<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 March 31, 1998
---------------------------
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.
Class Outstanding at March 31, 1998
------------------------- -----------------------------
Common Stock, $2.25 par value 1,000 Shares
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DELMARVA POWER & LIGHT COMPANY
------------------------------
Table of Contents
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<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 1
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Common
Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Part II. Other Information and Signature 15-20
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Electric $278,376 $262,603
Gas 115,743 56,117
Other services 21,991 27,359
------------ ------------
416,110 346,079
------------ ------------
OPERATING EXPENSES
Electric fuel and purchased energy 118,471 102,842
Gas purchased 98,628 35,753
Purchased electric capacity 7,217 6,977
Employee separation and other merger-related costs 40,338 -
Other services cost of sales 15,374 20,740
Operation and maintenance 79,819 74,000
Depreciation 33,731 33,395
Taxes other than income taxes 9,443 9,222
------------ ------------
403,021 282,929
------------ ------------
OPERATING INCOME 13,089 63,150
------------ ------------
OTHER INCOME
Allowance for equity funds used
during construction 307 -
Other income 858 1,531
------------ ------------
1,165 1,531
------------ ------------
INTEREST EXPENSE
Interest charges 20,818 20,621
Allowance for borrowed funds used during
construction and capitalized interest (722) (1,120)
------------ ------------
20,096 19,501
------------ ------------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 1,422
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (7,264) 43,758
INCOME TAXES (2,408) 17,965
------------ ------------
NET INCOME (LOSS) (4,856) 25,793
DIVIDENDS ON PREFERRED STOCK 1,086 1,215
------------ ------------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ($5,942) $24,578
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 23,841 $ 35,339
Accounts receivable 182,060 197,561
Accounts receivable from associated companies 36,081 -
Inventories, at average cost
Fuel (coal, oil and gas) 27,968 37,425
Materials and supplies 39,614 40,518
Prepayments 5,837 11,255
Deferred energy costs 5,324 18,017
Deferred income taxes, net 2,864 776
----------------------------------
323,589 340,891
----------------------------------
INVESTMENTS
Investment in leveraged leases - 46,375
Funds held by trustee 53,211 48,086
Other investments 82 9,500
----------------------------------
53,293 103,961
----------------------------------
PROPERTY, PLANT AND EQUIPMENT
Electric utility plant 3,028,736 3,010,060
Gas utility plant 243,243 241,580
Common utility plant 155,845 154,791
----------------------------------
3,427,824 3,406,431
Less: Accumulated depreciation 1,407,757 1,373,676
----------------------------------
Net utility plant in service 2,020,067 2,032,755
Utility construction work-in-progress 90,790 93,017
Leased nuclear fuel, at amortized cost 29,767 31,031
Nonutility property, net 7,074 74,811
Goodwill, net 73,392 92,602
----------------------------------
2,221,090 2,324,216
----------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Prepaid employee benefits costs 50,717 58,111
Unamortized debt expense 12,680 12,911
Deferred debt refinancing costs 18,109 18,760
Deferred recoverable income taxes 86,908 88,683
Other 47,521 67,948
----------------------------------
215,935 246,413
----------------------------------
TOTAL ASSETS $ 2,813,907 $ 3,015,481
==================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES
Short-term debt $ 2,300 $ 23,254
Long-term debt due within one year 32,055 33,318
Variable rate demand bonds 71,500 71,500
Accounts payable 98,600 103,607
Taxes accrued 13,618 10,723
Interest accrued 23,848 19,902
Dividends payable 24,492 23,775
Current capital lease obligation 12,472 12,516
Accrued employee separation and
other merger-related costs 10,713 -
Other 23,104 35,819
--------------------------
312,702 334,414
--------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 443,263 492,792
Deferred investment tax credits 39,302 39,942
Long-term capital lease obligation 18,506 19,877
Other postretirement benefit obligations 8,226 -
Other 26,467 30,585
--------------------------
535,764 583,196
--------------------------
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 542,980 526,812
Retained earnings 279,698 300,757
--------------------------
822,680 966,685
Treasury shares, at cost:
1998-0 shares, 1997--619,237 - (11,687)
Unearned compensation - (502)
--------------------------
Total common stockholders' equity 822,680 954,496
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 983,058 983,672
--------------------------
1,965,441 2,097,871
--------------------------
--------------------------
TOTAL CAPITALIZATION AND LIABILITIES $2,813,907 $3,015,481
==========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($4,856) $25,793
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 35,500 34,870
Allowance for equity funds used during construction (307) -
Investment tax credit adjustments, net (640) (640)
Deferred income taxes, net (7,241) (1,966)
Net change in:
Accounts receivable (2,519) (13,555)
Inventories 9,150 3,753
Accounts payable (1,349) (6,229)
Other current assets & liabilities 14,550 30,637
Accrued employee separation and other merger-related costs 38,741 -
Other, net (1,939) (1,505)
------------ ------------
Net cash provided by operating activities 79,090 71,158
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (8,970) (11,388)
Capital expenditures (21,253) (37,243)
Net cash of nonutility subsidiaries spun-up to Conectiv (18,138) -
Deposits to nuclear decommissioning trust funds (1,059) (1,060)
Other, net (387) 133
------------ ------------
Net cash used by investing activities (49,807) (49,558)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (23,652) (23,329)
Issuances: Long-term debt 33,000 124,200
Common stock 63 6,362
Redemptions: Long-term debt (74) (696)
Common stock (1,983) (23)
Principal portion of capital lease payments (1,740) (1,475)
Net change in short-term debt (46,384) (118,278)
Cost of issuances and refinancings (11) (2,035)
------------ ------------
Net cash used by financing activities (40,781) (15,274)
------------ ------------
Net change in cash and cash equivalents (11,498) 6,326
Cash and cash equivalents at beginning of period 35,339 36,533
------------ ------------
Cash and cash equivalents at end of period $23,841 $42,859
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<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 (4,856) (4,856)
Cash dividends declared
Common stock (23,761) (23,761)
Preferred stock (1,086) (1,086)
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) (117,936) 8,644 (109,292)
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 MARCH 31, 1998 1,000 $ 2 $542,980 $279,698 $ - $ - $822,680
==================================================================================
</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.
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<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. 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) which formed a new company named Conectiv. As
a result of the Merger, Conectiv now owns the nonutility subsidiaries formerly
held by the Company. Due to the restructuring as of March 1, 1998, the
Consolidated Statement of Income for the three months ended March 31, 1998
includes operating results of the nonutility subsidiaries for the two months
ended February 28, 1998. Refer to Note 2 "Merger with Atlantic" for additional
information concerning the Merger.
2. MERGER WITH ATLANTIC
--------------------
As previously reported, on March 1, 1998, the Company merged with Atlantic.
Prior to the Merger which formed Conectiv--a new holding company, Atlantic owned
Atlantic City Electric Company (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 was merged out of
existence, and Conectiv owns 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 $109.3 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.
Base Rate Decreases
- -------------------
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 as follows:
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<PAGE>
<TABLE>
<CAPTION>
Annualized Base
Jurisdiction Rate Decrease Effective Date
- ---------------------------- ------------------- --------------
<S> <C> <C>
Delaware retail electric $7.5 million (1.5%) March 1, 1998
Delaware retail electric $0.6 million (0.1%) March 1, 1999
Delaware retail electric $0.4 million (0.1%) March 1, 2000
Delaware gas $0.5 million (0.5%) March 1, 1999
Maryland retail electric $3.5 million (1.3%) March 1, 1998
Virginia retail electric $0.5 million (1.5%) March 1, 1998
</TABLE>
Employee Separation and Other Merger Related Costs
- --------------------------------------------------
In the first quarter of 1998, the Company recorded a $40.3 million charge ($24.4
million after tax) to recognize the costs of employee separation programs
utilized to achieve workforce reductions concurrent with the merger and other
merger-related costs. The $40.3 million charge included severance and benefits
for the employees being terminated ($29.1 million), relocation costs ($1.4
million), and other merger related costs ($9.8 million). These costs are
reflected in operating expenses. As of March 31, 1998 approximately $8.9
million has been charged against these accruals.
The charge for employee severance and benefits covers approximately 500
employees of which approximately 275 employee separations have occurred. The
Company expects the rest of the separations to occur in 1998.
In addition, the charge for employee severance and benefits is net of $32.5
million of curtailment and settlement gains for pension and postretirement
health care benefits. The Company estimates that approximately $7.0 million to
$23.0 million of settlement gains will be recognized later in 1998, as
additional settlements occur.
3. 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 has been reclassified to long-term debt on the consolidated
balance sheet as of December 31, 1997.
4. CONTINGENCIES
-------------
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 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
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<PAGE>
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, 1997 and March
31, 1998 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.
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 $3.2 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.
5. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
CASH PAID FOR 1998 1997
--------- -------
<S> <C> <C>
(Dollars in thousands)
Interest, net of amounts
capitalized $15,247 $12,335
Income taxes, net of refunds $ 56 $ 4,558
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
EARNINGS SUMMARY
- ----------------
Due 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 Company had a net loss of $5.9 million for the three months ended March 31,
1998 compared to net income of $24.6 million for the three months ended March
31, 1997. The earnings decline was primarily due a $24.4 million after tax
charge for costs associated with the merger. After adjusting for the one-time
merger costs, earnings were down $6.1 million primarily due to lower gas
revenues, net of fuel costs. Heating degree days were down 14% from last year.
As a result, electric and gas sales in the weather-sensitive residential
customer class were adversely impacted. Sales to residential electric and gas
customers decreased by 4% and 10%, respectively. Although utility operation and
maintenance expenses were relatively flat, expenses of nonutility subsidiaries
increased, as planned.
ELECTRIC INDUSTRY RESTRUCTURING
- -------------------------------
For background information concerning the restructuring of the electric utility
industry in Delaware, Maryland, and Virginia, refer to page I-2 and page II-4 of
The Company's 1997 Report on Form 10-K. Updates to previously disclosed
information are shown below.
. On January 27, 1998, the DPSC submitted its report on electric utility
industry restructuring to the Delaware General Assembly. To date, the DPSC
has not been able to secure a sponsor for its proposal. On April 8, 1998,
House Bill 570, the Electric Restructuring Act of 1998 (HB 570) was
introduced. HB 570 has the support of the newly-formed Alliance for Fair
Electric Competition Today, which is an alliance of small businesses, low-
income groups, industry, trade groups, the Delaware Electric Cooperative,
the Delaware electric municipalities and the Company. HB 570, while
reflecting many of the DPSC's recommendations, makes it unnecessary to
deal with litigious issues such as stranded costs, divestiture,
securitization and exit fees.
The key provisions of HB 570 are as follows:
The Company's customers would have choice on July 1, 1999 and the
Delaware Electric Cooperative's customers would have choice on January
1, 2000. The municipalities would not be regulated by the DPSC and would
set their own dates for customer choice.
Rates would be frozen for three years. The DPSC would establish a
specific retail market price "shopping credit" (a credit to the
customer's price per kilowatt-hour), enabling customers to shop for
their energy supplier.
The difference between the "shopping credit" for the retail market price
and the amount for energy supply in current rates (that are frozen for
three years), would be
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<PAGE>
included in the delivery charge during the transition period. This
provides a mechanism for recovering stranded costs.
. In Maryland, various parties have continued to work on resolving
implementation issues. Filings concerning electric utilities' stranded
costs and unbundled rates are due to the MPSC by July 1, 1998.
. 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.
ELECTRIC REVENUES
- -----------------
Details of the changes in the various components of electric revenues for the
three-month period ended March 31, 1998, as compared to the same period in 1997,
are shown below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Non-fuel (Base Rate) Revenues $ 1.2
Fuel Revenues (6.2)
Interchange Delivery Revenues (8.5)
Merchant Revenues 29.3
-----
Total $15.8
=====
</TABLE>
Electric non-fuel revenues increased $1.2 million primarily due to revenues from
storm restoration work in New England, partially offset by a 4% decrease in
residential kilowatt-hour (kWh) sales attributed to milder winter weather.
Additional sales from a 1.4% increase in the number of customers mitigated the
impact of the milder winter weather.
Electric fuel revenues decreased $6.2 million due to lower retail electric fuel
rates and lower sales. 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 $8.5 million mainly due to lower 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 $29.3
million mainly because the Company's merchant group has increased its operations
substantially since the first quarter of 1997, when the group was in the start-
up phase. 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.
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<PAGE>
GAS REVENUES
- ------------
Details of the changes in the various components of gas revenues for the three-
month period ended March 31, 1998, as compared to the same period in 1997, are
shown below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Non-fuel (Base Rate) Revenues $ (1.8)
Fuel Revenues (2.1)
Merchant Revenues 63.6
-----
Total $ 59.7
=====
</TABLE>
Gas non-fuel revenues decreased $1.8 million primarily due to a 10.2% decline in
residential gas sales from milder winter weather in the first quarter. This
weather-related sales revenue decrease was partly offset by additional sales
revenues from a 2.2% increase in the average number of gas customers.
Gas fuel revenues decreased $2.1 million due to lower sales volumes as a result
of the milder winter weather.
Gas merchant revenues increased $63.6 million 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 $27.4 million to $22.0
million. 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. These decreases were partially offset
by Conectiv Services, Inc.'s increased revenues from acquisitions of companies
which provide heating, ventilation, and air conditioning (HVAC) and plumbing
services.
ELECTRIC FUEL AND PURCHASED ENERGY EXPENSES
- -------------------------------------------
Electric fuel and purchased energy expenses increased $15.6 million for the
three-month period mainly due to greater volumes of energy purchased for sale
off-system, partly offset by lower kWh output for interchange deliveries and on-
system sales.
The kWh output required to serve load within the Company's service territory is
substantially equivalent to total output less interchange deliveries. For the
three months ended March 31, 1998, the Company's output for load within its
service territory was provided by 46% net purchased power, 33% coal generation,
12% nuclear generation, and 9% oil and gas generation.
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<PAGE>
GAS PURCHASED
- -------------
Gas purchased increased $62.9 million for the three-month period 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 weather.
EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
- --------------------------------------------------
The Company expensed $40.3 million of merger related costs in the first quarter
of 1998. The charge is net of $32.5 million of curtailment and settlement gains
from pension and postretirement benefits. The Company estimates that
approximately $7.0 million to $23.0 million of settlement gains will be
recognized later in 1998, as additional settlements occur. Refer to "Employee
Separation and Other Merger-Related Costs" in Note 2 to the Consolidated
Financial Statements for a more detailed discussion.
OPERATION AND MAINTENANCE EXPENSES
- ----------------------------------
Operation and maintenance expenses for the Company's utility business were
relatively flat due to cost containment measures. The $5.8 million increase in
operation and maintenance expenses was principally due to a higher level of HVAC
business activity and start-up costs for the telecommunications business.
DEPRECIATION EXPENSE
- --------------------
Depreciation expense increased $0.3 million due to completion of on-going
construction projects and installation of new systems, partially offset by lower
depreciation expense for the nonutility subsidiaries primarily due to the sale
of the Pine Grove landfill and waste-hauling operations in the fourth quarter of
1997.
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 $0.2 million for the three-month period mainly due to
higher interest charges from the issuance of $124.2 million of Medium-Term Notes
in February 1997, $42.0 million of Medium-Term Notes in the fourth quarter of
1997 and $33.0 million of Medium-Term Notes in January 1998. These increases
were partially offset by lower interest charges due to the redemption of $25.0
million dollars of Medium-Term Notes in September 1997 and lower short-term debt
balances.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $79.1 million for the three months
ended March 31, 1998 compared to $71.2 million for the three months ended March
31 1997, a $7.9 million increase. Capital expenditures for the three-month
periods decreased from $37.2 million to $21.3 million mainly due to the timing
of expenditures.
-12-
<PAGE>
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.
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
March 31, 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) 2.30 2.83 3.33 3.54 3.49 3.47
Fixed Charges and Preferred Stock
Dividends (SEC Method) (1) 2.13 2.63 2.83 2.92 2.85 2.88
</TABLE>
(1) Excluding the merger-related charge discussed in Note 2 to the Consolidated
Financial Statements, which decreased pre-tax income by $40.3 million, for
the twelve months ended March 31, 1998, the ratio of earnings to fixed
charges was 2.71 and the ratio of earnings to fixed charges and preferred
stock dividends was 2.52.
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.
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;
-13-
<PAGE>
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.
-14-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION
- -------------------------
Salem Nuclear Generating Station
- --------------------------------
After receiving authorization from the Nuclear Regulatory Commission, Public
Service Electric and Gas returned Salem Unit 1 to service on April 17, 1998.
The unit's restart marked the end of a prolonged outage which began in the
second quarter of 1995, and resulted in replacement of the unit's steam
generators and improvements in operations, maintenance, and safety.
Delaware Electric Fuel Adjustment Clause Proceeding
- ---------------------------------------------------
In the Company's 1998 Delaware fuel clause, now before a Hearing Examiner, the
DPSC Staff has proposed a disallowance of approximately $5.05 million based on
the DPSC Staff's view that a power purchase agreement between the Company and
PECO Energy should not have been entered into in 1994 and is higher-priced than
the Company's average fuel costs. The Company will assert that no disallowance
is appropriate based on the applicable legal standard in Delaware and what was
reasonably known about market prices in 1994. The Company believes it has a
strong legal defense, but cannot predict the outcome of the proceeding. Prior
litigation in 1996 involving this power purchase agreement resulted in an
unfavorable ruling by a different Hearing Examiner, which ruling was neither
adopted or rejected by the full DPSC, which deferred the issues for later
review. If the current proceeding is litigated to its conclusion, a final order
of the DPSC would be expected in the late summer or early fall.
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
- -------------------
On February 27, 1998, the Company filed an 8-K announcing that the SEC had
approved the merger between Atlantic and the Company.
On March 3, 1998, the Company filed an 8-K which included items 6, 7, and 8 of
the Company's 1997 Form 10-K.
On March 4, 1998, the Company filed an 8-K which included pro forma Conectiv
financial information. On March 9, 1998 the Company filed an amendment to the
8-K.
-15-
<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: May 14, 1998 /s/ B. S. Graham
------------------------ ------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-16-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<S> <C> <C>
Computation of ratio of earnings to fixed charges 12-A 18
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 19
Financial Data Schedule 27 20
</TABLE>
-17-
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
---------------------
<TABLE>
<CAPTION>
12 Months
Ended
March 31, Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income $75,060 $105,709 $116,187 $117,488 $108,310 $111,076
------------------ ------------- ------------- ------------- ------------- -------------
Income taxes 51,782 72,155 78,340 75,540 67,613 67,102
------------------ ------------- ------------- ------------- ------------- -------------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 79,587 78,350 69,329 65,572 61,128 62,651
Other interest 12,562 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 97,836 96,872 83,235 75,925 70,464 71,896
------------------ ------------- ------------- ------------- ------------- -------------
Nonutility capitalized interest (132) (208) (311) (304) (256) (246)
------------------ ------------- ------------- ------------- ------------- -------------
Earnings before income taxes
and fixed charges $224,546 $274,528 $277,451 $268,649 $246,131 $249,828
================= ============ ============ ============ ============ ============
Ratio of earnings to fixed charges 2.30 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, 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.
-18-
<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
March 31, Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income $75,060 $105,709 $116,187 $117,488 $108,310 $111,076
------------------ ------------- ------------- ------------- ------------- -------------
Income taxes 51,782 72,155 78,340 75,540 67,613 67,102
------------------ ------------- ------------- ------------- ------------- -------------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 79,587 78,350 69,329 65,572 61,128 62,651
Other interest 12,562 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 97,836 96,872 83,235 75,925 70,464 71,896
------------------ ------------- ------------- ------------- ------------- -------------
Nonutility capitalized interest (132) (208) (311) (304) (256) (246)
------------------ ------------- ------------- ------------- ------------- -------------
Earnings before income taxes
and fixed charges $224,546 $274,528 $277,451 $268,649 $246,131 $249,828
================= ============ ============ ============ ============ ============
Fixed charges $ 97,836 $ 96,872 $ 83,235 $ 75,925 $ 70,464 $ 71,896
Preferred dividend requirements 7,371 7,556 14,961 16,185 15,948 14,803
------------------ ------------- ------------- ------------- ------------- -------------
$105,207 $104,428 $98,196 $92,110 $86,412 $86,699
================= ============ ============ ============ ============ ============
Ratio of earnings to fixed charges
and preferred dividends 2.13 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.
-19-
<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 1ST
QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,020,067
<OTHER-PROPERTY-AND-INVEST> 60,367
<TOTAL-CURRENT-ASSETS> 323,589
<TOTAL-DEFERRED-CHARGES> 215,935
<OTHER-ASSETS> 193,949
<TOTAL-ASSETS> 2,813,907
<COMMON> 2
<CAPITAL-SURPLUS-PAID-IN> 542,980
<RETAINED-EARNINGS> 279,698
<TOTAL-COMMON-STOCKHOLDERS-EQ> 822,680
70,000
89,703
<LONG-TERM-DEBT-NET> 983,058
<SHORT-TERM-NOTES> 2,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 32,055
0
<CAPITAL-LEASE-OBLIGATIONS> 18,506
<LEASES-CURRENT> 12,472
<OTHER-ITEMS-CAPITAL-AND-LIAB> 783,133
<TOT-CAPITALIZATION-AND-LIAB> 2,813,907
<GROSS-OPERATING-REVENUE> 416,110
<INCOME-TAX-EXPENSE> (2,408)
<OTHER-OPERATING-EXPENSES> 403,021
<TOTAL-OPERATING-EXPENSES> 400,613
<OPERATING-INCOME-LOSS> 15,497
<OTHER-INCOME-NET> 1,165
<INCOME-BEFORE-INTEREST-EXPEN> 16,662
<TOTAL-INTEREST-EXPENSE> 21,518
<NET-INCOME> (4,856)
1,086
<EARNINGS-AVAILABLE-FOR-COMM> (5,942)
<COMMON-STOCK-DIVIDENDS> 23,761
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 79,090
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
