<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 March 31, 2000
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.
<TABLE>
<CAPTION>
Class Shares Outstanding at March 31, 2000
- ---------------------------------- ------------------------------------
<S> <C>
Common Stock, $0.01 par value 84,715,675
Class A Common Stock, $0.01 par value 5,742,315
</TABLE>
<PAGE>
CONECTIV
--------
Table of Contents
-----------------
Page
-----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income for the three months
ended March 31, 2000, and March 31, 1999.................. 1
Consolidated Balance Sheets as of March 31, 2000, and
December 31, 1999......................................... 2-3
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000, and March 31, 1999..... 4
Notes to Consolidated Financial Statements................ 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings......................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Item 6. Exhibits and Reports on Form 8-K.......................... 21
Signature .......................................................... 22
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONECTIV
--------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Electric $ 630,295 $ 563,313
Gas 274,493 291,850
Other services 140,557 91,422
------------- -------------
1,045,345 946,585
------------- -------------
OPERATING EXPENSES
Electric fuel and purchased energy and capacity 331,304 278,614
Gas purchased 251,619 271,613
Other services' cost of sales 118,437 73,933
Operation and maintenance 156,878 134,251
Depreciation and amortization 63,930 66,883
Taxes other than income taxes 21,231 18,753
------------- -------------
943,399 844,047
------------- -------------
OPERATING INCOME 101,946 102,538
------------- -------------
OTHER INCOME 12,315 23,113
------------- -------------
INTEREST EXPENSE
Interest charges 54,157 40,260
Allowance for borrowed funds used during
construction and capitalized interest (1,693) (1,566)
------------- -------------
52,464 38,694
------------- -------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES 5,049 4,948
------------- -------------
INCOME BEFORE INCOME TAXES 56,748 82,009
INCOME TAXES 24,211 33,314
------------- -------------
NET INCOME $ 32,537 $ 48,695
============= =============
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK
Common stock $ 34,990 $ 47,358
Class A common stock (2,453) 1,337
------------- -------------
$ 32,537 $ 48,695
============= =============
COMMON STOCK
Average shares outstanding (000)
Common stock 85,568 100,532
Class A common stock 5,742 6,561
Earnings (loss) per average share--basic and diluted
Common stock $0.41 $0.47
Class A common stock ($0.43) $0.20
Dividends declared per share
Common stock $0.22 $0.385
Class A common stock $0.80 $0.80
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-1-
<PAGE>
CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 80,545 $ 56,239
Accounts receivable, net of allowances of
$14,578 and $11,564, respectively 674,387 544,463
Inventories, at average cost
Fuel (coal, oil and gas) 51,640 65,360
Materials and supplies 59,386 58,177
Deferred energy supply costs 2,116 8,612
Other prepayments 11,500 20,295
Prepaid taxes - 15,674
Deferred income taxes, net 28,047 25,175
-------------- --------------
907,621 793,995
-------------- --------------
Investments
Investment in leveraged leases 62,024 72,161
Funds held by trustee 175,396 173,247
Other investments 101,563 100,764
-------------- --------------
338,983 346,172
-------------- --------------
Property, Plant and Equipment
Electric generation 1,572,919 1,571,556
Electric transmission and distribution 2,650,274 2,633,375
Gas transmission and distribution 266,452 265,708
Other electric and gas facilities 400,527 405,303
Telecommunications, thermal systems, and other
property, plant, and equipment 242,339 238,229
-------------- --------------
5,132,511 5,114,171
Less: Accumulated depreciation 2,139,678 2,097,529
-------------- --------------
Net plant in service 2,992,833 3,016,642
Construction work-in-progress 219,201 199,390
Leased nuclear fuel, at amortized cost 51,039 55,983
Goodwill, net 369,512 369,468
-------------- --------------
3,632,585 3,641,483
-------------- --------------
Deferred Charges and Other Assets
Recoverable stranded costs 1,020,406 1,030,049
Deferred recoverable income taxes 93,764 93,853
Unrecovered purchased power costs 25,318 28,923
Unrecovered New Jersey state excise tax 19,600 22,567
Deferred debt refinancing costs 20,163 21,113
Deferred other postretirement benefit costs 31,855 32,479
Prepaid pension costs 42,451 35,005
Unamortized debt expense 28,147 28,045
License fees 22,987 23,331
Other 41,925 41,447
-------------- --------------
1,346,616 1,356,812
-------------- --------------
Total Assets $6,225,805 $6,138,462
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-2-
<PAGE>
CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt $ 608,219 $ 579,688
Long-term debt due within one year 2,937 48,937
Variable rate demand bonds 158,430 158,430
Accounts payable 337,236 307,764
Taxes accrued 97,527 -
Interest accrued 45,214 41,137
Dividends payable 26,703 27,545
Deferred energy supply costs 55,542 46,375
Current capital lease obligation 28,718 28,715
Above-market purchased energy contracts
and other electric restructuring liabilities 35,140 41,101
Other 93,240 91,353
-------------- --------------
1,488,906 1,371,045
-------------- --------------
Deferred Credits and Other Liabilities
Other postretirement benefits obligation 93,134 96,388
Deferred income taxes, net 719,038 730,987
Deferred investment tax credits 73,158 74,431
Regulatory liability for New Jersey income tax benefit 49,262 49,262
Above-market purchased energy contracts
and other electric restructuring liabilities 115,607 119,704
Deferred gain on termination of purchased energy contract 70,849 70,849
Long-term capital lease obligation 25,197 30,395
Other 57,872 47,447
-------------- --------------
1,204,117 1,219,463
-------------- --------------
Capitalization
Common stock: $0.01 per share par value;
150,000,000 shares authorized; shares outstanding - -
84,715,675 in 2000, and 86,173,169 in 1999 849 863
Class A common stock, $0.01 per share par value;
10,000,000 shares authorized; shares outstanding - -
5,742,315 in 2000 and 1999 57 57
Additional paid-in capital - - common stock 1,063,946 1,085,060
Additional paid-in capital - - Class A common stock 93,738 93,738
Accumulated deficit (27,131) (36,472)
-------------- --------------
1,131,459 1,143,246
Treasury shares, at cost:
167,608 shares in 2000; 167,514 shares in 1999 (3,447) (3,446)
Unearned compensation (2,663) (1,627)
-------------- --------------
Total common stockholders' equity 1,125,349 1,138,173
Preferred stock of subsidiaries:
Not subject to mandatory redemption 95,933 95,933
Subject to mandatory redemption 188,950 188,950
Long-term debt 2,122,550 2,124,898
-------------- --------------
3,532,782 3,547,954
-------------- --------------
Commitments and Contingencies (Notes 4 and 7)
Total Capitalization and Liabilities $6,225,805 $6,138,462
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
CONECTIV
--------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32,537 $ 48,695
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 70,280 72,805
Allowance for equity funds used during construction (351) (736)
Investment tax credit adjustments, net (1,273) (1,274)
Deferred income taxes, net (14,733) 2,876
Net change in:
Accounts receivable (114,397) (28,497)
Inventories 12,511 11,467
Accounts payable 27,136 (14,693)
Accrued / Prepaid taxes 113,201 28,085
Other current assets & liabilities (1) 26,892 41,059
Other, net (2,899) (10,801)
------------ ------------
Net cash provided by operating activities 148,904 148,986
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (798) (1,950)
Capital expenditures (63,455) (58,909)
Investments in partnerships (2,845) (10,292)
Deposits to nuclear decommissioning trust funds - (2,672)
Decrease in bond proceeds held in trust funds - 11,536
Decrease in investment in leveraged leases, net 13,644 974
Other, net 2,456 626
------------ ------------
Net cash used by investing activities (50,998) (60,687)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends paid (23,496) (43,723)
Common stock redeemed (22,678) (22)
Long-term debt redeemed (48,414) (211)
Principal portion of capital lease payments (6,350) (5,922)
Net change in short-term debt 28,531 (1,650)
Cost of issuances and refinancings (1,193) (606)
------------ ------------
Net cash used by financing activities (73,600) (52,134)
------------ ------------
Net change in cash and cash equivalents 24,306 36,165
Cash and cash equivalents at beginning of period 56,239 65,884
------------ ------------
Cash and cash equivalents at end of period $ 80,545 $102,049
============ ============
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
CONECTIV
--------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
NOTE 1. FINANCIAL STATEMENT PRESENTATION
- ------- --------------------------------
Conectiv's consolidated condensed interim financial statements contained herein
include the accounts of Conectiv and its majority-owned subsidiaries and reflect
all adjustments necessary in the opinion of management for a fair presentation
of interim results. In accordance with regulations of the Securities and
Exchange Commission (SEC), disclosures which would substantially duplicate the
disclosures in Conectiv's 1999 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 1999 Annual
Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for
additional relevant information.
Within the Consolidated Statements of Income, amounts previously reported for
the three months ended March 31, 1999 as "Electric fuel and purchased power" and
"Purchased electric capacity" have been combined and reported as "Electric fuel
and purchased energy and capacity." Certain other reclassifications of prior
period data have been made to conform with the current presentation.
NOTE 2. PLANNED ASSET SALES
- ------- -------------------
For information concerning agreements for the sale of the nuclear and non-
strategic baseload fossil electric generating plants of Delmarva Power & Light
Company (DPL) and Atlantic City Electric Company (ACE), see Note 13 to the
Consolidated Financial Statements included in Item 8 of Part II of Conectiv's
1999 Annual Report on Form 10-K. The operating results of the electric
generating plants to be sold are included in the Energy business segment shown
in Note 9 to the Consolidated Financial Statements included herein.
On March 22, 2000, Conectiv announced its plans to sell Conectiv Services, Inc.
(CSI) and Conectiv Thermal Systems, Inc. (CTS). CSI provides heating,
ventilation, and air conditioning (HVAC) services and had total assets of
approximately $84 million as of March 31, 2000. The results of operations for
CSI are presented as the "HVAC" business segment in Note 9 to the Consolidated
Financial Statements included herein. CTS constructs and operates thermal
energy systems and had total assets of approximately $186 million as of March
31, 2000. The results of operations for CTS are included in the Energy business
segment in Note 9 to the Consolidated Financial Statements included herein.
NOTE 3. RATE MATTERS
- ------- ------------
An update to the information previously reported in Note 9 to the Consolidated
Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual
Report on Form 10-K is presented below.
NEW JERSEY ELECTRIC UTILITY INDUSTRY RESTRUCTURING
As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued
a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity
supply business and indicated that a more detailed order would be issued at a
later time. The NJBPU's final order for ACE has been delayed due to appeals of
the NJBPU's final order concerning restructuring the electricity supply business
of Public Service Electric and Gas Company (PSE&G). In April 2000, the appeals
of the NJBPU's restructuring
-5-
<PAGE>
order for PSE&G were denied by the Appellate Division of the New Jersey Superior
Court. On May 2, 2000, one of the appellants filed a notice of its intention to
request the New Jersey Supreme Court to exercise its discretion to review the
unanimous Appellate Division decision.
NOTE 4. LONG-TERM PURCHASED POWER CONTRACTS
- ------- -----------------------------------
As of March 31, 2000, the commitments of ACE and DPL under long-term purchased
power contracts were as follows: ACE--708 megawatts (MW) of capacity; DPL--593
MW of capacity; and DPL--100 megawatt-hours of firm energy. Based on these
contracts, Conectiv's commitments during the next five years for capacity and
energy under long-term purchased power contracts are estimated to be $374
million in 2000; $379 million in 2001; $385 million in 2002; $325 million in
2003; and $319 million in 2004.
As previously disclosed in Notes 1 and 13 to the Consolidated Financial
Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on
Form 10-K, the electric generating plants of DPL and ACE are expected to be
divested during 2000 through sales to third parties and transfers to other
Conectiv subsidiaries. Subsequent to these divestitures, DPL and ACE will
supply electricity to their customers entirely with purchased power. In
addition to the commitments for purchased power discussed above, DPL will
purchase 500 megawatt-hours of firm electricity per hour from NRG Energy, Inc.,
beginning upon completion of the sale of DPL's non-strategic fossil-fired
electric generating plants; the term of this purchased power agreement will
extend through December 31, 2005. ACE expects to enter into additional long-
term purchased power agreements in the third quarter of 2000 in order to supply
its Basic Generation Service (BGS) customers.
NOTE 5. COMMON STOCKHOLDERS' EQUITY
- ------- ---------------------------
(A) GENERAL
-------
As previously disclosed in Note 16 to the Consolidated Financial Statements
included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, as
a registered holding company under the Public Utility Holding Company Act of
1935 (PUHCA), Conectiv may not pay dividends on the shares of common stock and
Class A common stock from an accumulated deficit or paid-in-capital without SEC
approval. As of March 31, 2000, Conectiv had an accumulated deficit of $27.1
million. On April 27, 2000, the SEC approved Conectiv's payment of dividends on
common stock and Class A common stock for the first and second quarters of 2000.
Conectiv expects to have retained earnings sufficient to offset dividends
declared on shares of common stock and Class A common stock beginning in the
third quarter of 2000, when the sale of certain electric generating units is
expected to be completed. There can be no assurances, however, that the sales
of these electric generating units will be completed, or that any gain will be
realized from the sales of these electric generating units. Conectiv expects
that, if additional SEC approvals are required for quarterly payment of
dividends, such approvals would be received.
(B) CONECTIV COMMON STOCK
---------------------
During the three months ended March 31, 2000, Conectiv purchased 1,541,500
shares of Conectiv common stock for $22.7 million. As of March 31, 2000,
4,630,300 shares of common stock remained authorized for purchase under the
stock purchase program announced in January 2000.
-6-
<PAGE>
Conectiv's Board of Directors declared a $0.22 dividend per share of common
stock for the first quarter of 2000, which represented approximately 54% of the
$0.41 of earnings per average share of common stock outstanding for the first
quarter of 2000. For additional information concerning dividends on common
stock, see "Dividends on Common Stock" on page II-7 in Management's Discussion
and Analysis of Financial Condition and Results of Operations (MD&A) included in
Conectiv's 1999 Annual Report on Form 10-K.
(C) CONECTIV CLASS A COMMON STOCK
-----------------------------
For general information concerning Class A common stock and information about
conversion and redemption provisions related to Class A common stock, refer to
Note 17 to the Consolidated Financial Statements included in Item 8 of Part II
of Conectiv's 1999 Annual Report on Form 10-K.
For the three months ended March 31, 2000, dividends declared per share of Class
A common stock were $0.80 in comparison to a loss per share of Class A common
stock of $0.43. For additional information concerning dividends on Class A
common stock, see "Dividends on Class A Common Stock" on page II-8 of the MD&A
included in Conectiv's 1999 Annual Report on Form 10-K.
COMPUTATION OF EARNINGS APPLICABLE TO CONECTIV CLASS A COMMON STOCK
(Dollars in Thousands)(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net earnings of ACE $ 1,040 $ 14,558
Exclude net income of non-utility activities (24) (102)
-------- --------
Net income of Atlantic Utility Group 1,016 14,456
Pro-rata portion of fixed notional charge
of $40 million per year (10,000) (10,000)
-------- --------
Company Net Income (Loss) Attributable
to the Atlantic Utility Group (8,984) 4,456
Percentage applicable to Class A Common Stock * 27.3% 30.0%
-------- --------
Earnings (loss) applicable to Class A Common Stock $ (2,453) $ 1,337
======== ========
</TABLE>
* For information concerning the percentage of "Company Net Income (Loss)
Attributable to the Atlantic Utility Group" which is applicable to Class A
common stock, refer to Note 17 to the Consolidated Financial Statements
included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K.
SUMMARIZED FINANCIAL INFORMATION OF ATLANTIC CITY ELECTRIC COMPANY
(Dollars in Thousands)(unaudited)
INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Operating revenues $ 208,886 $ 244,839
Operating income $ 22,680 $ 38,034
Net income $ 1,573 $ 15,091
Earnings applicable to common stock $ 1,040 $ 14,558
</TABLE>
-7-
<PAGE>
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
<S> <C> <C>
Current assets $ 280,383 $ 340,774
Noncurrent assets 2,286,818 2,313,885
---------- ----------
Total assets $2,567,201 $2,654,659
========== ==========
Current liabilities $ 221,252 $ 300,837
Noncurrent liabilities 1,558,604 1,550,690
Preferred stock 125,181 125,181
Common stockholder's equity 662,164 677,951
---------- ----------
Total capitalization and liabilities $2,567,201 $2,654,659
========== ==========
</TABLE>
(D) CHANGES IN CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
---------------------------------------------------
Conectiv's consolidated common stockholders' equity decreased from $1,138.2
million as of December 31, 1999, to $1,125.3 million as of March 31, 2000,
primarily due to $23.2 million of common dividends declared and Conectiv's
purchase of 1,541,500 shares of Conectiv common stock for $22.7 million, partly
offset by net income of $32.5 million.
NOTE 6. DEBT
- ------- ----
The $608.2 million of short-term debt outstanding as of March 31, 2000
represented borrowings at the holding company level by Conectiv and had an
average interest rate of 6.2%. Conectiv (the holding company) has credit
agreements which provide borrowing capability of up to $1.03 billion.
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26,
2000. On February 1, 2000, DPL redeemed $2.1 million of 7 1/8% Pollution
Control Bonds.
On January 31, 2000, DPL arranged a $150 million revolving credit facility which
expires January 31, 2003. The credit facility will provide liquidity for DPL's
$104.8 million of Variable Rate Demand Bonds and for general corporate purposes.
NOTE 7. 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 March 31,
2000 and December 31, 1999, 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.
-8-
<PAGE>
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 $7.3 million on an aggregate basis.
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------- ----------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
<S> <C> <C>
2000 1999
-------- -------
(Dollars in thousands)
CASH PAID (RECEIVED) FOR:
Interest, net of amounts capitalized $ 46,103 $34,489
Income taxes, net of refunds $(74,832) $ 152
</TABLE>
As shown above, Conectiv received $74.8 million of income tax refunds during the
three months ended March 31, 2000. The income tax refunds were primarily
related to the tax benefit associated with ACE's payment of $228.5 million on
December 28, 1999 to terminate ACE's purchase of electricity under a contract
with the Pedricktown Co-generation Limited Partnership (Pedricktown). For
additional information concerning the contract termination, see Note 10 to the
Consolidated Financial Statements included in Item 8 of Part II of Conectiv's
1999 Annual Report on Form 10-K.
NOTE 9. BUSINESS SEGMENTS
- ------- -----------------
The following information is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). Conectiv's business segments under SFAS No.
131 are as follows: "ENERGY" represents (a) the generation, purchase, trading
and sale of electricity, including the obligations of DPL and ACE to supply
electricity to customers who do not choose an alternative electricity supplier;
(b) gas supply and trading activities, (c) power plant operation services, and
(d) thermal heating and cooling systems operation and construction services;
"POWER DELIVERY" includes activities related to delivery of electricity and gas
to customers at regulated prices over transmission and distribution systems;
"TELECOMMUNICATIONS" represents services provided by Conectiv Communications
Inc. (CCI), including local and long-distance telephone service and internet
services; "HVAC" represents heating, ventilation, and air conditioning services
provided by CSI.
-9-
<PAGE>
As discussed in Note 9 to the Consolidated Financial Statements included in Item
8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, Conectiv's
electricity supply businesses were deregulated in the third quarter of 1999.
Prior to deregulation, amounts included in billings to electric customers for
electricity supply and delivery were not separately identified; during this
period, revenues were allocated directly to the Energy and Power Delivery
business segments based on the cost of services provided.
The operating results for business segments are evaluated based on "earnings
before interest and income taxes," which is generally equivalent to Operating
Income plus Other Income, less certain interest charges allocated to the
business segments. The "earnings before interest and income taxes" of "All
Other" business segments for the three months ended March 31, 1999 include $16.0
million from equity in earnings of Enertech Capital Partners, L.P. (Enertech).
For additional information concerning Enertech, see Note 7 to the Consolidated
Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------------------------- ----------------------------------
EARNINGS EARNINGS
BEFORE INTEREST BEFORE INTEREST
BUSINESS SEGMENTS REVENUES AND TAXES REVENUES AND TAXES
- ------------------------ -------------- ---------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Energy (1) $ 950,295 $ 64,973 $ 763,358 $ 39,088
Power Delivery 188,060 63,262 196,966 80,934
Telecommunications 12,563 (13,577) 6,819 (8,289)
HVAC 31,863 (3,506) 26,696 (3,328)
All Other 2,640 (344) 1,784 14,359
-------------- ---------------- --------------- ---------------
$ 1,185,421 (2) $ 110,808 (3) $ 995,623 (4) $ 122,764 (5)
============== ================ =============== ===============
</TABLE>
(1) Includes the operating results of non-strategic electric generating plants
which are expected to be sold by the third quarter of 2000 and CTS, which
Conectiv plans to sell during 2000.
(2) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$137,654; Telecommunications business
segment--$1,026; All Other business segments--$1,396.
(3) "Earnings before interest and income taxes" less $53,555 of interest expense
and preferred stock dividends and $505 of net Merger-related consolidation
adjustments equals consolidated income before income taxes.
(4) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$45,204; Telecommunications business
segment--$729; All Other business segments--$3,105.
(5) "Earnings before interest and income taxes" less $40,404 of interest expense
and preferred stock dividends and $351 of net Merger-related consolidation
adjustments equals consolidated income before income taxes.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 "intend," "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: the effects of deregulation of energy supply and the unbundling
of delivery services; the ability to enter into purchased power agreements on
terms acceptable to Conectiv; market demand and prices for energy, capacity, and
fuel; weather variations affecting energy usage; operating performance of power
plants; 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.
COMMON STOCK EARNINGS SUMMARY
- ------------------------------
Earnings applicable to common stock were $35.0 million, or $0.41 per average
share of common stock outstanding (85,568,000 average shares outstanding) for
the first quarter of 2000, compared to earnings applicable to common stock of
$47.4 million, or $0.47 per average share of common stock outstanding
(100,532,000 average shares outstanding) for the first quarter of 1999. As
discussed further below, the $0.06 decrease in earnings per share reflects lower
investment income, rate decreases for electric delivery retail customers,
increased losses for the telecommunications business, and higher interest
expense. These variances were largely offset by additional revenues, net of
related energy costs, from non-regulated electricity sales and the positive
effect of fewer average shares of common stock outstanding. The table shown
below shows contributions to earnings per average share of common stock
outstanding for the first quarter of 2000 compared to the first quarter of 1999.
AFTER-TAX CONTRIBUTION TO EARNINGS (LOSS) PER AVERAGE SHARE OF COMMON STOCK
OUTSTANDING
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
<S> <C> <C>
2000 1999
------ ------
Equity in earnings of Enertech $ - $ 0.09
CCI (telecommunications) (0.12) (0.05)
CSI (HVAC) (0.03) (0.02)
Energy, Power Delivery, and Other 0.56 0.45
------ ------
$ 0.41 $ 0.47
====== ======
</TABLE>
-11-
<PAGE>
As shown in the table above, Conectiv's equity in the earnings of Enertech, a
venture capital fund that invests in energy-related technology and internet
service companies, contributed $0.09 to earnings per average share of common
stock outstanding in the first quarter of 1999. In the first quarter of 2000,
Conectiv's equity in earnings of Enertech were not significant. As discussed in
Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of
Conectiv's 1999 Annual Report on Form 10-K, the earnings of Enertech may be
volatile from period to period due to the nature of its investments. Enertech's
investments include, among others, essential.com, Capstone Turbine Corporation,
Coastal Security Systems, Inc., Extant, Inc., Sagemaker and Whisper
Communications, Inc. As of March 31, 2000, the carrying amount of Conectiv's
subsidiary's investment in Enertech was $29.5 million.
On March 22, 2000, Conectiv announced plans which included the intent to find a
strategic partner in the telecommunications business and increase focus on
business markets and internet related data services. For the first quarter of
2000, CCI's telecommunications operations resulted in a $0.12 loss per average
share of common stock outstanding compared to a $0.05 loss per average share of
common stock outstanding for the first quarter of 1999. The higher loss per
average share of common stock outstanding resulted from a larger operating loss
after taxes and fewer average shares outstanding of common stock. CCI's after-
tax operating loss increased due to higher customer service, sales and network
operations expenses. Expansion of the telecommunications business caused these
expenses to increase.
The strategic plans announced by Conectiv on March 22, 2000 included the intent
to sell CSI. The operations of CSI resulted in a $0.03 loss per average share
of common stock outstanding for the first quarter of 2000 compared to a $0.02
loss per average share of common stock outstanding for the first quarter of
1999. The loss per average share of common stock outstanding increased
primarily due to fewer average shares outstanding of common stock.
As shown in the preceding table, "Energy, Power Delivery, and Other" contributed
$0.56 to earnings per average share of common stock outstanding for the first
quarter of 2000, compared to $0.45 per average share of common stock outstanding
for the first quarter of 1999. This $0.11 increase was primarily due to fewer
average common shares outstanding and higher earnings from the Energy business
segment, partly offset by lower earnings from the Power Delivery business
segment. As disclosed in Note 9 to the Consolidated Financial Statements,
earnings before interest and income taxes of the Energy business segment
increased $25.9 million and earnings before interest and income taxes of the
Power Delivery business segment decreased by $17.7 million.
Earnings before interest and income taxes of the Energy business segment
increased primarily due to additional revenues from non-regulated electricity
generation, trading and sales. The Energy business segment also benefited from
lower depreciation and energy costs due to the effects of discontinuing the
application of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS No. 71) in the third
quarter of 1999. The impact of the electricity delivery customers of DPL and
ACE choosing alternative electricity suppliers was minimized by (a) selling
electricity generated by the deregulated power plants to other customers, and
(b) some customers selecting "Conectiv Energy" (the trade name under which DPL
markets competitive retail energy) as their alternative electricity supplier.
Customers representing approximately 6% of the 1999 peak loads of DPL and ACE
were purchasing electricity marketed under the Conectiv Energy trade name as of
March 31, 2000. Also, delivery customers representing approximately 8% of the
1999 peak loads of DPL and ACE were purchasing electricity from electricity
suppliers other than Conectiv as of March 31, 2000.
-12-
<PAGE>
Earnings before interest and income taxes of the Power Delivery business segment
decreased primarily due to revenue decreases from lower rates for electric
delivery customers and higher customer care expenses.
As previously disclosed in the MD&A under "Deregulated Generation and Power
Plant Sales" on page II-12 of Conectiv's 1999 Annual Report on Form 10-K,
Conectiv is building 1,100 MW of combined cycle units under its mid-merit
electric generation strategy and is selling the nuclear and non-strategic
baseload fossil electric generating plants of DPL and ACE. The sales of the
electric generating plants are expected to be completed by the third quarter of
2000 and may cause a temporary decrease in earnings from the Energy business
since the new mid-merit electric generation plants under construction are
expected to be phased into service from the third quarter of 2001 through 2003.
The proceeds from sales of the electric generating plants are expected to be
used for debt repayment, repurchases of common stock, expansion of the mid-merit
electric generation business, and general corporate purposes.
Conectiv's Board of Directors declared a $0.22 dividend per share of common
stock for the first quarter of 2000, which represented approximately 54% of the
$0.41 of earnings per average share of common stock outstanding for the first
quarter of 2000. For additional information concerning dividends on common
stock, see "Dividends on Common Stock" on page II-7 in the MD&A included in
Conectiv's 1999 Annual Report on Form 10-K.
CLASS A COMMON STOCK EARNINGS SUMMARY
- --------------------------------------
For general information concerning Class A common stock and information about
conversion and redemption provisions related to Class A common stock, refer to
Note 17 to the Consolidated Financial Statements included in Item 8 of Part II
of Conectiv's 1999 Annual Report on Form 10-K.
For the first quarter of 2000, a $2.5 million loss was applicable to Class A
common stock, or a $0.43 loss per average share of Class A common stock
outstanding (5,742,000 average shares outstanding). Under Conectiv's Restated
Certificate of Incorporation, Class A common stock has an interest in earnings
of the Atlantic Utility Group (AUG) in excess of a notional fixed charge of $40
million per year. (The AUG includes the assets and liabilities of the electric
generation, transmission, and distribution businesses of ACE which existed on
August 9, 1996 and were regulated by the NJBPU.) For any quarterly reporting
period, if the AUG earns less than $10.0 million (the quarterly pro-rata portion
of the annual fixed notional charge), a loss will be applicable to Class A
common stock. As shown in Note 5 to the Consolidated Financial Statements, the
net income of the AUG was $1.0 million for the first quarter of 2000, which
resulted in a $2.5 million loss applicable to Class A common stock.
In the first quarter of 1999, based on $14.5 million of net income of the AUG,
$1.3 million of earnings were applicable to Class A common stock, or $0.20 per
average share of Class A common stock outstanding (6,561,000 average shares
outstanding).
As discussed above, lower earnings of the AUG caused the earnings applicable to
Class A common stock to decrease from earnings of $0.20 per share in the first
quarter of 1999 to a loss of $0.43 per share in the first quarter of 2000.
Earnings of the AUG decreased primarily due to lower electric revenues of ACE,
reflecting the effect of customer rate decreases and lower volume of electricity
delivered, and higher operation and maintenance expenses of ACE.
For the three months ended March 31, 2000, dividends declared per share of Class
A common stock were $0.80 in comparison to a loss per share of common stock of
$0.43. For additional information concerning dividends on Class A common stock,
see "Dividends on Class A Common Stock" on page II-8 of the MD&A included in
Conectiv's 1999 Annual Report on Form 10-K.
-13-
<PAGE>
PLANNED FORMATION OF CONECTIV ENERGY HOLDING COMPANY
- ----------------------------------------------------
As discussed below, the strategic electric generating plants of DPL and ACE
which are being retained by Conectiv are expected to be transferred to other
Conectiv subsidiaries during mid-2000. By late-2000, the principal businesses
of DPL and ACE are expected to be the transmission and distribution of energy as
a result of the transfers and expected sales of electric generating plants, as
well as the expected transfer of energy trading and marketing activities from
DPL to another Conectiv subsidiary. The businesses of DPL and ACE will also
include supplying electricity to customers who do not choose an alternative
electricity supplier; power purchased by DPL and ACE will be the source of the
electricity supplied to their customers.
Conectiv expects to receive SEC approval in the second quarter of 2000 to
establish a new subsidiary, Conectiv Energy Holding Company (CEH), which will
own Conectiv Energy Supply, Inc (CESI), Conectiv Delmarva Generation Inc. (CDG),
and ACE REIT, Inc. and its subsidiary, Conectiv Atlantic Generation, LLC (CAG).
Through its subsidiaries, CEH will be engaged in non-regulated electricity
production and sales, and energy trading and marketing. The strategic electric
generating plants of DPL, with 1,364 MW of capacity, and the strategic electric
generating plants of ACE, with 502 MW of capacity, are expected to be
transferred to CDG and CAG, respectively. Despite these changes, the electric
generating plants transferred to CAG will remain part of the AUG. The combined
cycle units of Conectiv which are currently being constructed are also expected
to be transferred to CDG by early 2001. CESI's activities are expected to
include purchasing and selling the electricity generated by the power plants of
CDG and CAG, as well as energy trading and marketing, and other energy-related
services. The electricity and gas competitive energy activities currently
conducted by DPL are expected to be phased out by DPL and assumed by CESI over
the next six to twelve months.
ELECTRIC UTILITY INDUSTRY RESTRUCTURING
- ----------------------------------------
An update to the information previously reported in the MD&A under "Electric
Utility Industry Restructuring," beginning on page II-9 of Conectiv's 1999
Annual Report on Form 10-K is presented below.
NEW JERSEY ELECTRIC UTILITY INDUSTRY RESTRUCTURING
As previously disclosed, the NJBPU issued a Summary Order to ACE in July 1999
concerning restructuring ACE's electricity supply business and indicated that a
more detailed order would be issued at a later time. The NJBPU's final order
for ACE has been delayed due to appeals of the NJBPU's final order concerning
restructuring the electricity supply business of PSE&G. In April 2000, the
appeals of the NJBPU's restructuring order for PSE&G were denied by the
Appellate Division of the New Jersey Superior Court. On May 2, 2000, one of the
appellants filed a notice of its intention to request the New Jersey Supreme
Court to exercise its discretion to review the unanimous Appellate Division
decision.
ELECTRIC REVENUES
- -----------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------
2000 1999
------ ------
(Dollars in millions)
<S> <C> <C>
Regulated electric revenues $461.9 $500.1
Non-regulated electric revenues 168.4 63.2
------ ------
Total electric revenues $630.3 $563.3
====== ======
</TABLE>
-14-
<PAGE>
The table above shows the amounts of electric revenues earned which are subject
to price regulation (Regulated) and which are not subject to price regulation
(Non-regulated). "Regulated electric revenues" include revenues for delivery
(transmission and distribution) service and electricity supply service within
the service areas of DPL and ACE.
Regulated electric revenues decreased by $38.2 million, from $500.1 million for
the first quarter of 1999 to $461.9 million for the first quarter of 2000. The
$38.2 million decrease reflects a $23.3 million decrease due to customers
choosing alternative electricity suppliers and an $18.7 million reduction due to
retail rate decreases for electric utility industry restructuring, partly offset
by a $3.8 million increase primarily from higher volumes of electricity sold
through the interchange. The change in the volume of electricity delivered to
retail customers was not significant on a consolidated basis.
"Non-regulated electric revenues" result primarily from electricity trading
activities, bulk sales of electricity including sales of output from deregulated
electric generating plants, and competitive retail sales. Conectiv actively
participates in the wholesale energy markets to support wholesale utility and
competitive retail marketing activities. Energy market participation results in
exposure to commodity market risk when, at times, net open energy commodity
positions are created or allowed to continue. To the extent that Conectiv has
net open positions, controls are in place that are intended to keep risk
exposures within certain management-approved risk tolerance levels. For
additional information concerning commodity market risk, see "Item 3.
Quantitative and Qualitative Disclosures About Market Risk," included herein.
Non-regulated electric revenues increased by $105.2 million, from $63.2 million
for the first quarter of 1999 to $168.4 million for the first quarter of 2000.
The $105.2 million increase was mainly due to higher wholesale sales of
electricity generated by deregulated power plants, increased volumes of
electricity traded, and higher competitive retail electricity sales.
Deregulation of the electric generating plants, high plant availability, and
lower load obligations due to some customers choosing alternative suppliers made
more electricity output of electric generating plants available for sale in non-
regulated markets. Sales of competitive retail electricity increased due to
increased marketing to large commercial and industrial customers outside
Conectiv's service area and sales to the delivery customers of DPL and ACE who
selected "Conectiv Energy" (trade name) as their alternative electricity
supplier.
GAS REVENUES
- ------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------
2000 1999
------ ------
(Dollars in millions)
<S> <C> <C>
Regulated gas revenues $ 44.9 $ 52.6
Non-regulated gas revenues 229.6 239.3
------ ------
Total gas revenues $274.5 $291.9
====== ======
</TABLE>
DPL earns gas revenues from on-system sales which generally are subject to price
regulation, off-system trading and sales of natural gas which are not subject to
price regulation, and from the transportation of gas for customers. CESI also
markets natural gas. The table above shows the amounts of gas revenues earned
from sources which were subject to price regulation (Regulated) and which were
not subject to price regulation (Non-regulated).
-15-
<PAGE>
Regulated gas revenues decreased $7.7 million for the first quarter of 2000 in
comparison to the first quarter of 1999. The decrease resulted from some
commercial and industrial customers electing to buy gas from alternative
suppliers. However, because DPL's gross margin (gas revenues less gas
purchased) from supplying regulated gas customers is insignificant, the $7.7
million gas revenue decrease did not affect pre-tax profits.
Non-regulated gas revenues decreased $9.7 million due to lower volumes of gas
traded, partly offset by increased competitive retail gas sales. Although non-
regulated gas revenues decreased, the gross margin earned from non-regulated gas
revenues increased by $2.4 million.
OTHER SERVICES REVENUES
- ------------------------
Other services revenues were comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
<S> <C> <C>
2000 1999
------ ------
(Dollars in millions)
Fuel oil and gasoline $ 71.4 $37.5
CSI (HVAC) 31.9 26.7
CCI (Telecommunications) 12.6 6.8
Thermal systems 6.1 5.9
Operation of power plants 9.3 5.8
Solutions * 3.3 4.7
Other 6.0 4.0
------ -----
Total $140.6 $91.4
====== =====
</TABLE>
* Customized energy-related products and services
"Other services" revenues increased $49.2 million in the first quarter of 2000
primarily due to increases of $33.9 million for fuel oil and gasoline sales,
$5.2 million for HVAC services, and $5.8 million for telecommunications.
Revenues from fuel oil and gasoline sales increased due to higher volume and
higher market prices for oil.
The gross margin (revenues less cost of sales) earned from "Other services"
increased by $4.6 million, which was primarily attributed to CCI's
telecommunications business and CSI's HVAC business. The improvement in CCI's
gross margin reflects the benefit of having a greater proportion (about two-
thirds) of access lines on its network facilities in comparison to last year.
CCI had sold approximately 85,000 access lines as of March 31, 2000, which
represented a 102% increase from a year ago.
OPERATING EXPENSES
- -------------------
Electric Fuel and Purchased Energy and Capacity
"Electric fuel and purchased energy and capacity" increased $52.7 million in the
first quarter of 2000 due to higher volumes of non-regulated electricity
generated and purchased for resale, partly offset by lower costs due to the
effects of discontinuing application of SFAS No. 71 to the electricity supply
businesses of DPL and ACE.
-16-
<PAGE>
Gas Purchased
Gas purchased decreased by $20.0 million in the first quarter of 2000 due to
lower volumes of gas purchased for resale off-system and for supply of
commercial and industrial customers in DPL's service area.
Other Services Cost of Sales
Other services cost of sales increased by $44.5 million in the first quarter of
2000 primarily due to higher volumes and market prices of fuel oil and gasoline
purchased for resale, and higher volumes of HVAC and telecommunication services
provided.
Operation and Maintenance Expenses
Operation and maintenance expenses increased by $22.6 million in the first
quarter of 2000 primarily due to increases in the operating expenses of jointly-
owned power plants, customer care expenses associated with Power Delivery
customers, and expenses related to expanding the telecommunications business.
Depreciation and amortization
Depreciation and amortization expenses decreased $3.0 million mainly due to the
write-downs in the third and fourth quarters of 1999 of the electric generating
plants in connection with restructuring the electric utility industry in
Delaware, Maryland, and New Jersey. Amortization of "Recoverable stranded
costs" partly offset the decrease from lower depreciation of power plants.
Taxes other than income taxes
Taxes other than income taxes increased $2.5 million primarily due to higher
revenues from non-regulated electricity sales.
OTHER INCOME
- -------------
Other income decreased $10.8 million in the first quarter of 2000 primarily
because Conectiv's equity in earnings of Enertech was not significant in the
first quarter of 2000 compared to $16.0 million in the first quarter of 1999.
Excluding the decrease due to Enertech, other income increased $5.2 million
primarily due to a gain on the sale of an investment in a leveraged lease,
higher equity in earnings of a non-utility generation joint venture, partly
offset by income in the first quarter of 1999 from implementation of mark-to-
market accounting for energy trading activities.
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 $14.2
million in the first quarter mainly due to approximately $6.4 million of
additional interest expense for financing purchases of Conectiv common stock,
$4.1 million of interest charges on the $228.5 million borrowing in December
1999 to finance the payment to terminate the Pedricktown purchased power
contract, and $1.0 million of interest expense accrued on ACE's regulatory
liability related to BGS. The net impact of the additional interest expense
from purchasing common stock and fewer shares of common stock outstanding
resulted in an increase in earnings per share of common stock of approximately
$0.02.
-17-
<PAGE>
INCOME TAXES
- ------------
Income taxes decreased $9.1 million mainly due to lower income before income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Due to $148.9 million of cash provided by operating activities, $51.0 million of
cash used by investing activities, and $73.6 million of cash used by financing
activities, cash and cash equivalents increased by $24.3 million during the
first quarter of 2000.
Net cash provided by operating activities for the first quarter of 2000 included
positive cash flow from $74.8 million of income tax refunds which were primarily
related to the tax benefit associated with ACE's payment of $228.5 million on
December 28, 1999 to terminate the Pedricktown purchased power contract. In the
first quarter of 1999, $0.2 million of income taxes were paid. Excluding the
$75.0 million positive variance in cash flow attributed to income taxes, net
cash flow from operations decreased by $75.1 million primarily due to slower
collection of accounts receivable, higher interest expense payments, and prior-
year over-collections of energy costs from customers.
Excluding changes due to reclassifications, accounts receivable as of March 31,
2000 increased by $114.4 million in comparison to December 31, 1999. This
increase reflects higher revenues and slower collections of accounts receivable
caused by conversion to a new customer billing system in December 1999.
Management expects that the average time period for collection of accounts
receivable will decrease in future periods.
As of March 31, 2000, Conectiv had an accrued tax liability of $97.5 million.
In comparison, as of December 31, 1999, Conectiv had prepaid income taxes of
$15.7 million primarily due to the expected tax benefit for the December 1999
payment to terminate the Pedricktown purchased power contract. The $113.2
million increase in accrued taxes was mainly due to the $74.8 million of income
tax refunds received and income taxes accrued on taxable income in the first
quarter of 2000.
Capital expenditures were $63.5 million for the first quarter of 2000 compared
to $58.9 million for the first quarter of 1999. Increased capital expenditures
due to expansion of CCI's telecommunications network, upgrades of the electric
transmission and distribution systems, and expenditures for construction of the
combined cycle units, were largely offset by last year's expenditures for a new
customer service center and other shared infrastructure assets.
The $13.6 million of positive cash flow in the first quarter of 2000 from
"Decrease in investment in leveraged leases" was mainly due to the sale of an
aircraft which was owned through a leveraged lease.
Common dividends paid were $23.5 million for the first quarter of 2000 in
comparison to $43.7 million for the first quarter of 1999. The decrease in
common dividends paid was due to fewer shares of common stock and Class A common
stock and lower dividends per share of common stock. For information concerning
the 1999 offer to purchase shares of common stock and the 1999 reduction in
dividends per share of common stock, see Note 16 to the Consolidated Financial
Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on
Form 10-K.
As previously disclosed, as a registered holding company under PUHCA, Conectiv
may not pay dividends on the shares of common stock and Class A common stock
from an accumulated deficit or paid-in-capital without SEC approval. As of
March 31, 2000, Conectiv had an accumulated deficit of $27.1 million. On April
27, 2000, the SEC approved Conectiv's payment of dividends on common stock and
Class A common stock for the first and second quarters of 2000. Conectiv
expects to have retained
-18-
<PAGE>
earnings sufficient to offset dividends declared on shares of common stock and
Class A common stock beginning in the third quarter of 2000, when the sale of
certain electric generating units is expected to be completed. There can be no
assurances, however, that the sales of these electric generating units will be
completed, or that any gain will be realized from the sales of these electric
generating units. Conectiv expects that, if additional SEC approvals are
required for quarterly payment of dividends, such approvals would be received.
During the three months ended March 31, 2000, Conectiv purchased 1,541,500
shares of Conectiv common stock for $22.7 million. As of March 31, 2000,
4,630,300 shares of common stock remained authorized for purchase under the
stock purchase program announced in January 2000.
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26,
2000. On February 1, 2000, DPL redeemed $2.1 million of 7 1/8% Pollution
Control Bonds.
Conectiv's short-term debt balance as of March 31, 2000 increased by $28.5
million from the balance as of December 31, 1999 primarily due to financing
purchases of Conectiv common stock.
Conectiv's capital structure, including short-term debt, current maturities of
long-term debt, and variable rate demand bonds, is shown below.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Common stockholders' equity 26.2% 26.2%
Preferred stock of subsidiaries 6.6% 6.6%
Long-term debt and variable rate demand bonds 53.0% 52.7%
Short-term debt and
current maturities of long-term debt 14.2% 14.5%
</TABLE>
Conectiv's ratio of earnings to fixed charges under the SEC Method is shown
below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional
information.
12 Months
Ended Year Ended December 31,
March 31, ----------------------------
2000 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ----
Ratio of Earnings to
Fixed Charges (SEC Method) 1.81 1.98 2.38 2.63 2.83 2.92
-19-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
As previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-24 to II-25 of Conectiv's 1999 Annual Report on Form
10-K, Conectiv is subject to market risks, including interest rate risk, equity
price risk, and commodity price risk. An update concerning Conectiv's commodity
price risk is below.
Conectiv is exposed to the impact of market fluctuations in the price and
transportation costs of natural gas, electricity, and petroleum products.
Conectiv engages in commodity hedging activities to minimize the risk of market
fluctuations associated with the purchase and sale of energy commodities
(natural gas, petroleum and electricity). Some hedging activities are conducted
using energy derivatives (futures, option, and swaps). The remainder of
Conectiv's hedging activity is conducted by backing physical transactions with
offsetting physical positions. The hedging objectives include the assurance of
stable and known minimum cash flows and the fixing of favorable prices and
margins when they become available. Conectiv also engages in energy commodity
trading and arbitrage activities, which expose Conectiv to commodity market risk
when, at times, Conectiv creates net open energy commodity positions or allows
net open positions to continue. To the extent that Conectiv has net open
positions, controls are in place that are intended to keep risk exposures within
management-approved risk tolerance levels.
Conectiv uses a value-at-risk model to assess the market risk of its
electricity, gas, and petroleum commodity activities. The model includes fixed
price sales commitments, physical forward contracts, and commodity derivative
instruments. Value-at-risk represents the potential gain or loss on instruments
or portfolios due to changes in market factors, for a specified time period and
confidence level. Conectiv estimates value-at-risk across its power, gas, and
petroleum commodity business using a delta-normal variance/covariance model with
a 95 percent confidence level and assuming a five-day holding period. Conectiv's
calculated value-at-risk with respect to its commodity price exposure was
approximately $18.3 million as of March 31, 2000, in comparison to $4.0 million
as of December 31, 1999. The increase in value-at-risk was primarily due to
increased hedging, with forward contracts, of the deregulated portion of the
electricity output of Conectiv's power plants.
-20-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The municipal utility within the City of Vineland has built electric
distribution facilities to a previously undeveloped area that is both within the
city limits and ACE's franchised service area. After unsuccessful negotiations
with the City of Vineland, ACE has initiated litigation before the NJBPU to
defend its franchise right to serve. Because the area has previously been
undeveloped, the outcome of the litigation, even if negative, will have no
immediate effects on revenue.
In addition, the City of Vineland has recently initiated a process to appraise
all of ACE's electric distribution property located within the municipal
boundaries. This process may or may not lead to an effort by the City of
Vineland to condemn ACE's electric distribution property. ACE intends to oppose
any involuntary condemnation and, alternatively, to ensure that there is
adequate compensation for any property condemned.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On March 28, 2000, Conectiv held its 2000 Annual Meeting of Stockholders.
Pursuant to "Proposal No. 1 - Election of Directors" included in the Definitive
Proxy Statement filed with the SEC on February 22, 2000, Conectiv's stockholders
voted on the election of one Class 1 Director (Cyrus H. Holley) and three Class
II Directors (Robert D. Burris, Sarah I. Gore, and George F. MacCormack). Class
I Directors serve until the Annual Meeting in 2002 and Class II Directors serve
until the Annual Meeting in 2003. All four nominees for Directors of Conectiv
were elected, with the voting results shown below:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Cyrus H. Holley 68,069,038 2,636,115
Robert D. Burris 68,090,986 2,614,167
Sarah I. Gore 68,032,026 2,673,127
George F. MacCormack 68,069,803 2,635,350
</TABLE>
No other matters were submitted to a vote of Conectiv's security holders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibits
- --------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- --------------------
On January 31, 2000, Conectiv filed a Current Report on Form 8-K dated January
18, 2000 reporting on Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
On March 22, 2000, Conectiv filed a Current Report on Form 8-K dated March 22,
2000 reporting on Item 5, Other Events.
-21-
<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: May 12, 2000 /s/ John C. van Roden
------------ ----------------------------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-22-
<PAGE>
Exhibit Index
-------------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
<PAGE>
Exhibit 12
Conectiv
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
March 31, ------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $ 97,420 $113,578 $153,201 $101,218 $107,251 $107,546
---------- ---------- --------- --------- -------- ----------
Income taxes 96,713 105,816 105,817 72,155 78,340 75,540
---------- ---------- --------- --------- -------- ----------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 157,695 149,732 133,796 78,350 69,329 65,572
Other interest 43,635 37,743 26,199 12,835 12,516 10,353
Preferred dividend require-
ments of subsidiaries 19,995 19,894 17,871 10,178 10,326 9,942
---------- ---------- --------- --------- -------- ----------
Total fixed charges 221,325 207,369 177,866 101,363 92,171 85,867
---------- ---------- --------- --------- -------- ----------
Nonutility capitalized interest (3,563) (3,264) (1,444) (208) (311) (304)
---------- ---------- --------- --------- -------- ----------
Earnings before extraordinary
item, income taxes, and
fixed charges $411,895 $423,499 $435,440 $274,528 $277,451 $268,649
========== ========== ========= ========= ======== ==========
Total fixed charges shown above $221,325 $207,369 $177,866 $101,363 $ 92,171 $ 85,867
Increase preferred stock dividend
requirements of subsidiaries to
a pre-tax amount 6,639 6,123 4,901 3,065 6,025 6,243
---------- ---------- --------- --------- -------- ----------
Fixed charges for ratio
computation $227,964 $213,492 $182,767 $104,428 $ 98,196 $ 92,110
========== ========== ========= ========= ======== ==========
Ratio of earnings to fixed charges 1.81 1.98 2.38 2.63 2.83 2.92
</TABLE>
For purposes of computing the ratio, earnings are income before extraordinary
item plus income taxes and fixed charges, less nonutility capitalized interest.
Fixed charges include gross interest expense, the estimated interest component
of rentals, and preferred stock dividend requirements of subsidiaries. Preferred
stock 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 1ST QUARTER
2000 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,786,962
<OTHER-PROPERTY-AND-INVEST> 544,854
<TOTAL-CURRENT-ASSETS> 908,621
<TOTAL-DEFERRED-CHARGES> 1,346,616
<OTHER-ASSETS> 638,752
<TOTAL-ASSETS> 6,225,805
<COMMON> 906
<CAPITAL-SURPLUS-PAID-IN> 1,157,684
<RETAINED-EARNINGS> (27,131)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,125,349
188,950
95,933
<LONG-TERM-DEBT-NET> 2,122,550
<SHORT-TERM-NOTES> 608,219
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,937
0
<CAPITAL-LEASE-OBLIGATIONS> 25,197
<LEASES-CURRENT> 28,718
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,027,952
<TOT-CAPITALIZATION-AND-LIAB> 6,225,805
<GROSS-OPERATING-REVENUE> 1,045,345
<INCOME-TAX-EXPENSE> 24,211
<OTHER-OPERATING-EXPENSES> 943,399
<TOTAL-OPERATING-EXPENSES> 967,610
<OPERATING-INCOME-LOSS> 77,735
<OTHER-INCOME-NET> 12,315
<INCOME-BEFORE-INTEREST-EXPEN> 90,050
<TOTAL-INTEREST-EXPENSE> 57,513
<NET-INCOME> 32,537
0
<EARNINGS-AVAILABLE-FOR-COMM> 32,537
<COMMON-STOCK-DIVIDENDS> 23,196
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 148,904
<EPS-BASIC> $0.41
<EPS-DILUTED> $0.41
</TABLE>
