PAGE>

beginning of such period, constitute the Board (the "Incumbent
Directors") cease for any reason other than death to constitute at
least a majority thereof; provided that a director who was not a
director at the beginning of such 24-month period shall be deemed to
have satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the recommendation of
or with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because they were
directors at the beginning of such 24-month period) or by prior
operation of this clause (ii);

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Committee" shall mean such Committee as may be appointed and
constituted from time to time under Section 5.

"Company" shall mean, subject to Section 8.1(a), Conectiv, a Delaware
corporation.

"Covered Termination" shall mean, with respect to a Participant, if,
within the one-year period immediately following a Change in Control, the
Participant (i) is terminated by the Employer without Cause (other than on
account of death or Disability), or (ii) terminates his or her employment with
the Employer for Good Reason. A Participant shall not be deemed to

2
<PAGE>

have terminated for purposes of the Plan merely because he or she ceases to be
employed by the Employer and becomes employed by a new employer involved in the
Change in Control; provided that such new employer shall be bound by the Plan as
if it were the Employer hereunder with respect to such Participant. It is
expressly understood that no Covered Termination shall be deemed to have
occurred merely because, upon the occurrence of a Change in Control, the
Participant ceases to be employed by the Employer and does not become employed
by a successor to the Employer after the Change in Control if the successor
makes an offer to employ the Participant on terms and conditions which, if
imposed by the Employer, would not give the Participant a basis on which to
terminate employment for Good Reason.

"Date of Termination" shall mean the date on which a Covered
Termination occurs.

"Effective Date" shall mean March 1, 1998.

(ii) a reduction in the Participant's Base Salary as in effect
immediately before the Change in Control;

3
<PAGE>

(v) the failure of the Employer to obtain a reasonable agreement from
any successor to assume and agree to perform the Plan, as contemplated
in Section 8.1(a).

"Participant" shall have the meaning ascribed thereto by Section 3.

"Plan" shall mean this Conectiv Change-in-Control Severance Plan for
Certain Select Employees, as it may from time to time be amended in accordance
with Section 7.

"Potential Change in Control" shall mean the occurrence, before a
Change in Control, of any of the following:

(i) if the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control;

(ii) if the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;

(iv) if the Board adopts a resolution to the effect that, for purposes
of the Plan, a Potential Change in Control has occurred.

4
<PAGE>

"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.

"Stock" shall mean the common stock, $.01 par value, of the Company.

"Subsidiary" shall mean any entity, directly or indirectly, through
one or more intermediaries, controlled by the Company and which has duly adopted
the Plan.

Section 3

PARTICIPATION

The employees of the Employer who shall be "Participants" for purposes hereof
shall be, subject to Section 7, those employees of the Employer as shall be
proposed by the management of the Company for coverage hereby and approved by
the Chief Executive Officer of the Company, as reflected in duly executed
certificate of the Chief Executive Officer from time to time. The initial
Participants shall be listed on Exhibit A hereto (which is hereby incorporated
herein by reference) as in effect as of the Effective Date. The Company shall
cause such Exhibit A to be amended to reflect the Participants participating in
the Plan from time to time.

Section 4
BENEFITS

4.1 If a Covered Termination occurs, with respect to Participant,
then such Participant shall be entitled hereunder to the following:

(c) for a period of one and one-half years after such termination, the
Employer shall arrange to make available to such Participant medical, dental,
vision, group life and disability benefits that are at least at a level (and
cost to the Participant) that is substantially similar in the aggregate to the
level of such benefits which was available to such Participant

5
<PAGE>

immediately prior to the Change in Control; provided that (i) the Employer shall
be required to provide group life and disability benefits only to the extent it
is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer
shall not be required to provide benefits under this Section 4.1(c) upon and
after the Change in Control which are in excess of those provided to a
significant number of employees of similar status who are employed by the
Employer from time to time upon and after the Change in Control, and (iii) no
type of benefit otherwise to be made available to a Participant pursuant to this
Section 4.1(c) shall be required to be made available to the extent that such
type of benefit is made available to the Participant by any subsequent employer
of the Participant; and

(i) the present value of the retirement benefits (or, if available,
the lump-sum retirement benefits) which would have accrued under the
terms of the Retirement Plan and the SERP (without regard to any
amendment to the Retirement Plan or the SERP made subsequent to a
Change in Control and prior to the Date of Termination, which
amendment adversely affects in any manner the computation of
retirement benefits thereunder), determined as if such Participant was
18 months older than their actual age at the Date of Termination and
had accumulated (after the Date of Termination) 18 additional months
of service credit for vesting, benefit accrual and eligibility
purposes thereunder at their highest annual rate of compensation
during the 12 months immediately preceding the Date of Termination
(or, if higher, as in effect at the time of the Change in Control) and
as if any benefit indexing factors continued at the rate applicable at
the Date of Termination, minus

6
<PAGE>

discretion; provided that the Employer shall be permitted to defer any payment
or benefit otherwise provided for in the Plan to the 15th day after its receipt
of such release and time at which it has become valid, binding and irrevocable.
The Employer may require that any such release contain an agreement of the
Participant to notify the Employer of any benefit made available by a subsequent
employer as contemplated by clause (iii) of the provision to Section 4.1(c).

Section 5

ADMINISTRATION

Section 6
PARACHUTE TAX PROVISIONS

7
<PAGE>

amount necessary to place the Participant in the same after-tax position (taking
into account any and all applicable federal, state and local excise, income or
other taxes at the highest possible applicable rates on such Parachute Payments
(including, without limitation, any payments under this Section 6.1)) as if no
excise taxes had been imposed with respect to Parachute Payments (the "Parachute
Gross-up"). Any Parachute Gross-up otherwise required by this Section 6.1 shall
not be made later than the time of the corresponding payment or benefit
hereunder giving rise to the underlying Section 4999 excise tax, even if the
payment of the excise tax is not required under the Code until a later time. Any
Parachute Gross-up otherwise required under this Section 6.1 shall be made
whether or not there is a Change in Control, whether or not payments or benefits
are payable under the Plan, whether or not the payments or benefits giving rise
to the Parachute Gross-up are made in respect of a Change in Control and whether
or not the Participant's employment with the Employer shall have been
terminated.

Section 7

AMENDMENT AND TERMINATION

7.2 Notwithstanding any other provision of the Plan to the contrary:

8
<PAGE>

Section 8
MISCELLANEOUS

9
<PAGE>

(i) approve the claim and take appropriate steps for satisfaction of
the claim; or

(ii) if the claim is wholly or partially denied, advise the claimant
of such denial by furnishing to him or her a written notice of such
denial setting forth (A) the specific reason or reasons for the
denial; (B) specific reference to pertinent provisions of the Plan on
which the denial is based and, if the denial is based in whole or in
part on any rule of construction or interpretation adopted by the
Committee, a reference to such rule, a copy of which shall be provided
to the

10
<PAGE>

claimant; (C) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of
the reasons why such material or information is necessary; and (D) a
reference to this Section 8.4.

8.9 Nothing in the Plan shall confer on any individual any right to
continue in the employ of the Employer or interfere in any way (other than by
virtue of requiring payments or benefits as may expressly be provided herein)
with the right of the Employer to terminate the individual's employment at any
time.

11
<PAGE>

8.10 The Employer shall be entitled to withhold from any payments or
deemed payments any amount of tax withholding required by law.

8.11 The invalidity or unenforceability of any provision of the Plan
shall not affect the validity or enforceability of any other provision of the
Plan which shall remain in full force and effect.

8.12 The use of captions in the Plan is for convenience. The
captions are not intended to and do not provide substantive rights.

<PAGE>

EXHIBIT 12
----------

Ratio of Earnings to Fixed Charges
<PAGE>

Exhibit 12
Conectiv
--------

Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)

1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>

Net income $153,201 $101,218 $107,251 $107,546 $ 98,940
-------- -------- -------- -------- --------

Income taxes 105,817 72,155 78,340 75,540 67,613
-------- -------- -------- -------- --------

Fixed charges:
Interest on long-term debt 133,796 78,350 69,329 65,572 61,128
Other interest 26,199 12,835 12,516 10,353 9,336
Preferred stock dividend
requirements of subsidiaries 17,871 10,178 10,326 9,942 9,370
-------- -------- -------- -------- --------
Total fixed charges 177,866 101,363 92,171 85,867 79,834
-------- -------- -------- -------- --------

Nonutility capitalized interest (1,444) (208) (311) (304) (256)
-------- -------- -------- -------- --------

Earnings before income taxes
and fixed charges $435,440 $274,528 $277,451 $268,649 $246,131
======== ======== ======== ======== ========

Total fixed charges shown above $177,866 $101,363 $ 92,171 $ 85,867 $ 79,834
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 4,901 3,065 6,025 6,243 6,578
-------- -------- -------- -------- --------
Fixed charges for ratio computation $182,767 $104,428 $ 98,196 $ 92,110 $ 86,412
======== ======== ======== ======== ========

Ratio of earnings to fixed charges 2.38 2.63 2.83 2.92 2.85
-------- -------- -------- -------- --------
</TABLE>

For purposes of computing the ratio, earnings are net income plus income taxes
and fixed charges, less nonutility capitalized interest. Fixed charges consist
of interest on long- and short-term debt, amortization of debt discount,
premium, and expense, preferred stock dividend requirements of subsidiaries, and
interest on leases. Preferred dividend requirements for purposes of computing
the ratio have been increased to an amount representing the pre-tax earnings
which would be required to cover such dividend requirements.

<PAGE>

EXHIBIT 23
----------

Consent of Independent Accountants

<PAGE>

Exhibit 23

Consent of Independent Accountants

We consent to the incorporation by reference in the Registration Statements of
Conectiv on Form S-3 (File Nos. 333-72251 and 333-44219) and Form S-8 (File No.
333-50063) of our report dated February 5, 1999, on our audits of the
consolidated financial statements of Conectiv as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998, which
report is included in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 1999

<PAGE>
<ARTICLE> UT
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated Balance Sheet and Statement of Income from Conectiv's 1998 Annual
Report on Form 10-K and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,569,178
<OTHER-PROPERTY-AND-INVEST> 595,893
<TOTAL-CURRENT-ASSETS> 723,872
<TOTAL-DEFERRED-CHARGES> 495,737
<OTHER-ASSETS> 702,994
<TOTAL-ASSETS> 6,087,674
<COMMON> 1,073
<CAPITAL-SURPLUS-PAID-IN> 1,569,770
<RETAINED-EARNINGS> 276,939
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,843,161
188,950
95,933
<LONG-TERM-DEBT-NET> 1,746,562
<SHORT-TERM-NOTES> 376,061
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 80,822
0
<CAPITAL-LEASE-OBLIGATIONS> 36,603
<LEASES-CURRENT> 28,314
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,691,268
<TOT-CAPITALIZATION-AND-LIAB> 6,087,674
<GROSS-OPERATING-REVENUE> 3,071,606
<INCOME-TAX-EXPENSE> 105,817
<OTHER-OPERATING-EXPENSES> 2,684,691
<TOTAL-OPERATING-EXPENSES> 2,790,508
<OPERATING-INCOME-LOSS> 281,098
<OTHER-INCOME-NET> 36,860
<INCOME-BEFORE-INTEREST-EXPEN> 317,958
<TOTAL-INTEREST-EXPENSE> 164,757
<NET-INCOME> 153,201
0
<EARNINGS-AVAILABLE-FOR-COMM> 153,201
<COMMON-STOCK-DIVIDENDS> 176,296
<TOTAL-INTEREST-ON-BONDS> 153,644
<CASH-FLOW-OPERATIONS> 372,309
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50

</TABLE>