<PAGE>
SECURITIES AND EXCHANGE COMMISSION
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 June 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
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DELMARVA POWER & LIGHT COMPANY
------------------------------
Table of Contents
-----------------
Page No.
--------
Part I. Financial Information:
Consolidated Statements of Income for the three
and six months ended June 30, 1998 and 1997 1
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 2-3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 4
Consolidated Statement of Changes in Common
Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
Part II. Other Information and Signature 18-23
i
<PAGE>
Part I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 287,176 $ 246,368 $ 565,552 $ 508,971
Gas 72,850 32,299 188,593 88,416
Other services 2,352 32,301 24,343 59,660
--------- --------- --------- ---------
362,378 310,968 778,488 657,047
--------- --------- --------- ---------
OPERATING EXPENSES
Electric fuel and purchased energy 123,278 86,098 241,749 188,940
Gas purchased 62,543 22,431 161,171 58,184
Purchased electric capacity 7,274 6,979 14,491 13,956
Employee separation and other merger-related costs (14,277) - 26,061 -
Other services cost of sales 665 22,275 16,039 43,015
Operation and maintenance 62,618 78,953 142,437 152,953
Depreciation 32,979 34,121 66,710 67,516
Taxes other than income taxes 8,961 8,735 18,404 17,957
--------- --------- --------- ---------
284,041 259,592 687,062 542,521
--------- --------- --------- ---------
OPERATING INCOME 78,337 51,376 91,426 114,526
--------- --------- --------- ---------
OTHER INCOME
Allowance for equity funds used
during construction 608 - 915 -
Other income (1,657) 1,448 (799) 2,979
--------- --------- --------- ---------
(1,049) 1,448 116 2,979
--------- --------- --------- ---------
INTEREST EXPENSE
Interest charges 21,178 20,897 41,996 41,518
Allowance for borrowed funds used during
construction and capitalized interest (360) (1,116) (1,082) (2,236)
--------- --------- --------- ---------
20,818 19,781 40,914 39,282
--------- --------- --------- ---------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 1,422 2,844 2,844
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 55,048 31,621 47,784 75,379
INCOME TAXES 21,973 13,624 19,565 31,589
--------- --------- --------- ---------
NET INCOME 33,075 17,997 28,219 43,790
DIVIDENDS ON PREFERRED STOCK 1,086 1,084 2,172 2,299
--------- --------- --------- ---------
EARNINGS APPLICABLE TO COMMON STOCK $ 31,989 $ 16,913 $ 26,047 $ 41,491
========= ========= ========= =========
</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>
June 30, December 31,
1998 1997
---------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $22,296 $35,339
Accounts receivable 179,926 197,561
Accounts receivable from associated
companies 50,057 -
Inventories, at average cost
Fuel (coal, oil and gas) 24,629 37,425
Materials and supplies 37,411 40,518
Prepayments 6,268 11,255
Deferred energy costs - 18,017
Deferred income taxes, net 7,829 776
---------- ----------
328,416 340,891
---------- ----------
Investments
Investment in leveraged leases - 46,375
Funds held by trustee 55,257 48,086
Other investments 84 9,500
---------- ----------
55,341 103,961
---------- ----------
Property, Plant and Equipment
Electric utility plant 3,030,128 3,010,060
Gas utility plant 245,643 241,580
Common utility plant 156,132 154,791
---------- ----------
3,431,903 3,406,431
Less: Accumulated depreciation 1,433,413 1,373,676
---------- ----------
Net utility plant in service 1,998,490 2,032,755
Utility construction work-in-progress 103,183 93,017
Leased nuclear fuel, at amortized cost 27,654 31,031
Nonutility property, net 4,305 74,811
Goodwill, net 72,900 92,602
---------- ----------
2,206,532 2,324,216
---------- ----------
Deferred Charges and Other Assets
Prepaid employee benefits costs 65,736 58,111
Unamortized debt expense 12,496 12,911
Deferred debt refinancing costs 17,458 18,760
Deferred recoverable income taxes 85,132 88,683
Other 44,511 67,948
---------- ----------
225,333 246,413
---------- ----------
Total Assets $2,815,622 $3,015,481
========== ==========
</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>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt $30,696 $23,254
Long-term debt due within one year 37,287 33,318
Variable rate demand bonds 71,500 71,500
Accounts payable 88,164 103,607
Taxes accrued 19,221 10,723
Interest accrued 18,574 19,902
Dividends payable 23,821 23,775
Current capital lease obligation 12,474 12,516
Deferred energy costs 8,600 -
Accrued employee separation and
other merger-related costs 6,252 -
Other 23,611 35,819
---------- ----------
340,200 334,414
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes, net 447,683 492,792
Deferred investment tax credits 38,662 39,942
Long-term capital lease obligation 16,373 19,877
Other postretirement benefit obligations 824 -
Other 29,335 30,585
---------- ----------
532,877 583,196
---------- ----------
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 287,942 300,757
---------- ----------
830,924 966,685
Treasury shares, at cost:
1998-0 shares, 1997--619,237 - (11,687)
Unearned compensation - (502)
---------- ----------
Total common stockholders' equity 830,924 954,496
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 951,918 983,672
---------- ----------
1,942,545 2,097,871
---------- ----------
Total Capitalization and Liabilities $2,815,622 $3,015,481
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------- ----------
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,219 $ 43,790
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 70,900 70,445
Allowance for equity funds used during construction (915) -
Investment tax credit adjustments, net (1,280) (1,280)
Deferred income taxes, net (6,010) (5,587)
Net change in:
Accounts receivable (14,361) (18,331)
Inventories 14,692 882
Accounts payable (11,785) (7,538)
Other current assets & liabilities (1) 45,922 34,267
Other, net 3,262 (1,010)
--------- ---------
Net cash provided by operating activities 128,644 115,638
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (8,970) (17,303)
Capital expenditures (45,554) (75,625)
Net cash of nonutility subsidiaries spun-up to Conectiv (18,138) -
Deposits to nuclear decommissioning trust funds (2,120) (2,120)
Other, net 150 1,441
--------- ---------
Net cash used by investing activities (74,632) (93,607)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (47,413) (46,684)
Preferred dividends paid (2,265) (1,373)
Issuances: Long-term debt 33,000 124,200
Common stock 63 12,065
Redemptions:Long-term debt (26,029) (2,150)
Variable rate demand bonds - (700)
Common stock (1,983) (70)
Principal portion of capital lease payments (4,190) (2,929)
Net change in short-term debt (17,979) (101,822)
Cost of issuances and refinancings (259) (2,219)
--------- ---------
Net cash used by financing activities (67,055) (21,682)
--------- ---------
Net change in cash and cash equivalents (13,043) 349
Cash and cash equivalents at beginning of period 35,339 36,533
--------- ---------
Cash and cash equivalents at end of period $ 22,296 $ 36,882
========= =========
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
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 28,219 28,219
Cash dividends declared
Common Stock (47,506) (47,506)
Preferred Stock (2,172) (2,172)
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 June 30, 1998 1,000 $ 2 $ 542,980 $ 287,942 $ - $ - $ 830,924
===================================================================================
</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 six months ended June 30, 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 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 $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.
Employee Separation and Other Merger-Related Costs
- --------------------------------------------------
For the six months ended June 30, 1998, the Company recorded a $26.0 million
charge ($15.8 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 $42.3
million gain from curtailment and settlements of pension and postretirement
health care benefits. For the three months ended June 30, 1998, gains on
settlements of pension obligations ($13.3 million) and
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<PAGE>
revised cost estimates ($1.0 million) caused pre-tax expenses to decrease by
$14.3 million ($8.6 million after taxes). The Company estimates that
approximately $4 million to $7 million of settlement gains will be recognized
later in 1998, as additional settlements occur. Of the $26.0 million of costs
discussed above, $14.1 million had been paid as of June 30, 1998, $5.7 million
will not require the use of operating funds, and $6.2 million remains to be paid
from operating funds.
The charge for employee severance and benefits covers approximately 415
employees of which approximately 380 employee separations have occurred. The
Company expects the rest of the separations to occur in 1998.
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 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.
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. 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. There is $2 million included in the Company's current
liabilities as of December 31, 1997 and June 30, 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.
-7-
<PAGE>
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
----------------------------------
Six Months Ended
June 30,
----------------
CASH PAID FOR 1998 1997
------- -------
(Dollars in thousands)
Interest, net of amounts capitalized $40,444 $33,492
Income taxes, net of refunds $17,120 $30,623
6. 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.
On July 1, 1998, the Company filed with the MPSC its quantification of stranded
costs and computation of unbundled rates. Stranded costs were computed by
comparing the net present value (NPV) of projected future net revenues to the
book values of generation units, or in the case of purchased power, to the NPV
of purchased power contract costs. For purposes of the filing, stranded costs
were reduced if the NPV of the projected future net revenues exceeded the
generating unit's book value or the NPV of the purchased power contract's costs.
The discount rate used was the Company's after-tax cost of capital (7.83%).
Based on this methodology, stranded costs were quantified to be $217 million on
a total system basis, of which $69 million is the retail Maryland portion. The
$217 million stranded cost total consists of $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 that the Maryland retail portion of the stranded costs be
recovered over a three-year period, starting July 1, 2000, through a market
transition charge (MTC) per kilowatt-hour (kWh) to all transmission and
distribution customers of roughly one cent.
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<PAGE>
Over the three year period, $121.5 million would be collected, which on an
after-tax, NPV basis equates to the $69 million of retail Maryland stranded
costs.
Contingent on a reasonable overall resolution of all restructuring issues, the
Company suggested that rates be frozen during the three-year transition period
at rates effective as of the start of the transition period.
The effects of the above proposal, if accepted by the MPSC, on the Company's
financial statements have not yet been determined. However, stranded costs
recovered from transmission and distribution customers through the MTC would
reduce any potential one-time charge for the write-down of assets or reserve for
uneconomic purchased power contracts. The final determination of the amount of
stranded costs for regulatory purposes and the amount to be recovered from
customers may differ from the amounts in the Company's filing. Also, the
quantification of stranded costs under existing generally accepted accounting
principles (GAAP) differs from the method used to quantify the Company's
stranded costs for the MPSC. Among other differences, GAAP would preclude
recognition of the gains on plants (or purchased power contracts) not impaired,
but would require write down of the plants that are impaired.
7. 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. 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 a hedge 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.
The Company has not yet determined the effect that SFAS No. 133 will have on its
financial statements and related notes. For information concerning the
Company's current accounting policy for derivatives and related energy trading
activities, refer to Notes 1 and 6 to the 1997 Financial Statements in the 1997
Report on Form 10-K.
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<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 six months ended
June 30, include revenues of $19.5 million and $51.8 million and net losses of
$3.5 million and $1.9 million, for 1998 and 1997, respectively, from the
operations of these nonutility subsidiaries.
The Company had earnings applicable to common stock of $26.1 million and $41.5
million for the six months ended June 30, 1998 and 1997, respectively. The
earnings decline was primarily due a $15.8 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, earnings were up $2.0 million,
primarily due to lower operation and maintenance expenses partially offset by
lower gas revenues (net of fuel costs) due to milder winter weather.
The Company had earnings applicable to common stock of $32.0 million and $16.9
million for the three months ended June 30, 1998, and 1997, respectively. Net
income for the three months ended June 30, 1998 increased $8.6 million due to
the recognition of gains on the settlement of pension obligations and
adjustments that were made to the costs associated with the Merger, which were
originally recorded in the first quarter. After adjusting for the one-time
Merger costs and the affect of the nonutility subsidiaries, earnings were up
$5.6 million primarily due to lower operation and maintenance expenses.
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.
* 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 restructuring legislation until 1999.
* On July 1, 1998, the Company filed with the MPSC its quantification of
stranded costs and computation of unbundled rates. Stranded costs were
computed by comparing the NPV of projected future net revenues to the book
values of generation units, or in the case of purchased power, to the NPV of
purchased power contract costs. For purposes of the filing, stranded costs
were reduced if the NPV of the projected future net revenues exceeded the
generating unit's book value or the NPV of the purchased power contract's
costs. The discount rate used was the Company's after-tax cost of capital
(7.83%). Based on this methodology, stranded costs were quantified to be
$217 million on a total system basis, of which $69 million is the retail
Maryland
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<PAGE>
portion. The $217 million stranded cost total consists of $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 that the Maryland retail portion of the stranded costs
be recovered over a three-year period, starting July 1, 2000, through a
market transition charge (MTC) per kWh to all transmission and distribution
customers of roughly one cent.
Over the three year period, $121.5 million would be collected, which on an
after-tax, NPV basis equates to the $69 million of retail Maryland stranded
costs.
Contingent on a reasonable overall resolution of all restructuring issues,
the Company suggested that rates be frozen during the three-year transition
period at rates effective as of the start of the transition period.
The effects of the above proposal, if accepted by the MPSC, on the Company's
financial statements have not yet been determined. However, stranded costs
recovered from transmission and distribution customers through the MTC would
reduce any potential one-time charge for the write-down of assets or reserve
for uneconomic purchased power contracts. The final determination of the
amount of stranded costs for regulatory purposes and the amount to be
recovered from customers may differ from the amounts in the Company's filing.
Also, the quantification of stranded costs under existing GAAP differs from
the method used to quantify the Company's stranded costs for the MPSC. Among
other differences, GAAP would preclude recognition of the gains on plants (or
purchased power contracts) not impaired, but would require write down of the
plants that are impaired.
* 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- and six-month periods ended June 30, 1998, as compared to the same
periods in 1997, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Six
Months Months
------- -------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $ 5.7 $ 6.9
Fuel Revenues (2.1) (8.3)
Interchange Delivery Revenues 23.7 15.2
Merchant Revenues 13.5 42.8
----- -----
Total $40.8 $56.6
===== =====
</TABLE>
Electric non-fuel revenues increased $5.7 million for the three-month period,
primarily due
-11-
<PAGE>
to a 5.1% increase in retail kWh sales due to favorable economic conditions and
customer growth, partially offset by Merger-related rate reductions. Electric
non-fuel revenues increased $6.9 million for the six-month period, primarily due
to 1.3% higher retail kWh sales and revenues from storm restoration work in New
England during the first quarter, partially offset by Merger-related rate
reductions. The year-to-date increase in kWh sales was diminished substantially
by the mild winter weather in the first quarter.
Electric fuel revenues decreased $2.1 million and $8.3 million for the three-
and six-month periods, respectively, due to lower retail electric fuel rates,
partially offset by higher retail 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 increased $23.7 million and $15.2 million for the
three- and six-month periods, respectively, mainly due to higher sales and
higher billing rates to the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection. Interchange delivery revenues reduce the rates charged to
customers under fuel adjustment clauses and, thus, generally do not affect net
income.
Electric merchant revenues from off-system, unregulated sales increased $13.5
million and $42.8 million for the three- and six-month periods, respectively,
mainly because the Company's merchant group has increased its operations
substantially since the beginning 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.
GAS REVENUES
- ------------
Details of the changes in the various components of gas revenues for the three-
and six-month periods ended June 30, 1998, as compared to the same periods in
1997, are shown below (dollars in millions):
<TABLE>
<CAPTION>
Three Six
Months Months
------- -------
<S> <C> <C>
Non-fuel (Base Rate) Revenues $(0.4) $ (2.2)
Fuel Revenues (2.0) (4.1)
Merchant Revenues 42.9 106.5
----- ------
Total $40.5 $100.2
===== ======
</TABLE>
The decreases shown above for non-fuel and fuel gas revenues were primarily due
to lower residential gas sales caused by milder winter and warmer April weather.
Residential gas sales decreased 15.0% and 11.3% for the second quarter and six-
month period, respectively. The weather-related gas revenue decrease was partly
offset by additional gas revenues from a 2.3% increase in the average number of
gas customers.
Gas merchant revenues increased $42.9 million and $106.5 million for the three-
and six-month periods, respectively, primarily due to higher off-system gas
sales resulting from a
-12-
<PAGE>
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 $32.3 million to $2.3
million for the three-month period and from $59.7 million to $24.3 million for
the six-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.
ELECTRIC FUEL AND PURCHASED ENERGY EXPENSES
- -------------------------------------------
Electric fuel and purchased energy expenses increased $37.2 million and $52.8
million for the three- and six-month periods, respectively, mainly due to
greater volumes of energy purchased for sale off-system and an increase in
deferred fuel expense.
GAS PURCHASED
- -------------
Gas purchased increased $40.1 million and $103.0 million for the three- and six-
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 weather.
EMPLOYEE SEPARATION AND OTHER MERGER-RELATED COSTS
- --------------------------------------------------
The Company recognized additional settlement gains on its pension obligations
and revised its previous estimate of Merger-related costs in the second quarter
of 1998 which resulted in a $14.3 million reduction in the Merger-related costs
that were charged in the first quarter. For the six months ended June 30, 1998,
the Company has expensed $26.0 million of Merger-related costs. The charge is
net of $42.3 million of curtailment and settlement gains from pension and
postretirement benefits. The Company estimates that approximately $4 million to
$7 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 decreased by $16.3 million for the three-
month period, primarily due to the transfer of the nonutility subsidiaries to
Conectiv on March 1, 1998, lower operating expenses at the Salem nuclear power
plant and the utility business's cost containment measures.
Operation and maintenance expenses decreased by $10.5 million for the six-month
period, primarily due to lower operating expenses at the Salem nuclear power
plant and the utility business's cost containment measures.
-13-
<PAGE>
Depreciation Expense
- --------------------
Depreciation expense decreased $1.1 million and $0.8 million for the three- and
six-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 and installation of new systems.
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 $0.4 million and $0.6 million for the three- and six-
month periods, respectively, mainly due to higher average debt balances
associated with utility plant financing requirements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $128.6 million for the six months
ended June 30, 1998, compared to $115.6 million for the six months ended June
30, 1997, a $13.0 million increase. Capital expenditures for the six-month
periods decreased from $75.6 million to $45.6 million mainly due to the timing
of expenditures.
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.
-14-
<PAGE>
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 Year Ended December 31,
June 30, -----------------------------------
1998 1997 1996 1995 1994 1993
--------- ---- ------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges (SEC Method) (1) 2.55 2.83 3.33 3.54 3.49 3.47
Fixed Charges and Preferred Stock
Dividends (SEC Method) (1) 2.37 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 $26.0 million, for
the twelve months ended June 30, 1998, the ratio of earnings to fixed
charges was 2.82 and the ratio of earnings to fixed charges and preferred
stock dividends was 2.62.
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.
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 Conectiv 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. The
Company faces 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 its customers.
The project team is using a phased approach to managing its activities. The
first phase is identification, inventory and assessment of all systems,
equipment, and processes. Each identified item is given a criticality rating of
high, medium or low. The second phase is determining and implementing
corrective action for the systems, equipment and processes rated as high or
medium and thus believed to put the Company's business operations and customers
at substantial risk. The third phase is testing. The project team has
completed corrective action on most of the information technology systems used
in managing the Company's businesses and has tested approximately half of the
systems in this area. Assessment of, and modifications to, other impacted
systems, equipment and processes in the power generation, power distribution,
natural gas distribution, and energy services business units are in the early
stages and are expected to continue through 1998 and
-15-
<PAGE>
1999, with testing of critical items expected to be done as modifications are
completed. The Company will be updating established outage contingency plans to
address Year 2000 issues over the next twelve months.
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.
Conectiv has incurred approximately $3 million in costs for year 2000 activities
and currently expects 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.
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 will be assessing
the status of the Year 2000 project team on at least a monthly basis to
determine the likelihood of substantial business disruptions. Any disruption to
the Company's operations could significantly impact its customers and could
generate substantial 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
-16-
<PAGE>
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.
-17-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION
- -------------------------
SALEM NUCLEAR GENERATING STATION
- --------------------------------
On July 29, 1998 the Nuclear Regulatory Commission (NRC) announced that the
Salem Nuclear Generating Station has been removed from the NRC's watch list.
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
-18-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delmarva Power & Light Company
------------------------------
(Registrant)
Date: August 13, 1998 /s/ B. S. Graham
------------------------ -----------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-19-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------- ------
<S> <C> <C>
Computation of ratio of earnings to fixed charges 12-A 21
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 22
Financial Data Schedule 27 23
</TABLE>
-20-
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
12 Months
Ended Year Ended December 31,
June 30, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 90,138 $105,709 $116,187 $117,488 $108,310 $111,076
------------- ---------- ---------- ---------- ---------- ----------
Income taxes 60,131 72,155 78,340 75,540 67,613 67,102
------------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 80,463 78,350 69,329 65,572 61,128 62,651
Other interest 10,845 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 96,995 96,872 83,235 75,925 70,464 71,896
------------- ---------- ---------- ---------- ---------- ----------
Nonutility capitalized interest (53) (208) (311) (304) (256) (246)
------------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes
and fixed charges $247,211 $274,528 $277,451 $268,649 $246,131 $249,828
============= ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 2.55 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.
-21-
<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 Year Ended December 31,
June 30, ------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $90,138 $105,709 $116,187 $117,488 $108,310 $111,076
------------- ---------- ---------- ---------- ---------- ----------
Income taxes 60,131 72,155 78,340 75,540 67,613 67,102
------------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 80,463 78,350 69,329 65,572 61,128 62,651
Other interest 10,845 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 96,995 96,872 83,235 75,925 70,464 71,896
------------- ---------- ---------- ---------- ---------- ----------
Nonutility capitalized interest (53) (208) (311) (304) (256) (246)
------------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes
and fixed charges $247,211 $274,528 $277,451 $268,649 $246,131 $249,828
============= ========== ========== ========== ========== ==========
Fixed charges $96,995 $96,872 $83,235 $75,925 $70,464 $71,896
Preferred dividend requirements 7,275 7,556 14,961 16,185 15,948 14,803
------------- ---------- ---------- ---------- ---------- ----------
$104,270 $104,428 $98,196 $92,110 $86,412 $86,699
============= ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred dividends 2.37 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.
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COLSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM THE COMPANY'S 2ND
QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,998,490
<OTHER-PROPERTY-AND-INVEST> 59,646
<TOTAL-CURRENT-ASSETS> 328,416
<TOTAL-DEFERRED-CHARGES> 225,333
<OTHER-ASSETS> 203,737
<TOTAL-ASSETS> 2,815,622
<COMMON> 2
<CAPITAL-SURPLUS-PAID-IN> 542,980
<RETAINED-EARNINGS> 287,942
<TOTAL-COMMON-STOCKHOLDERS-EQ> 830,924
70,000
89,703
<LONG-TERM-DEBT-NET> 951,918
<SHORT-TERM-NOTES> 30,696
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 37,287
0
<CAPITAL-LEASE-OBLIGATIONS> 16,373
<LEASES-CURRENT> 12,474
<OTHER-ITEMS-CAPITAL-AND-LIAB> 776,247
<TOT-CAPITALIZATION-AND-LIAB> 2,815,622
<GROSS-OPERATING-REVENUE> 778,488
<INCOME-TAX-EXPENSE> 19,565
<OTHER-OPERATING-EXPENSES> 687,062
<TOTAL-OPERATING-EXPENSES> 706,627
<OPERATING-INCOME-LOSS> 71,861
<OTHER-INCOME-NET> 116
<INCOME-BEFORE-INTEREST-EXPEN> 71,977
<TOTAL-INTEREST-EXPENSE> 43,758
<NET-INCOME> 28,219
2,172
<EARNINGS-AVAILABLE-FOR-COMM> 26,047
<COMMON-STOCK-DIVIDENDS> 47,506
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 128,644
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
