<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
- --
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13895
CONECTIV
--------
(Exact name of registrant as specified in its charter)
Delaware 51-0377417
------------------------ -------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231, Wilmington, Delaware 19899
--------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3114
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at July 31, 1999
--------------------------------- -----------------------------------
Common Stock, $0.01 par value 87,822,737
Class A Common Stock, $0.01 par value 5,742,604
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Conectiv
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Table of Contents
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<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information:
Consolidated Statements of Income for the three and six
months ended June 30, 1999, and June 30, 1998.......... 1
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998.................................. 2-3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999, and June 30, 1998...... 4
Notes to Consolidated Financial Statements............. 5-16
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 17-33
Part II. Other Information and Signature........................ 34-36
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
CONECTIV
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CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $553,510 $526,402 $1,116,823 $ 880,530
Gas 133,180 72,931 425,030 188,716
Other services 115,790 84,706 207,212 118,384
-------- -------- ---------- ----------
802,480 684,039 1,749,065 1,187,630
-------- -------- ---------- ----------
OPERATING EXPENSES
Electric fuel and purchased energy 201,645 190,698 430,198 326,358
Gas purchased 119,199 62,543 390,812 161,171
Other services' cost of sales 90,892 65,640 164,825 89,328
Purchased electric capacity 56,286 50,337 106,347 72,874
Employee separation and other merger-related costs - (14,277) - 26,346
Operation and maintenance 159,512 134,994 293,763 238,530
Depreciation 68,291 65,971 135,174 109,862
Taxes other than income taxes 20,797 18,704 39,550 31,569
-------- -------- ---------- ----------
716,622 574,610 1,560,669 1,056,038
-------- -------- ---------- ----------
OPERATING INCOME 85,858 109,429 188,396 131,592
-------- -------- ---------- ----------
OTHER INCOME
Allowance for equity funds used
during construction 398 784 1,134 1,116
Other income 8,587 2,157 30,964 4,672
-------- -------- ---------- ----------
8,985 2,941 32,098 5,788
-------- -------- ---------- ----------
INTEREST EXPENSE
Interest charges 42,689 41,091 82,949 67,446
Allowance for borrowed funds used during
construction and capitalized interest (1,457) (824) (3,023) (1,588)
-------- -------- ---------- ----------
41,232 40,267 79,926 65,858
-------- -------- ---------- ----------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES 4,778 4,924 9,726 8,247
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 48,833 67,179 130,842 63,275
INCOME TAXES 17,474 27,835 50,788 27,909
-------- -------- ---------- ----------
NET INCOME $ 31,359 $ 39,344 $ 80,054 $ 35,366
======== ======== ========== ==========
EARNINGS APPLICABLE TO COMMON STOCK
Common stock $ 30,061 $ 37,310 $ 77,424 $ 33,174
Class A common stock 1,298 2,034 2,630 2,192
-------- -------- ---------- ----------
$ 31,359 $ 39,344 $ 80,054 $ 35,366
======== ======== ========== ==========
COMMON STOCK
Average shares outstanding (000)
Common stock 98,120 101,063 99,326 87,874
Class A common stock 6,408 6,561 6,484 6,561
Earnings per average share--basic and diluted
Common stock $ 0.31 $ 0.37 $ 0.78 $ 0.38
Class A common stock $ 0.20 $ 0.31 $ 0.41 $ 0.33
Dividends declared per share
Common stock $ 0.22 $ 0.385 $ 0.605 $ 0.77
Class A common stock $ 0.80 $ 0.80 $ 1.60 $ 1.60
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 44,433 $ 65,884
Accounts receivable 447,476 455,088
Inventories, at average cost:
Fuel (coal, oil, and gas) 57,844 71,701
Materials and supplies 78,935 73,047
Prepaid New Jersey sales and excise taxes 40,234 20,078
Other prepayments 13,142 17,278
Deferred income taxes, net 33,099 20,796
----------- -----------
715,163 723,872
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INVESTMENTS
Investment in leveraged leases 117,573 122,256
Funds held by trustee 171,145 174,509
Other investments 132,250 90,913
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420,968 387,678
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PROPERTY, PLANT, and EQUIPMENT
Electric utility plant 5,723,283 5,649,827
Gas utility plant 254,262 249,383
Common utility plant 182,544 169,883
----------- -----------
6,160,089 6,069,093
Less: Accumulated depreciation 2,603,257 2,499,915
----------- -----------
Net utility plant in service 3,556,832 3,569,178
Utility construction work-in-progress 226,281 236,830
Leased nuclear fuel, at amortized cost 57,049 63,328
Nonutility property, net 243,553 208,215
Goodwill, net 409,297 402,836
----------- -----------
4,493,012 4,480,387
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DEFERRED CHARGES AND OTHER ASSETS
Unrecovered purchased power costs 38,891 48,274
Deferred recoverable income taxes 184,245 184,434
Unrecovered New Jersey state excise tax 30,814 35,594
Deferred debt refinancing costs 42,014 44,223
Deferred other postretirement benefit costs 33,728 34,978
Prepaid employee benefits costs 24,937 16,132
Unamortized debt expense 28,633 27,375
License fees 24,018 24,706
Other 81,334 80,021
----------- -----------
488,614 495,737
----------- -----------
TOTAL ASSETS $ 6,117,757 $ 6,087,674
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONECTIV
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES
Short-term debt $ 600,008 $ 376,061
Long-term debt due within one year 67,055 80,822
Variable rate demand bonds 125,100 125,100
Accounts payable 217,876 240,775
Taxes accrued 34,257 41,299
Interest accrued 42,915 37,346
Dividends payable 27,442 47,743
Deferred energy costs 49,243 15,990
Current capital lease obligation 28,107 28,314
Accrued employee separation and
other merger-related costs 4,856 12,173
Other 66,315 76,168
---------- ------------
1,263,174 1,081,791
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DEFERRED CREDITS AND OTHER LIABILITIES
Other postretirement benefits obligation 102,918 102,268
Deferred income taxes, net 870,004 862,179
Deferred investment tax credits 76,978 79,525
Long-term capital lease obligation 30,244 36,603
Other 62,600 50,702
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1,142,744 1,131,277
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CAPITALIZATION
Common stock: $0.01 par value;
150,000,000 shares authorized; shares outstanding--
87,822,737 in 1999, and 100,516,768 in 1998 1,021 1,007
Class A common stock, $0.01 par value;
10,000,000 shares authorized; shares outstanding--
5,742,604 in 1999, 6,560,612 in 1998 57 66
Additional paid-in capital--common stock 1,477,336 1,462,675
Additional paid-in capital--Class A common stock 93,742 107,095
Retained earnings 289,139 276,939
---------- ------------
1,861,295 1,847,782
Treasury shares, at cost:
14,261,349 shares in 1999; 185,030 shares in 1998 (362,741) (3,797)
Unearned compensation (2,236) (824)
---------- ------------
Total common stockholders' equity 1,496,318 1,843,161
Preferred stock of subsidaries:
Not subject to mandatory redemption 95,933 95,933
Subject to mandatory redemption 188,950 188,950
Long-term debt 1,930,638 1,746,562
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3,711,839 3,874,606
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TOTAL CAPITALIZATION AND LIABILITIES $6,117,757 $ 6,087,674
========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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CONECTIV
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 80,054 $ 35,366
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 145,824 117,573
Allowance for equity funds used during construction (1,134) (1,116)
Investment tax credit adjustments, net (2,547) (2,125)
Deferred income taxes, net (4,289) (3,090)
Net change in:
Accounts receivable 13,978 (17,940)
Inventories 8,487 16,480
Prepaid New Jersey sales and excise taxes (20,156) (62,207)
Accounts payable (25,797) 6,234
Other current assets & liabilities (1) 16,407 1,747
Other, net (8,913) 8,343
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Net cash provided by operating activities 201,914 99,265
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (14,704) 8,938
Capital expenditures (134,219) (71,023)
Investments in partnerships (21,116) (10,530)
Deposits to nuclear decommissioning trust funds (5,341) (5,344)
Decrease in bond proceeds held in trust funds 11,536 -
Decrease in investment in leveraged leases 5,930 6,532
Other, net 1,336 1,403
---------- -----------
Net cash used by investing activities (156,578) (70,024)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (87,518) (65,966)
Long-term debt issued 250,000 33,000
Common stock issued - 63
Long-term debt redeemed (80,805) (193,336)
Common stock purchased (358,943) (2,028)
Principal portion of capital lease payments (10,650) (7,711)
Net change in short-term debt 223,947 240,884
Cost of issuances and refinancings (2,818) (492)
---------- -----------
Net cash used by financing activities (66,787) 4,414
---------- -----------
Net change in cash and cash equivalents (21,451) 33,655
Cash and cash equivalents at beginning of period 65,884 35,339
---------- -----------
Cash and cash equivalents at end of period $ 44,433 $ 68,994
========== ===========
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Financial Statement Presentation
--------------------------------
Conectiv's consolidated condensed interim financial statements contained herein
include the accounts of Conectiv and its majority-owned subsidiaries and reflect
all adjustments necessary in the opinion of management for a fair presentation
of Interim results. In accordance with regulations of the Securities and
Exchange Commission (SEC), disclosures which would substantially duplicate the
disclosures in Conectiv's 1998 Annual Report on Form 10-K have been omitted.
Accordingly, Conectiv's consolidated condensed interim financial statements
contained herein should be read in conjunction with Conectiv's 1998 Annual
Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for
additional relevant information.
On March 1, 1998, Conectiv became a holding company that owns Delmarva Power &
Light Company (DPL), Atlantic City Electric Company (ACE) and other subsidiaries
(the Merger). Under the purchase method of accounting, with DPL as the acquirer
of Atlantic Energy, Inc. (Atlantic) and its subsidiaries, the Consolidated
Statement of Income for the six months ended June 30, 1998 includes four months
of results of operations for ACE and the nonutility subsidiaries formerly owned
by Atlantic. For additional information about the Merger, see Note 4 to the
Consolidated Financial Statements included in Conectiv's 1998 Annual Report on
Form 10-K. See Note 4 to the Consolidated Financial Statements of this report
for comparative pro forma information.
2. Investment Income
------------------
ATE Investment, Inc. (ATE), a wholly-owned Conectiv subsidiary, holds a 94%
limited partner interest in Enertech Capital Partners, L.P. (Enertech).
Enertech is a venture capital fund which invests in energy-related technology
and Internet service companies. Enertech records its investments at fair value
and includes gains and losses on changes in the fair value of its investments in
income in accordance with industry practice. Conectiv accounts for ATE's
investment in Enertech with the equity method of accounting. Conectiv's equity
in pre-tax earnings of Enertech was $18.0 million ($10.6 million after-income
taxes or $0.11 per common share) for the six months ended June 30, 1999. The
pre-tax earnings are reported as "Other income" in the Consolidated Statement of
Income. Conectiv's equity in earnings of Enertech was not significant in 1998.
Due to the nature of Enertech's investments, its earnings may be volatile from
period to period. Upon receiving SEC approval, ATE will be transferred to
Conectiv Solutions LLC, or a subsidiary thereof, in connection with the
establishment and funding of a captive insurance company.
3. Employee Separation and Other Merger-Related Costs
--------------------------------------------------
Enhanced retirement offers and other employee separation programs were utilized
in 1998 to reduce the workforces of DPL, ACE, and other Conectiv subsidiaries.
Shown on the following page are the effects on 1998 interim operating results of
DPL employee separation costs, other Merger-related costs expensed, and the net
gains which resulted from curtailments and settlements of pensions and other
postretirement benefit obligations. The 1998 employee separation, relocation,
and other Merger-related costs for Atlantic and its former subsidiaries were
capitalized as costs of the Merger.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- --------------
<S> <C> <C>
Operating Income (millions of dollars) $14.3 $(26.3)
Net Income (millions of dollars) $ 8.6 $(16.0)
Earnings Per Average Common Share $0.09 $(0.18)
</TABLE>
4. Pro Forma Information (unaudited)
----------------------------------
Actual unadjusted operating results for the six months ended June 30, 1999 and
pro forma unaudited financial information for the six months ended June 30,
1998, giving effect to the Merger as if it had occurred on January 1, 1998, are
presented below. The pro forma information for the six months ended June 30,
1998 has not been adjusted to exclude the charge to earnings for employee
separation and other Merger-related costs incurred by DPL which reduced
operating income, net income, earnings applicable to common stock and earnings
per average Conectiv common share by $26.3 million, $16.0 million, $16.0
million, and $0.18, respectively. The pro forma information presented below is
not necessarily indicative of the results that would have occurred, or that will
occur in the future.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Dollars in Thousands, except ------------------------
per share amounts) 1999 1998
- ----------------------------------------- ------------------------
(Actual) (Pro Forma)
<S> <C> <C>
Operating Revenues $1,749,065 $1,352,815
Operating Income $ 188,396 $ 152,626
Net Income $ 80,054 $ 37,497
Earnings Applicable to Common Stock:
Common stock $ 77,424 $ 35,152
Class A common stock $ 2,630 $ 2,345
Average common shares outstanding (000)
Common stock 99,326 101,034
Class A common stock 6,484 6,561
Basic and diluted earnings per average
share outstanding of:
Common stock $ 0.78 $ 0.35
Class A common stock $ 0.41 $ 0.36
</TABLE>
5. Common Stockholders' Equity
---------------------------
(A) Conectiv Common Stock
---------------------
On May 11, 1999, Conectiv announced financial and strategic initiatives that
included an offer to purchase approximately 14,000,000 shares of Conectiv common
stock (Shares) at a price per Share not greater than $25.50 nor less than $23.50
(the Offer). In June 1999, Conectiv paid $358.9 million to purchase 14,075,338
Shares through the Offer at a price of $25.50 per Share, which was determined
based on Dutch Auction procedures provided for in the Offer. As of June 30,
1999, the Shares purchased through the Offer were held as treasury shares and
are classified as such on the Consolidated Balance Sheet. In accordance with
the Restated Certificate of Incorporation of Conectiv, holders of shares of
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Conectiv Class A common stock (Class A Shares) could participate in the Offer by
electing to convert Class A Shares into Shares and tendering such Shares
pursuant to the Offer. The 14,075,338 Shares purchased through the Offer
included 1,308,788 Shares which were issued to (and tendered by) holders of
818,008 Class A Shares who elected to convert Class A Shares through the Offer.
Holders of Class A Shares received 1.59997 Shares for each Class A Share
converted.
The financial and strategic initiatives announced by Conectiv on May 11, 1999,
included the intention to reduce the dividends on Shares to a targeted payout
ratio of 40% to 60% of earnings per Share. On June 29, 1999, Conectiv's Board of
Directors declared a quarterly dividend of $0.22 per Share. The previous
quarterly dividend level was $0.385 per Share.
(B) Conectiv Class A Common Stock
-----------------------------
Earnings applicable to Class A Shares are equal to a percentage of the Atlantic
Utility Group (AUG) earnings, which are earnings attributable to ACE's regulated
electric utility business, as the business existed on August 9, 1996, less $40
million per year. The percentage of AUG earnings applicable to Class A Shares
was 30% at the date of the Merger. Certain circumstances, as specified in the
Restated Certificate of Incorporation of Conectiv, result in an adjustment to
the percentage of AUG earnings applicable to Class A Shares. As discussed in
Note 5 (A) to the Consolidated Financial Statements, the number of Class A
Shares outstanding decreased by 818,008 as a result of the Offer. Due to this
reduction in the number of Class A Shares outstanding and in accordance with the
Restated Certificate of Incorporation of Conectiv, the percentage of AUG
earnings applicable to Class A shares decreased to 27.3% in June 1999, when the
Offer was completed.
The calculation of earnings applicable to Class A Shares and summarized ACE
financial information are presented below and on the following page. Under the
purchase method of accounting, the Conectiv Consolidated Statement of Income for
the six months ended June 30, 1998 includes ACE's operating results for the four
months ended June 30, 1998.
Computation of Earnings Applicable to Class A Shares
(Dollars in Thousands)(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------- Six Months Four Months
June 30, June 30, Ended Ended
1999 1998 June 30, 1999 June 30, 1998
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) of ACE [a] $ 14,345 $ 18,314 $ 28,903 $ (9,067)
Exclude:
Employee separation and other
Merger-related costs [a] - (1,987) - 28,959
Net loss (income) of nonutility activities 54 453 (48) 747
Pro-rata portion of fixed amount
of $40 million per year (10,000) (10,000) (20,000) (13,333)
-------- -------- --------- --------
Net earnings of the AUG 4,399 6,780 8,855 7,306
Percentage applicable to Class A Shares [b] 29.5% 30% 29.7% 30%
-------- -------- --------- --------
Earnings applicable to Class A Shares $ 1,298 $ 2,034 $ 2,630 $ 2,192
======== ======== ========= ========
</TABLE>
[a] See Summarized Financial Information of Atlantic City Electric Company
shown on the following page for additional information.
[b] The percentage applicable to Class A Shares in a reporting period is a
weighted average based on the number of days the percentage was in
effect during the reporting period.
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<PAGE>
Summarized Financial Information of Atlantic City Electric Company
(Dollars in Thousands)(unaudited)
<TABLE>
<CAPTION>
Income Statement Information
Three Months Ended
------------------------ Six Months Four Months
June 30, June 30, Ended Ended
1999 1998 June 30, 1999 June 30, 1998
-------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $246,143 $241,883 $490,982 $317,962
Operating income (1) $ 35,967 $ 46,028 $ 74,001 $ 6,437
Earnings (loss) applicable to common stock (1) $ 14,345 $ 18,314 $ 28,903 $ (9,067)
</TABLE>
(1) Employee separation and other Merger-related costs for ACE reduced ACE's
operating income and net earnings for the four months ended June 30, 1998 by
$48.1 million and $29.0 million, respectively. For the three months ended June
30, 1998, ACE's operating income and net earnings increased by $3.4 million
and $2.0 million, respectively, due to revision of ACE's estimated employee
separation and other Merger-related costs. In the Consolidated Conectiv
Financial Statements, these costs were capitalized as costs of the Merger.
<TABLE>
<CAPTION>
Balance Sheet Information
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Current assets $ 266,313 $ 236,177
Noncurrent assets 2,085,134 2,131,045
---------- ----------
Total assets $2,351,447 $2,367,222
========== ==========
Current liabilities $ 284,899 $ 236,546
Noncurrent liabilities 1,204,561 1,275,402
Preferred stock 125,181 125,181
Common stockholder's equity 736,806 730,093
---------- ----------
Total capitalization and liabilities $2,351,447 $2,367,222
========== ==========
</TABLE>
(C) Changes in Consolidated Common Stockholders' Equity
---------------------------------------------------
Consolidated common stockholders' equity decreased from $1,843.2 million as of
December 31, 1998, to $1,496.3 million as of June 30, 1999, primarily due to
$358.9 million paid to purchase Shares through the Offer and $67.9 million of
dividends declared on Shares and Class A Shares, partly offset by the $80.1
million of net income for the six months ended June 30, 1999.
6. Debt
----
On May 26, 1999, Conectiv issued $250 million of 6.73% Medium Term Notes which
mature as follows: $100 million in 2002; $50 million in 2003; $50 million in
2004; $30 million in 2005; and $20 million in 2006. Proceeds from the issuance
of the Medium Term Notes and short-term borrowings under Conectiv's bank credit
lines were used to finance the $358.9 million purchase of Shares pursuant to the
Offer, as discussed in Note 5 (A) to the Consolidated Financial Statements.
In May 1999, DPL repaid at maturity $30 million of 7.50% Medium Term Notes and
ACE repaid at maturity $30 million of 7.52% Medium Term Notes. In June 1999,
ACE purchased $18.9 million of First Mortgage Bonds, which had an average
interest rate of 6.88% and were scheduled to mature in 2013 ($6.4 million) and
2023 ($12.5 million).
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<PAGE>
Conectiv's consolidated short-term debt balance increased $223.9 million from
the $376.1 million balance as of December 31, 1998, to $600.0 million (average
interest rate of 5.26%) as of June 30, 1999. This increase resulted from
financing $108.9 million of the purchase of Shares pursuant to the Offer with
short-term debt, providing $94.7 million of funding for nonutility businesses
and Conectiv's subsidiary service company, and interim financing requirements of
$20.3 million for the utility businesses. Conectiv has two credit agreements
that provide $800 million of borrowing capability as follows: (a) a $300 million
credit agreement which has a five-year term that expires in February 2003; and
(b) a $500 million credit agreement which has a one-year term that expires in
February 2000.
7. Rate Matters
------------
The following information updates the disclosures previously made in Note 6,
Rate Matters, to Conectiv's Consolidated 1998 Financial Statements included in
Conectiv's 1998 Annual Report on Form 10-K.
NJBPU Summary Order
On June 9, 1999, ACE entered into a Stipulation of Settlement (Stipulation) with
some of the parties to proceedings pending before the New Jersey Board of Public
Utilities (NJBPU) concerning ACE's stranded costs, unbundled rates, and
restructuring. The Stipulation was filed with the NJBPU. On July 15, 1999, the
NJBPU approved the Stipulation with modifications and issued a summary order
(Summary Order) detailing the modifications to the Stipulation. The NJBPU stated
that a more detailed order would be issued at a later date.
In its Summary Order, the NJBPU directed ACE to implement a five percent
aggregate rate reduction effective August 1, 1999. ACE also must implement at
least an additional two percent rate reduction by January 1, 2001. By August 1,
2002, rates must be reduced by ten percent from the rates which were in effect
as of April 30, 1997. ACE estimates that the initial rate reduction effective
August 1, 1999, will reduce revenues by approximately $50 million (on an
annualized basis, assuming fiscal year 1998 sales and revenues). Since an
estimated $25 million of the revenue reduction results from the current level of
the energy component of ACE's regulated revenues exceeding related energy costs,
this portion of the revenue reduction should not affect earnings. The ultimate
impact of the mandated rate reductions on ACE's net income depends, among other
factors, on the nature and extent of cost reductions that may be realized by
ACE.
The Summary Order also established minimum initial shopping credits for
customers who choose an alternative electric supplier, from a system average
5.27 cents per kilowatt-hour (kWh), effective August 1, 1999, to a system
average of 5.48 cents per kWh in 2003. These shopping credits include
transmission costs and charges by ACE for Basic Generation Service (BGS) to be
provided to retail customers who do not have a competitive electric power
supplier. The Summary Order also approved the deferral mechanism contained in
the Stipulation, in order to enable ACE to meet and sustain the rate reductions
ordered by the NJBPU. The deferral mechanism provides for the accumulated
deferral of costs (including BGS) and application of certain over-recovery
credits, for ultimate recovery of the resultant net deferred balance, during the
four years after the initial four-year transition period (Transition Period)
commencing August 1, 1999. The NJBPU approved certain rates of return to be
applied to the deferred balances.
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a non-utility
affiliated company at net book value. The Summary Order provided that ACE shall
be permitted the opportunity to recover 100% of the net stranded costs related
to the generation units to be divested, subject to further NJBPU proceedings.
The Summary Order further provided that ACE may also recover 100% of the
stranded costs associated with power purchased from
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<PAGE>
Non-Utility Generators (NUGs). The Summary Order also provided for the
securitization of amounts used to effect potential buyouts or buydowns of
contracts with NUGs as well as limited incentives for ACE in the event of such
contract restructuring.
The Summary Order does not provide for recovery of stranded costs associated
with the electric generating units to be transferred to a non-utility affiliated
company. See "Asset Impairments and Charges to Earnings" for additional
information.
Delaware Electric Utility Restructuring Legislation
As previously reported, the Governor of Delaware signed the Electric Utility
Restructuring Act of 1999 (the Delaware Act) on March 31, 1999. The Delaware Act
phases-in customer choice of electricity suppliers during the period from
October 1999 to October 2000. Assuming that a 7.5% rate reduction, as required
by the Delaware Act, had been effective as of January 1, 1998, management
estimates that the impact on revenue of DPL would have been to decrease revenue
during the fiscal year ended December 31, 1998 by approximately $17 million.
Under the Delaware Act, after the 7.5% rate reduction is implemented in October
1999, customer rates are held constant for 3 to 4 years, depending on customer
rate class.
The Delaware Act makes DPL the provider of default service to customers who do
not choose an alternative supplier for a period of 3 or 4 years for non-
residential and residential customers, respectively. Thereafter, the Delaware
Public Service Commission (DPSC) may conduct a bidding process to select the
default supplier for such customers. The DPSC also has the authority under the
Delaware Act to order DPL to divest its generating assets, as a last resort, to
remedy any adverse effects of electricity supply market power. The DPSC also is
authorized to establish licensing standards for electricity suppliers. Unless
DPL asks the DPSC to make these functions competitive earlier, and the DPSC so
orders, metering functions will be performed by DPL for 3 or 4 years after they
may choose their electricity suppliers, for non-residential customers and
residential customers, respectively.
Among other matters, unbundled rates to be charged by DPL during the "rate
freeze" periods prescribed by the Delaware Act have been agreed upon by a number
of the participants in the restructuring proceeding contemplated by the Delaware
Act. Included within the agreement on unbundled rates, which is subject to DPSC
approval, 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.
Implementation of the Delaware Act is being overseen by the DPSC in several
separate but related proceedings. The DPSC is expected to issue orders in these
proceedings by August 31, 1999.
Maryland Electric Utility Restructuring Legislation
On April 2, 1999, the Maryland General Assembly passed the Electric Customer
Choice and Competition Act of 1999 (the Maryland Act). On April 8, 1999, the
Governor of Maryland signed the Maryland Act. The major elements of the
Maryland Act include the following:
(A) Phase-in of retail choice beginning in July 2000, with full choice for all
customers by July 2003;
(B) Rate reductions of 3% to 7.5% for residential customers with rates then held
constant for four years;
(C) The deregulation of generating assets sold to a non-affiliate or transferred
to an affiliate prior to January 1, 2001;
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<PAGE>
(D) Recovery of stranded costs and other costs associated with the transition to
retail choice through a method to be determined by the Maryland Public Service
Commission (MPSC);
(E) Imposition by the MPSC of an environmental surcharge on each kilowatt-hour
distributed in Maryland;
(F) The creation of a statewide fund for low-income assistance.
On May 5, 1999, DPL filed a proposed settlement, which was supplemented on
August 4, 1999 to include an additional party, with the MPSC in DPL's pending
restructuring proceeding. The proposed settlement is with most parties to the
proceeding, including the MPSC Staff and the Office of People's Counsel.
Included in the proposed settlement are the following provisions: (i) effective
July 1, 2000, all of DPL's Maryland-retail customers will be eligible to select
an alternative electricity supplier; (ii) for a period of at least 3 years
thereafter, DPL will remain the supplier of "standard offer service" for
customers who do not select an alternative electricity supplier; (iii) agreed-
upon unbundled rates (including nuclear decommissioning costs and funding for
low income energy assistance programs at an estimated level of between $2 and $3
million per year); (iv) the deregulation of DPL's generating facilities, such
that electric rates would not be changed in the event DPL sells or transfers
generating assets; (v) authorization to transfer DPL generating assets to one or
more affiliates at net book value; (vi) the recovery of an estimated $8 million
(Maryland retail basis) in stranded costs from non-residential customers; (vii)
a 7.5% reduction in residential rates effective July 1, 2000 (representing a
revenue reduction of approximately $12.5 million, on an annualized basis,
assuming fiscal year 1998 sales and revenue levels); and (viii) effective July
1, 2000, "rate freezes" for 4 years for residential customers and 3 years for
non-residential customers, subject to certain adjustments. In addition, under
the proposed settlement, effective July 1, 2000, DPL customers with loads in
excess of 300 kilowatts (kW) may elect to have meters installed and read by an
alternative supplier. Prior to that date, another MPSC proceeding will be
initiated to determine the level of, and recovery mechanism for, any DPL
stranded metering costs. Other DPL customers will be eligible for competitive
metering on April 1, 2002, as set forth in the Maryland Act.
The MPSC is expected to issue an order with respect to the proposed settlement
by October 1, 1999.
Virginia Electric Utility Restructuring Legislation
The Virginia Electric Utility Restructuring Act, signed into law on March 29,
1999, phases in retail electric competition beginning January 1, 2002.
Asset Impairments and Charges to Earnings
Management has made a preliminary estimate of the amount of stranded costs not
expected to be recovered through regulated electricity delivery rates after the
restructuring of the electric utility industry in the states in which ACE and
DPL operate. Based on the Summary Order and the expected Delaware and Maryland
restructuring orders, management expects that, in the third and/or fourth
quarters of 1999, ACE's electricity supply business and DPL's electricity supply
businesses in Delaware and Maryland will no longer be subject to the
requirements of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result, ACE
and DPL expect to apply the requirements of SFAS No. 101, "Regulated
Enterprises--Accounting for the Discontinuation of Application of FASB Statement
No. 71," and record extraordinary charges to earnings. As discussed on the next
page, the portion of the expected extraordinary charge related to impairment of
assets is determined in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
-11-
<PAGE>
To estimate the impairment of electric generating plants of DPL and ACE in
accordance with SFAS No. 121, the book value of each generating plant is first
compared to the estimated future net operating cash flows of each generating
plant. Any electric generating plant with undiscounted future net cash flows
less than book value is considered impaired, and the plant's net future cash
flows are discounted. The amount by which the book value of the impaired
electric generating plants exceeds their discounted cash flows (or other
estimate of fair value) is the estimated impairment amount.
DPL has purchased power contracts expected to be uneconomic when customer choice
begins, and the stranded cost amount associated with these arrangements is
estimated to be the net present value of the contracts' costs less the
forecasted revenues from sales of the purchased power. The Summary Order
provided for ACE to recover 100% of the stranded costs associated with power it
purchases from NUGs.
The total amount that could be charged to earnings, on a consolidated basis,
includes (a) the impairment amount for the electric generating plants of DPL and
ACE, (b) the stranded cost amount for DPL's purchased power contracts, and (c)
regulatory assets of DPL and ACE related to their electric generation
businesses. The charge to earnings is reduced by the estimated cost recovery
through regulated electricity delivery rates. Based on this methodology (giving
effect to estimated cost recoveries), management currently estimates that the
electric utility industry restructuring will result in an extraordinary after-
tax charge to earnings during the third and /or fourth quarters of 1999 as
follows:
DPL $300 million to $425 million
ACE $ 50 million to $ 75 million
----------------------------
Consolidated Conectiv $350 million to $500 million
============================
Expected Sales of Electric Generating Plants
The financial and strategic initiatives announced by Conectiv on May 11, 1999,
included the intention to solicit bids for the sale of over 2,000 megawatts (MW)
of DPL's and ACE's nuclear and non-strategic baseload fossil electric generating
plants. Conectiv intends to retain certain electric generating plants which are
strategic to Conectiv's energy business. In June and July 1999, Conectiv
distributed offering memoranda for the proposed sale of fossil and jointly-owned
nuclear electric generating plants. Assuming the auction process goes as
planned, the divestiture of the electric generating plants is expected to be
completed by mid-2000. A summary of the electric generating plants which have
been offered for sale is shown in the table below.
<TABLE>
<CAPTION>
Consolidated Conectiv DPL Generating Units ACE Generating Units
--------------------- --------------------- ---------------------
MW of Net Book MW of Net Book MW of Net Book
Capacity Value (a) Capacity Value (a) Capacity Value (a)
---------- --------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fossil Units:
Wholly-owned 1,640.0 $ 595.3 954.0 $284.7 686.0 $310.6
Jointly-owned 234.5 68.2 126.8 32.3 107.7 35.9
Jointly-owned
nuclear units 714.0 656.2 331.0 245.5 383.0 410.7
------- -------- ------- ------ ------- ------
2,588.5 $1,319.7 1,411.8 $562.5 1,176.7 $757.2
======= ======== ======= ====== ======= ======
</TABLE>
(a) Net book value is as of December 31, 1998, and is stated in millions of
dollars.
The net book value of some of the electric generating units offered for sale is
expected to be written down in 1999 due to the impairment resulting from
deregulation of the electricity supply business. Since an impaired electric
generating unit is written down to its estimated fair market value net of
estimated selling costs, the sale of an impaired electric generating plant is
not expected to result in a significant gain or
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<PAGE>
loss. Some of the electric generating plants which are not impaired may be sold
at a gain. Under generally accepted accounting principles, the write-down of
impaired assets is not reduced by expected future gains on sales of assets which
are not impaired by electric utility industry restructuring; the gain on the
sale of an asset is recognized when the sale occurs.
Potential gains which could be realized from the sale of certain of ACE's
electric generating plants will reduce the amount of stranded cost recovery in
accordance with the Summary Order. Accordingly, any such gain realized would not
affect future earnings. DPL's agreements with some participants in restructuring
proceedings being conducted by the DPSC and MPSC provide that electric rates
will not be changed in the event DPL sells or transfers assets. Accordingly,
subject to DPSC and MPSC approval of these agreements, the Delaware and Maryland
portions of any gains, or losses, realized on the sale of DPL electric
generating plants would affect future earnings. There can be no assurances,
however, that DPL or ACE will elect or be able to sell any such electric
generating plants, or that any gains will be realized from such sales of
electric generating plants.
After the sale of electric generating plants is completed, management estimates
that the net impact on retained earnings of asset impairments, stranded costs,
and asset sales to be a charge of approximately $300 million to $400 million.
8. Contingencies
--------------
Environmental Matters
- ----------------------
Conectiv's subsidiaries are subject to regulation with respect to the
environmental effects of their operations, including air and water quality
control, solid and hazardous waste disposal, and limitations on land use by
various federal, regional, state, and local authorities. Federal and state
statutes authorize governmental agencies to compel responsible parties to clean
up certain abandoned or uncontrolled hazardous waste sites. Costs may be
incurred to clean up facilities found to be contaminated due to past disposal
practices. Conectiv's current liabilities include $3.0 million as of June 30,
1999 and December 31, 1998, respectively, for potential clean-up and other costs
related to sites at which a Conectiv subsidiary is a potentially responsible
party or alleged to be a third party contributor. Conectiv does not expect such
future costs to have a material effect on its financial position or results of
operations.
Nuclear Insurance
- ------------------
In conjunction with the ownership interests of DPL and ACE in Peach Bottom
Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem),
and Hope Creek Nuclear Generating Station (Hope Creek), DPL and ACE could be
assessed for a portion of any third-party claims associated with an incident at
any commercial nuclear power plant in the United States. Under the provisions of
the Price Anderson Act, if third-party claims relating to such an incident
exceed $200 million (the amount of primary insurance), DPL and ACE could be
assessed up to $57.0 million on an aggregate basis for such third-party claims.
In addition, Congress could impose a revenue-raising measure on the nuclear
industry to pay such claims.
The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance
coverage of approximately $2.8 billion for each unit for loss or damage to the
units, including coverage for decontamination expense and premature
decommissioning. In addition, Conectiv is a member of an industry mutual
insurance company, which provides replacement power cost coverage in the event
of a major accidental outage at a nuclear power plant. Under these coverages,
Conectiv is subject to potential retrospective loss experience assessments of up
to $9.4 million on an aggregate basis.
-13-
<PAGE>
9. Supplemental Cash Flow Information
----------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Cash paid for:
(Dollars in thousands)
Interest, net of amounts capitalized $71,145 $57,768
Income taxes, net of refunds $65,520 $46,866
</TABLE>
10. Business Segments
-----------------
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Conectiv's business segments under SFAS No. 131 are as follows: Generation--
produces electricity and operates power plants; Merchant--purchases and sells
bulk energy; Power Delivery--delivers electricity and gas to customers at
regulated prices over transmission and distribution systems; All Other--includes
heating, ventilation, and air conditioning (HVAC), plumbing, telephone and other
services provided to homes and businesses; thermal heating and cooling systems
for large commercial and industrial customers; and various other businesses
which are not subject to price regulation.
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 business segments based
on the cost of services provided. The Merchant business segment also earns
revenues from bulk energy sales to off-system customers in markets not subject
to price regulation.
The operating results for each business segment are evaluated based on a profit
measure called "contribution to corporate," which is equal to operating revenues
and other income less operating expenses other than corporate expenses. All
Other business segments' contribution to corporate for the six-month period
ended June 30, 1999 includes $18.0 million from ATE's investment in Enertech as
discussed in Note 2 to the Consolidated Financial Statements.
For the six months ended June 30, 1998, the business segment revenues and
contribution to corporate include the January and February 1998 operating
results of the former Atlantic-owned companies and exclude Merger-related costs
charged to expense.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------------------ ----------------------------
Contribution Contribution
Business Segments Revenues to Corporate Revenues to Corporate
- ----------------- ------------ -------------- ---------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Energy:
Generation $ 213,716 $ 53,784 $ 230,983 $ 53,067
Merchant 381,393 4,145 252,320 2,808
Power Delivery 177,761 61,340 161,222 68,532
All Other 78,863 (11,511) 39,514 (15,345)
------------- -------------- --------- --------------
$ 851,733 (1) $ 107,758 (2) $ 684,039 $ 109,062 (3)
============= ============== ========= ==============
</TABLE>
(1) Includes intercompany revenues which are eliminated in consolidation as
follows: Merchant business segment--$43,818; All Other business segments--
$5,435.
(2) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $15,388 of corporate costs
not allocated to business segments, (b) $43,033 of interest expense and
preferred dividends deducted after contribution to corporate, and (c) $504
of net Merger-related consolidation adjustments.
(3) To reconcile contribution to corporate to consolidated income before income
taxes subtract (a) $13,344 of corporate expenses not allocated to business
segments, (b) $41,769 of interest expense and preferred dividends deducted
after contribution to corporate and (c) $1,047 of net Merger-related
consolidation adjustments, and add $14,277, representing the net pre-tax
expense credit for "Employee separation and other Merger-related costs,"
which are discussed in Note 3 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------------------------- -----------------------------------
Contribution Contribution
Business Segments Revenues to Corporate Revenues to Corporate
- ----------------- ---------------- ---------------- ----------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Energy:
Generation $ 435,410 $ 101,464 $ 420,285 $ 108,128
Merchant 893,345 4,663 543,177 (1,358)
Power Delivery 374,727 148,132 314,437 134,584
All Other 143,874 (9,524) 74,916 (30,414)
---------------- ---------------- ----------------- ----------------
$ 1,847,356 (1) $ 244,735 (2) $ 1,352,815 (3) $ 210,940 (4)
================ ================ ================= ================
</TABLE>
(1) Includes intercompany revenues which are eliminated in consolidation as
follows: Merchant business segment--$92,488; All Other business segments--
$5,803.
(2) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $29,601 of corporate costs
not allocated to business segments, (b) $83,437 of interest expense and
preferred dividends deducted after contribution to corporate, and (c) $855
of net Merger-related consolidation adjustments.
(3) Includes $165,185 of revenues for January to February 1998 of the formerly
Atlantic-owned companies which are excluded from consolidated revenues.
(4) The following items are subtracted from contribution to corporate to arrive
at consolidated income before income taxes: (a) $20,914 for the January to
February 1998 contribution to corporate of the formerly Atlantic-owned
companies, (b) $26,346 of employee separation and other Merger-related
costs, (c) $32,389 of corporate expenses not allocated to business segments,
(d) $66,969 of interest expense and preferred dividends deducted after
contribution to corporate, and (e) $1,047 of net Merger-related
consolidation adjustments.
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<PAGE>
11. Accounting for Energy Trading and Risk Management Activities
------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," which delays the required
implementation date for SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," until all fiscal quarters of all fiscal years beginning
after June 15, 2000. Reporting entities may elect to adopt SFAS No. 133 prior to
the required implementation date. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. 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.
On January 1, 1999, Conectiv adopted the Emerging Issues Task Force (EITF)
consensus EITF 98-10, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities" under which contracts entered into in connection
with energy trading activities are marked to market, with gains and losses
(unrealized and realized) included in earnings. Implementation of EITF 98-10 did
not have a material impact on net income.
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial and Strategic Initiatives
- -----------------------------------
Conectiv's plans and actions pursuant to the financial and strategic initiatives
announced on May 11, 1999 are summarized below.
. Recapitalization
----------------
In June 1999, Conectiv paid $358.9 million to purchase 14.1 million shares of
Conectiv common stock (Shares), including 1.3 million Shares issued to (and
tendered by) holders of shares of Conectiv Class A common stock (Class A Shares)
who converted their Class A Shares to Shares in order to participate in the
Offer. The Shares purchased were financed through the issuance of debt,
including $250 million of 6.73% Medium Term Notes and $108.9 million of short-
term debt. The recapitalization reduced the number of Shares and Class A Shares
outstanding by 12.8 million and 0.8 million, respectively, increased total debt
by $358.9 million, and increased annualized interest expense by $22.6 million,
assuming 5.3% (Conectiv's June 30, 1999 short-term debt interest rate) for
interest on short-term debt.
Without giving effect to any other factors that could affect future earnings,
based on (a) earnings applicable to Shares for the twelve months ended June 30,
1999 of $185.5 million, (b) 12.8 million fewer Shares outstanding as a result of
the Offer, and (c) the assumed $22.6 million increase in annual interest
expense, management expects the recapitalization should increase annual earnings
per Share by approximately $0.08 to $0.10 per Share. Since the recapitalization
occurred in mid-year, management expects earnings per Share in 1999 should
increase by $0.04 to $0.05 from the recapitalization.
Primarily due to the recapitalization, total long- and short-term debt, as a
percentage of total capitalization including short-term debt, increased to 60.5%
as of June 30, 1999 from 52.2% as of December 31, 1998. Over the next several
years, debt leverage is expected to be reduced as additional cash from lower
dividends and the proposed sale of certain electric generating units is applied
towards debt reduction. There can be no assurances, however, that Conectiv will
be successful in effecting the sale of such electric generating units or that
the proceeds from such sale would be sufficient to permit debt reduction.
. Dividend Reduction
------------------
On June 29, 1999, Conectiv's Board of Directors declared a quarterly dividend of
$0.22 per Share, as compared to the previous quarterly dividend level of $0.385
per Share. Conectiv's Board of Directors has announced an intention to pay out
40% to 60% of earnings per Share as dividends. This targeted payout ratio
reflects the restructuring of the utility industry and the increasingly
competitive nature of Conectiv's businesses. The lower payout ratio will
increase Conectiv's financing flexibility and increase the potential for
business growth by retaining a higher proportion of earnings for reinvestment in
the business or other purposes such as retirement of debt. The reduction in the
dividend rate per Share and the lower number of Shares and Class A Shares
outstanding will decrease annualized dividend payments by approximately $80.2
million.
. Expected Sales of Electric Generating Plants
--------------------------------------------
For information concerning "Expected Sales of Electric Generating Plants," see
this caption herein under "Electric Utility Industry Restructuring."
-17-
<PAGE>
. Strategic Business Focus
------------------------
Management believes that Conectiv's growth opportunities are in its energy,
telecommunications and regulated electric and gas delivery businesses. These
businesses comprise Conectiv's focus on providing vital services to customers
and allow Conectiv to concentrate on solidifying and expanding its customer
relationships. Management intends to center the energy business initially on
2,000 MW of flexible, low-cost generating units that back Conectiv's Merchant
capabilities. Conectiv also will focus resources on growing its facilities-based
telecommunications business. See "Other Services Revenues" for information about
Conectiv's telecommunication's subsidiary, Conectiv Communications, Inc. (CCI).
. Productivity Improvements and Cost Reductions
---------------------------------------------
Conectiv recently initiated a comprehensive cost improvement program with a
renewed focus on improving productivity and continuing to realize Merger
synergies in its core business processes, with a goal of $25 million in cost
reductions over the next 12 to 18 months. Over the longer term, management plans
to review all business processes and expenses to accelerate process improvements
and achieve sustained cost reductions. Management is currently identifying
initial positions to be eliminated and expects to record the related employee
separation expenses in the third quarter of 1999.
Electric Utility Industry Restructuring
- ----------------------------------------
Revenue Reductions and Earnings Impact
As previously reported, provisions for customer rate reductions included in
electric utility industry restructuring legislation become effective when
customer choice begins in August 1999 in New Jersey, in October 1999 in
Delaware, and in July 2000 in Maryland. Without reflecting other factors, the
initial reduction in Conectiv's annual electric utility revenues due to the
restructuring legislation rate reductions is estimated to be approximately $80
million in total (on an annualized basis, assuming fiscal year 1998 sales and
revenues). Since an estimated $25 million of the revenue reduction results from
the current level of the energy component of ACE's regulated revenues exceeding
related energy costs, this portion of the revenue reduction should not affect
earnings.
The deregulation of electricity traditionally supplied by regulated utilities
will involve deregulation of revenue streams associated with the previously
regulated electricity supply service. Accordingly, the impact on Conectiv's
earnings of deregulating the supply of electricity depends on various factors in
addition to the mandated revenue reductions. The return on the proceeds from the
expected sale of power plants compared to returns earned on such power plants
prior to their sale will impact future earnings. The performance and operating
results of deregulated power plants, which previously were subject to rate
regulation, will also impact earnings. Conectiv's future earnings will also be
affected by its ability to achieve cost reductions and streamline operations. As
discussed above, Conectiv's productivity improvement and cost reduction program
announced in May 1999 seeks to reduce costs by $25 million over the next 12 to
18 months. Depreciation costs for generating assets will also decrease due to a
lower book value after impairment write-downs and due to the sale of certain
generating assets. Also, certain costs which had previously been deferred under
SFAS No. 71 will now be charged to expense in the period incurred.
-18-
<PAGE>
NJBPU Summary Order
On June 9, 1999, ACE entered into a Stipulation of Settlement (Stipulation) with
some of the parties to proceedings pending before the New Jersey Board of Public
Utilities (NJBPU) concerning ACE's stranded costs, unbundled rates, and
restructuring. The Stipulation was filed with the NJBPU. On July 15, 1999, the
NJBPU approved the Stipulation with modifications and issued a summary order
(Summary Order) detailing the modifications to the Stipulation. The NJBPU stated
that a more detailed order would be issued at a later date.
In its Summary Order, the NJBPU directed ACE to implement a five percent
aggregate rate reduction effective August 1, 1999. ACE also must implement at
least an additional two percent rate reduction by January 1, 2001. By August 1,
2002, rates must be reduced by ten percent from the rates which were in effect
as of April 30, 1997. ACE estimates that the initial rate reduction effective
August 1, 1999, will reduce revenues by approximately $50 million (on an
annualized basis, assuming fiscal year 1998 sales and revenues). Since an
estimated $25 million of the revenue reduction results from the current level of
the energy component of ACE's regulated revenues exceeding related energy costs,
this portion of the revenue reduction should not affect earnings. For additional
information, see "Revenue Reductions and Earnings Impact" on the preceding page.
The Summary Order also established minimum initial shopping credits for
customers who choose an alternative electric supplier, from a system average
5.27 cents per kWh, effective August 1, 1999, to a system average of 5.48 cents
per kWh in 2003. These shopping credits include transmission costs and charges
by ACE for Basic Generation Service (BGS) to be provided to retail customers who
do not have a competitive electric power supplier. The Summary Order also
approved the deferral mechanism contained in the Stipulation, in order to enable
ACE to meet and sustain the rate reductions ordered by the NJBPU. The deferral
mechanism provides for the accumulated deferral of costs (including BGS) and
application of certain over-recovery credits, for ultimate recovery of the
resultant net deferred balance, during the four years after the initial four-
year transition period (Transition Period) commencing August 1, 1999. The NJBPU
approved certain rates of return to be applied to the deferred balances.
The Summary Order provides that ACE may divest its nuclear and fossil fuel
baseload units and transfer the remaining generating units to a non-utility
affiliated company at net book value. The Summary Order provided that ACE shall
be permitted the opportunity to recover 100% of the net stranded costs related
to the generation units to be divested, subject to further NJBPU proceedings.
The Summary Order further provided that ACE may also recover 100% of the
stranded costs associated with power purchased from Non-Utility Generators
(NUGs). The Summary Order also provided for the securitization of amounts used
to effect potential buyouts or buydowns of contracts with NUGs as well as
limited incentives for ACE in the event of such contract restructuring.
The Summary Order does not provide for recovery of stranded costs associated
with the electric generating units to be transferred to a non-utility affiliated
company. See "Asset Impairments and Charges to Earnings" for additional
information.
-19-
<PAGE>
Delaware Electric Utility Restructuring Legislation
As previously reported, the Governor of Delaware signed the Electric Utility
Restructuring Act of 1999 (the Delaware Act) on March 31, 1999. The Delaware Act
phases-in customer choice of electricity suppliers during the period from
October 1999 to October 2000. Assuming that a 7.5% rate reduction, as required
by the Delaware Act, had been effective as of January 1, 1998, management
estimates that the impact on revenue of DPL would have been to decrease revenue
during the fiscal year ended December 31, 1998 by approximately $17 million.
Under the Delaware Act, after the 7.5% rate reduction is implemented in October
1999, customer rates are held constant for 3 to 4 years, depending on customer
rate class.
The Delaware Act makes DPL the provider of default service to customers who do
not choose an alternative supplier for a period of 3 or 4 years for non-
residential and residential customers, respectively. Thereafter, the Delaware
Public Service Commission (DPSC) may conduct a bidding process to select the
default supplier for such customers. The DPSC also has the authority under the
Delaware Act to order DPL to divest its generating assets, as a last resort, to
remedy any adverse effects of electricity supply market power. The DPSC also is
authorized to establish licensing standards for electricity suppliers. Unless
DPL asks the DPSC to make these functions competitive earlier, and the DPSC so
orders, metering functions will be performed by DPL for 3 or 4 years after they
may choose their electricity suppliers, for non-residential customers and
residential customers, respectively.
Among other matters, unbundled rates to be charged by DPL during the "rate
freeze" periods prescribed by the Delaware Act have been agreed upon by a number
of the participants in the restructuring proceeding contemplated by the Delaware
Act. Included within the agreement on unbundled rates, which is subject to DPSC
approval, 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.
Implementation of the Delaware Act is being overseen by the DPSC in several
separate but related proceedings. The DPSC is expected to issue orders in these
proceedings by August 31, 1999.
Maryland Electric Utility Restructuring Legislation
On April 2, 1999, the Maryland General Assembly passed the Electric Customer
Choice and Competition Act of 1999 (the Maryland Act). On April 8, 1999, the
Governor of Maryland signed the Maryland Act. The major elements of the
Maryland Act include the following:
(A) Phase-in of retail choice beginning in July 2000, with full choice for all
customers by July 2003;
(B) Rate reductions of 3% to 7.5% for residential customers with rates then held
constant for four years;
(C) The deregulation of generating assets sold to a non-affiliate or transferred
to an affiliate prior to January 1, 2001;
(D) Recovery of stranded costs and other costs associated with the transition to
retail choice through a method to be determined by the Maryland Public Service
Commission (MPSC);
(E) Imposition by the MPSC of an environmental surcharge on each kilowatt-hour
distributed in Maryland;
(F) The creation of a statewide fund for low-income assistance.
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<PAGE>
On May 5, 1999, DPL filed a proposed settlement, which was supplemented on
August 4, 1999 to include an additional party, with the MPSC in DPL's pending
restructuring proceeding. The proposed settlement is with most parties to the
proceeding, including the MPSC Staff and the Office of People's Counsel.
Included in the proposed settlement are the following provisions: (i) effective
July 1, 2000, all of DPL's Maryland-retail customers will be eligible to select
an alternative electricity supplier; (ii) for a period of at least 3 years
thereafter, DPL will remain the supplier of "standard offer service" for
customers who do not select an alternative electricity supplier; (iii) agreed-
upon unbundled rates (including nuclear decommissioning costs and funding for
low income energy assistance programs at an estimated level of between $2 and $3
million per year); (iv) the deregulation of DPL's generating facilities, such
that electric rates would not be changed in the event DPL sells or transfers
generating assets; (v) authorization to transfer DPL generating assets to one or
more affiliates at net book value; (vi) the recovery of an estimated $8 million
(Maryland retail basis) in stranded costs from non-residential customers; (vii)
a 7.5% reduction in residential rates effective July 1, 2000 (representing a
revenue reduction of approximately $12.5 million, on an annualized basis
assuming fiscal year 1998 sales and revenue levels); and (viii) effective July
1, 2000, "rate freezes" for 4 years for residential customers and 3 years for
non-residential customers, subject to certain adjustments. In addition, under
the proposed settlement, effective July 1, 2000, DPL customers with loads in
excess of 300 kilowatts (kW) may elect to have meters installed and read by an
alternative supplier. Prior to that date, another MPSC proceeding will be
initiated to determine the level of, and recovery mechanism for, any DPL
stranded metering costs. Other DPL customers will be eligible for competitive
metering on April 1, 2002, as set forth in the Maryland Act.
The MPSC is expected to issue an order with respect to the proposed settlement
by October 1, 1999.
Virginia Electric Utility Restructuring Legislation
The Virginia Electric Utility Restructuring Act, signed into law on March 29,
1999, phases in retail electric competition beginning January 1, 2002.
Asset Impairments and Charges to Earnings
Management has made a preliminary estimate of the amount of stranded costs not
expected to be recovered through regulated electricity delivery rates after the
restructuring of the electric utility industry in the states in which ACE and
DPL operate. Based on the Summary Order and the expected Delaware and Maryland
restructuring orders, management expects that, in the third and/or fourth
quarters of 1999, ACE's electricity supply business and DPL's electricity supply
businesses in Delaware and Maryland will no longer be subject to the
requirements of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result, ACE
and DPL expect to apply the requirements of SFAS No. 101, "Regulated
Enterprises--Accounting for the Discontinuation of Application of FASB Statement
No. 71," and record extraordinary charges to earnings. As discussed below, the
portion of the expected extraordinary charge related to impairment of assets is
determined in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
To estimate the impairment of electric generating plants of DPL and ACE in
accordance with SFAS No. 121, the book value of each generating plant is first
compared to the estimated future net operating cash flows of each generating
plant. Any electric generating plant with undiscounted future net cash flows
less than book value is considered impaired, and the plant's net future cash
flows are discounted. The amount by which the book value of the impaired
electric generating plants exceeds their discounted cash flows (or other
estimate of fair value) is the estimated impairment amount.
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<PAGE>
DPL has purchased power contracts expected to be uneconomic when customer choice
begins, and the stranded cost amount associated with these arrangements is
estimated to be the net present value of the contracts' costs less the
forecasted revenues from sales of the purchased power. The Summary Order
provided for ACE to recover 100% of the stranded costs associated with power it
purchases from NUGs.
The total amount that could be charged to earnings, on a consolidated basis,
includes (a) the impairment amount for the electric generating plants of DPL and
ACE, (b) the stranded cost amount for DPL's purchased power contracts, and (c)
regulatory assets of DPL and ACE related to their electric generation
businesses. The charge to earnings is reduced by the estimated cost recovery
through regulated electricity delivery rates. Based on this methodology (giving
effect to estimated cost recoveries), management currently estimates that the
electric utility industry restructuring will result in an extraordinary after-
tax charge to earnings during the third and /or fourth quarters of 1999 as
follows:
DPL $300 million to $425 million
ACE $ 50 million to $ 75 million
----------------------------
Consolidated Conectiv $350 million to $500 million
============================
Expected Sales of Electric Generating Plants
The financial and strategic initiatives announced by Conectiv on May 11, 1999,
included the intention to solicit bids for the sale of over 2,000 megawatts (MW)
of DPL's and ACE's nuclear and non-strategic baseload fossil electric generating
plants. Conectiv intends to retain certain electric generating plants which are
strategic to Conectiv's energy business. In June and July 1999, Conectiv
distributed offering memoranda for the proposed sale of fossil and jointly-owned
nuclear electric generating plants. Assuming the auction process goes as
planned, the divestiture of the electric generating plants is expected to be
completed by mid-2000. A summary of the electric generating plants which have
been offered for sale is shown in the table below.
<TABLE>
<CAPTION>
Consolidated Conectiv DPL Generating Units ACE Generating Units
--------------------- --------------------- ---------------------
MW of Net Book MW of Net Book MW of Net Book
Capacity Value (a) Capacity Value (a) Capacity Value (a)
--------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fossil Units:
Wholly-owned 1,640.0 $ 595.3 954.0 $284.7 686.0 $310.6
Jointly-owned 234.5 68.2 126.8 32.3 107.7 35.9
Jointly-owned
nuclear units 714.0 656.2 331.0 245.5 383.0 410.7
------- -------- ------- ------ ------- ------
2,588.5 $1,319.7 1,411.8 $562.5 1,176.7 $757.2
======= ======== ======= ====== ======= ======
</TABLE>
(a) Net book value is as of December 31, 1998, and is stated in millions of
dollars.
The net book value of some of the electric generating units offered for sale is
expected to be written down in 1999 due to the impairment resulting from
deregulation of the electricity supply business. Since an impaired electric
generating unit is written down to its estimated fair market value net of
estimated selling costs, the sale of an impaired electric generating plant is
not expected to result in a significant gain or loss. Some of the electric
generating plants which are not impaired may be sold at a gain. Under generally
accepted accounting principles, the write-down of impaired assets is not reduced
by expected future gains on sales of assets which are not impaired by electric
utility industry restructuring; the gain on the sale of an asset is recognized
when the sale occurs.
Potential gains which could be realized from the sale of certain of ACE's
electric generating plants will reduce the amount of stranded cost recovery in
accordance with the Summary Order. Accordingly, any
-22-
<PAGE>
such gain realized would not affect future earnings. DPL's agreements with some
participants in restructuring proceedings being conducted by the DPSC and MPSC
provide that electric rates will not be changed in the event DPL sells or
transfers assets. Accordingly, subject to DPSC and MPSC approval of these
agreements, the Delaware and Maryland portions of any gains, or losses, realized
on the sale of DPL electric generating plants would affect future earnings.
There can be no assurances, however, that DPL or ACE will elect or be able to
sell any such electric generating plants, or that any gains will be realized
from such sales of electric generating plants.
After the sale of electric generating plants is completed, management estimates
that the net impact on retained earnings of asset impairments, stranded costs,
and asset sales to be a charge of approximately $300 million to $400 million.
Intent to Renegotiate Purchased Power Contracts
ACE has four NJBPU-approved long-term power purchase contracts with NUGs. ACE
continues to negotiate buyouts and buydowns of these contracts, which would be
subject to NJBPU and other approvals, including NJBPU authorization to recover
any contract buyout and buydown costs through the issuance of transition bonds,
as permitted by the New Jersey Act. The financial commitments associated with
such buyouts and buydowns could be substantial. Management cannot currently
predict the outcome of contract buyout and buydown negotiations or the costs
associated with such efforts. There can be no assurances, moreover, that the
NJBPU will approve the issuance of transition bonds for such costs or that ACE
will be able to issue and sell any such bonds.
On May 7, 1999, ACE and a NUG, with which ACE has a long-term power purchase
contract, signed a letter of intent ("LOI") relating to a transaction which
could ultimately result in the termination of such existing contract. The LOI
calls for the negotiation of a definitive agreement and the establishment of
necessary arrangements associated with the termination. Upon receipt of
corporate and regulatory approvals (including NJBPU approval), the agreement
would require, among other things, a substantial payment by ACE to the NUG
(estimated to be in excess of $100 million) and establishment of a new,
substitute long-term power contract between the NUG and a new power purchaser.
Management cannot predict whether the LOI will result in the negotiation of a
definitive agreement or if such an agreement would receive the necessary
approvals. On July 27, 1999, ACE and the NUG issued a request for proposals from
parties prospectively interested in becoming a purchaser under the substitute
power contract.
On July 30, 1999, ACE made a conditional offer to another non-utility supplier
(in which an affiliate has a 50% interest) with which it has a long-term power
purchase contract, to effect the termination of the power contract. Such
conditional offer has not yet been accepted and, if it were to be accepted, it
would also be subject to receipt of corporate and regulatory approvals. In
accordance with such offer, the termination would require a substantial payment
to the power producer (in excess of $200 million) by ACE. It is not possible for
management to predict at this time the ultimate outcome of such offer.
Delaware Retail Natural Gas Pilot Program
On April 27, 1999, the DPSC approved DPL's plan for a natural gas pilot program.
Beginning on July 1, 1999, 15,000 current DPL residential natural gas customers
and 1,500 current DPL commercial natural gas customers will be able to choose a
natural gas supplier other than DPL. The pilot program is expected to last two
years, with third-party gas supply beginning on November 1, 1999.
-23-
<PAGE>
Earnings Summary
- ----------------
In the second quarter of 1999, earnings applicable to Shares were $30.1 million,
or $0.31 per average Share (98,120,000 average Shares). In the second quarter of
1998, earnings applicable to Shares of $37.3 million, or $0.37 per Share
(101,063,000 average Shares) included a non-recurring gain, primarily for
settling pension obligations to separated DPL employees, which increased
earnings applicable to Shares and earnings per average Share in the second
quarter of 1998 by $8.6 million and $0.09, respectively. Excluding the non-
recurring gain of $0.09 per average Share in the second quarter of last year,
earnings per average Share increased by $0.03 due primarily to higher Other
Income, mainly from non-utility investments, and a lower average number of
Shares outstanding, due to the Offer.
In accordance with the purchase method of accounting and based on the Merger
date of March 1, 1998, Conectiv's consolidated operating results for the first
six months of 1998 include four months of operating results for ACE and the
nonutility businesses formerly owned by Atlantic.
Earnings applicable to Shares were $77.4 million, or $0.78 per average Share
(99,326,000 average Shares) for the six months ended June 30, 1999, compared to
earnings applicable to Shares of $33.2 million, or $0.38 per average Share
(87,874,000 average Shares) for the six months ended June 30, 1998. Earnings for
the six months ended June 30, 1999 included $10.6 million, or $0.11 per average
Share, from equity in earnings of a venture capital fund, whereas earnings for
the six months ended June 30, 1998 included a charge of $16.0 million, or $0.18
per average Share, for Merger-related expenses, including employee severance.
Excluding these two unusual items, earnings per average Share were $0.67 for the
first six months of 1999 compared to $0.56 for the first six months of 1998. The
$0.11 increase in earnings per average Share (as adjusted) was primarily
attributed to higher regulated retail electric and gas sales, which increased
mainly due to colder winter weather than last year and higher gross margins
earned from non-regulated, Merchant electricity and gas sales. The operations of
Conectiv's telecommunications business, HVAC business, and competitive retail
energy business resulted in a net after-tax loss of $18.9 million ($0.19 per
Share) in the first six months of 1999, compared to a net after-tax loss of
$15.0 million ($0.17 per Share) in the first six months of 1998.
The average number of Shares outstanding increased in the current six-month
period primarily due to two additional months outstanding of Shares issued to
Atlantic stockholders concurrent with the March 1998 Merger, slightly offset by
the effect of Shares purchased in June 1999 through the Offer. The earnings per
Share dilution for the six-month period attributed to the higher average number
of Shares outstanding was offset by the additional two months of earnings
contributed in 1999 by the former Atlantic-owned companies.
Earnings applicable to Class A Shares were $1.3 million or $0.20 per average
Class A Share for the second quarter of 1999, compared to $2.0 million or $0.31
per average Class A Share for the second quarter of 1998. Earnings applicable to
Class A Shares were $2.6 million or $0.41 per average Class A Share for the six
months ended June 30, 1999, compared to $2.2 million or $0.33 per average Class
A Share for the six months ended June 30, 1998. The variances in earnings
applicable to Class A Shares and earnings per average Class A Share are mainly
due to earnings variances for ACE. The increase in earnings applicable to Class
A Shares for the six-month period also reflects the two additional months of
ACE's operating results included in consolidated earnings for the six months
ended June 30, 1999. For additional information, see Note 5 (B) to the
Consolidated Financial Statements.
Dividends declared per Class A Share were $0.80 and $1.60 for the three and six
months ended June 30, 1999, respectively, compared to earnings applicable to
Class A Shares of $0.20 and $0.41 per average Class A Share for the same
respective periods.
-24-
<PAGE>
Electric Revenues
- -----------------
The table below shows the amounts of electric revenues earned which are subject
to price regulation (Regulated) and which are not subject to price regulation
(Non-regulated).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated electric revenues $491.7 $492.0 $ 991.7 $802.2
Non-regulated electric revenues 61.8 34.4 125.1 78.3
------ ------ -------- ------
Total electric revenues $553.5 $526.4 $1,116.8 $880.5
====== ====== ======== ======
</TABLE>
Fluctuations in electric revenues from regulated resale and interchange sales,
and non-regulated Merchant and competitive retail electricity sales, generally
do not impact earnings to the same extent as fluctuations in regulated retail
electricity sales. Gross margin percentages earned from regulated and non-
regulated bulk power sales and competitive retail electricity sales are
generally lower than the gross margin percentages earned in regulated retail
electricity markets due to product and pricing differences. Also, interchange
revenues are currently included in energy adjustment clauses, resulting in no
earnings effect from gross margins on these sales. After restructuring becomes
effective, gross margins from interchange revenues generally will affect
earnings and gross margins from regulated retail electricity sales will decrease
due to rate reductions provided for in restructuring legislation and related
settlements.
Consolidated electric revenues increased by $27.1 million, from $526.4 million
for the second quarter of 1998 to $553.5 million for the second quarter of 1999.
The $27.1 million increase was primarily from bulk sales of power by Conectiv's
Merchant group and competitive retail electricity sales. Bulk sales of power by
Conectiv's Merchant group increased due to higher selling prices and sales
volumes. Competitive retail electricity sales increased mainly due to higher
sales in Pennsylvania, which introduced customer choice of electric suppliers to
most Pennsylvania electricity consumers during 1999. For regulated sales of
electricity, a $9.6 million revenue increase from a 1.2% increase in retail kWh
sold and higher billings of services related to the electricity delivery
business was offset by a $4.8 million decrease in interchange revenues and a
$5.1 million decrease in resale revenues. Resale revenues decreased principally
due to lower kWh sales to DPL's largest resale customer (Old Dominion Electric
Cooperative, or ODEC), reflecting the 60 MW load reduction effective September
1, 1998.
Consolidated electric revenues increased by $236.3 million, from $880.5 million
for the first six months of 1998 to $1,116.8 million for first six months of
1999. Regulated electric revenues increased $189.5 million, primarily due to a
$163.5 million increase for two additional months of ACE's revenues in the
current reporting period, with the remaining $26.0 million increase comprised of
the following items: (a) a $20.2 million increase in interchange revenues, (b) a
$12.2 million revenue increase from a 3.5% increase in retail kWh sold and
higher billings of services related to the electricity delivery business, and
(c) a $6.4 million decrease in resale revenues, largely due to ODEC's 60 MW load
reduction. The 3.5% regulated retail kWh sales increase was due to colder winter
weather, which caused greater kWh usage than last year for heating, and a 1.3%
increase in the number of customers.
Non-regulated electric revenues increased $46.8 million for the six months ended
June 30, 1999, compared to the same period last year. This increase reflects
higher selling prices and sales volumes for bulk power sales by Conectiv's
Merchant group and increased competitive retail electricity sales, mainly due to
higher sales in Pennsylvania, where most consumers gained choice of electric
suppliers in 1999.
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<PAGE>
Gas Revenues
- ------------
The table below shows the amounts of gas revenues earned which are subject to
price regulation (Regulated) and which are not subject to price regulation (Non-
regulated).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
--------- ------- ------ --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Regulated gas revenues $ 22.8 $20.9 $ 75.4 $ 66.0
Non-regulated gas revenues 110.4 52.0 349.6 122.7
------ ----- ------ ------
Total gas revenues $133.2 $72.9 $425.0 $188.7
====== ===== ====== ======
</TABLE>
Regulated gas revenues increased $9.4 million for the six-month period ended
June 30, 1999, due primarily to a 14.2% increase in residential gas sales (based
on cubic feet sold) from colder winter weather, which caused more cubic feet of
gas to be used to operate heating systems. Higher average rates charged under
the energy adjustment clause also contributed to the increase. Non-regulated gas
revenues increased $58.4 million for the three-month period and $226.9 million
for the six-month period, mainly due to higher volumes of bulk gas sales. The
margin earned from non-regulated bulk gas sales in excess of related purchased
gas costs is relatively small mainly due to the competitive nature of bulk
commodity sales.
Other Services Revenues
- -----------------------
Other services revenues were comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------ --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Fuel oil and gasoline $ 45.8 $40.2 $ 83.3 $ 40.2
HVAC 38.3 21.8 65.0 42.1
Telecommunications 7.4 1.0 13.5 1.4
Thermal systems 6.4 6.7 12.3 8.7
Operation of power plants 7.2 5.6 13.3 11.1
Solutions (1) 4.5 1.8 9.2 3.6
Other 6.2 7.6 10.6 11.3
------ ----- ------ ------
Total $115.8 $84.7 $207.2 $118.4
====== ===== ====== ======
</TABLE>
(1) Refer to page I-3 of Conectiv's 1998 Annual Report on Form 10-K for a
description of this business.
As shown in the preceding table, other services revenues increased to $115.8
million in the second quarter of 1999, from $84.7 million in the second quarter
of 1998. The $31.1 million revenue increase for the second quarter was mainly
due to additional acquisitions of HVAC service businesses, expansion of
Conectiv's telecommunications business, and higher sales of fuel oil and
gasoline. For the six months ended June 30, 1999, other services revenues
increased to $207.2 million from $118.4 million for the six months ended June
30, 1998. The $88.8 million increase for the six-month period was primarily due
to an additional three months of revenues from a business acquired by Conectiv
in March 1998 which distributes fuel oil and gasoline, additional acquisitions
of HVAC service businesses, and expansion of Conectiv's telecommunications and
Solutions businesses.
-26-
<PAGE>
As shown in the table above, CCI's revenues were $7.4 million in the second
quarter of 1999 compared to $1.0 million in the second quarter of 1998. CCI had
sold about 56,000 access line equivalents as of June 30, 1999, which is a 75%
increase in comparison to 32,000 access line equivalents as of December 31,
1998. Among other services, CCI offers customers bundled local and long-distance
phone service and a seven cents per minute rate on outbound toll calls to
anywhere in Delaware, New Jersey, Maryland and Pennsylvania. In June 1999, CCI
purchased an Internet service provider which offers dedicated and dial-up
Internet service, consulting, data security, and web services. This acquisition
combined with CCI's DSL (digital subscriber line--a high speed Internet
connection) service, enables CCI to provide end-to-end Internet service.
Operating Expenses
- ------------------
Electric Fuel and Purchased Energy
Electric fuel and purchased energy increased $10.9 million in the second quarter
of 1999 due to higher regulated and non-regulated electricity sales and a higher
average cost per kWh of output. The $10.9 million increase was reduced by a
$21.2 million decrease in energy expense recorded pursuant to regulated energy
adjustment clauses.
Electric fuel and purchased energy increased $103.8 million in the current six
month period, with the additional two months of ACE's operations in the current
period accounting for $50.3 million of the total increase. The remaining $53.5
million of the increase was primarily due to higher regulated and non-regulated
electricity sales and a higher average cost per kWh of output. The $53.5 million
increase was reduced by a $15.7 million decrease in energy expense recorded
pursuant to regulated energy adjustment clauses.
Gas Purchased
Gas purchased increased by $56.7 million to $119.2 million for the second
quarter of 1999, and by $229.6 million to $390.8 million for the first six
months of 1999. These increases were mainly due to larger volumes of gas
purchased for resale off-system and to satisfy higher on-system sales demand due
to the colder winter weather.
Other Services Cost of Sales
Other services cost of sales increased by $25.3 million and $75.5 million for
the second quarter and the six-month period, respectively, primarily due to
higher volumes of HVAC services provided and increased volumes of fuel oil and
gasoline sold.
Purchased Electric Capacity
Purchased electric capacity costs increased $5.9 million for the second quarter
and $5.5 million for the six-month period (excluding $28.0 million attributable
to the two additional months of ACE's operations in 1999), due to higher
capacity requirements associated with energy supplied within and outside of
DPL's and ACE's regulated service territories.
Employee Separation and Other Merger-Related Costs
Enhanced retirement offers and other employee separation programs were utilized
in 1998 to reduce the workforces of DPL, ACE, and other Conectiv subsidiaries.
Earnings for the second quarter of 1998 include a non-recurring gain of $14.3
million ($8.6 million after-taxes, or $0.09 per Share), primarily for settling
pension obligations to separated DPL employees. For the six months ended June
30, 1998, the net costs of the DPL employee separation programs and other
Merger-related costs expensed were $26.3 million ($16.0 million after taxes, or
$0.18 per Share). Employee separation, relocation, and other Merger-related
costs for Atlantic's former subsidiaries were capitalized as costs of the
Merger.
-27-
<PAGE>
Operation and Maintenance Expenses
For the second quarter of 1999, operation and maintenance expenses increased by
$24.5 million due to an $11.6 million increase for regulated utility businesses,
including higher power plant maintenance expenses, and a $12.9 million increase
for expansion of non-utility businesses, primarily telecommunications and
competitive retail energy.
After excluding the $35.5 million of operation and maintenance expenses
attributed to the two additional months of ACE's operations in 1999, operation
and maintenance expenses increased by $19.7 million for the six-month period
primarily due to costs associated with expanding Conectiv's telecommunications,
competitive retail energy, Merchant and other non-utility businesses.
Depreciation and Taxes Other than Income Taxes
The increases in depreciation and taxes other than income taxes for the six-
month period were principally due to inclusion of the two additional months of
operating results of ACE and other former Atlantic-owned businesses in 1999.
Other Income
- ------------
Other income increased $6.4 million in the second quarter mainly due to a prior-
year write-off of a non-utility investment, higher current-year non-utility
investment income, and current-year interest income related to a successful tax
appeal.
Other income increased $26.3 million for the six-month period primarily due to
ATE's $18.0 million ($10.6 million after-taxes or $0.11 per Share) equity in
earnings of an investment partnership (Enertech). Due to the nature of
Enertech's investments, which include Internet service companies, its earnings
may be volatile from period to period. The remaining $8.3 million increase in
other income for the six-month period was mainly due to a prior-year write-off
of a non-utility investment, current-year interest income related to a
successful tax appeal, the additional two months of ACE's operating results in
1999, and implementation of mark-to-market accounting for energy trading
activities in January 1999.
Financing Costs
- ---------------
Financing costs reflected in the Consolidated Statements of Income include
interest charges, allowance for funds used during construction, and preferred
stock dividend requirements of subsidiaries. Financing costs increased $15.5
million for the six-month period primarily due to the two additional months of
operating results of ACE and other former Atlantic-owned businesses included in
the current six-month period.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs and embedded systems
using a two-digit format, as opposed to four digits, to indicate the year.
Computer and embedded systems with this characteristic may be unable to
interpret dates during and beyond the year 1999, which could cause a system
failure or other computer errors, leading to disruption of operations. A project
team, originally started in 1996 by ACE, is managing Conectiv's response to this
situation. A Conectiv corporate officer, reporting directly to the Chief
Executive Officer, is coordinating all Year 2000 activities. There have been
substantial challenges in identifying and correcting the computer and embedded
systems critical to generating and delivering power, delivering natural gas and
providing other services to customers.
-28-
<PAGE>
The project team is using a phased approach to managing its activities. The
first phase was inventory and assessment of all systems, equipment, and
processes. Each identified item was given a criticality rating of high, medium
or low. Those items rated as high or medium were then subject to the second
phase of the project. The second phase -- determining and implementing
corrective action for the identified systems, equipment and processes -- will
conclude with a test of the unit being remediated. The third phase involves
system testing and compliance certification. Additionally, Conectiv is actively
completing contingency plans in the event that Year 2000 outages do occur.
Contingency plans have been drafted for all mission critical systems and are
being coordinated into a detailed overall Year 2000 restoration plan under the
direction of a senior-level engineering manager. Contingency plans are also
being developed for non-mission critical systems. The Year 2000 plans build on
Conectiv's existing expertise in service restorations. Conectiv is also
coordinating its efforts with state and local emergency management agencies.
Overall, Conectiv's Year 2000 Project covers approximately 140 different systems
(some with numerous components) that had been originally identified as high or
medium in criticality. However, only 21 of those 140 systems are essential for
continued operations and customer response across Conectiv's several businesses;
these are regarded as "mission critical." The Year 2000 Project team has focused
on these 21 systems, with work on the other systems continuing based on their
relative importance to Conectiv's businesses.
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 business.
Conectiv expects to continue to see significant progress in remediation and
testing over the next quarter based on work that is in process and material that
has been ordered or already received, resulting in timely completion of this
work.
<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
- -------------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C>
Business systems 100% 98% 90%
Power production 100% 95% 90%
Electricity distribution 100% 87% 49%
Gas delivery 100% 97% 95%
Competitive services 100% 85%-100% 95%
</TABLE>
Conectiv has also been contacting vendors and service providers to review their
Year 2000 efforts. Many aspects of Conectiv's businesses are dependent on third
parties. For example, fuel suppliers must be able to provide coal or gas to
allow Conectiv's subsidiaries to generate electricity.
Distribution of electricity is dependent on the overall reliability of the
electric grid. ACE and DPL have been cooperating with the North American
Electric Reliability Council (NERC) and the PJM Interconnection in Year 2000
remediation, contingency planning and restoration planning efforts. Recent
reports issued by NERC indicate a small risk of disruption to the electric grid
caused by Year 2000 issues. Conectiv's Year 2000 Project timeline and status are
in line with the recommendations of those groups, with limited exceptions.
As requested by NERC, ACE and DPL filed their Year 2000 Readiness Statement with
NERC stating that 96% of work on mission critical systems had been completed as
of June 30, 1999. The exceptions to full readiness status were reported to NERC
in the regular monthly filing made on June 30, 1999. They are limited in nature
and are expected to be complete in advance of critical date changes. On the
basis of Conectiv's filings, NERC has designated Conectiv as "Ready with Limited
Exceptions". NERC regards
-29-
<PAGE>
exceptions as "limited" only if they "do not pose a measurable risk to reliable
electric operations into the Year 2000." NERC, in its report to the Department
of Energy dated August 3, 1999, stated that the factors it considers in making
this evaluation include the number of facilities in a reporting company, the
percent of that company's capacity included in the exception, expected
completion date, importance of the facilities included in the exception and
steps taken to mitigate risks. In that Report, NERC stated that based "on data
received through June 30, 1999, NERC believes that the electric power industry
will operate reliably into the Year 2000 with the resources that are Y2k Ready
today." (NERC Report, cover letter to Department of Energy. )
In addition, Conectiv participated in the first of two NERC drills on April 9,
1999; a small number of manageable issues similar to those found by other
utilities were identified and have been addressed. Conectiv will also
participate in the second NERC drill scheduled for September 8-9, 1999 and will
conduct its own drill on November 10, 1999. All of these drills are exercises
only and are not expected to result in service interruptions.
Conectiv has incurred approximately $10.8 million in costs for the Year 2000
Project. The current budget for the Year 2000 Project is $10 million to $15
million, although this budget may exceed total project costs. The costs set
forth above do not include significant expenditures covering new systems, such
as Conectiv's SAP business, financial and human resources management systems, an
energy control system, and a customer information system. While these new
systems effectively remediated Year 2000 problems in the systems they replaced,
Conectiv is not reporting the expenditures on these systems in its costs for the
Year 2000 Project, because the new systems were installed principally for other
reasons. The total cost of these other projects over several years exceeds $87
million.
During July 1999, President Clinton signed the Year 2000 litigation reform bill,
known as the "Y2K Act." The Y2K Act provides some new partial liability and
damages protections to defendants in Year 2000 failure-related cases. It also
establishes new litigation procedures that plaintiffs and defendants must
follow. In general, the Y2K Act provides a pre-litigation notice period,
proportionate liability among defendants in Year 2000 cases, a requirement that
plaintiffs mitigate damages from Year 2000-related failures, and federal court
jurisdiction for Year 2000 claims. The law covers many types of civil actions
that allege harm or injury related to an actual or potential Year 2000-related
failure, or a claim or defense arising or related to such a failure. The Y2K Act
does not, however, cover civil actions for personal injury or wrongful death or
most actions brought by a government entity acting in a regulatory, supervisory
or enforcement capacity. The law governs actions brought after January 1, 1999
for a Year 2000-related failure occurring before January 1, 2003. Although the
Y2K Act will not afford Conectiv complete protection from Year 2000-related
claims, it should serve to help limit any liability related to any Year 2000-
related failures. Conectiv cannot predict the extent to which such liability
will be limited by the Y2K Act.
Since the project work is ongoing, Conectiv cannot with certainty determine
whether the Year 2000 issue might cause disruptions to its operations and impact
related costs and revenues. Conectiv assesses the status of the Year 2000
Project on at least a semi-monthly basis to determine the likelihood of
disruption. Based on its own Year 2000 program, as well as reports from NERC and
other utilities, Conectiv's management believes it is unlikely that significant
Year 2000-related disruptions will occur. However, any substantial disruption to
Conectiv's operations could negatively impact Conectiv's revenues, significantly
impact its customers and could generate legal claims against Conectiv, liability
from which may be mitigated under the provisions of the Y2K Act. Conectiv's
results of operations and financial position would likely suffer an adverse
impact if other entities, such as suppliers, customers and service providers do
not effectively address their Year 2000 issues.
-30-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Due to $201.9 million of cash provided by operating activities, $156.6 million
of cash used by investing activities, and $66.8 million of cash used by
financing activities, cash and cash equivalents decreased by $21.5 million
during the first six months of 1999.
Net cash provided by operating activities for the first six months of 1999
increased by $102.6 million from the first six months of 1998. The increase was
primarily due to the two additional months of ACE's operations included in the
consolidated financial statements, a lower prepayment of New Jersey Sales and
Excise taxes during the second quarter, and the absence of last year's payments
for employee separation and other Merger-related costs.
The June 30, 1999 balance of "Prepaid New Jersey sales and excise taxes"
increased by $20.2 million compared to the December 31, 1998 balance due to the
sales tax prepayment in the second quarter of 1999, partly offset by
amortization of the balance to expense.
Primarily due to over-collections of energy costs from utility customers,
Conectiv's consolidated liability for deferred energy costs was $49.2 million as
of June 30, 1999. These over-collections of energy costs will be returned to
customers as the energy businesses of DPL and ACE are restructured through
deregulation.
The $14.7 million use of cash for acquisitions of businesses during the six
months ended June 30, 1999 was primarily due to purchases of HVAC businesses,
and also includes CCI's purchase of an Internet service company. Acquisitions of
businesses during the first six months of last year provided a net $8.9 million
source of cash due to the Merger-related consolidation of the cash balances of
the formerly Atlantic-owned companies, partly offset by cash paid for the
acquisition of a gas marketing company, a fuel oil and gasoline distributor, and
HVAC businesses.
Capital expenditures for the first six months of 1999 were $134.2 million
compared to $71.0 million for the same period last year. The $63.2 million
increase in capital expenditures was primarily due to construction of a new
customer service center, higher expenditures for computer networks, customer
service systems, and other shared infrastructure assets, and expansion of CCI's
telecommunications system.
"Investments in partnerships" of $21.1 million and $10.5 million for the six
months ended June 30, 1999 and 1998, respectively, were primarily due to
Conectiv Thermal Systems' share of funding for construction of the "Venetian"
project in Las Vegas, Nevada, and investments in Enertech by ATE.
Common dividends paid increased to $87.5 million for the first six months of
1999 from $66.0 million for the first six months of 1998. This increase occurred
because common dividends paid in the first quarter of 1998 were based on the
common shares outstanding prior to the issuance of Shares and Class A Shares in
conjunction with the Merger. As discussed under "Financial and Strategic
Initiatives" and "Dividend Reduction," the reduction in the quarterly dividend
rate per Share from $0.385 to $0.22 and the lower number of Shares and Class A
Shares outstanding as a result of the Offer will decrease future annualized
dividend payments by approximately $80.2 million. The increase in cash flow from
the lower dividend payments began in July 1999, when the dividends which were
declared in June 1999 were paid. The $27.4 million balance of "Dividends
payable" as of June 30, 1999 in comparison to the $47.7 million balance as of
December 31, 1998, reflects lower dividends declared per Share and lower numbers
of Shares and Class A Shares outstanding.
-31-
<PAGE>
Under the Public Utility Holding Company Act of 1935, as amended, Conectiv, DPL,
and ACE may not pay dividends on the Shares, the Class A Shares, or shares of
preferred stock from a retained deficit or paid-in-capital without SEC approval.
In anticipation of the possibility that retained earnings might be temporarily
inadequate, due to the extraordinary charges expected to result from electric
utility industry restructuring, to fund such dividend payments, Conectiv, DPL,
and ACE have made the necessary SEC filing which has been duly noticed.
Conectiv, DPL and ACE will request an appropriate order from the SEC when the
final impact and timing of the pending NJBPU, DPSC and MPSC electric
restructuring orders is known. It may be necessary for DPL and ACE to obtain
similar such approvals from the Federal Energy Regulatory Commission (FERC). An
appropriate FERC filing will be made in the near future.
Conectiv's capital structure including short-term debt and current maturities of
long-term debt, expressed as a percentage of total capitalization, is shown
below as of June 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
<S> <C> <C>
Common stockholders' equity 33.2% 41.4%
Preferred stock of subsidiaries 6.3% 6.4%
Long-term debt and variable rate demand bonds 45.7% 42.0%
Short-term debt and
current maturities of long-term debt 14.8% 10.2%
</TABLE>
As discussed under "Financial and Strategic Initiatives" and "Recapitalization,"
the decrease in common stockholders' equity and increase in long- and short-term
debt as a percent of total capitalization were primarily due to the $358.9
million purchase of Shares pursuant to the Offer which was financed by $250
million of 6.73% Medium Term Notes and $108.9 million of short-term borrowings
under Conectiv's $800 million bank credit lines. The $108.9 million short-term
debt increase due to the Offer combined with $94.7 million of funding for
nonutility businesses and Conectiv's subsidiary service company, and interim
financing requirements of $20.3 million for the utility businesses accounted for
the $223.9 million increase in Conectiv's consolidated short-term debt balance.
Over the next several years, debt leverage is expected to be reduced as
additional cash from lower dividend payments and the proposed sale of certain
electric generating units is applied towards debt reduction.
The net $184.1 million increase in the long-term debt balance as of June 30,
1999, as compared to the balance as of December 31, 1998, was principally due to
(a) the issuance of $250 million of 6.73% Medium Term Notes in May 1999 in
connection with the Offer, less (b) $46 million of Medium Term Notes
reclassified to "Long-term debt due within one year" due to scheduled maturity,
and (c) redemption of $18.9 million of ACE's First Mortgage Bonds (6.88% average
interest rate) prior to maturity in June 1999. "Long-term debt due within one
year" decreased $13.8 million mainly due to repayment at maturity in May 1999 of
$60 million of Medium Term Notes (7.51% average interest rate), substantially
offset by the $46 million increase for reclassification of the Medium Term Notes
which became current after December 31, 1998.
Conectiv's ratio of earnings to fixed charges under the SEC Method are shown
below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional
information.
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
June 30, -----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges (SEC Method) 2.59 2.38 2.63 2.83 2.92
</TABLE>
-32-
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------
As of June 30, 1999, there were no material changes in the information
previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-14 and II-15 of Conectiv's 1998 Annual Report on Form
10-K.
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act)
provides a "safe harbor" for forward-looking statements to encourage such
disclosures without the threat of litigation, provided those statements are
identified as forward-looking and are accompanied by meaningful, cautionary
statements identifying important factors that could cause the actual results to
differ materially from those projected in the statement. Forward-looking
statements have been made in this report. Such statements are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used herein, the words "will," "anticipate,"
"estimate," "expect," "believe," and similar expressions are intended to
identify forward-looking statements. In addition to any assumptions and other
factors referred to specifically in connection with such forward-looking
statements, factors that could cause actual results to differ materially from
those contemplated in any forward-looking statements include, among others, the
following: deregulation of energy supply and the unbundling of delivery
services; an increasingly competitive marketplace; results of any asset
dispositions; sales retention and growth; federal and state regulatory actions;
future litigation results; costs of construction; operating restrictions;
increased costs and construction delays attributable to environmental
regulations; nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel; and credit market concerns. Conectiv
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The foregoing list of factors pursuant to the Litigation Reform Act should not
be construed as exhaustive or as any admission regarding the adequacy of
disclosures made prior to the effective date of the Litigation Reform Act.
-33-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
ACE has entered into an Administrative Consent Order with the New Jersey
Department of Environmental Protection (NJDEP) in settlement of alleged
violation of NJDEP-issued permits regarding air pollution control. Without an
admission of liability, the settlement resolves a number of Administrative
Orders and Notices of Civil Penalty Assessments issued to ACE between April 1993
and March 1998 for alleged permit violations at the B.L. England, Deepwater,
Missouri Avenue, Cumberland and Sherman Avenue electric generating stations and
requires ACE to pay a civil administrative penalty of $300,000.
Item 5. Other Information
- --------------------------
Electrical System Outages
- -------------------------
During early July 1999, including the July 4th holiday weekend, there were
electric service outages affecting customers in the service territories of ACE
and DPL. These interruptions occurred during an extended period of hot and humid
weather in the mid-Atlantic region and northeastern United States. The weather
caused there to be high demands for electricity, and the weather adversely
affected both regional and local electric transmission and distribution system
equipment and operations. DPL power plant operations also were adversely
affected by the weather and then-prevailing regional and local electric system
conditions.
On July 15, 1999, the NJBPU initiated an investigation of the outages occurring
in the service territories of ACE and other New Jersey electric utilities. In
addition to investigating the outages themselves, the investigation is expected
to address, among other topics, communications between ACE and public agencies
and officials during these kinds of situations. On July 27, 1999, the DPSC
initiated an investigation of outages occurring in DPL's service territory
during the same early-July period. These interruptions of service included so-
called "rolling blackouts" during which electric service to customers was
interrupted in order to preserve the overall integrity of DPL's electric system.
The DPSC investigation also is expected to address, among other topics, customer
service issues arising before and during the outages. The MPSC has asked DPL to
provide information to it about the outages occurring in DPL's Maryland service
territory.
Both ACE and DPL are currently responding to information requests submitted by
the regulatory agencies with jurisdiction over their operations.
Stockholder Proposals
- ---------------------
Conectiv's Annual Meeting of Stockholders will be held at the Grand Opera House,
Wilmington, Delaware on Tuesday March 28, 2000. Any stockholder proposal
intended to be presented at the Annual Meeting of Stockholders under Rule 14a-8
under the Securities Exchange Act of 1934 must be received by the Secretary of
Conectiv, at Conectiv's principal executive offices no later than October 27,
1999, in order to be eligible to be considered for inclusion in Conectiv's proxy
materials related to that meeting. Under the Certificate of Incorporation of
Conectiv, any stockholder proposal intended to be presented at the Annual
Meeting other than pursuant to Rule 14a-8 must be received by the Secretary of
Conectiv, at Conectiv's principal executive offices not earlier than December
31, 1999 and not later than January 31, 2000. Conectiv's principal executive
offices are located at 800 King Street, Wilmington, Delaware, 19801.
-34-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
Exhibits
- --------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
Conectiv filed a Report on Form 8-K dated May 11, 1999 reporting on Item 5,
Other Events, and Item 7, Financial Statements and Exhibits.
Conectiv filed a Report on Form 8-K dated July 15, 1999 reporting on Item 5,
Other Events, and Item 7, Financial Statements and Exhibits.
Conectiv filed a Report on Form 8-K dated July 27, 1999 reporting on Item 5,
Other Events.
-35-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Conectiv
------------
(Registrant)
Date: August 13, 1999 /s/ John C. van Roden
--------------- ----------------------------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-36-
<PAGE>
EXHIBIT INDEX
Exhibit
Title of Exhibit Number
---------------- ------
Ratio of earnings to fixed charges 12
Financial Data Schedule 27
<PAGE>
Exhibit 12
----------
Conectiv
--------
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Twelve Months Twelve Months Ended December 31,
Ended ---------------------------------------------
June 30, 1999 1998 1997 1996 1995
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income $197,889 $153,201 $101,218 $107,251 $107,546
-------- -------- -------- -------- --------
Income taxes 128,696 105,817 72,155 78,340 75,540
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt 142,672 133,796 78,350 69,329 65,572
Other interest 34,060 26,199 12,835 12,516 10,353
Preferred stock dividend
requirements of subsidiaries 19,350 17,871 10,178 10,326 9,942
-------- -------- -------- -------- --------
Total fixed charges 196,082 177,866 101,363 92,171 85,867
-------- -------- -------- -------- --------
Nonutility capitalized interest (3,245) (1,444) (208) (311) (304)
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $519,422 $435,440 $274,528 $277,451 $268,649
======== ======== ======== ======== ========
Total fixed charges shown above $196,082 $177,866 $101,363 $ 92,171 $ 85,867
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 4,340 4,901 3,065 6,025 6,243
-------- -------- -------- -------- --------
Fixed charges for ratio computation $200,422 $182,767 $104,428 $ 98,196 $ 92,110
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.59 2.38 2.63 2.83 2.92
-------- -------- -------- -------- --------
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM CONECTIV'S 2ND QUARTER
1999 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,556,832
<OTHER-PROPERTY-AND-INVEST> 664,521
<TOTAL-CURRENT-ASSETS> 715,163
<TOTAL-DEFERRED-CHARGES> 488,614
<OTHER-ASSETS> 692,627
<TOTAL-ASSETS> 6,117,757
<COMMON> 1,078
<CAPITAL-SURPLUS-PAID-IN> 1,571,078
<RETAINED-EARNINGS> 289,139
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,496,318
188,950
95,933
<LONG-TERM-DEBT-NET> 1,930,638
<SHORT-TERM-NOTES> 600,008
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 67,055
0
<CAPITAL-LEASE-OBLIGATIONS> 30,244
<LEASES-CURRENT> 28,107
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,680,504
<TOT-CAPITALIZATION-AND-LIAB> 6,117,757
<GROSS-OPERATING-REVENUE> 1,749,065
<INCOME-TAX-EXPENSE> 50,788
<OTHER-OPERATING-EXPENSES> 1,560,669
<TOTAL-OPERATING-EXPENSES> 1,611,457
<OPERATING-INCOME-LOSS> 137,608
<OTHER-INCOME-NET> 32,098
<INCOME-BEFORE-INTEREST-EXPEN> 169,706
<TOTAL-INTEREST-EXPENSE> 89,652
<NET-INCOME> 80,054
0
<EARNINGS-AVAILABLE-FOR-COMM> 80,054
<COMMON-STOCK-DIVIDENDS> 67,856
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 201,914
<EPS-BASIC> $0.78
<EPS-DILUTED> $0.78
</TABLE>
