<PAGE>
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, 1997
-------------------------------------
Commission file number 1-1405
Delmarva Power & Light Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware and Virginia 51-0084283
------------------------ -------------------
(States 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 302-429-3527
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1997
----------------------------- ----------------------------
Common Stock, $2.25 par value 61,296,320 Shares
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
Table of Contents
-----------------
Page No.
---------
Part I. Financial Information:
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 1-2
Consolidated Statements of Income for the three and
six months ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Part II. Other Information and Signature 19-27
i
<PAGE>
PART I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $36,882 $36,533
Accounts receivable 162,811 142,431
Inventories, at average cost:
Fuel (coal, oil, and gas) 34,040 36,584
Materials and supplies 43,164 41,292
Prepayments 5,835 20,233
Deferred energy costs 17,351 31,127
------------ ------------
300,083 308,200
------------ -------------
NONUTILITY PROPERTY AND INVESTMENTS
Nonutility property, net 88,757 63,023
Investment in leveraged leases 46,281 46,961
Funds held by trustee 36,954 34,735
Other investments 5,461 4,155
------------ ------------
177,453 148,874
------------ ------------
UTILITY PLANT, AT ORIGINAL COST
Electric 3,036,671 3,037,830
Gas 233,414 229,362
Common 150,791 136,897
------------ ------------
3,420,876 3,404,089
Less: Accumulated depreciation 1,317,651 1,292,325
------------ ------------
Net utility plant in service 2,103,225 2,111,764
Construction work-in-progress 118,622 118,208
Leased nuclear fuel, at amortized cost 29,901 31,513
------------ ------------
2,251,748 2,261,485
------------ ------------
DEFERRED CHARGES AND OTHER ASSETS
Prepaid employee benefit costs 38,898 35,146
Unamortized debt expense 13,664 13,858
Deferred debt refinancing costs 20,063 21,366
Deferred recoverable income taxes 130,716 137,561
Other 59,181 52,663
------------ ------------
262,522 260,594
------------ ------------
TOTAL ASSETS $2,991,806 $2,979,153
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $49,533 $74,355
Long-term debt due within one year 52,792 27,676
Variable rate demand bonds 84,300 85,000
Accounts payable 75,186 81,628
Taxes accrued 1,798 -
Interest accrued 20,249 16,193
Dividends declared 24,475 23,265
Current capital lease obligation 12,708 12,598
Deferred income taxes, net 2,305 7,276
Other 32,057 31,489
------------ ------------
355,403 359,480
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 518,989 526,449
Deferred investment tax credits 41,221 42,501
Long-term capital lease obligation 18,819 20,552
Other 31,639 31,522
------------ ------------
610,668 621,024
------------ ------------
CAPITALIZATION
Common stock, $2.25 par value; 90,000,000
shares authorized; shares outstanding:
1997--61,296,320, 1996--60,682,719 138,399 136,765
Additional paid-in capital 520,572 508,300
Retained earnings 288,125 293,604
------------ ------------
947,096 938,669
Treasury shares, at cost:
1997--214,130 shares, 1996--101,831 share (4,434) (2,138)
Unearned compensation (340) (1,618)
------------- -------------
Total common stockholders' equity 942,322 934,913
Cumulative preferred stock 89,703 89,703
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Company debentures 70,000 70,000
Long-term debt 923,710 904,033
------------ ------------
2,025,735 1,998,649
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $2,991,806 $2,979,153
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
DELMARVA POWER & LIGHT COMPANY
-----------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $246,368 $229,385 $508,971 $477,534
Gas 32,299 22,621 88,416 68,312
Other services 32,301 15,777 59,660 30,556
-------- -------- -------- ---------
310,968 267,783 657,047 576,402
-------- -------- -------- ---------
OPERATING EXPENSES
Electric fuel and purchased energy 86,098 72,106 188,940 153,825
Gas purchased 22,431 12,821 58,184 36,564
Purchased electric capacity 6,979 7,432 13,956 16,953
Operation and maintenance 101,228 82,365 195,968 160,630
Depreciation 34,121 32,339 67,516 63,308
Taxes other than income taxes 8,735 8,404 17,957 17,186
-------- -------- -------- --------
259,592 215,467 542,521 448,466
-------- -------- -------- --------
OPERATING INCOME 51,376 52,316 114,526 127,936
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used
during construction - 256 - 481
Other income 1,448 2,088 2,979 2,944
-------- -------- -------- --------
1,448 2,344 2,979 3,425
-------- -------- -------- --------
INTEREST EXPENSE
Interest charges 20,897 18,190 41,518 36,780
Allowance for borrowed funds used during
construction and capitalized interest (1,116) (766) (2,236) (1,449)
-------- -------- -------- --------
19,781 17,424 39,282 35,331
-------- -------- -------- --------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 - 2,844 -
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 31,621 37,236 75,379 96,030
INCOME TAXES 13,624 14,911 31,589 38,562
-------- -------- -------- --------
NET INCOME 17,997 22,325 43,790 57,468
DIVIDENDS ON PREFERRED STOCK 1,084 2,423 2,299 4,863
-------- -------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK $16,913 $19,902 $41,491 $52,605
======== ======== ======== ========
COMMON STOCK
Average shares outstanding (000) 61,177 60,703 61,017 60,731
Earnings per average share $0.28 $0.33 $0.68 $0.87
Dividends declared per share $0.38 1/2 $0.38 1/2 $0.77 $0.77
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $43,790 $57,468
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 70,445 66,201
Allowance for equity funds used during construction - (481)
Investment tax credit adjustments, net (1,280) (1,280)
Deferred income taxes, net (5,587) 10,724
Net change in:
Accounts receivable (18,331) (4,854)
Inventories 882 3,003
Accounts payable (7,538) (4,273)
Other current assets & liabilities 34,267 (20,252)
Other, net (1,010) (7,246)
-------- --------
Net cash provided by operating activities 115,638 99,010
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and acquisition expenditures (92,928) (64,786)
Decrease in bond proceeds held in trust funds 946 5,118
Deposits to nuclear decommissioning trust funds (2,120) (2,119)
Other, net 495 (2,489)
-------- --------
Net cash used by investing activities (93,607) (64,276)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends: Common (46,684) (46,669)
Preferred (1,373) (4,950)
Issuances: Long-term debt 124,200 -
Common stock 12,065 50
Redemptions: Long-term debt (2,150) (621)
Variable rate demand bonds (700) -
Common stock (70) (1,055)
Principal portion of capital lease payments (2,929) (2,893)
Net change in short-term debt (101,822) 30,689
Cost of issuances and refinancings (2,219) (107)
--------- --------
Net cash used by financing activities (21,682) (25,556)
--------- --------
Net change in cash and cash equivalents 349 9,178
Cash and cash equivalents at beginning of period 36,533 28,951
--------- --------
Cash and cash equivalents at end of period $36,882 $38,129
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Financial Statement Presentation
--------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The statements reflect all adjustments
necessary in the opinion of the Company for a fair presentation of interim
results. They should be read in conjunction with the Company's 1996 Annual
Report to Stockholders and Part II of this Report on Form 10-Q for additional
relevant information.
Certain reclassifications, not affecting net income, have been made to
conform amounts reported for the three- and six-month periods ended June
30, 1996 to the current presentation. Primarily, the operating results of
nonutility subsidiaries were reclassified from "other income" into other
classifications within the income statement. Revenues from "Other
services" includes revenues of the nonutility subsidiaries and revenues
from the parent company's nonutility activities. Refer to "Nonutility
Business" on page I-3 of the Company's 1996 report on Form 10-K for
additional information concerning these activities.
2. Pending Merger
--------------
As previously reported in Note 4 to the Consolidated Financial Statements
of the Company's 1996 Annual Stockholders' Report, on August 12, 1996, the
Company announced plans to merge with Atlantic Energy, Inc. (Atlantic). On
June 26, 1997, the Company and Atlantic announced that an enhanced
retirement offer (ERO) and other employee separation programs are expected
to be utilized to achieve workforce reductions concurrent with the merger
of the two companies. The ERO and other employee separation programs are
contingent on consummation of the merger. Employee separation costs
related to Delmarva's employees and employee retraining costs will be
expensed and are estimated to be approximately $30 million to $35 million
before taxes ($18 million to $21 million after taxes). The actual cost of
Delmarva's employee separation plans may vary from the estimate above
depending on the number of employees who choose the ERO. Employee
separation and relocation costs related to Atlantic's employees are
expected to be included in the acquisition cost of the merged company.
For information concerning the status of regulatory approvals of the
pending merger, refer to Part II, Item 5.
-5-
<PAGE>
3. Contingencies
-------------
Salem Nuclear Generating Station
- --------------------------------
The Company owns 7.41% of Salem Nuclear Generating Station (Salem), which
consists of two pressurized water nuclear reactors and is operated by
Public Service Electric & Gas Company (PSE&G). Salem Units 1 and 2 were
removed from operation by PSE&G on May 16, 1995, and June 7, 1995,
respectively, due to operational problems, and maintenance and safety
concerns. Due to degradation of a significant number of tubes in the Unit
1 steam generators, PSE&G replaced the Unit 1 steam generators. The
Company's share of capitalized costs for the steam generators, including
installation, and the cost of disposal of the old steam generators, is
approximately $13 million to $14 million. Subject to approval of the
Nuclear Regulatory Commission (NRC), PSE&G expects that it will return Unit
1 to service in late-1997.
On August 6, 1997, the NRC authorized the restart of Unit 2. PSE&G expects
to return Unit 2 to full power over the next several weeks. The NRC will
monitor Unit 2's ascension to full power, review the Unit's performance at
three hold points during the power ascension, and complete a final
performance assessment after approximately two months of full power
operations.
The Company incurs replacement power costs while the units are out of
service of approximately $750,000 per month, per unit. Such amounts vary
based on the cost and availability of other Company-owned generation and
the cost of purchased energy. Replacement power costs typically are not
incurred for routine refueling and maintenance outages, and the recovery of
replacement power costs is subject to approval by the regulatory
commissions having jurisdiction over the Company.
In June 1997, the Company reached a tentative settlement with the Delaware
Public Service Commission (DPSC) Staff and the Delaware Office of the
Public Advocate (OPA) regarding the ratemaking treatment of the Salem
replacement power costs. Under the terms of the tentative settlement,
approximately one-half of replacement power costs apportioned to the
Delaware jurisdiction will be disallowed for recovery through the fuel
adjustment rate. Through June 30, 1997, this disallowance amounts to
approximately $9.5 million which is equivalent to approximately $15.8
million on a total system basis.
Subsequent to June 30, 1997, an additional disallowance of $15,200 per day
for each unit ($25,000 per day for each unit on a system basis) will be
incurred under the terms of the tentative settlement in Delaware.
Also, the tentative settlement provides that the Company will retain the
first $4.8 million ($8.0 million on a system basis) of proceeds from the
lawsuit settlement with PSE&G, which is discussed below. The next $2.4
million ($4.0 million on a system basis) of lawsuit settlement proceeds
will benefit customers.
-6-
<PAGE>
On a system basis, from the start of the outage through March 31, 1997, the
Company had expensed approximately one-half of the replacement power costs
related to the Salem outage or a cumulative amount of $12.2 million. Based
on the dates the units are expected to return to service, amounts
previously expensed by the Company, the lawsuit settlement with PSE&G, and
the tentative settlement in Delaware, the Company does not expect future
earnings to be significantly impacted by the lawsuit settlement or
replacement power costs disallowed for ratemaking purposes.
As previously reported, in March 1996, the Company and PECO Energy Company
(PECO) filed a complaint in the United States District Court for the
Eastern District of Pennsylvania against Public Service Enterprise Group,
Inc. (Enterprise) and PSE&G seeking damages for breach of contract and
negligence respecting Salem operations. The suit asked for compensatory
damages for breach of contract and negligence and unspecified punitive
damages. On May 12, 1997, it was announced that PSE&G settled the suit
with the Company and PECO. Under the settlement, PSE&G will pay the
Company approximately $12 million on December 31, 1997, in settlement of
all claims related to the lawsuit.
Also under the settlement, PSE&G will be obligated to pay the Company
approximately $0.2 million for each reactor unit month that the outage
continues beyond an aggregate outage of 64 reactor unit months, up to a
maximum of approximately $2.5 million. The Salem station has been out of
service for approximately 53 reactor unit months, through July 31, 1997.
The parties to the settlement also agreed to operating performance
standards through December 31, 2011 for Salem, and similar standards
through December 31, 2007 for the Peach Bottom Atomic Power Station
operated by PECO. Under these standards, the Company is entitled to
receive payments from the nuclear plant operator as follows: (a) if the
three-year capacity factor determined annually falls below 40 percent but
is equal to or above 20 percent, the operator will pay the Company $1.5
million for each year that the historical capacity factor is below 40
percent; and (b) if the historical capacity factor is below 20 percent, the
operator will pay the Company $3.7 to $3.8 million for each such year. The
initial three-year period begins on January 1, 1998. If a Salem unit
returns to service after January 1, 1998, then the initial three-year
period for Salem would begin on the date the later of the two Salem units
returns to service.
The parties have further agreed to forego litigation in the future, except
for very limited cases in which the operator would be responsible for no
more than $5 million per year.
Environmental Matters
- ---------------------
The Company is subject to regulation with respect to the environmental
effects of its operations, including air and water quality control, solid
and hazardous waste disposal, and limitation on land use by various
federal, regional, state, and local authorities. The disposal of Company-
generated hazardous substances can result in costs to clean up facilities
found to be contaminated due to past disposal practices. Federal and state
statutes authorize governmental agencies to compel responsible parties to
clean up certain
-7-
<PAGE>
abandoned or uncontrolled hazardous waste sites. The Company is currently a
potentially responsible party (PRP) at three federal superfund sites and is
alleged to be a third-party contributor at three other federal superfund
sites. The Company also has two former coal gasification sites in Delaware
and one former coal gasification site in Maryland, each of which is a state
superfund site. There is $2 million included in the Company's current
liabilities as of December 31, 1996 and June 30, 1997 for clean-up and
other potential costs related to the federal and state superfund sites. The
Company does not expect such future costs to have a material effect on the
Company's financial position or results of operations.
For information concerning new clean air standards recently promulgated by
the United States Environmental Protection Agency, refer to Item 5 of Part
II.
Nuclear Insurance
- -----------------
In the event of an incident at any commercial nuclear power plant in the
United States, the Company could be assessed for a portion of any third-
party claims associated with the incident. 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), the Company could be
assessed up to $23.7 million 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 and Salem maintain property insurance
coverage in the aggregate amount of $2.8 billion for each unit for loss or
damage to the units, including coverage for decontamination expense and
premature decommissioning. The Company is self-insured, to the extent of
its ownership interest, for its share of property losses in excess of
insurance coverages. Under the terms of the various insurance agreements,
the Company could be assessed up to $3.7 million in any policy year for
losses incurred at nuclear plants insured by the insurance companies.
The Company 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. The premium for this coverage is subject
to retrospective assessment for adverse loss experience. The Company's
present maximum share of any assessment is $1.3 million per year.
Other
- -----
On February 6, 1997, a major customer of the Company filed a lawsuit in the
Delaware Superior Court alleging negligence and breach of contract against
the Company in relation to electric system outages that occurred on March
28, 1996 and May 14, 1996. The complaint asks for actual damages in excess
of $41 million and for special and punitive damages in unspecified amounts.
The Company believes that its insurance will cover any amounts awarded in
this lawsuit in excess of $1 million for each outage. There is $2 million
included in the Company's current liabilities as of December 31, 1996 and
June 30, 1997 for claims related to the outages. The Company cannot predict
the outcome of this lawsuit.
-8-
<PAGE>
4. Supplemental Cash Flow Information
----------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
CASH PAID FOR 1997 1996
------- ------
(Dollars in thousands)
<S> <C> <C>
Interest, net of amounts
capitalized $33,492 $32,923
Income taxes, net of refunds $30,623 $33,181
</TABLE>
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Earnings Summary
- ----------------
Earnings per share were $0.28 for the three months ended June 30, 1997
compared to $0.33 for the three months ended June 30, 1996. This $0.05 per
share earnings decrease was mainly due to higher capital costs and
anticipated increased operating costs associated with investments intended
to position the Company for competition in a deregulated energy market.
Earnings per share were $0.68 for the six months ended June 30, 1997
compared to $0.87 for the six months ended June 30, 1996. This $0.19 per
share earnings decrease was primarily due to the milder winter weather in
the first quarter which lowered sales to residential customers and
decreased electric and gas revenues, net of fuel costs. Earnings for the
current six-month period were also unfavorably impacted by higher capital
costs and increased operating costs associated with investments intended to
position the Company for competition in a deregulated energy market.
Lower costs for the outages of the two nuclear generating units at Salem
mitigated the three-month earnings decrease by approximately $0.02 per
share and the six-month earnings decrease by approximately $0.07 per share.
Although the Salem outage costs were lower in the current year reporting
periods, the Salem outages decreased earnings per share by approximately
$0.02 for the three months ended June 30, 1997 and by approximately $0.05
for the six months ended June 30, 1997.
As discussed in Note 3 to the Consolidated Financial Statements, on May 12,
1997, the Company settled a joint lawsuit filed against PSE&G relating to
the Salem outages for approximately $12 million and additional compensation
under certain conditions. In June 1997, the Company reached a tentative
settlement in Delaware concerning the ratemaking treatment of the Salem
replacement power costs and the lawsuit settlement proceeds. Based on the
dates the units are expected to return to service, amounts previously
expensed by the Company, the lawsuit settlement with PSE&G, and the
tentative settlement in Delaware, the Company does not expect future
earnings to be significantly impacted by the lawsuit settlement or
replacement power costs disallowed for ratemaking purposes.
Industry Change and Investment
- ------------------------------
Over the next five years, the Company's objective is to grow total
shareholder return (dividend plus stock price) to a level that will place
the Company in the top quartile of its industry. The Company believes that
by offering a portfolio of new, related businesses, such as
telecommunications and HVAC (heating, ventilation, and air conditioning),
along with electric and natural gas service, it can meet its objective for
growing shareholder value. This portfolio approach will require the Company
to apply its resources to the businesses that have the greatest potential
for the highest return.
-10-
<PAGE>
With the electric industry in the early stages of deregulation, the Company
has an opportunity to be a prominent regional player by being first into
new markets that complement its utility business and by enhancing its
ability to serve additional customers outside its traditional borders. To
achieve this position, the Company has been making increased investments
in:
(1) Marketing/branding programs to inform people throughout the Mid-
Atlantic region about the Company and how it can make their homes and
businesses run better.
(2) New businesses to begin offering more products and services that will
enable the Company to expand existing relationships with customers and
establish new ones.
(3) Infrastructure systems to better manage the portfolio of businesses.
As a result of these investments, the Company anticipates 1997 and 1998
earnings per share to be lower than results for the past two years. Beyond
1998, the Company expects that its investments will yield new revenues that
will result in earnings growth, which will exceed the industry average.
The Company believes that it will be successful with these new business
investments for several reasons:
(1) The target Mid-Atlantic regional market is very attractive in terms of
size, location, and customer attributes.
(2) The Company's assets, which include low-cost energy supply and a modern
reliable delivery system, have the potential for attractive returns.
(3) The Company's strategy, based on providing a broad array of energy-
related products and services, is sound.
(4) Through new hires and new systems, the Company has the breadth of
management expertise and effective tools to manage its business in a
competitive marketplace.
A holding company named Conectiv will own Delmarva Power & Light Company
(Delmarva) and Atlantic Energy, Inc. (Atlantic) upon consummation of the
pending merger as previously reported in Note 4 to the Consolidated
Financial Statements of Delmarva's 1996 Annual Stockholders' Report. On
June 30, 1997, Delmarva launched a campaign to introduce its new Conectiv
brand. The campaign, which runs to the end of 1997, will also introduce
customers to Conectiv products and services. In order to reach the largest
audience in the most cost-efficient manner, the campaign focuses on the
Philadelphia area media market with a mixture of television, radio,
newspaper, and billboard advertising.
-11-
<PAGE>
Electric Revenues
- -----------------
Details of the changes in the various components of electric revenues for
the three- and six-month periods ended June 30, 1997, as compared to the
same periods in 1996, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Six
Months Months
------- -------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ 2.2 $(7.3)
Fuel Revenues 9.1 18.3
Interchange Delivery Revenues (12.5) (9.9)
Merchant Revenues 18.2 30.3
------- -------
Total $17.0 $31.4
======= =======
</TABLE>
Electric non-fuel revenues increased $2.2 million for the three-month
period mainly due to increased revenues from transmission wheeling and
ancillary transmission and distribution services. Electric non-fuel
revenues decreased $7.3 million for the six-month period primarily due to a
9% decrease in residential electric kilowatt-hour (kWh) sales attributed to
milder winter weather in the first quarter. This weather-related sales
revenue decrease was partially offset by additional sales revenues from a
1.3% increase in the average number of electric customers and additional
revenues from transmission wheeling and ancillary transmission and
distribution services.
Electric fuel revenues increased $9.1 million and $18.3 million for the
three- and six-month periods, respectively, due to higher retail electric
fuel rates. Fuel revenues, or electric fuel costs billed to customers,
generally do not affect net income, since the expense recognized as fuel
costs is adjusted to match the fuel revenues. The amount of under- or
over-recovered fuel costs is deferred until it is subsequently recovered
from or returned to utility customers.
Interchange delivery revenues decreased $12.5 million and $9.9 million for
the three- and six-month periods, respectively, mainly due to lower output
available for sale to the Pennsylvania-New Jersey-Maryland Interconnection
(PJM Interconnection). Interchange delivery revenues reduce the rates
charged to customers under fuel adjustment clauses and, thus, generally do
not affect net income.
Electric merchant revenues, which are not subject to price regulation,
increased $18.2 million and $30.3 million for the three- and six-month
periods, respectively, due to efforts of the Company's new merchant group
to sell power in competitive markets. The margin provided by electric
merchant revenues in excess of related energy costs is relatively small due
to the competitive nature of bulk commodity sales.
-12-
<PAGE>
Gas Revenues
- ------------
Details of the changes in the various components of gas revenues for the
three- and six-month periods ended June 30, 1997, as compared to the same
periods in 1996, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Six
Months Months
------ ------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ - $(2.0)
Fuel Revenues 2.4 7.7
Merchant Revenues 7.3 14.4
------ ------
Total $9.7 $20.1
====== ======
</TABLE>
Gas non-fuel revenues decreased $2.0 million for the six-month period
primarily due to a 12.5% decline in residential gas sales which resulted
from milder winter weather in the first quarter. This weather-related
sales revenue decrease was partly offset by additional sales revenues from
a 2.5% increase in the average number of gas customers.
Gas fuel revenues increased $2.4 million and $7.7 million for the three-
and six-month periods, respectively, due to higher fuel rates.
Gas merchant revenues increased $7.3 million and $14.4 million for the
three- and six-month periods, respectively, primarily due to higher off-
system gas sales. Gas merchant revenues also include fees earned for
release of pipeline capacity and other services. Through June 30, 1997,
most of the gas merchant revenues were subject to certain tariff provisions
which reduce fuel rates for firm gas customers by 80% of the margin
(revenues net of fuel costs) earned from such sales.
Other Services Revenues
- -----------------------
Total revenues from "Other services" (as discussed in Note 1 to the
Consolidated Financial Statements) increased from $15.8 million to $32.3
million for the three-month period, and from $30.6 million to $59.7 million
for the six-month period. These revenue increases were principally due to
acquisitions in late-1996 and the first quarter of 1997 of companies which
provide HVAC and plumbing services. The acquired companies are part of
Conectiv Services, Inc., a subsidiary named after Conectiv (the holding
company which will own Delmarva and Atlantic upon consummation of the
merger). The companies acquired by Conectiv Services, Inc. are located in
Delaware, Maryland, and Pennsylvania. The Company expects that the
services marketed by Conectiv Services, Inc. will help build customer
relationships and brand recognition, leading customers to choose the
Company as their energy supplier when such choice is available.
As discussed under "Additional Regulatory Matters" in Item 5 of Part II,
certain interested trade groups backed legislation introduced in Delaware
which would have prohibited the Company from actively engaging in HVAC and
certain other activities. As a result of negotiation between the Company,
interested trade groups, and legislators, joint resolutions were passed by
the General Assembly. These joint resolutions bar the
-13-
<PAGE>
Company from acquiring any new energy-related service business in Delaware,
but not in other states, until the Delaware Public Service Commission
submits its findings (expected in January 1998) concerning cross-
subsidization and similar issues, after review of the Company's Cost
Accounting Manual and Code of Conduct.
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Electric fuel and purchased energy expenses increased $14.0 million and
$35.1 million for the three- and six-month periods, respectively, mainly
due to greater volumes of energy purchased for resale off-system and an
increase in deferred fuel expense to offset higher fuel revenues.
Incremental fuel-related costs associated with the Salem outages which were
expensed decreased by $1.1 million and $2.9 million for the three- and six-
month periods, respectively.
The kWh output required to serve load within the Company's service
territory is substantially equivalent to total output less interchange
deliveries. For the six months ended June 30, 1997, the Company's output
for load within its service territory was provided by 36% coal generation,
30% net purchased power, 24% oil and gas generation, and 10% nuclear
generation.
Gas Purchased
- -------------
Gas purchased increased $9.6 million for the three-month period primarily
due to larger volumes of gas purchased for resale off-system, partially
offset by lower average prices. For the six-month period, gas purchased
increased $21.6 million primarily due to larger volumes of gas purchased
for resale off-system and also due to variances in energy costs deferred
and subsequently expensed under the gas fuel adjustment clause.
Operation, Maintenance and Depreciation Expenses
- ------------------------------------------------
Operation and maintenance expenses increased $18.9 million and $35.3
million for the three- and six-month periods, respectively, primarily due
to the cost of sales and other operating expenses of acquired HVAC
companies (which are discussed under "Other Services Revenues").
Advertising costs to establish the Conectiv brand name and start-up costs
related to the Company's plans to provide retail phone service and sell
energy in deregulated retail markets also contributed to the operation and
maintenance expense increase. (Refer to "Industry Change and Investment"
for additional information concerning these types of expenses.) Expenses
related to the Salem outage decreased by $0.7 million and $3.5 million for
the three- and six-month periods, respectively.
Depreciation expense increased $1.8 million and $4.2 million due to
completion of on-going construction projects and installation of new
systems. The new systems support the Company's business unit management
information needs and have also substantially resolved the "year 2000"
problem.
-14-
<PAGE>
On June 26, 1997, the Company and Atlantic announced that an enhanced
retirement offer (ERO) and other employee separation programs are expected
to be utilized to achieve workforce reductions concurrent with the merger
of the two companies. The ERO and other employee separation programs are
contingent on consummation of the merger. Employee separation costs related
to Delmarva's employees and employee retraining costs will be expensed and
are estimated to be approximately $30 million to $35 million before taxes
($18 million to $21 million after taxes). The actual cost of Delmarva's
employee separation plans may vary from the estimate above depending on the
number of employees who choose the ERO. Employee separation and relocation
costs related to Atlantic's employees are expected to be included in the
acquisition cost of the merged company.
Financing Costs
- ---------------
Financing costs reflected in the consolidated income statement include
interest charges, allowance for funds used during construction (AFUDC),
dividends on preferred securities of a subsidiary trust, and dividends on
preferred stock. Financing costs increased $2.7 million ($1.2 million
after income taxes) and $4.7 million ($2.0 million after income taxes) for
the three- and six-month periods, respectively, mainly due to higher
interest charges from the issuance of $124.2 million of Medium-Term Notes
in February 1997 and higher miscellaneous interest expenses. The higher
interest charges were partly offset by savings after income taxes of $0.5
million and $0.9 million for the three- and six-month periods,
respectively, from the refinancing of $78.4 million of preferred stock in
late-1996.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities increased from $99.0 million for
the six months ended June 30, 1996 to $115.6 million for the six months
ended June 30, 1997, primarily due to higher fuel revenues, net of related
fuel costs.
Capital and acquisition expenditures for the six-month periods increased
from $64.8 million to $92.9 million principally due to expenditures for
the acquisition of HVAC service companies and construction of
telecommunication assets. The telecommunication assets under construction
include a network operations center and a five-mile fiber optic ring that
will be accessible to 35 of the largest office buildings in the City of
Wilmington, Delaware. In addition, the Company has installed a 50,000
line telephone switch and fiber optic ring connecting the new City of
Wilmington ring and the network operations center. The HVAC and
telecommunication expenditures are classified as "nonutility property,
net" on the consolidated balance sheet.
In February 1997, the Company issued $124.2 million of unsecured Medium-
Term Notes with maturities of 10 to 30 years and interest rates of 7.06%
to 7.72%. The proceeds were used to refinance short-term debt. The
Consolidated Statements of Cash Flows show a $101.8 million decrease in
short-term debt for the six months ended June 30, 1997, which reflects the
$124.2 million decrease from the refinancing, partly offset by a $22.4
-15-
<PAGE>
million increase due to interim financing requirements. On the
consolidated balance sheet as of December 31, 1996, $77.0 million of
short-term debt was reclassified to long-term debt in order to recognize
the amount of short-term debt which had been refinanced with Medium-Term
Notes by February 7, 1997. Thus, balances as of June 30, 1997 compared to
balances as of December 31, 1996 reflect a $47.2 million increase in long-
term debt and a like decrease in short-term debt for the portion of the
refinancing which occurred after February 7, 1997.
Long-term debt due within one year increased from $27.7 million as of
December 31, 1996 to $52.8 million as of June 30, 1997, primarily due to
the scheduled maturity on June 24, 1998 of $25.0 million of 5.69%, Medium-
Term Notes.
During the first six months of 1997, the Company raised $12.1 million by
issuing shares of common stock through the Dividend Reinvestment and
Common Share Purchase Plan (DRIP). In contrast, the Company did not raise
cash through the DRIP during the first six months of 1996 since shares
were purchased in the open market to satisfy the plan's needs.
A shelf registration for $250 million of securities filed by the Company
with the Securities and Exchange Commission (SEC) became effective May 12,
1997. The shelf registration is for the issuance of up to $250 million,
in the aggregate, of common stock, preferred stock, Medium-Term Notes, and
First Mortgage Bonds. The proceeds primarily will be used for financing
the capital requirements of the Company, including capital and acquisition
expenditures, and refinancing or redeeming the Company's outstanding long-
and short-term securities.
Ratio of Earnings to Fixed Charges
- ----------------------------------
<TABLE>
<CAPTION>
The Company's ratios of earnings to fixed charges and earnings to fixed
charges and preferred stock dividends under the SEC Method are shown
below:
12 Months
Ended
June 30, Year Ended December 31,
--------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges 2.91 3.33 3.54 3.49 3.47 3.03
Fixed Charges, as Adjusted (1) - - - 3.74 - 2.78
Fixed Charges and Preferred
Stock Dividends 2.60 2.83 2.92 2.85 2.88 2.51
Fixed Charges and Preferred
Stock Dividends, as Adjusted (1) - - - 3.05 - 2.30
</TABLE>
(1) Adjusted ratios reflect the following pre-tax amounts: for 1994, the
exclusion of an early retirement offer charge of $17.5 million; and for
1992, the exclusion of the gain from the Company's share of the settlement
reached in a lawsuit of $18.5 million.
-16-
<PAGE>
Under the SEC Method, earnings, including AFUDC, have been computed by
adding income taxes and fixed charges to net income. Fixed charges
include gross interest expense, the estimated interest component of
rentals, and dividends on preferred securities of a subsidiary trust. For
the ratio of earnings to fixed charges and preferred stock dividends,
preferred stock dividends represent annualized preferred stock dividend
requirements multiplied by the ratio that pre-tax income bears to net
income.
Accounting for Deregulation of Utilities
- ----------------------------------------
The following discussion updates information previously disclosed under
the caption "Competition and the Changing Regulatory Environment" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1996 Annual Stockholders' Report.
Prices charged to electric utility customers have historically been a
"bundled" price which includes the electricity production cost and the
delivery cost (transmission and distribution). Various state regulatory
commissions and legislatures, as well as federal legislators, are
considering or have approved changes to laws and regulations governing the
pricing of electricity. These changes would generally deregulate the
component of the price charged to a customer for the production of
electricity. Under existing plans, the transmission and distribution of
electricity would continue to be regulated. In light of these industry
developments, issues have arisen concerning the application of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS No. 71).
The Emerging Issues Task Force (EITF), which evaluates accounting issues
under the direction of the Financial Accounting Standards Board (FASB),
was asked to consider certain accounting issues related to deregulation of
electricity production and continued application of SFAS No. 71. At a
meeting held in July 1997, the EITF tentatively concluded that a utility
should cease to apply SFAS No. 71 for the electricity production portion
of its business no later than the date that a specific deregulation plan
is enacted. Stranded costs and regulatory assets attributed to
electricity production could continue to be recognized to the extent that
a transition plan provides for their recovery through cash flows from the
regulated transmission and distribution business.
Although the Company is conferring with its state regulators concerning
deregulation of the electric utility industry, such a plan does not
currently exist in Delaware, Maryland or Virginia (the states which have
jurisdiction over the Company's retail electric utility business). For
updated information concerning the status of restructuring the electric
utility business in Delaware and Maryland, refer to Part II, Item 5.
-17-
<PAGE>
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (Litigation Reform
Act) provides a "safe harbor" for forward-looking statements to encourage
such disclosures without the threat of litigation, provided those
statements are identified as forward-looking and are accompanied by
meaningful, cautionary statements identifying important factors that could
cause the actual results to differ materially from those projected in the
statement. Forward-looking statements have been made in this report.
Such statements are based on management's beliefs as well as assumptions
made by and information currently available to management. When used
herein, the words "will," "anticipate," "estimate," "expect," "objective,"
and similar expressions are intended to identify forward-looking
statements. In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, factors
that could cause actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following: deregulation and the unbundling of energy supplies and
services; an increasingly competitive energy marketplace; sales retention
and growth; federal and state regulatory actions; 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. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. The foregoing
review of factors pursuant to the Litigation Reform Act should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the
Litigation Reform Act.
-18-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- -------------------------
Refer to "Salem Nuclear Generating Station" in Note 3 to the Consolidated
Financial Statements for updated information concerning the Company's
lawsuit against Public Service Enterprise Group, Inc. and PSE&G.
Refer to "Other" in Note 3 to the Consolidated Financial Statements for
information concerning a lawsuit filed against the Company by a major
customer.
Item 5. Other Information
- -------------------------
Delmarva / Atlantic Merger Filings
- ----------------------------------
The following disclosure updates information previously reported under the
caption of "The Company/Atlantic Merger Filings" on page I-15 of the
Company's 1996 10-K.
On November 27, 1996, Delmarva and Atlantic filed their merger application
at the Federal Energy Regulatory Commission (FERC). On March 3, 1997, the
companies made supplemental filings pursuant to revised merger guidelines
issued by the FERC in December 1996. On July 30, 1997, the FERC issued an
order which approved the merger and the Company's proposed accounting for
the merger, including the purchase method of accounting.
On February 24, 1997, the companies filed merger applications with the
Delaware Public Service Commission (DPSC) and the New Jersey Board of
Public Utilities (NJBPU). Merger applications were also filed on February
25, 1997 and April 18, 1997 with the Virginia State Corporation Commission
(VSCC) and the Maryland Public Service Commission (MPSC), respectively.
In Maryland, the MPSC approved the merger on July 16, 1997. Under the
Maryland settlement, the Company will share a portion of cost savings
expected to result from the merger by reducing Maryland retail electric
base rates by $3.5 million, approximately one percent, effective the
closing date of the merger. In addition, the Company will contribute
$340,000 per year to certain economic development and societal programs in
Maryland for three years.
In Virginia, the VSCC approved the merger on August 6, 1997. Under the
Virginia settlement, the Company will share a portion of cost savings
expected to result from the merger by reducing Virginia retail electric
base rates by $0.4 million, approximately 1.5%, effective the closing date
of the merger.
In Delaware, hearings and briefings have been completed. The Hearing
Examiner is scheduled to issue a report on August 25, 1997, and the DPSC is
expected to make its decision on September 9, 1997.
-19-
<PAGE>
In New Jersey, hearings on the companies' direct case have been completed,
and the companies anticipate the NJBPU will issue its final order by year-
end.
On March 24, 1997, an application seeking approval of the merger was filed
with the Pennsylvania Public Utility Commission. On April 30, 1997, an
application seeking the consent of the Nuclear Regulatory Commission for
the indirect transfer of control of Atlantic's interest in the operating
license of the Hope Creek Nuclear Generating Station was filed. On July 2,
1997, the Company filed a Form U-1 with the SEC for approval of the merger
and the holding company system structure under the Public Utility Holding
Company Act of 1935. The Company expects to obtain approval of these
applications by year-end.
Electric Industry Restructuring--Delaware
- -----------------------------------------
In response to House Resolution No. 36 (passed June 30, 1997), the DPSC
opened a new docket on July 15, 1997 to address issues surrounding the
restructuring of the electric industry within Delaware and to provide the
House of Representatives a report containing a recommendation and other
possible alternative approaches by January 31, 1998. On August 8, 1997,
the DPSC Staff issued a draft report. There will be a period for comments,
public hearings, and reply comments before the Staff submits a final draft
report to the Commission later this year. The DPSC will then issue a Final
Report, with alternatives, to the House of Representatives. The Company
will support the DPSC in this process and believes the discussions and
information gathered since February 1996 under the Collaborative for
Customer Choice will aid the DPSC and the Delaware General Assembly.
Electric Industry Restructuring--Maryland
- -----------------------------------------
The MPSC Staff submitted its Report to the MPSC on May 30, 1997. The Staff
proposes that investor-owned utility customers should be able to choose
their electric suppliers by April 2001. The proposal calls for utilities
to unbundle rates by April 1998. It also proposes to implement a prototype
program that will phase in customer choice. Enrollment would begin in
December 1998, with service commencing in April 1999. Ten percent of each
customer class' load would be eligible the first year, 20% the second year,
and 100% by 2001. Roundtable discussions will be organized and chaired by
the MPSC Staff to address issues relating to the implementation of retail
access programs. The Company filed comments on the Staff's report in June
1997 and the Commission will conduct hearings in mid-August 1997. The
Company's primary concern relates to Staff's recommendation to retain a
"regulated supply option" within a competitive market operation.
FERC PJM Interconnection Filing
- -------------------------------
On April 1, 1997, the PJM Interconnection, as agent for the PJM
Interconnection transmission owners, began providing service under the PJM
Interconnection Open Access Transmission Tariff. On April 1, 1997, another
filing was made to further modify the PJM
-20-
<PAGE>
Interconnection Agreement, converting it into an Operating Agreement for a
limited liability company (PJM Interconnection, L.L.C.) in order to permit
an independent board of directors to exercise oversight over the day-to-day
operations of the PJM Interconnection Pool. On June 2, 1997, seven of the
eight regional transmission owners, all of whom are members of the PJM
Interconnection, including the Company, (Supporting Companies) submitted a
filing to the FERC. This filing builds on the December 31, 1996 and April
1, 1997 filings, making only those additional changes necessary to
accomplish the following objectives: (1) Establish an Independent System
Operator that satisfies the FERC's principles; (2) Preserve reliability
compatible with retail choice; (3) Clarify and improve the implementation
of locational marginal pricing; and (4) Implement "up to" rates for non-
firm, point-to-point transmission services. On June 9, 1997, PECO Energy
Company and others filed a separate and directly competing proposal for
restructuring the PJM Interconnection. On June 19, 1997, the Coalition for
a Competitive Electric Market filed an additional proposal for pricing
transmission services and transmission congestion. On July 14, 1997, the
PJM Interconnection, on behalf of the eight regional transmission owners,
submitted revisions to the PJM Interconnection Tariff to comply with the
requirements of FERC Order No. 888-A. Also, on July 14, 1997, the
Supporting Companies submitted a request to the FERC for authorization to
make market-based offers for sales though the PJM Interconnection
Interchange Energy Market.
Additional Regulatory Matters
- -----------------------------
On May 8, 1997, the MPSC established a procedural schedule for the quasi-
legislative procedures to consider affiliated transactions and affiliate
standards of conduct of gas and electric utilities. Initial comments were
filed by all parties on July 17, 1997. Reply comments and legislative-type
hearings are scheduled for October 1997. The Company has filed a Cost
Accounting Manual (CAM) and Code of Conduct (Code) with the Delaware Public
Service Commission and attached its CAM and Code to its comments filed in
Maryland on July 17, 1997. The Company believes that its CAM and Code
protects trade competitors against any unfair competitive advantages that
the Company may be perceived to have as a result of its regulated utility
operations.
As previously reported, the Company was actively opposing legislation
introduced in the Delaware General Assembly in 1997 which would bar the
Company (and any affiliate) from controlling, acquiring control or
continuing to control any "Unregulated Energy Services Subsidiary," defined
to include heating, ventilation and air conditioning (HVAC) installation
and maintenance, certain electrical connection services, plumbing,
pipefitting, propane sales, petroleum sales, mechanical contracting and
appliance sales and service. Under the proposed legislation, while the
Company would have been permitted to own or hold voting securities or other
equity interests, it would not have been permitted to perform management
services under contract with a subsidiary or share resources, employees,
overhead, administrative or support costs. As a result of negotiation
between the Company, interested trade groups, and legislators, joint
resolutions were passed by the General Assembly. These joint resolutions
require that, during the pendency of the case before the DPSC for the
review and approval of Delmarva's CAM and Code, Delmarva will: (1) operate
under the CAM and Code as filed; (2) not acquire any new energy services
businesses in Delaware, nor increase the number of Delaware employees
working for energy services businesses beyond a certain number; (3) allow
the DPSC to examine the
-21-
<PAGE>
books and records of the Company's affiliates; and (4) give 20 days notice
prior to completing any acquisitions of new affiliates in excess of
$50,000. The legislation directs the DPSC to complete its review of the
CAM and Code on or before February 1, 1998.
Pine Grove Landfill, Inc.
- -------------------------
One of the Company's indirect subsidiaries, Pine Grove Landfill, Inc.,
which owns and operates a solid waste disposal facility in Pennsylvania,
recently received approval of its landfill expansion application from the
Pennsylvania Department of Environmental Protection. This approval gives
the landfill sufficient additional capacity to continue in operation for
several years.
New Clean Air Standards
- -----------------------
On July 16, 1997, the United States Environmental Protection Agency
promulgated final regulations which would amend the National Ambient Air
Quality Standards by introducing standards for fine particulate matter and
creating new ozone standards. Existing sources that cause or contribute to
nonattainment regions will likely be subject to additional regulatory
requirements, including possible emission reductions. New sources wanting
to build facilities in nonattainment areas may also be subject to
additional control requirements and may be required to offset their
emissions. Because power plants emit certain air pollutants that could
contribute to the formation of ambient ozone and fine particulate matter,
there is a possibility that existing Company sources will be required to be
retrofitted with additional air pollution controls in the future.
Congressional intervention and/or litigation regarding the standards are
probable. Due to these uncertainties, it is not presently possible to
predict the potential impacts associated with implementation of these
standards on the Company's facilities.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibits
- --------
Exhibit 12-A, Computation of Ratio of Earnings to Fixed Charges
Exhibit 12-B, Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the second quarter of 1997.
On July 2, 1997, the Company filed an 8-K concerning a review of business
strategy and the impact of growth initiatives on earnings.
-22-
<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.
Delmarva Power & Light Company
------------------------------
(Registrant)
Date: August 12, 1997 /s/ B. S. Graham
--------------- -----------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-23-
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Number
------- ------
Computation of ratio of earnings to fixed charges 12-A 25
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 26
Financial Data Schedule 27 27
-24-
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months
Ended
June 30, Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $102,509 $116,187 $117,488 $108,310 $111,076 $98,526
-------- -------- -------- -------- -------- --------
Income taxes 71,367 78,340 75,540 67,613 67,102 54,834
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 73,547 69,329 65,572 61,128 62,651 66,976
Other interest 13,233 12,516 10,353 9,336 9,245 8,449
Preferred dividend require-
ments of a subsidiary
trust 4,234 1,390 - - - -
-------- -------- -------- -------- -------- --------
Total fixed charges 91,014 83,235 75,925 70,464 71,896 75,425
-------- -------- -------- -------- -------- --------
Nonutility capitalized interest (311) (311) (304) (256) (246) (231)
-------- -------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $264,579 $277,451 $268,649 $246,131 $249,828 $228,554
======== ======== ======== ======== ======== =========
Ratio of earnings to fixed charge 2.91 3.33 3.54 3.49 3.47 3.03
</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, dividends on preferred securities of
a subsidiary trust, plus the interest factor associated with the Company's
major leases, and one-third of the remaining annual rentals.
-25-
<PAGE>
Exhibit 12-B
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges and Preferred Dividends
----------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months
Ended
June 30, Year Ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $102,509 $116,187 $117,488 $108,310 $111,076 $98,526
--------- -------- -------- -------- -------- --------
Income taxes 71,367 78,340 75,540 67,613 67,102 54,834
--------- -------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 73,547 69,329 65,572 61,128 62,651 66,976
Other interest 13,233 12,516 10,353 9,336 9,245 8,449
Preferred dividend require-
ments of a subsidiary
trust 4,234 1,390 - - - -
--------- -------- -------- -------- -------- --------
Total fixed charges 91,014 83,235 75,925 70,464 71,896 75,425
--------- -------- -------- --------- -------- --------
Nonutility capitalized interest (311) (311) (304) (256) (246) (231)
--------- -------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $264,579 $277,451 $268,649 $246,131 $249,828 $228,554
========= ======== ======== ======== ======== ========
Fixed charges $91,014 $83,235 $75,925 $70,464 $71,896 $75,425
--------- -------- -------- -------- -------- --------
Preferred dividend requirements 10,808 14,961 16,185 15,948 14,803 15,785
--------- -------- -------- -------- -------- --------
$101,822 $98,196 $92,110 $86,412 $86,699 $91,210
========= ======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividends 2.60 2.83 2.92 2.85 2.88 2.51
</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, dividends on preferred securities of
a subsidiary trust, plus the interest factor associated with the Company's
major leases, and one-third of the remaining annual rentals. Preferred
dividend requirements represent annualized preferred dividend requirements
multiplied by the ratio that pre-tax income bears to net income.
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME
FROM THE COMPANY'S 2ND QUARTER 1997 FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2103225
<OTHER-PROPERTY-AND-INVEST> 177453
<TOTAL-CURRENT-ASSETS> 300083
<TOTAL-DEFERRED-CHARGES> 262522
<OTHER-ASSETS> 148523
<TOTAL-ASSETS> 2991806
<COMMON> 138399
<CAPITAL-SURPLUS-PAID-IN> 520572
<RETAINED-EARNINGS> 288125
<TOTAL-COMMON-STOCKHOLDERS-EQ> 942322
70000
89703
<LONG-TERM-DEBT-NET> 923710
<SHORT-TERM-NOTES> 49533
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 52792
0
<CAPITAL-LEASE-OBLIGATIONS> 18819
<LEASES-CURRENT> 12708
<OTHER-ITEMS-CAPITAL-AND-LIAB> 832219
<TOT-CAPITALIZATION-AND-LIAB> 2991806
<GROSS-OPERATING-REVENUE> 657047
<INCOME-TAX-EXPENSE> 31589
<OTHER-OPERATING-EXPENSES> 542521
<TOTAL-OPERATING-EXPENSES> 574110
<OPERATING-INCOME-LOSS> 82937
<OTHER-INCOME-NET> 2979
<INCOME-BEFORE-INTEREST-EXPEN> 85916
<TOTAL-INTEREST-EXPENSE> 42126
<NET-INCOME> 43790
2299
<EARNINGS-AVAILABLE-FOR-COMM> 41491
<COMMON-STOCK-DIVIDENDS> 46968
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 115638
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
