<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark one]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 302-429-3114
------------
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.
Conectiv owns all of the 1,000 outstanding shares of Common Stock, $2.25 par
value, of Delmarva Power & Light Company
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Consolidated Statements of Income for the three
and nine months ended September 30, 1998 and 1997 1
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Common
Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Part II. Other Information and Signature 19-24
</TABLE>
i
<PAGE>
Part I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ---------------------------
1998 1997 1998 1997
------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 500,508 $ 332,391 $ 1,066,060 $ 841,362
Gas 93,456 39,315 282,049 127,731
Other services 4,924 28,796 29,341 88,456
------------ ---------- ------------ -------------
598,888 400,502 1,377,450 1,057,549
------------ ---------- ------------ -------------
OPERATING EXPENSES
Electric fuel and purchased energy 272,844 128,411 514,593 317,351
Gas purchased 87,590 32,246 248,761 90,430
Purchased electric capacity 8,295 6,980 22,786 20,936
Employee separation and other merger-related costs 728 - 26,788 -
Other services cost of sales 3,460 20,559 20,601 63,574
Operation and maintenance 54,154 82,584 195,564 235,537
Depreciation 32,556 34,291 99,266 101,807
Taxes other than income taxes 10,185 9,922 28,589 27,879
------------ ---------- ------------ -------------
469,812 314,993 1,156,948 857,514
------------ ---------- ------------ -------------
OPERATING INCOME 129,076 85,509 220,502 200,035
------------ ---------- ------------ -------------
OTHER INCOME
Allowance for equity funds used
during construction 685 - 1,600 -
Other income 1,326 2,021 527 5,000
------------ ---------- ------------ -------------
2,011 2,021 2,127 5,000
------------ ---------- ------------ -------------
INTEREST EXPENSE
Interest charges 20,574 20,932 62,570 62,450
Allowance for borrowed funds used during
construction and capitalized interest (493) (791) (1,575) (3,027)
------------ ---------- ------------ -------------
20,081 20,141 60,995 59,423
------------ ---------- ------------ -------------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 1,422 4,266 4,266
------------ ---------- ------------ -------------
INCOME BEFORE INCOME TAXES 109,584 65,967 157,368 141,346
INCOME TAXES 42,847 26,556 62,412 58,145
------------ ---------- ------------ -------------
NET INCOME 66,737 39,411 94,956 83,201
DIVIDENDS ON PREFERRED STOCK 1,087 1,092 3,259 3,391
------------ ---------- ------------ -------------
EARNINGS APPLICABLE TO COMMON STOCK $ 65,650 $ 38,319 $ 91,697 $ 79,810
============ ========== ============ =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-1-
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
-------
CURRENT ASSETS
Cash and cash equivalents $ 5,343 $ 35,339
Accounts receivable 206,331 197,561
Accounts receivable from associated companies 20,514 -
Intercompany loan receivable 27,936 -
Inventories, at average costs
Fuel (coal, oil and gas ) 39,465 37,425
Materials and supplies 38,603 40,518
Prepayments 9,944 11,255
Deferred energy costs - 18,017
Deferred income taxes, net 9,473 776
------------- ------------
357,609 340,891
------------- ------------
INVESTMENTS
Investment in leveraged leases - 46,375
Funds held by trustee 52,949 48,086
Other investments 85 9,500
------------- ------------
53,034 103,961
------------- ------------
PROPERTY, PLANT AND EQUIPMENT
Electric utility plant 3,047,571 3,010,060
Gas utility plant 248,889 241,580
Common utility plant 156,964 154,791
------------- ------------
3,453,424 3,406,431
Less : Accumulated depreciation 1,459,160 1,373,676
------------- ------------
Net utility plant in service 1,994,264 2,032,755
Utility construction work-in-progress 102,815 93,017
Leased nuclear fuel, at amortized cost 29,614 31,031
Nonutility property, net 4,378 74,811
Goodwill, net 72,407 92,602
------------- ------------
2,203,478 2,324,216
------------- ------------
DEFERRED CHARGES AND OTHER ASSETS
Prepaid employee benefits costs 80,664 58,111
Unamortized debt expense 12,318 12,911
Deferred debt refinancing costs 16,811 18,760
Deferred recoverable income taxes 83,357 88,683
Other 44,097 67,948
------------- ------------
237,247 246,413
------------- ------------
TOTAL ASSETS $ 2,851,368 $ 3,015,481
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
Current Liabilities
Short-term debt $ - $ 23,254
Long-term debt due within one year 37,287 33,318
Variable rate demand bonds 71,500 71,500
Accounts payable 95,862 103,607
Taxes accrued 55,068 10,723
Interest accrued 16,189 19,902
Dividends payable 23,706 23,775
Current capital lease obligation 12,478 12,516
Deferred energy costs 1,379 -
Accrued employee separation and
other merger related costs 3,433 -
Other 24,498 35,819
----------- -----------
341,400 334,414
----------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes, net 455,960 492,792
Deferred investment tax credits 38,022 39,942
Long term capital lease obligation 18,313 19,877
Other 27,223 30,585
----------- -----------
539,518 583,196
----------- -----------
Capitalization
Common stock, $2.25 par value; shares authorized:
1998 - 1,000,000, 1997 - 90,000,000
Shares outstanding: 1998 - 1,000, 1997- 61,210,262 2 139,116
Additional paid-in-capital 528,893 526,812
Retained earnings 329,888 300,757
----------- -----------
858,783 966,685
Treasury shares, at cost:
1997-619,237 - (11,687)
Unearned compensation - (502)
----------- -----------
Total common stockholders' equity 858,783 954,496
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 951,964 983,672
----------- -----------
1,970,450 2,097,871
----------- -----------
Total Capitalization and Liabilities $ 2,851,368 $ 3,015,481
=========== ===========
</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>
Nine Months Ended
September 30
--------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 94,956 $ 83,201
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 106,614 106,269
Allowance for equity funds used during construction (1,600) -
Deferred income taxes, net 2,398 3,338
Investment tax credit adjustments, net (1,920) (1,919)
Net change in:
Accounts receivable (25,310) (33,771)
Inventories (1,336) (123)
Accounts payable (4,087) (2,614)
Other current assets & liabilities (1) 71,719 35,559
Other, net (18,519) (7,631)
---------------- ---------------
Net cash provided by operating activities 222,915 182,309
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Intercompany loan receivable (27,936) -
Acquisition of businesses, net of cash acquired (8,970) (22,594)
Capital expenditures (69,371) (108,261)
Investments in partnerships - (4,324)
Net cash of nonutility subsidiaries spun-up to Conectiv (18,138) -
Deposits to nuclear decommissioning trust funds (3,180) (3,180)
Other, net 202 1,445
---------------- ---------------
Net cash used by investing activities (127,393) (136,914)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (71,088) (70,266)
Preferred dividends (3,382) (3,119)
Issuances : Long-term debt 33,000 124,200
Common stock 63 17,711
Redemptions: Long-term debt (26,029) (27,256)
Variable rate demand bonds - (1,500)
Common stock (1,983) (7,274)
Principal portion of capital lease payments (7,164) (4,462)
Net change in short-term debt (48,675) (72,972)
Cost of issuances and refinancings (260) (4,159)
---------------- ---------------
Net cash used by financing activities (125,518) (49,097)
---------------- ---------------
Net change in cash and cash equivalents (29,996) (3,702)
Cash and cash equivalents at beginning of period 35,339 36,533
---------------- ---------------
Cash and cash equivalents at end of period $ 5,343 $ 32,831
================ ===============
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
Delmarva Power & Light Company
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Additional Unearned
Shares Par Paid-in Retained Treasury Compen-
(Dollars in Thousands) Outstanding Value Capital Earnings Stock sation Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 61,210,262 $ 139,116 $ 526,812 $ 300,757 $ (11,687) $ (502) $954,496
Net income 94,956 94,956
Cash dividends declared
Common stock (71,210) (71,210)
Preferred stock (3,259) (3,259)
Issuance of common stock
Business acquisitions 488,473 9,090 9,090
Stock options 3,200 7 56 63
Reacquired common shares (90,764) 50 (1,983) (1,933)
LTIP (1) (41) (41)
Transfer of nonutility subsidiaries (2) (132,023) 8,644 (123,379)
Change in shares outstanding due to Merger (3) (61,831,699) (139,121) 139,121 -
Transfer of treasury shares to Conectiv due
to merger (4) 221,528 (4,580) 4,580 -
Transfer of unearned compensation to Conectiv
due to the merger (4) (543) 543 -
--------------------------------------------------------------------------------------
Balance as of September 30, 1998 1,000 $ 2 $ 528,893 $ 329,888 $ - $ - $858,783
======================================================================================
</TABLE>
(1) Long-term incentive plan.
(2) On March 1, 1998, the Company's nonutility subsidiaries were transferred to
Conectiv.
(3) As part of the merger, all of the Company's outstanding shares of stock
were exchanged for Conectiv shares of stock on a one to one basis.
Effective March 1, 1998 the Company has 1,000 shares of stock outstanding,
$2.25 par value, all of which are held by Conectiv.
(4) As part of the Merger, the Company's treasury shares and unearned
compensation have been transferred to Conectiv.
See accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
--------------------------------
The consolidated financial statements include the accounts of Delmarva Power &
Light Company (the Company) and its wholly-owned subsidiaries. Due to the
merger-related restructuring discussed below, the Company's only subsidiary was
Delmarva Power Financing I as of March 1, 1998. Certain reclassifications, not
affecting net income, have been made to conform amounts previously reported to
the current presentation. The financial 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 1997 Annual
Report on Form 10-K and Part II of this Report on Form 10-Q for additional
relevant information.
On March 1, 1998, the Company and Atlantic Energy, Inc. (Atlantic) consummated
merger transactions (the Merger) by which the Company and Atlantic City Electric
Company (ACE) became wholly-owned subsidiaries of Conectiv. As a result of the
Merger, Conectiv now owns, directly or indirectly, the nonutility subsidiaries
formerly held by the Company. Due to the restructuring as of March 1, 1998, the
Consolidated Statement of Income for the nine months ended September 30, 1998,
includes operating results of the nonutility subsidiaries for the two months
ended February 28, 1998. Refer to Note 4, "Merger with Atlantic," for
additional information concerning the Merger.
2. ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES
------------------------------------------------------------
The Company actively participates in the wholesale energy markets to support its
wholesale utility and competitive retail marketing activities. The Company's
energy market participation exposes the Company to commodity market risk when,
at times, the Company creates net open energy commodity positions or allows net
open positions to continue. To the extent that the Company has net open
positions, controls are in place that are intended to keep risk exposures within
management-approved risk tolerance levels.
The Emerging Issues Task Force (EITF), which evaluates accounting issues under
the direction of the Financial Accounting Standards Board (FASB), has reached a
tentative conclusion concerning accounting for energy trading activities.
Energy trading activities generally involve the purchase or sale of energy with
the objective of earning profits resulting from changes in market prices. The
Company accrues losses on firm commitments, and records other gains and losses
from energy trading transactions at the time of settlement. The EITF has
tentatively concluded that, effective for financial statements issued for fiscal
years beginning after December 15, 1998, contracts entered into in connection
with energy trading activities should be marked to market with gains and losses
(unrealized and realized) shown net in the income statement. This accounting
method would change the timing of gain and loss recognition in the income
statement and recognize assets and liabilities for unrealized gains and losses.
-6-
<PAGE>
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 which becomes effective in the
first quarter of fiscal years beginning after June 15, 1999, unless early
adoption is elected. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that all
derivatives be recognized as assets or liabilities in the balance sheet and be
measured at fair value. Under specified conditions, a derivative may be
designated as a hedge. The change in the fair value of derivatives which are not
designated as hedges is recognized in earnings. For derivatives designated as
hedges of changes in the fair value of an asset or liability, or as a hedge of
exposure to variable cash flows of a forecasted transaction, earnings are
affected to the extent the hedge does not match offsetting changes in the hedged
item.
Upon adoption of SFAS No. 133, the Company's balance sheet will be adjusted to
include assets and liabilities for the fair market value of derivative
instruments. Deferred gains and losses on derivative instruments existing at
the time of adoption will be eliminated and be recorded as an effect of a change
in accounting principle in net income or other comprehensive income. As
discussed in Note 2 to the Consolidated Financial Statements, if the EITF
tentative conclusion on Accounting for Energy Trading and Risk Management
Activities becomes final, no gains or losses from energy trading activities
will have been deferred upon the Company's adoption of SFAS No. 133. For
information concerning the Company's current accounting policy for derivatives
and related energy trading activities, refer to Notes 1 and 6 to the Financial
Statements in the 1997 Report on Form 10-K.
4. MERGER WITH ATLANTIC
--------------------
As previously reported, on March 1, 1998, the Company and ACE became wholly-
owned subsidiaries of Conectiv. Prior to the Merger, Atlantic owned ACE, an
electric utility serving the southern one-third of New Jersey, and Atlantic
Energy Enterprises (AEE), which owns nonutility subsidiaries. As a result of
the Merger, Atlantic ceased to exist and Conectiv owns, directly or indirectly,
ACE, AEE, the Company, and nonutility subsidiaries formerly held by the Company.
In connection with the Merger, the Company's Board of Director's declared that a
dividend consisting of the common stock of its nonutility subsidiaries be paid
to Conectiv. These nonutility subsidiaries had net assets of $123.4 million as
of February 28, 1998 and net losses of $3.5 million through February 28, 1998.
Conectiv holds the common stock of the Company and is a registered holding
company under the Public Utility Holding Company Act of 1935. Each outstanding
share of the Company's common stock, par value $2.25 per share, was exchanged
for one share of Conectiv's common stock, par value $0.01 per share.
Employee Separation and Other Merger-Related Costs
- --------------------------------------------------
For the nine months ended September 30, 1998, the Company recorded a $26.8
million charge ($16.2 million after taxes) to recognize the costs of employee
separation programs utilized to achieve workforce reductions concurrent with the
Merger and other Merger-related costs. The charge to expense was reduced by a
net $45.4 million gain from
-7-
<PAGE>
curtailment and settlements of pension and postretirement health care benefits.
For the three months ended September 30, 1998, higher estimated costs ($3.1
million) were partly offset by gains on settlements of pension obligations ($2.4
million) resulting in a net pre-tax expense of $0.7 million, or $0.4 million
after taxes. Of the $26.8 million of costs discussed above, $19.7 million had
been paid as of September 30, 1998, $3.7 million will not require the use of
operating funds, and $3.4 million remains to be paid from operating funds.
The charge for employee severance and benefits covers approximately 420
employees, of which, approximately 410 employee separations have occurred.
5. DEBT
----
In January 1998, the Company issued $33.0 million of 6.81% unsecured Medium-Term
Notes which mature in 20 years. The Company used $25.4 million of the proceeds
to refinance short-term debt. In recognition of this refinancing, $25.4 million
of short-term debt was reclassified to long-term debt on the consolidated
balance sheet as of December 31, 1997.
In June 1998, the Company repaid at maturity $25.0 million of 5.69% Medium-Term
Notes and $1.0 million of 6.95% Amortizing First Mortgage Bonds.
6. CONTINGENCIES
-------------
Environmental Matters
- ---------------------
The Company is subject to regulation with respect to the environmental effect 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. Costs may be incurred 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 abandoned or uncontrolled hazardous waste sites. The Company is
currently a potentially responsible party 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. In addition, on August 11, 1998, the Delaware Department of
Natural Resources and Environmental Control notified the Company that it is a
potentially responsible party liable for clean-up of the Wilmington Public Works
Yard as a former owner of the property. There is $2 million included in the
Company's current liabilities as of December 31, 1997 and September 30, 1998,
for clean-up and other potential costs related to these sites. The Company does
not expect such future costs to have a material effect on the Company's
financial position or results of operations.
See Part II, Item 5 for additional information on environmental matters.
Nuclear Insurance
- -----------------
In conjunction with the Company's ownership interests in the Peach Bottom Atomic
Power Station (Peach Bottom), and Salem Nuclear Generating Station (Salem), the
Company could be assessed for a portion of any third-party claims associated
with an incident at any
-8-
<PAGE>
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), the Company could be
assessed up to $23.7 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 and Salem 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, 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. Under these coverages, the Company
is subject to potential retrospective loss experience assessments of up to $3.2
million on an aggregate basis.
7. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
See Note 4 to the Consolidated Financial Statements for information concerning
the transfer of the Company's nonutility subsidiaries to Conectiv on the Merger
date. The assets transferred to Conectiv were primarily leveraged leases,
nonutility property, and goodwill.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
CASH PAID FOR 1998 1997
-------- -------
<S> <C> <C>
(Dollars in thousands)
Interest, net of amounts capitalized $62,086 $50,026
Income taxes, net of refunds $19,132 $42,721
</TABLE>
8. RATE MATTERS
------------
Under the Merger approval settlement agreements with the Delaware Public Service
Commission (DPSC), Maryland Public Service Commission (MPSC), and Virginia State
Corporation Commission, the Company will reduce retail base rates in order to
share with utility customers a portion (ranging from approximately 50% to 60%)
of the net cost savings expected to result from the Merger. The annualized
amounts of the retail base rate decreases are $11.5 million, $1.1 million, and
$0.4 million effective March 1, 1998, 1999, and 2000, respectively.
As previously reported and as discussed below, the Company has quantified
stranded costs in regulatory filings in Maryland. The amount of stranded costs
ultimately recovered from utility customers and the final form of legislation
deregulating the electric utility industry in any of the Company's regulated
utility jurisdictions cannot be predicted. Also, the quantification of stranded
costs under existing generally accepted accounting principles (GAAP) can differ
from methods used in regulatory filings. Among other differences, GAAP precludes
recognition of the gains on plants (or purchased power contracts) not impaired,
but requires write down of the plants that are impaired. Due to the
aforementioned considerations, the Company's management currently cannot predict
the ultimate effects that electric utility industry deregulation may have on the
financial statements of the Company, although such effects could be material.
Any stranded costs recovered from transmission and distribution customers
through a market transition charge
-9-
<PAGE>
are expected to reduce the potential one-time charge for the write-down of
assets or reserve for uneconomic purchased power contracts.
In the course of electric restructuring proceedings in any of the Company's
regulatory jurisdictions, the portion of base rates which remains subject to
rate regulation may be decreased.
Delaware Utility Industry Restructuring
Legislation (House Bill 570) providing Delaware retail customers with the
ability to choose their electric supplier in July 1999 was passed by the
Delaware House of Representatives on June 2, 1998. However, on June 30, 1998,
the Delaware General Assembly adjourned without a Senate vote on House Bill 570,
delaying consideration of Delaware restructuring legislation until 1999.
In September 1998, the Alliance for Fair Electric Competition Today, which
includes the Company, began negotiations with Delaware executive branch
representatives and Delaware Public Service Commission and Staff representatives
to structure consensus legislation for passage early in 1999.
Maryland Utility Industry Restructuring
As previously reported in Note 6 to the Consolidated Financial Statements of the
Company's Second Quarter 1998 Report on Form 10-Q, on July 1, 1998, the Company
filed with the MPSC its quantification of stranded costs and computation of
unbundled rates. Stranded costs were estimated to be $217 million on a company
system-wide basis, including $123 million attributable to generating units, $54
million associated with purchased power contracts, $21 million related to fuel
inventory financing costs, and $19 million of regulatory assets. The Company
proposed full recovery of the Maryland retail portion of the stranded costs over
a three-year period, starting with the commencement of retail competition on
July 3, 2000. The MPSC is scheduled to issue an order on stranded cost recovery
by October 1, 1999.
On September 10, 1998, the MPSC issued an Order addressing rehearing
applications and motions to strike filed by several parties in January 1998.
Among other things, the Order confirmed a schedule intended to result in
electric retail competition by July 3, 2000 and the adoption of an interstate
reciprocity requirement. The Company's request to deregulate generation assets
at the beginning of the transition period was denied. The MPSC proposes to
deregulate generation assets once the market is deemed to be competitive. On
October 7, 1998, the Company sought re-consideration of the MPSC's Order. On
October 9, 1998, the Company filed an appeal of the Order to preserve the
Company's rights with respect to portions of the Order that might be deemed
final.
Virginia
On April 15, 1998, the Governor of Virginia signed into law a bill which
establishes a schedule for Virginia's transition to retail competition in the
electric utility industry. The schedule requires that the transition to retail
competition commence on January 1, 2002 and that full retail competition
commence on January 1, 2004. The bill also allows for the full recovery of just
and reasonable net stranded costs.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
EARNINGS SUMMARY
- ----------------
Pursuant to a Merger-related corporate restructuring, Conectiv became the owner
of the Company's nonutility subsidiaries as of March 1, 1998. Accordingly, the
year-to-date 1998 operating results include two months of nonutility subsidiary
operations. The consolidated statements of income, for the nine months ended
September 30, include revenues of $19.5 million and $77.4 million and net losses
of $3.5 million and $3.3 million, for 1998 and 1997, respectively, from the
operations of these nonutility subsidiaries.
The Company had earnings applicable to common stock of $91.7 million and $79.8
million for the nine months ended September 30, 1998 and 1997, respectively.
The earnings increase was reduced by a $16.2 million after-tax charge for costs
associated with the Merger. After adjusting for the one-time Merger costs and
the effect of the nonutility subsidiaries, year-to-date earnings were up $28.3
million. The increase was primarily due to higher electric revenues (net of
fuel costs) due to a 3.8% retail electric sales increase and lower operation and
maintenance expenses, partially offset by lower gas revenues (net of fuel costs)
due to milder winter and spring weather.
The Company had earnings applicable to common stock of $65.6 million and $38.3
million for the three months ended September 30, 1998, and 1997, respectively.
Earnings were up $27.3 million primarily due to higher net electric revenues due
to hotter summer weather and lower operation and maintenance expenses.
ELECTRIC INDUSTRY RESTRUCTURING
- -------------------------------
For previously reported information concerning restructuring the electric
utility industry in Delaware, Maryland and Virginia, refer to page I-2 and page
I-4 of the Company's 1997 Report on Form 10-K and Note 6 to the Consolidated
Financial Statements of the Company's Second Quarter 1998 Report on Form 10-Q.
As previously reported and as discussed below, the Company has quantified
stranded costs in regulatory filings in Maryland. The amount of stranded costs
ultimately recovered from utility customers and the final form of legislation
deregulating the electric utility industry in any of the Company's regulated
utility jurisdictions cannot be predicted. Also, the quantification of stranded
costs under existing GAAP can differ from methods used in regulatory filings.
Among other differences, GAAP precludes recognition of the gains on plants (or
purchased power contracts) not impaired, but requires write down of the plants
that are impaired. Due to the aforementioned considerations, the Company's
management currently cannot predict the ultimate effects that electric utility
industry deregulation may have on the financial statements of the Company,
although such effects could be material. Any stranded costs recovered from
transmission and distribution customers through a market transition charge are
expected to reduce the potential one-time charge for the write-down of assets or
reserve for uneconomic purchased power contracts.
-11-
<PAGE>
In the course of electric restructuring proceedings in any of the Company's
regulatory jurisdictions, the portion of base rates which remains subject to
rate regulation may be decreased.
Delaware
Legislation (House Bill 570) providing Delaware retail customers with the
ability to choose their electric supplier in July 1999 was passed by the
Delaware House of Representatives on June 2, 1998. However, on June 30, 1998,
the Delaware General Assembly adjourned without a Senate vote on House Bill 570,
delaying consideration of Delaware restructuring legislation until 1999.
In September 1998, the Alliance for Fair Electric Competition Today, which
includes the Company, began negotiations with Delaware executive branch
representatives and Delaware Public Service Commission and Staff representatives
to structure consensus legislation for passage early in 1999.
Maryland
As previously reported in Note 6 to the Consolidated Financial Statements of the
Company's Second Quarter 1998 Report on Form 10-Q, on July 1, 1998, the Company
filed with the MPSC its quantification of stranded costs and computation of
unbundled rates. Stranded costs were estimated to be $217 million on a Company
system-wide basis, including $123 million attributable to generating units, $54
million associated with purchased power contracts, $21 million related to fuel
inventory financing costs, and $19 million of regulatory assets. The Company
proposed full recovery of the Maryland retail portion of the stranded costs over
a three-year period, starting with the commencement of retail competition on
July 3, 2000. The MPSC is scheduled to issue an order on stranded cost recovery
by October 1, 1999.
On September 10, 1998, the MPSC issued an Order addressing rehearing
applications and motions to strike filed by several parties in January 1998.
Among other things, the Order confirmed a schedule intended to result in
electric retail competition by July 3, 2000 and the adoption of an interstate
reciprocity requirement. The Company's request to deregulate generation assets
at the beginning of the transition period was denied. The MPSC proposes to
deregulate generation assets once the market is deemed to be competitive. On
October 7, 1998, the Company sought re-consideration of the MPSC's Order. On
October 9, 1998, the Company filed an appeal of the Order to preserve the
Company's rights with respect to portions of the Order that might be deemed
final.
Virginia
On April 15, 1998, the Governor of Virginia signed into law a bill which
establishes a schedule for Virginia's transition to retail competition in the
electric utility industry. The schedule requires that the transition to retail
competition commence on January 1, 2002 and that full retail competition
commence on January 1, 2004. The bill also allows for the full recovery of just
and reasonable net stranded costs.
-12-
<PAGE>
ELECTRIC REVENUES
- -----------------
Details of the changes in the various components of electric revenues for the
three- and nine-month periods ended September 30, 1998, as compared to the same
periods in 1997, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Nine
Months Months
------ -------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ 18.9 $ 25.8
Fuel Revenues 0.1 (8.2)
Interchange Delivery Revenues 29.2 44.4
Merchant Revenues 119.9 162.7
------ ------
Total $168.1 $224.7
====== ======
</TABLE>
Electric non-fuel revenues increased $18.9 million for the three-month period,
due to an 8.3% increase in retail kilowatt hour (kWh) sales, which was mainly a
result of hotter summer weather. Electric non-fuel revenues increased $25.8
million for the nine-month period, primarily due to 3.8% higher retail kWh sales
and revenues from storm restoration work in New England during the first
quarter. Year-to-date electric retail sales growth was mainly due to favorable
economic conditions and customer growth. Weather's effect on the year-to-date
electric kWh sales increase was minimal because the additional sales from the
hotter summer were largely offset by lower sales from milder winter and spring
weather earlier in the year. Merger-related rate reductions reduced the increase
in non-fuel electric revenues by $3.7 million and $7.7 million for the three-
and nine-month periods, respectively.
Electric fuel revenues increased $0.1 million and decreased $8.2 million for the
three- and nine-month periods, respectively. The decrease for the nine-month
period was due to lower retail electric fuel rates, partially offset by higher
retail sales. For the three-month period higher retail sales more than offset
the lower 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 increased $29.2 million and $44.4 million for the
three- and nine-month periods, respectively, mainly due to higher sales to the
Pennsylvania-New Jersey-Maryland 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 from off-system, unregulated sales increased $119.9
million and $162.7 million for the three- and nine-month periods, respectively,
mainly because the Company's merchant group has increased its operations
substantially since the beginning of 1997, when the group commenced operations.
The Company actively participates in the wholesale energy markets to support its
utility and competitive retail marketing activities. The Company's wholesale
energy market participation exposes the Company to commodity market risk when,
at times, the Company creates net open energy commodity positions or allows net
open positions to continue. To the extent that the Company has net open
positions, controls are in place that are intended to keep risk exposures within
certain management approved risk tolerance levels.
-13-
<PAGE>
Gross margins (revenues net of fuel costs) from unregulated electric merchant
sales increased by approximately $6.8 million mainly due to profitable
transactions settled in the third quarter of 1998. Due to the nature of the
product sold (a bulk commodity) and competitive markets, the margin percentage
from merchant revenues in excess of related energy costs is generally relatively
small.
The Company has emerged as a leading independent energy marketer in Pennsylvania
by adding more than 30,000 new customers in Pennsylvania's pilot programs for
customer choice of electric suppliers. Pennsylvania is transitioning to a
deregulated retail electric power market. One-third of all Pennsylvania
consumers will be able to choose their electric supplier by January 1, 1999,
another third will have choice by January 2, 2000, and all Pennsylvania
consumers will have choice by January 2, 2001. As the Pennsylvania electric
choice program expands, the Company's management believes that the Company will
retain many of its new customers and attract an even larger share of the market.
GAS REVENUES
- ------------
Details of the changes in the various components of gas revenues for the three-
and nine-month periods ended September 30, 1998, as compared to the same periods
in 1997, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Nine
Months Months
------- -------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $(0.5) $ (2.7)
Fuel Revenues 0.4 (3.7)
Merchant Revenues 54.2 160.7
----- ------
Total $54.1 $154.3
===== ======
</TABLE>
Non-fuel and fuel gas revenues decreased for the nine-month period ended
September 30, 1998 primarily due to lower residential gas sales caused by milder
winter and spring weather. Residential gas sales decreased 11.0% for the nine-
month period. The weather-related gas revenue decrease was partly offset by
additional gas revenues from a 2.4% increase in the average number of gas
customers.
Gas merchant revenues increased $54.2 million and $160.7 million for the three-
and nine-month periods, respectively, primarily due to higher off-system gas
sales resulting from a substantial increase in the Company's merchant operations
since start-up last year. Gas merchant revenues also include fees earned for
release of pipeline capacity and other services. Similar to electric merchant
revenues, the margin provided by gas merchant revenues in excess of related
purchased gas costs is relatively small due to the competitive nature of bulk
commodity sales.
OTHER SERVICES REVENUES
- -----------------------
Total revenues from "Other services" decreased from $28.8 million to $4.9
million for the three-month period and from $88.5 million to $29.3 million for
the nine-month period. These revenue decreases were primarily due to the loss
of revenue attributed to the sale of the Pine Grove landfill and waste-hauling
operations in the fourth quarter of 1997, and the transfer of the Company's
nonutility subsidiaries to Conectiv on March 1, 1998.
-14-
<PAGE>
ELECTRIC FUEL AND PURCHASED ENERGY EXPENSES
- -------------------------------------------
Electric fuel and purchased energy expenses increased $144.4 million and $197.2
million for the three- and nine-month periods, respectively, mainly due to
greater volumes of energy purchased for sale on and off-system.
GAS PURCHASED
- -------------
Gas purchased increased $55.3 million and $158.3 million for the three- and
nine-month periods, respectively, mainly due to larger volumes of gas purchased
for resale off-system partially offset by lower volumes of gas purchased for
sale on-system due to the milder winter and spring weather.
EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
- --------------------------------------------------
The Company expensed $26.8 million ($16.2 million after taxes) of Merger-related
costs for the nine months ended September 30, 1998. The charge is net of $45.4
million of curtailment and settlement gains from pension and postretirement
benefits. Refer to "Employee Separation and Other Merger-Related Costs" in Note
4 to the Consolidated Financial Statements for a more detailed discussion.
OPERATION AND MAINTENANCE EXPENSES
- ----------------------------------
Operation and maintenance expenses decreased by $28.4 million for the three-
month period, primarily due to the transfer of the nonutility subsidiaries to
Conectiv on March 1, 1998, lower payroll costs due to a reduction of
approximately 410 employees and lower pension costs.
Operation and maintenance expenses decreased by $40.0 million for the nine-month
period, primarily due to lower operating expenses at the Salem nuclear power
plant, the transfer of the nonutility subsidiaries to Conectiv on March 1, 1998,
lower payroll costs due to a reduction of approximately 410 employees and lower
pension costs.
DEPRECIATION EXPENSE
- --------------------
Depreciation expense decreased $1.7 million and $2.5 million for the three- and
nine-month periods, respectively, due to the sale of the Pine Grove landfill and
waste-hauling operations in the fourth quarter of 1997 and the transfer of the
nonutility subsidiaries to Conectiv on March 1, 1998. These decreases were
partially offset by higher utility depreciation expenses due to the completion
of on-going construction projects.
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 decreased $0.8 million for the three-month period and decreased
$0.2 million for the nine-month period.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $222.9 million for the nine months
ended September 30, 1998, compared to $182.3 million for the nine months ended
September 30, 1997, a $40.6 million increase. The increase was primarily due to
higher earnings and lower tax payments in the current year. Tax payments were
lower due to the timing of tax payments which was affected by the annualization
methods elected. Capital expenditures for the nine-month periods decreased from
$108.3 million to $69.4 million and are expected to be less than originally
planned at year-end. Investing activities also included a $27.9 million loan to
Conectiv Resource Partners, Inc. which manages lendings and borrowings among the
Conectiv companies.
In January 1998, the Company issued $33.0 million of 6.81% unsecured Medium-Term
Notes which mature in 20 years. The Company used $25.4 million of the proceeds
to refinance short-term debt. In recognition of this refinancing, $25.4 million
of short-term debt was reclassified to long-term debt on the consolidated
balance sheet as of December 31, 1997.
In June 1998, the Company redeemed $25.0 million of 5.69% unsecured Medium-Term
Notes and $1.0 million of 6.95% Amortizing First Mortgage Bonds. The balances
of long-term debt due within one year increased by $4.0 million due to the
scheduled maturity of $30.0 million of 7.50% Medium-Term Notes in June 1999,
partially offset by the redemptions that occurred in June 1998.
RATIO OF EARNINGS TO FIXED CHARGES
- ----------------------------------
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:
<TABLE>
<CAPTION>
12 Months
Ended
September 30, Year Ended December 31,
-----------------------------------
1998 1997 1996 1995 1994 1993
------------- ---- ------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges (SEC Method) (1) 3.00 2.83 3.33 3.54 3.49 3.47
Fixed Charges and Preferred Stock
Dividends (SEC Method) (1) 2.80 2.63 2.83 2.92 2.85 2.88
</TABLE>
(1) Excluding the Merger-related charge discussed in Note 4 to the Consolidated
Financial Statements, which decreased pre-tax income by $26.8 million, for
the twelve months ended September 30, 1998, the ratio of earnings to fixed
charges was 3.28 and the ratio of earnings to fixed charges and preferred
stock dividends was 3.05.
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.
-16-
<PAGE>
YEAR 2000
- ---------
The Year 2000 issue is the result of computer programs and embedded systems
using a two-digit format, as opposed to four digits, to indicate the year.
Computer and embedded systems with this characteristic may be unable to
interpret dates beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruption of operations. A project team,
originally started in 1996 by ACE, is assisting line management in addressing
the issue of computer programs and embedded systems not properly recognizing the
Year 2000. A Conectiv corporate officer, reporting directly to the Chief
Executive Officer, is coordinating all Year 2000 activities. There are
substantial challenges in identifying and correcting the many computer and
embedded systems critical to generating and delivering power, delivering natural
gas and providing other services to customers.
The project team is using a phased approach to managing its activities. The
first phase is, inventory and assessment of all systems, equipment, and
processes. Each identified item is given a criticality rating of high, medium
or low. Those items rated as high or medium are believed to put the Company's
business operations and customers at substantial risk and are then subject to
the second phase of the project. The second phase is determining and
implementing corrective action for the systems, equipment and processes, and
concludes with a test of the unit being remediated. The third phase is system
testing and compliance certification. Additionally, the project team will be
updating existing outage contingency plans to address Year 2000 issues over the
next 12 months.
The following chart sets forth the current completion percentage of the Year
2000 Project by major business group, and for the information technology systems
used in managing the Company's business. The Company expects significant
progress in remediation and testing over the next two quarters based on work
that is in process and material that is being ordered.
<TABLE>
<CAPTION>
Inventory and Corrective Testing and
Business Group Assessment Action Compliance
- --------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Business systems 95% 70% 60%
Power production 90% 0% 0%
Electricity distribution 90% 5% 5%
Energy and other services 75%-95% 0%-80% 0%-80%
</TABLE>
The Company is also contacting critical vendors and service providers to review
remediation of their Year 2000 issues. Many aspects of the Company's businesses
are dependent on third parties. For example, fuel suppliers must be able to
provide coal or gas to allow the Company to generate power.
Distribution of electricity is dependent on the overall reliability of the
electric grid. The Company is cooperating with the North American Electric
Reliability Council and the PJM Interconnection in Year 2000 remediation
efforts, and is accelerating its Year 2000 Project timeline to be generally in-
line with the recommendations of those groups.
Conectiv has incurred approximately $3 million in costs for the Year 2000
Project and currently estimates the costs for the Year 2000 Project to range
from $10 million to $15 million. These estimates could change significantly as
the Year 2000 Project progresses.
-17-
<PAGE>
Since the project team is still in the process of assessing and correcting
impacted systems, equipment and processes, the Company cannot currently
determine whether the Year 2000 issue might cause disruptions to its operations
and have impacts on related costs and revenues. The Company assesses the status
of the Year 2000 Project on at least a monthly basis to determine the likelihood
of business disruptions. Any substantial disruption to the Company's operations
could significantly impact its customers and could generate legal claims against
the Company. The Company's results of operations and financial position would
likely suffer an adverse impact if other entities, such as suppliers, customers
and service providers do not effectively address their Year 2000 issues.
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
- -------------------------
As previously reported in Note 18 to the Consolidated Financial Statements
included in the Company's 1997 Annual Report on Form 10-K, on February 27, 1996,
the co-owners of Salem, including the Company, filed a complaint in the United
States District Court for New Jersey against Westinghouse Electric Corporation
(Westinghouse), the designer and manufacturer of the Salem steam generators.
The complaint, which sought to recover from Westinghouse the costs associated
with and resulting from the cracks discovered in Salem's steam generators and
with replacing such steam generators, alleged violations of federal and New
Jersey Racketeer Influenced and Corrupt Organizations Acts, fraud, negligent
misrepresentation and breach of contract. On November 4, 1998, the Court
granted Westinghouse's motion for summary judgment with regard to the federal
Racketeer Influenced and Corrupt Organizations Act claim, and dismissed the
remaining state law claims without prejudice. The Company is assessing its
options, including a possible appeal.
ITEM 5. OTHER INFORMATION
- -------------------------
Salem Nuclear Generating Station
- --------------------------------
In September 1998, the Nuclear Regulatory Commission (NRC) issued its periodic
Systematic Assessment of Licensee Performance (SALP) Report on the performance
of activities at Salem for the period March 1, 1997 to August 1, 1998. SALP
reports rate licensee performance in four assessment areas: Operations,
Maintenance, Engineering and Plant Support. Ratings range from a high of "1" to
a low of "3". Salem received a rating of 1 in Operations, a 2 in Maintenance, a
2 in Engineering, and a 1 in Plant Support. The NRC noted that the overall
performance at Salem improved as demonstrated by a nearly event free return of
both units to operation following the extended outage.
Air Quality Regulations
- -----------------------
Due to their location in the Ozone Transport Region created by the federal Clean
Air Act Amendments of 1990, the Company's facilities are required, by Delaware
Department of Natural Resources and Environmental Control and Maryland
Department of the Environment regulations, to reduce nitrogen oxide emissions
significantly during warm weather months beginning in summer 1999. Achieving
these reductions will require capital expenditures of approximately $12 million.
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
- -------------------
None
-19-
<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: November 12, 1998 /s/ B. S. Graham
------------------------- ------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-20-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------- ------
<S> <C> <C>
Computation of ratio of earnings to fixed charges 12-A 22
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 23
Financial Data Schedule 27 24
</TABLE>
-21-
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
--------------------
<TABLE>
<CAPTION>
12 Months
Ended
September 30, Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $117,464 $105,709 $116,187 $117,488 $108,310 $111,076
------------- ---------- --------- --------- --------- --------
Income taxes 76,422 72,155 78,340 75,540 67,613 67,102
------------- ---------- --------- --------- --------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 80,916 78,350 69,329 65,572 61,128 62,651
Other interest 10,155 12,835 12,516 10,353 9,336 9,245
Preferred dividend require-
ments of a subsidiary trust 5,687 5,687 1,390 - - -
------------- ---------- --------- --------- --------- --------
Total fixed charges 96,758 96,872 83,235 75,925 70,464 71,896
------------- ---------- --------- --------- --------- --------
Nonutility capitalized interest - (208) (311) (304) (256) (246)
------------- ---------- --------- --------- --------- --------
Earnings before income taxes
and fixed charges $290,644 $274,528 $277,451 $268,649 $246,131 $249,828
============= ========== ========= ========= ========= ========
Ratio of earnings to fixed charges 3.00 2.83 3.33 3.54 3.49 3.47
</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, a mortization 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.
-22-
<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
September 30, Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income $117,464 $105,709 $116,187 $117,488 $108,310 $111,076
-------- -------- -------- -------- -------- --------
Income taxes 76,422 72,155 78,340 75,540 67,613 67,102
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 80,916 78,350 69,329 65,572 61,128 62,651
Other interest 10,155 12,835 12,516 10,353 9,336 9,245
Preferred dividend require-
ments of a subsidiary
trust 5,687 5,687 1,390 - - -
-------- -------- -------- -------- -------- --------
Total fixed charges 96,758 96,872 83,235 75,925 70,464 71,896
-------- -------- -------- -------- -------- --------
Nonutility capitalized interest - (208) (311) (304) (256) (246)
-------- -------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $290,644 $274,528 $277,451 $268,649 $246,131 $249,828
-------- -------- -------- -------- -------- --------
Fixed charges $ 96,758 $ 96,872 $ 83,235 $ 75,925 $ 70,464 $ 71,896
Preferred dividend requirements 7,195 7,556 14,961 16,185 15,948 14,803
-------- -------- -------- -------- -------- --------
$103,953 $104,428 $ 98,196 $ 92,110 $ 86,412 $ 86,699
-------- -------- -------- -------- -------- --------
Ratio of earnings to fixed charges
and preferred dividends 2.80 2.63 2.83 2.92 2.85 2.88
</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.
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> OPUR1
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 3RD QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,994,264
<OTHER-PROPERTY-AND-INVEST> 57,412
<TOTAL-CURRENT-ASSETS> 357,609
<TOTAL-DEFERRED-CHARGES> 237,247
<OTHER-ASSETS> 204,836
<TOTAL-ASSETS> 2,851,368
<COMMON> 2
<CAPITAL-SURPLUS-PAID-IN> 528,893
<RETAINED-EARNINGS> 329,888
<TOTAL-COMMON-STOCKHOLDERS-EQ> 858,783
70,000
89,703
<LONG-TERM-DEBT-NET> 951,964
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 37,287
0
<CAPITAL-LEASE-OBLIGATIONS> 18,313
<LEASES-CURRENT> 12,478
<OTHER-ITEMS-CAPITAL-AND-LIAB> 812,840
<TOT-CAPITALIZATION-AND-LIAB> 2,851,368
<GROSS-OPERATING-REVENUE> 1,377,450
<INCOME-TAX-EXPENSE> 62,412
<OTHER-OPERATING-EXPENSES> 1,156,948
<TOTAL-OPERATING-EXPENSES> 1,219,360
<OPERATING-INCOME-LOSS> 158,090
<OTHER-INCOME-NET> 2,127
<INCOME-BEFORE-INTEREST-EXPEN> 160,217
<TOTAL-INTEREST-EXPENSE> 65,261
<NET-INCOME> 94,956
3,259
<EARNINGS-AVAILABLE-FOR-COMM> 91,697
<COMMON-STOCK-DIVIDENDS> 71,210
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 222,915
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
