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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-1405
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DELMARVA POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware & Virginia 51-0084283
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
800 King Street, P. O. Box 231
Wilmington, Delaware 19899
(Address of principal executive offices)
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Registrant's telephone number (302) 429-3114
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
First Mortgage Bonds (Series issued New York Stock Exchange and Philadelphia
prior to 1968) Stock Exchange
Preferred Stock, Cumulative, Par Philadelphia Stock Exchange
Value $100.00
(Series issued prior to 1978)
8.125% Cumulative Trust Preferred New York Stock Exchange
Capital Securities of Delmarva
Financing I
(Liquidation Value of $25.00)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
All 1,000 issued and outstanding shares of Delmarva Power & Light Company
common stock, $2.25 per share par value, are owned by Conectiv.
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TABLE OF CONTENTS
<TABLE>
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Page
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<C> <S> <C>
Glossary.............................................................. iii
PART I
Item 1. Business.................................................... I-1
General............................................................ I-1
Competition and Electric Utility Industry Restructuring............ I-2
Electric Business.................................................. I-2
Installed Capacity............................................. I-2
Electricity Supply............................................. I-3
Pennsylvania-New Jersey-Maryland Interconnection Association... I-3
Purchased Power................................................ I-4
Nuclear Power Plants........................................... I-4
Fuel Supply for Electric Generation............................ I-5
Coal....................................................... I-5
Oil........................................................ I-5
Gas........................................................ I-5
Nuclear.................................................... I-6
Electric Regulatory Matters.................................... I-6
Electric Retail Rates...................................... I-6
Electric Energy Adjustment Clauses......................... I-7
Gas Business....................................................... I-7
Deregulation................................................... I-7
Gas Operations................................................. I-8
Gas Regulatory Matters......................................... I-8
Other Regulatory Matters........................................... I-8
Special Contract Rate Tariffs.................................. I-8
Cost Accounting Manual/Code of Conduct......................... I-8
Virginia Affiliates Act........................................ I-9
Federal Decontamination & Decommissioning Fund................. I-9
Capital Spending and Financing Program............................. I-9
Environmental Matters.............................................. I-9
Air Quality Regulations........................................ I-10
Water Quality Regulations...................................... I-10
Hazardous Substances........................................... I-11
Executive Officers................................................. I-12
Item 2. Properties.................................................. I-13
Item 3. Legal Proceedings........................................... I-14
Item 4. Submission of Matters to a Vote of Security Holders......... I-14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... II-1
Item 6. Selected Financial Data..................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... II-3
Item 8. Financial Statements and Supplementary Data................. II-14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... II-41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... III-1
Item 11. Executive Compensation...................................... III-2
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i
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Page
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Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. III-12
Item 13. Certain Relationships and Related Transactions............. III-12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... IV-1
Signatures........................................................... IV-6
</TABLE>
ii
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GLOSSARY
The following glossary lists the abbreviations used in this report.
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
1992 Energy Act............... National Energy Policy Act of 1992
ACE........................... Atlantic City Electric Company
AFUDC......................... Allowance For Funds Used During Construction
Atlantic...................... Atlantic Energy, Inc.
APB........................... Accounting Principles Board
Bcf........................... Billion Cubic Feet
CAM........................... Cost Accounting Manual
CRP........................... Conectiv Resource Partners, Inc.
Clean Water Act............... Federal Water Pollution Control Act
Debentures.................... 8.125% Junior Subordinated Debentures
D&D Fund...................... Decontamination & Decommissioning Fund
DNREC......................... Delaware Department of Natural Resources and
Environmental Control
DOE........................... United States Department of Energy
DPL........................... Delmarva Power & Light Company
DPSC.......................... Delaware Public Service Commission
DRIP.......................... Dividend Reinvestment and Common Share Purchase
Plan
EITF.......................... Emerging Issues Task Force
FASB.......................... Financial Accounting Standards Board
FERC.......................... Federal Energy Regulatory Commission
GAAP.......................... Generally Accepted Accounting Principles
HVAC.......................... Heating, ventilation, and air conditioning
kWh........................... Kilowatt-hour
Litigation Reform Act......... The Private Securities Litigation Reform Act of
1995
LLRW.......................... Low Level Radioactive Waste
LMP........................... Locational Marginal Pricing
LTIP.......................... Long-Term Incentive Plan
Mcf........................... Thousand Cubic Feet
Merger........................ A series of merger transactions by which DPL and
ACE became subsidiaries of Conectiv
Mortgage...................... Mortgage and Deed of Trust
MPSC.......................... Maryland Public Service Commission
MW............................ Megawatt
MWH........................... Megawatt-hour
NERC.......................... North American Electric Reliability Council
NJPDES........................ New Jersey Pollution Discharge Elimination
System
NOTR.......................... Northeast Ozone Transport Region
NOx........................... Oxides of Nitrogen
NPDES......................... National Pollution Discharge Elimination System
NRC........................... Nuclear Regulatory Commission
NWPA.......................... Nuclear Waste Policy Act of 1982
ODEC.......................... Old Dominion Electric Cooperative
Peach Bottom.................. Peach Bottom Atomic Power Station
PECO.......................... PECO Energy Company
PJM Interconnection........... Pennsylvania-New Jersey-Maryland Interconnection
Association
PPPP.......................... Power Plant Performance Program
</TABLE>
iii
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<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
PSE&G.......................... Public Service Electric and Gas Company
PUHCA.......................... Public Utility Holding Company Act of 1935
RACT........................... Reasonably Available Control Technology
RTP............................ Real Time Pricing
Salem.......................... Salem Nuclear Generating Station
SALP........................... Systematic Assessment of Licensee Performance
SEC............................ Securities and Exchange Commission
SFAS........................... Statement of Financial Accounting Standards
SFAS No. 71.................... SFAS No. 71, "Accounting For the Effects of
Certain Types of Regulation"
SFAS No. 88.................... SFAS No. 88, "Employers' Accounting For
Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits"
SFAS No. 128................... SFAS No. 128, "Earnings Per Share"
SFAS No. 131................... SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information"
SFAS No. 133................... SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SO/2/ ......................... Sulfur Dioxide
USEPA.......................... United States Environmental Protection Agency
Vienna......................... Vienna Generating Station
VRDB........................... Variable Rate Demand Bonds
VSCC........................... Virginia State Corporation Commission
Westinghouse................... Westinghouse Electric Corporation
</TABLE>
iv
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PART I
Item 1. Business
General
Delmarva Power & Light Company (DPL) is a regulated public electric and gas
utility and a subsidiary of Conectiv, which is a Delaware corporation and a
registered holding company under the Public Utility Holding Company Act of
1935 (PUHCA). DPL was incorporated in Delaware in 1909 and in Virginia in 1979
and holds the franchises necessary to provide regulated electric and gas
service in its service territory.
DPL's electric utility business activities are primarily generating,
purchasing, delivering, and selling electricity. DPL serves approximately
455,300 electric customers within its service territory, which has a
population of approximately 1.2 million and covers an area of about 6,000
square miles on the Delmarva Peninsula, which includes Delaware, ten primarily
Eastern Shore counties in Maryland, and the Eastern Shore of Virginia. DPL
also sells electricity outside its service territory (off-system) and in
markets that are not subject to price regulation.
DPL provides regulated gas service (supply and/or transportation) to
approximately 105,700 customers located in a service territory, which has a
population of approximately 485,000 and covers an area of about 275 square
miles in northern Delaware, including the City of Wilmington. DPL also sells
gas off-system and in markets which are not subject to price regulation.
In 1998, DPL's sources of revenues were as follows: regulated electricity
sales--55.5%; non-regulated electricity sales--14.5%; regulated gas sales--
5.6%; non-regulated gas sales--22.5%; and other services--1.9%.
DPL's utility business is subject to regulation with respect to its retail
electric sales by the Delaware Public Service Commission (DPSC), Maryland
Public Service Commission (MPSC), and the Virginia State Corporation
Commission (VSCC). The Federal Energy Regulatory Commission (FERC) also has
regulatory authority over certain aspects of DPL's electric utility business,
including the transmission of electricity, the sale of electricity to
municipalities and electric cooperatives, and interchange and other purchases
and sales of electricity involving other utilities. DPL is also subject to
regulation by the Pennsylvania Public Utility Commission in limited respects
concerning property and operations in Pennsylvania.
On March 1, 1998, DPL and Atlantic City Electric Company (ACE) became
wholly-owned subsidiaries of Conectiv. Before the Merger, Atlantic Energy,
Inc. (Atlantic) owned ACE, an electric utility serving the southern one-third
of New Jersey, and nonutility subsidiaries. As a result of the Merger,
Atlantic no longer exists and Conectiv owns, directly or indirectly, DPL, ACE,
and nonutility subsidiaries formerly held separately by DPL and Atlantic.
DPL's former nonutility subsidiaries included Conectiv Services, Inc.
(heating, ventilation, and air conditioning construction and services),
Conectiv Communications, Inc. (local and long-distance phone service), and
Delmarva Capital Investments, Inc. (various nonutility businesses). Conectiv
is a registered holding company under the Public Utility Holding Company Act
of 1935 (PUHCA), which imposes certain restrictions on the operations of
registered holding companies and their subsidiaries.
At December 31, 1998, DPL had 1,259 employees, of which 988 were represented
by collective bargaining labor organizations. During 1998, DPL reduced its
workforce by 1,461 employees, including 421 employees separated through
Merger-related employee separation programs and 1,040 employees transferred to
Conectiv Resource Partners, Inc. (CRP), a Conectiv subsidiary and service
company established pursuant to PUHCA regulations. CRP provides a variety of
support services to Conectiv subsidiaries, and its employees are primarily
former DPL and ACE employees. The costs of CRP are directly assigned,
distributed and allocated to the Conectiv subsidiaries using CRP's services,
including DPL.
For additional information about the Merger, refer to Note 4 to DPL's 1998
Consolidated Financial Statements included in Item 8 of Part II.
I-1
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For information concerning DPL's business segments, see Note 21 to DPL's
1998 Consolidated Financial Statements included in Item 8 of Part II.
Competition and Electric Utility Industry Restructuring
For information concerning restructuring the electric utility industry in
Delaware, Maryland, and Virginia, see Note 6 to DPL's 1998 Consolidated
Financial Statements included in Item 8 of Part II. Generally, with
restructuring, the supply component of the price charged to a customer for
electricity will be deregulated, and electricity suppliers will compete to
supply electricity to customers. Customers will continue to pay the local
utility a regulated price for delivery of electricity over the transmission
and distribution system. As electric utility industry restructuring is
implemented in DPL's and other utilities' service territories, gross margins
earned from supplying electricity are expected to decrease as competition to
supply customers with electricity increases. Delaware legislation is expected
to be enacted which would begin phasing-in choice of electricity suppliers to
customers beginning October 1, 1999. In Maryland, competition to supply
electric customers is expected to be phased in beginning July 3, 2000, over a
3-year period. In Virginia, retail electric competition is expected to be
phased-in beginning January 1, 2002.
As a greater percentage of DPL's revenues become subject to competition,
financial risks and rewards, and the volatility of earnings are expected to
increase. DPL's ability to continue reducing costs by streamlining operations,
regulatory decisions pursuant to restructurings, retention of existing
customers and the ability to gain new customers are significant determinants
of DPL's future success.
Electric Business
Installed Capacity
The megawatts (MW) of net installed summer electric generating capacity
available to DPL to serve its peak load as of December 31, 1998, are presented
below. See Item 2, Properties, for additional information.
<TABLE>
<CAPTION>
% of
Source of Capacity MW Total
------------------ ----- -----
<S> <C> <C>
Coal-fired generating units................................... 1,153 33
Oil-fired generating units.................................... 598 17
Combustion turbines/combined cycle generating units........... 674 19
Nuclear generating units...................................... 328 9
Diesel units.................................................. 23 --
Long-term purchased capacity.................................. 237 7
Customer-owned capacity....................................... 57 2
----- ---
Subtotal.................................................... 3,070 87
Short-term purchased capacity................................. 449 13
----- ---
Total....................................................... 3,519 100
===== ===
</TABLE>
The net generating capacity available for operations at any time may be less
than the total net installed generating capacity due to generating units being
out of service for inspection, maintenance, repairs, or unforeseen
circumstances.
As restructuring of the electric utility industry is implemented, DPL
expects to sell some of its generating units. DPL has identified certain
generating assets that may be sold, but has not determined when such sale, or
sales, would occur.
DPL also has demand-side management programs which provide DPL with the
ability to reduce its peak load by approximately 272 MW.
I-2
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Electricity Supply
As a member of the Pennsylvania-New Jersey-Maryland Interconnection Associa-
tion (PJM Interconnection), DPL is obligated to maintain capacity levels based
on its allocated share of estimated aggregate PJM Interconnection capacity re-
quirements. (The PJM Interconnection is discussed below.) DPL periodically up-
dates its forecast of peak demand and PJM Interconnection reserve require-
ments, and re-evaluates resources available to supply projected growth. Any
short-term capacity deficiencies related to obligations to the PJM Intercon-
nection are expected to be satisfied through short-term capacity-only pur-
chases. Incremental energy supply needs are expected to be filled through pur-
chased power.
DPL's peak load in 1998 was 3,085 MW on July 23, an 8.0% increase from DPL's
previous historical peak demand of 2,857 MW which occurred on July 15, 1997.
DPL's capacity obligation to the PJM Interconnection, including a reserve
margin, is based on normal weather conditions and full implementation of its
demand-side management programs. Under these conditions, DPL's 1998 peak
demand would have been approximately 2,952 MW. DPL's installed capacity of
3,481 MW at the time of the peak resulted in a reserve margin of 18%, computed
under PJM Interconnection guidelines. DPL's reserve obligation to the PJM
Interconnection is approximately 18%.
The sources of electricity supplied to DPL's customers in its service
territory during 1998, 1997, and 1996 are shown below.
<TABLE>
<CAPTION>
Source of Electricity 1998 1997 1996
--------------------- ---- ---- ----
<S> <C> <C> <C>
Generation fuel type
Coal.................................................. 34% 35% 38%
Oil/Natural Gas....................................... 18 20 29
Nuclear............................................... 16 10 9
Interchange and Purchased Power......................... 32 35 24
--- --- ---
Total................................................. 100% 100% 100%
=== === ===
</TABLE>
Pennsylvania-New Jersey-Maryland Interconnection Association
As a member of the PJM Interconnection, DPL's generation and transmission
facilities are operated on an integrated basis with other electricity
suppliers in Pennsylvania, New Jersey, Maryland, and the District of Columbia,
and are interconnected with other major utilities in the United States. This
power pool improves the reliability and operating economies of the systems in
the group and provides capital economies by permitting shared reserve
requirements. The PJM Interconnection's installed capacity as of December 31,
1998, was 57,551 MW. The PJM Interconnection's peak demand during 1998 was
48,663 MW on August 15, which resulted in a summer reserve margin of 18.2%
(based on installed capacity of 57,511 MW on that date).
On October 15, 1998, the PJM Interconnection began operating a centralized
capacity credit market, providing a new option to participants for procuring
and selling surplus capacity to meet reliability obligations within the PJM
Interconnection region. Capacity is the capability to produce electric power,
typically from owned generation or third-party purchase contracts and differs
from the electric energy markets, which trade the actual energy being
generated. This market facilitates the selling and buying of capacity for
participants by providing a single point of contact for market participants
and a published capacity market clearing price.
Effective April 1, 1998, the PJM Interconnection implemented locational
marginal pricing (LMP) to establish the market clearing prices for electric
energy and to price electric transmission usage based upon costs associated
with transmission system congestion. When there is no congestion on the power
system and energy is flowing on the grid in an unconstrained manner, energy
prices are cleared at the highest bid accepted by the PJM Interconnection for
the entire PJM Interconnection region. When a limit is reached on the
transmission grid, the PJM Interconnection will operate generators to preserve
system reliability. LMP allows the PJM Interconnection to send price signals
to raise and lower generator output when the power flows are constrained.
Different energy
I-3
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market clearing prices are paid by wholesale power buyers and sellers on the
power grid that reflect the value relative to a system constraint. LMP
provides for an efficient allocation of congestion costs to transmission users
within the PJM Interconnection region. The FERC has approved the use of the
LMP congestion management system to allow electric energy market participants
with power contracts on neighboring electric systems to compensate the PJM
Interconnection for any unintended flows on the PJM Interconnection system,
rather than forcing those participants to curtail their contracts.
Currently, the PJM Interconnection Operating Agreement requires bids to sell
electricity received from generation located within the PJM Interconnection
control area not to exceed the variable cost of producing such electricity.
Transactions that are bid into the PJM pool from generation located outside
the PJM Interconnection control area are capped at $1,000 per megawatt hour.
All power providers are paid the LMP set through power providers' bids.
Certain PJM Interconnection members have requested that FERC revise the PJM
Interconnection Operating Agreement to allow the submission of market based
bids to the PJM Interconnection energy market.
Purchased Power
In conjunction with its acquisition of Conowingo Power Company in 1995, DPL
purchases from PECO Energy Company (PECO) 237 MW of base-load capacity and
associated energy, which increases to 279 MW by 2006 when the contract
expires. DPL is also currently purchasing 105 MW of capacity under one-year
contracts and 344 MW of capacity through agreements with terms of less than
one year.
Nuclear Power Plants
DPL's nuclear capacity is provided by Peach Bottom Atomic Power Station
(Peach Bottom) Units 2 and 3 and by Salem Nuclear Generating Station (Salem)
Units 1 and 2. DPL jointly owns these units, as tenants in common, with PECO,
ACE and Public Service Electric and Gas Company (PSE&G). The Peach Bottom
units are operated by PECO and have a combined summer capacity of 2,186 MW, of
which DPL is entitled to 164 MW (7.51%). The Salem units are operated by PSE&G
and have a combined summer capacity of 2,212 MW, of which DPL is entitled to
164 MW (7.41%).
DPL's ownership share in nuclear power plants provided approximately 9% of
its installed capacity as of December 31, 1998. In 1998, DPL's share of output
from the jointly-owned nuclear power plants provided 16% of the electricity
used by DPL's customers. See Note 9 to DPL's 1998 Consolidated Financial
Statements included in Item 8 of Part II for information about DPL's
investment in jointly-owned generating stations.
The operation of nuclear generating units is regulated by the Nuclear
Regulatory Commission (NRC). Such regulation requires that all aspects of
plant operation be conducted in accordance with NRC safety and environmental
requirements and that continuous demonstrations be made to the NRC that plant
operations meet applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating unit may operate.
As a by-product of nuclear operations, nuclear generating units produce low-
level radioactive waste (LLRW). LLRW is accumulated on-site until shipped to a
federally licensed permanent disposal facility. Salem and Peach Bottom have
on-site interim storage facilities with five-year storage capacities.
For a discussion of the cycle of production, use and disposal of nuclear
fuel, see "Nuclear" on page I-6.
For a discussion of DPL's funding of its share of the estimated future cost
of decommissioning the Salem and Peach Bottom nuclear reactors, see Note 8 to
DPL's 1998 Consolidated Financial Statements included in Part II, Item 8.
The NRC is requiring nuclear plant operators to report by July 1, 1999, that
their nuclear power plants are Year 2000 ready, or will be Year 2000 ready, by
January 1, 2000. PSE&G and PECO have informed DPL that they are on schedule to
meet the July 1, 1999 response date and that their nuclear operations' Year
2000 programs will make Salem and Peach Bottom Year 2000 ready by January 1,
2000.
I-4
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Salem Units 1 and 2 were removed from operation by PSE&G in the second
quarter of 1995 due to operational problems, and maintenance and safety
concerns. Due to degradation of a significant number of tubes in the Unit 1
steam generators, PSE&G replaced the Unit 1 steam generators. After receiving
NRC authorization, PSE&G returned Unit 2 to service on August 30, 1997, and
Unit 1 to service on April 17, 1998. On July 29, 1998, the NRC removed Salem
from its "watch list" of troubled nuclear plants. The Salem Unit 2 steam
generators will be inspected for tube degradation in upcoming outages.
See Note 18 to DPL's 1998 Consolidated Financial Statements included in Part
II, Item 8, for information concerning DPL's lawsuit against Westinghouse
Electric Corporation, the designer and manufacturer of the Salem steam
generators, and the financial impact of the outages.
Systematic Assessment of Licensee Performance (SALP) reports issued by the
NRC rate licensee performance in four assessment areas: Operations,
Maintenance, Engineering and Plant Support. Ratings range from a high of "1"
to a low of "3." In September 1998, the NRC issued a SALP on the performance
of activities at Salem for the period March 1, 1997, to August 1, 1998. Salem
received a rating of 1 in Operations, a 2 in Maintenance, a 2 in Engineering,
and a 1 in Plant Support. The NRC noted that the overall performance at Salem
improved, as demonstrated by a nearly event-free return of both units to
operation following the extended outage.
On July 17, 1997, the NRC issued a SALP report on Peach Bottom for the
period October 15, 1995, to June 7, 1997. Peach Bottom received a rating of 1
in the areas of Operations, Maintenance, and Plant Support, and 2 in
Engineering.
On September 16, 1998, the NRC announced that it was suspending the SALP
report process until it completes a review of its nuclear power plant
performance assessment process. The SALP process has not yet been resumed or
replaced.
Fuel Supply for Electric Generation
DPL's electric generating capacity by fuel type is shown under "Installed
Capacity" on page I-2. To facilitate the purchase of adequate amounts of fuel
at reasonable prices, DPL contracts with various suppliers of coal, oil, and
natural gas on both a long- and short-term basis. DPL's long-term coal
contracts generally contain provisions for periodic and limited price
adjustments, which are based on current market prices. Oil and natural gas
contracts generally are of shorter term with prices determined by market-based
indices.
Coal
Edge Moor Units 3 and 4, and the Indian River, Keystone and Conemaugh
Generating Stations are coal-fired. During 1998, 47% of DPL's coal supply was
purchased under contracts less than three years in duration, 48% under long-
term contracts (up to ten years), and the balance on the spot market.
Approximately 69% of DPL's projected coal requirements are expected to be
provided under supply contracts. DPL does not anticipate any difficulty in
obtaining adequate amounts of coal at reasonable prices.
Oil
Currently, 100% of the residual oil used in Edge Moor Unit 5 is purchased on
a spot basis. Natural gas is used when economically feasible. A two-year
residual oil supply contract that expires in 1999 provides 90% to 100% of the
fuel supply requirements for the Vienna Generating Station (Vienna). Any
amount over 90% of Vienna's requirements may be purchased in the spot market.
Gas
Natural gas is the primary fuel for the three combustion turbines at DPL's
Hay Road combustion turbines and a secondary fuel at Edge Moor Units 3, 4, and
5. Natural gas for these generating units is purchased on a
I-5
<PAGE>
firm or interruptible basis from suppliers such as marketers, producers, and
utilities. The gas is delivered to DPL by interstate pipelines under a mix of
firm and interruptible transportation agreements. The secondary fuel for the
Hay Road combustion turbines is low-sulfur diesel fuel, which is purchased in
the spot market.
Nuclear
The supply of fuel for nuclear generating units involves the mining and
milling of uranium ore to uranium concentrate, conversion of the uranium
concentrate to uranium hexaflouride, enrichment of the uranium hexaflouride
gas, conversion of the enriched gas to fuel pellets, and fabrication of fuel
assemblies. After spent fuel is removed from a nuclear reactor, it is placed
in temporary storage for cooling in a spent fuel pool at the nuclear station
site. The federal government has an obligation for the transportation and
ultimate disposal of the spent fuel, as discussed below.
PSE&G has informed DPL it has several long-term contracts with uranium ore
operators, converters, enrichers and fabricators to process uranium ore to
uranium concentrate to meet the currently projected requirements for Salem.
DPL has also been advised by PECO that it has similar contracts to satisfy the
fuel requirements of Peach Bottom. Currently, there is an adequate supply of
nuclear fuel for Salem and Peach Bottom.
In conformity with the Nuclear Waste Policy Act of 1982 (NWPA), PSE&G and
PECO have entered into contracts with the United States Department of Energy
(DOE) on behalf of the joint owners providing that the federal government
shall for a fee take title to, transport, and dispose of spent nuclear fuel
and high level radioactive waste from the Salem and Peach Bottom reactors. In
accordance with the NWPA, DPL pays the DOE one-tenth of one cent per kWh of
nuclear generation (net of station use) for the future cost of spent nuclear
fuel disposal. Under the NWPA, the DOE was to begin accepting spent fuel for
permanent off-site storage no later than January 1998. However, no such
repositories are in service or under construction. The DOE has stated that it
would not be able to open a permanent, high level nuclear waste storage
facility until 2010, at the earliest.
Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be
stored in reactor facility storage pools or in independent spent nuclear fuel
storage installations located at or away from reactor sites for at least 30
years beyond the licensed life for operation (which may include the term of a
revised or renewed license).
PSE&G has advised DPL that, as a result of reracking the two spent fuel
storage pools at Salem, the availability of spent fuel storage capacity is
estimated to be adequate through 2012 for Unit 1 and 2016 for Unit 2. PECO has
advised DPL that spent fuel racks at Peach Bottom have adequate storage
capacity until 2000 for Unit 2 and until 2001 for Unit 3. PECO has also
advised DPL that it is constructing an on-site dry storage facility, which is
expected to be operational in 2000, to provide additional storage capacity.
Electric Regulatory Matters
For information concerning restructuring the electric utility industry in
Delaware, Maryland, and Virginia, see Note 6 to DPL's 1998 Consolidated
Financial Statements included in Item 8 of Part II.
Electric Retail Rates
DPL's base rates for retail electric service are subject to the approval of
the DPSC, MPSC, and VSCC. However, the utility ratemaking process is changing
in Delaware, Maryland, and Virginia, as discussed in Note 6 to DPL's 1998
Consolidated Financial Statements included in Item 8 of Part II.
See Note 6 to DPL's 1998 Consolidated Financial Statements, included in Part
II, Item 8, for information concerning base rate decreases related to the
Merger and base rate decreases expected in connection with the electric
utility industry restructuring.
I-6
<PAGE>
Electric Energy Adjustment Clauses
DPL's regulated retail electric tariffs include energy adjustment clauses
that provide for collection from customers of fuel costs and the energy costs
of purchased and net interchange power. Any under- or over-collection of
energy adjustment clause costs in a current period is generally deferred until
customers' rates are adjusted to collect or return the under- or over-
collection. Capacity costs arising from purchased power transactions are
generally subject to base rate recovery.
The current status or results of significant fuel rate issues are discussed
below. As of December 31, 1998, DPL's accrued liabilities included amounts
which are expected to adequately provide for disallowances of energy
adjustment clause costs and penalties related to the issues discussed below.
Both Delaware and Maryland have programs that assess the overall performance
of DPL's 15 major generating units. Under the DPSC's Power Plant Performance
Program (PPPP), DPL can receive financial rewards or penalties, which will not
exceed an estimated cap of $1.7 million in 1998. The 1996 and 1997 PPPP
results were not material to DPL's financial position or results of
operations. If DPL does not meet an overall system performance standard set by
Maryland's Generating Unit Performance Program, the MPSC can disallow certain
fuel costs of units that operated below their individual performance
standards. DPL did not meet the 1996 or 1997 overall system standards due
principally to the Salem outage. For information concerning replacement power
costs not recovered through customer rates due to a prolonged outage at Salem,
see Note 18 to DPL's 1998 Consolidated Financial Statements included in Item 8
of Part II.
DPL's long-term purchased power agreement with PECO has previously been the
subject of regulatory litigation in Delaware as the result of disallowances
proposed by DPSC Staff and the Delaware Division of the Public Advocate. No
such disallowances were ordered for 1996 or 1997. Delaware's Division of the
Public Advocate has proposed a total disallowance of $17.7 million for 1998
and 1999. DPL will contest the proposed disallowance.
Energy adjustment clauses are expected to be eliminated under electric
industry restructuring initiatives. Based on existing restructuring
initiatives in Delaware, Maryland, and Virginia, profits or losses on the
energy portion of electricity sales may affect DPL's earnings after
restructuring becomes effective.
Gas Business
Deregulation
Effective April 1, 1996, a restructuring of natural gas pricing and service
options enabled DPL's large and medium volume commercial and industrial
customers to purchase gas from DPL, or directly from other suppliers and make
arrangements for transporting gas purchased from these suppliers to their
facilities. DPL's transportation customers pay a fee, which may be either
fixed or negotiated, for the use of DPL's gas transmission and distribution
facilities.
The restructuring mentioned above also authorized off-system gas sales and
other "nonjurisdictional merchant sales and services." Earnings from gas sales
which are off the Delmarva Peninsula and do not use DPL's gas system assets
are not shared with regulated customers through lower rates. For other off-
system gas sales and nonjurisdictional merchant sales and services, 80% of the
margin (revenues net of fuel costs) earned reduces energy rates charged to
firm gas customers.
On December 1, 1998, DPL filed an application with the DPSC, seeking
approval of a pilot program to provide transportation service and a choice of
gas suppliers to a group of retail customers. DPL proposed a one-year pilot
program, starting November 1, 1999, open to 15% of residential customers and
15% of small commercial customers. DPL and intervening parties are engaged in
settlement discussions about the proposed pilot program.
I-7
<PAGE>
Gas Operations
DPL purchases gas supplies from marketers and producers under spot market,
short-term, and long-term agreements. As shown in the table below, DPL's
maximum 24-hour system capability, including natural gas purchases, storage
deliveries, and the emergency sendout capability of its peak shaving plant, is
187,074 Mcf (thousand cubic feet).
<TABLE>
<CAPTION>
Number of Expiration Daily
Contracts Dates Mcf
--------- ---------- -------
<S> <C> <C> <C>
Supply....................................... 1 2001 9,180
Transportation............................... 5 2004-2016 82,810
Storage...................................... 6 1999-2011 50,084
Local Peak Shaving (emergency capability).... 45,000
-------
Total...................................... 187,074
=======
</TABLE>
DPL experienced an all-time daily peak in combined firm sales and
transportation sendout of 158,810 Mcf on January 17, 1997. DPL's peak shaving
plant liquefies, stores, and re-gasifies natural gas in order to provide
supplemental gas in the event of pipeline supply shortfalls or system
emergencies.
Gas Regulatory Matters
Similar to DPL's Delaware electric energy adjustment clause, a gas cost rate
clause provides for the recovery of gas costs from DPL's regulated gas
customers. Gas costs for regulated, on-system customers are charged to
operations based on costs billed to customers under the gas cost rate clause.
Any under- or over-collection of gas costs in a current period is generally
deferred until customers' rates are adjusted to collect or return the under-
or over-collection.
In 1998, DPL implemented a DPSC-approved gas price hedging/risk management
program with respect to gas supply for regulated customers. The program seeks
to limit regulated customers exposure to commodity price uncertainty. Costs
and benefits of the program are included in the gas cost rate clause,
resulting in no effect on DPL's earnings.
Other Regulatory Matters
Special Contract Rate Tariffs
Under programs approved by the MPSC and DPSC, DPL may enter into negotiated
contracts with retail electric customers in Maryland and retail electric and
natural gas customers in Delaware. Also, "Real Time Pricing" (RTP) tariffs are
available to customers in Maryland and in Delaware, and an experimental RTP
tariff is effective in Virginia. The RTP tariffs provide additional
flexibility in providing pricing and service to certain large customers.
Cost Accounting Manual/Code of Conduct
DPL has cost allocation and direct charging mechanisms in place to ensure
that there is no cross-subsidization of competitive activities by regulated
utility activities. In 1998, DPL made filings with the DPSC, the MPSC and VSCC
to update and revise its Cost Accounting Manual (CAM) to reflect the holding
company structure created in 1998. The CAM is subject to review and audit.
DPL is also subject to various Codes of Conduct that affect the relationship
between DPL's regulated and Conectiv's competitive activities. In general,
these Codes of Conduct limit information obtained through utility activities
from being disseminated to employees engaged in non-regulated activities,
require separate telephone numbers for competitive activities and restrict or
prohibit sales leads, joint sales calls, or joint promotions.
I-8
<PAGE>
Requirements that separate operational and managerial employees be
maintained, as required by the MPSC for non-regulated activities making retail
sales of electricity or gas, could impact the way DPL and the Conectiv system
of companies are organized and DPL's ability to capture economies of common
management and deploy personnel efficiently, without duplicating personnel
functions. Prohibitions or restrictions on joint promotions may adversely
impact Conectiv's competitive businesses.
Virginia Affiliates Act
Certain types of transactions between DPL and its affiliates may require the
prior approval of the VSCC under the Virginia Affiliates Act. Past
applications have generally been approved by the VSCC.
Federal Decontamination & Decommissioning Fund
The Energy Policy Act of 1992 provided for creation of a Decontamination &
Decommissioning (D&D) Fund to pay for the future clean-up of DOE gaseous
diffusion enrichment facilities. Domestic utilities and the federal government
are required to make payments to the D&D Fund until 2008 or $2.25 billion,
adjusted annually for inflation, is collected. The liability accrued for DPL's
share of the D&D Fund was $5.3 million as of December 31, 1998. DPL is
recovering this cost through energy adjustment clause revenues.
Capital Spending and Financing Program
For financial information concerning DPL's capital spending and financing
program, refer to "Liquidity and Capital Resources" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7, of Part II and Notes 12 to 14 to DPL's 1998 Consolidated
Financial Statements, included in Item 8 of Part II.
DPL's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1994-1998 are shown below.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges (SEC Method)... 2.92 2.83 3.33 3.54 3.49
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends (SEC Method)..................... 2.72 2.63 2.83 2.92 2.85
</TABLE>
Under the SEC Method, earnings, including Allowance For Funds During
Construction (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. Excluding the Merger-related pre-tax charge of
$27.4 million discussed in Note 4 to DPL's 1998 Consolidated Financial
Statements included in Item 8 of Part II, the 1998 ratio of earnings to fixed
charges was 3.21 and the 1998 ratio of earnings to fixed charges and preferred
stock dividends was 2.98.
Environmental Matters
DPL is subject to various federal, regional, state, and local environmental
regulations, including air and water quality control, oil pollution control,
solid and hazardous waste disposal, and limitation on land use. Permits are
required for DPL's construction projects and the operation of existing
facilities. DPL has incurred, and expects to continue to incur, capital
expenditures and operating costs because of environmental considerations and
requirements. DPL has a continuing program to assure compliance with the
environmental standards adopted by various regulatory authorities.
I-9
<PAGE>
Included in DPL's forecasted capital requirements are construction
expenditures for compliance with environmental regulations, which are
estimated to be $10 million in 1999.
Air Quality Regulations
The federal Clean Air Act requires utilities and other industries to
significantly reduce emissions of air pollutants such as sulfur dioxide
(SO/2/) and oxides of nitrogen (NOx). Title IV of the Clean Air Act, the acid
rain provisions, established a two-phase program which mandated reductions of
SO/2/ and NOx emissions from certain utility units by 1995 (Phase I) and
required other utility units to begin reducing SO/2/ and NOx emissions in the
year 2000 (Phase II). Phase I emission reductions requirements applicable to
the jointly-owned Conemaugh Power Plant have been achieved. The remainder of
DPL's wholly- and jointly-owned fossil-fuel units are expected to meet Phase
II emission limits through a combination of fuel switching and SO/2/ allowance
trading.
DPL's facilities also must comply with Title I of the Clean Air Act, the
ozone nonattainment provisions, which require states to promulgate Reasonably
Available Control Technology (RACT) regulations for existing sources located
within ozone nonattainment areas or within the Northeast Ozone Transport
Region (NOTR). DPL's facilities in Delaware and Maryland are in the NOTR. To
comply with RACT regulations, DPL has installed low NOx burner technology on
six of its generating units. DPL's RACT compliance program has not yet
received final regulatory approvals by Delaware and Maryland.
Additional "post-RACT" NOx emission regulations are being pursued by states
in the NOTR. Delaware has proposed post-RACT NOx control regulations requiring
attainment of summer seasonal emission reductions of up to 65% below 1990
levels by May 1999 through reduced emissions or the procurement of NOx
emission allowances. DPL's post-RACT compliance plan for its Delaware
generating units includes capital expenditures of approximately $12 million.
In addition to the above requirements, summer seasonal NOx controls
commensurate with reductions of up to 85% below baseline years by the year
2003 are required for areas in the NOTR, which includes Delaware. DPL
currently cannot determine the additional operating and capital costs that
will be incurred to comply with these initiatives since state regulations
implementing the federal requirement have not yet been promulgated.
In July 1997, the United States Environmental Protection Agency (USEPA)
adopted new federal air quality standards for particulate matter and ozone.
The new particulate matter standard addressed fine particulate matter.
Attainment of the fine particulate matter standard may require reductions in
NOx and SO/2/. However, under the time schedule announced by the USEPA,
particulate matter non-attainment areas will not be designated until 2002 and
control measures to meet this standard will not be identified until 2005.
Water Quality Regulations
The federal Water Pollution Control Act, as amended (the Clean Water Act)
provides for the imposition of effluent limitations to regulate the discharge
of pollutants, including heat, into the waters of the United States. National
Pollution Discharge Elimination System (NPDES) permits issued by state
environmental regulatory agencies specify effluent limitations, monitoring
requirements, and special conditions with which facilities discharging
wastewaters must comply. To ensure that water quality is maintained, permits
are issued for a term of five years and are modified as necessary to reflect
requirements of new or revised regulations or changes in facility operations.
The Clean Water Act also requires that cooling water intake structures be
designed to minimize adverse environmental impact. The USEPA is required by a
consent order to propose regulations in 1999 for determining whether cooling
water intake structures represent the best technology available for minimizing
adverse environmental impacts. Final action on the proposed regulations is
required in 2001.
I-10
<PAGE>
Between 1976 and 1979, DPL submitted to the Delaware Department of Natural
Resources and Environmental Control (DNREC) the results of environmental
impact studies which demonstrated compliance with the Clean Water Act. DNREC
has required DPL to update its earlier studies to determine if the Indian
River and Edge Moor power plants are still in compliance. In addition, in 1993
DNREC promulgated increased restrictions on thermal discharges. Studies
assessing thermal water quality standards compliance will be completed in 1999
and studies assessing impacts of the cooling water intake structures will be
completed in 2001. If the studies indicate an adverse environmental impact,
then upgrades to the intake structures and/or environmental enhancement
projects to offset adverse impacts will be required. Impact studies would cost
up to $2 million per plant. Costs for intake structure upgrades and
enhancement projects would range from approximately $1 million if little
adverse impact is found, to $45 million if cooling towers are required, which
DPL considers to be an unlikely potential outcome.
PSE&G is implementing the 1994 New Jersey Pollution Discharge Elimination
System (NJPDES) permit issued for the jointly-owned Salem facility, which
requires, among other things, water intake screen modifications and wetlands
restoration. Under the 1994 permit, PSE&G is continuing to restore wetlands
and conduct the requisite management and monitoring associated with the
special conditions of the 1994 permit. In 1999, PSE&G must apply to renew
Salem's NJPDES permit.
Hazardous Substances
The nature of the electric and gas utility businesses results in the
production, or handling, of various by-products and substances which may
contain substances defined as hazardous under federal or state statutes. The
disposal of 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. DPL's
exposure is minimized by adherence to environmental standards for DPL-owned
facilities and through a waste disposal contractor screening and audit
process.
As of December 31, 1998, DPL's other accrued liabilities included $2 million
for clean-up and other potential costs related to federal and state superfund
sites. DPL does not expect such future costs to have a material effect on
DPL's financial position or results of operations. For additional information,
see Note 19 to DPL's 1998 Consolidated Financial Statements included in Item 8
of Part II.
I-11
<PAGE>
Executive Officers
The names, ages, and positions of all of the executive officers of DPL as of
December 31, 1998, are listed below, along with their business experiences
during the past five years. Officers are elected annually by Conectiv's Board
of Directors. There are no family relationships among these officers, nor any
arrangement or understanding between any officer and any other person pursuant
to which the officer was selected.
Executive Officers of DPL
(As of December 31, 1998)
<TABLE>
<CAPTION>
Business Experience
Name, Age and Position During Past 5 Years
---------------------- -------------------
<S> <C>
Howard E. Cosgrove, 55.......... Elected 1998 as Chairman of the Board and Chief
Chairman of the Board and Chief Executive Officer of Conectiv, Delmarva Power &
Executive Officer Light Company, and Atlantic City Electric
Company. Elected 1992 as Chairman of the Board,
President and Chief Executive Officer and
Director of Delmarva Power & Light Company
Meredith I. Harlacher, Jr., 56.. Elected 1998 as President and Chief Operating
President Officer of Conectiv, and President and Chief
Operating Officer and Director of Delmarva Power
& Light Company and Atlantic City Electric
Company. Elected 1993 as Senior Vice President
of Atlantic Energy, Inc.
Barry R. Elson, 57.............. Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1997 as
Executive Vice President, Delmarva Power & Light
Company. Executive Vice President, Cox
Communications, Inc., Atlanta, Georgia, from
1995 to 1996. Senior Vice President, Cox
Enterprises/Cox Communications, Inc., Atlanta,
Georgia, from 1984 to 1995.
Thomas S. Shaw, 51.............. Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1992 as
Senior Vice President, Delmarva Power & Light
Company.
Barbara S. Graham, 50........... Elected 1998 as Senior Vice President and Chief
Senior Vice President and Chief Financial Officer of Conectiv, and Senior Vice
Financial Officer President and Chief Financial Officer and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1994 as
Senior Vice President, Treasurer and Chief
Financial Officer, Delmarva Power & Light
Company. Vice President and Chief Financial
Officer from 1992 to 1994.
James P. Lavin, 51.............. Elected 1998 as Controller of Conectiv, Delmarva
Controller and Chief Accounting Power & Light Company, and Atlantic City
Officer Electric Company. Elected 1993 as Comptroller,
Delmarva Power & Light Company.
John C. van Roden, 49........... Elected 1998 as Senior Vice President and Chief
Senior Vice President and Chief Financial Officer, effective January 1999, of
Financial Officer* Conectiv, Delmarva Power & Light Company, and
Atlantic City Electric Company. Principal, Cook
and Belier, Inc. in 1998. Senior Vice
President/Chief Financial Officer and Vice
President/Treasurer, Lukens, Inc. from 1987 to
1998.
</TABLE>
- --------
* Effective January 1999
I-12
<PAGE>
Item 2. Properties
Substantially all utility plants and properties of DPL are subject to the
lien of the Mortgage under which DPL's First Mortgage Bonds are issued.
DPL's electric properties are located in Delaware, Maryland, Virginia,
Pennsylvania, and New Jersey. The following table sets forth the net installed
summer electric generating capacity available to DPL to serve its peak load as
of December 31, 1998.
<TABLE>
<CAPTION>
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
<S> <C> <C>
Coal-Fired
Edge Moor............. Wilmington, DE...................... 260,000
Indian River.......... Millsboro, DE....................... 767,000
Conemaugh............. New Florence, PA.................... 63,000(A)
Keystone.............. Shelocta, PA........................ 63,000(A)
---------
1,153,000
---------
Oil-Fired
Edge Moor............. Wilmington, DE...................... 445,000
Vienna................ Vienna, MD.......................... 153,000
---------
598,000
---------
Combustion Turbines/Combined Cycle
Hay Road.............. Wilmington, DE...................... 511,000
Christiana............ Wilmington, DE...................... 45,000
Edge Moor............. Wilmington, DE...................... 13,000
Madison Street........ Wilmington, DE...................... 11,000
West.................. Marshallton, DE..................... 15,000
Delaware City......... Delaware City, DE................... 16,000
Indian River.......... Millsboro, DE....................... 17,000
Vienna................ Vienna, MD.......................... 17,000
Tasley................ Tasley, VA.......................... 26,000
Salem................. Lower Alloways Creek Twp., NJ....... 3,000(A)
---------
674,000
---------
Nuclear
Peach Bottom.......... Peach Bottom Twp., PA............... 164,000(A)
Salem................. Lower Alloways Creek Twp., NJ....... 164,000(A)
---------
328,000
---------
Diesel Units
Crisfield............. Crisfield, MD....................... 10,000
Bayview............... Bayview, VA......................... 12,000
Keystone.............. Shelocta, PA........................ 400(A)
Conemaugh............. New Florence, PA.................... 400(A)
---------
22,800
---------
Customer-Owned
Capacity............... Delaware City, DE................... 57,000(B)
Long-Term Capacity Purchase.................................. 237,000
---------
Subtotal................................................... 3,069,800
---------
Short-Term Capacity Purchase................................. 449,000
---------
Total...................................................... 3,518,800
=========
</TABLE>
- --------
(A) DPL's portion of jointly-owned plants.
(B) Represents capacity owned by a refinery customer which is available to DPL
to serve its peak load.
DPL's electric transmission and distribution system includes 1,391
transmission poleline miles of overhead lines, 5 transmission cable miles of
underground cables, 6,931 distribution poleline miles of overhead lines, and
5,540 distribution cable miles of underground cables.
I-13
<PAGE>
DPL has a liquefied natural gas plant located in Wilmington, Delaware, with
a storage capacity of 3.045 million gallons and an emergency sendout
capability of 45,000 Mcf per day. DPL also owns four natural gas city gate
stations at various locations in its gas service territory. These stations
have a total sendout capacity of 125,000 Mcf per day.
The following table sets forth DPL's gas pipeline miles:
<TABLE>
<S> <C>
Transmission Mains..................... 114*
Distribution Mains..................... 1,492
Service Lines.......................... 1,104
</TABLE>
- --------
* Includes 11 miles of joint-use gas pipeline that is used 10% for gas
operations and 90% for electric operations.
DPL owns and occupies office buildings in Wilmington and Christiana,
Delaware and Salisbury, Maryland, and also owns elsewhere in its service area
a number of properties that are used for office, service, and other purposes.
Item 3. Legal Proceedings
See Note 18 to DPL's 1998 Consolidated Financial Statements included in Part
II, Item 8 for information concerning DPL's lawsuit against Westinghouse
Electric Corporation, the designer and manufacturer of the Salem steam
generators.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
I-14
<PAGE>
DELMARVA POWER & LIGHT COMPANY
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
All shares of DPL's common stock are owned by Conectiv, its parent company.
DPL's certificate of incorporation requires payment of all preferred
dividends in arrears (if any) prior to payment of common dividends to Conectiv,
and has certain other limitations on the payment of common dividends.
II-1
<PAGE>
DELMARVA POWER & LIGHT COMPANY
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998(1) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Operating Results and
Data
Operating Revenues...... $ 1,899,899 $ 1,415,367 $ 1,168,664 $ 1,055,725 $ 1,033,442
Operating Income........ $ 265,427 (2) $ 226,294 $ 250,389 $ 254,425 $ 233,244 (3)
Net Income.............. $ 112,410 (2) $ 105,709 $ 116,187 $ 117,488 $ 108,310 (3)
Earnings Applicable to
Common Stock........... $ 108,058 (2) $ 101,218 $ 107,251 $ 107,546 $ 98,940 (3)
On System Electric Sales
(kWh 000) (4).......... 13,429,102 13,231,766 12,925,716 12,310,921 12,505,082
On System Gas Sold and
Transported (Mcf 000).. 21,587 22,855 22,424 21,371 20,342
Capitalization
Variable Rate Demand
Bonds
(VRDB) (5)............. $ 71,500 $ 71,500 $ 85,000 $ 86,500 $ 71,500
Long-Term Debt.......... 951,911 983,672 904,033 853,904 774,558
DPL Obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust
Holding Solely DPL
Debentures............. 70,000 70,000 70,000 -- --
Preferred Stock......... 89,703 89,703 89,703 168,085 168,085
Common Stockholder's
Equity................. 851,494 954,496 934,913 923,440 884,169
----------- ----------- ----------- ----------- -----------
Total Capitalization
with VRDB.............. $ 2,034,608 $ 2,169,371 $ 2,083,649 $ 2,031,929 $ 1,898,312
=========== =========== =========== =========== ===========
Other Information
Total Assets............ $ 2,904,851 $ 3,015,481 $ 2,931,855 $ 2,866,685 $ 2,669,785
Long-Term Capital Lease
Obligations............ $ 17,003 $ 19,877 $ 20,552 $ 20,768 $ 19,660
Capital Expenditures.... $ 114,663 $ 156,808 $ 165,595 $ 142,833 $ 166,938
Common Dividends
Declared (6)........... $ 94,860 $ 94,065 $ 93,294 $ 92,686 $ 91,436
</TABLE>
- --------
(1) As discussed in Note 4 to the Consolidated Financial Statements, Delmarva
Power & Light Company (DPL) and Atlantic City Electric Company (ACE)
became wholly-owned subsidiaries of Conectiv (the Merger) on March 1,
1998. The Merger also resulted in Conectiv owning the nonutility
subsidiaries previously owned by DPL. Accordingly, the 1998 Consolidated
Statement of Income includes 2 months of operating results for DPL's
former nonutility subsidiaries.
(2) Employee separation and other Merger-related costs in 1998 decreased
operating income and net income by $27.4 million and $16.6 million,
respectively.
(3) An early retirement offer in 1994 decreased operating income and net
income by $17.5 million and $10.7 million, respectively.
(4) Excludes interchange deliveries.
(5) Although Variable Rate Demand Bonds are classified as current
liabilities, DPL intends to use the bonds as a source of long-term
financing as discussed in Note 14 to the Consolidated Financial
Statements.
(6) Amounts shown as total, rather than on a per-share basis, since DPL is a
wholly-owned subsidiary of Conectiv. Excludes non-cash dividend for
transfer of nonutility subsidiaries to Conectiv on March 1, 1998, due to
the Merger.
II-2
<PAGE>
DELMARVA POWER & LIGHT COMPANY
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merger with Atlantic
On March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic City
Electric Company (ACE) became wholly-owned subsidiaries of Conectiv, a
registered holding company under the Public Utility Holding Company of 1935.
Each outstanding share of DPL's common stock was exchanged for one share of
Conectiv's common stock.
Conectiv became the owner of DPL's nonutility subsidiaries as of March 1,
1998, resulting in inclusion of two months of nonutility subsidiary operations
in DPL's 1998 Consolidated Statement of Income. The Consolidated Statements of
Income include revenues of $19.5 million and $113.0 million, and a net loss of
$3.5 million and net income of $9.8 million, for 1998 and 1997, respectively,
from the operations of these nonutility subsidiaries. The common stockholder's
equity of these nonutility subsidiaries was $123.4 million as of February 28,
1998.
DPL continued to sell electricity and gas in markets not subject to price
regulation subsequent to the Merger.
See Note 4 to the Consolidated Financial Statements for additional
information concerning the Merger.
Earnings Results Summary
DPL had earnings applicable to common stock of $108.1 million and $101.2
million for 1998 and 1997, respectively. The $6.9 million earnings increase
was reduced by a $16.6 million after-tax charge for costs associated with the
Merger and a $13.3 million decrease in nonutility subsidiary earnings. In
1997, nonutility subsidiary earnings included a $13.7 million gain on the sale
of a landfill and waste-hauling company. Excluding the one-time Merger costs
and operating results of the nonutility subsidiaries, earnings were up $36.8
million in 1998. This increase was primarily due to a 2.5% retail electric
kilowatt-hour (kWh) sales increase and lower operation and maintenance
expenses. The earnings increase was constrained by milder winter weather's
unfavorable effect on electric and gas sales.
Earnings applicable to common stock, for 1997, were $101.2 million, a $6.1
million decrease from 1996. The $6.1 million decrease was primarily attributed
to losses from investments in new businesses and participation in the
competitive energy markets (including branding expenditures), partly offset by
the gain on the sale of the landfill and waste-hauling company. Regulated
utility earnings were relatively flat in 1997 primarily because higher net
electric revenues and lower outage expenses for the Salem nuclear generating
units were offset by anticipated higher capital costs.
Electric Utility Industry Restructuring
As discussed on the following pages, deregulation of the electric utility
industry is underway in Delaware, Maryland, and Virginia. Generally, with
restructuring, the supply component of the price charged to a customer for
electricity will be deregulated, and electricity suppliers will compete to
supply electricity to customers. Customers would continue to pay the local
utility a regulated price for the delivery of the electricity over the
transmission and distribution system.
Stranded costs are costs which may not be recoverable in a competitive
energy supply market due to lower prices or customers choosing a different
supplier. Stranded costs generally include above-market costs associated with
generation facilities or long-term purchased power agreements, and regulatory
assets. DPL has quantified stranded costs in its Maryland regulatory filing
and has proposed a plan seeking approval for recovery of these costs from
customers during the transition to a competitive market.
II-3
<PAGE>
When a specific plan that deregulates electricity supply becomes final, DPL
would cease applying Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation," to its
electricity supply business in the regulatory jurisdiction to which the plan
applies. To the extent that a deregulation plan provides for recovery of
stranded costs through cash flows from the regulated transmission and
distribution business, the stranded costs would continue to be recognized as
assets under SFAS No. 71. Any stranded costs (including regulatory assets) for
which cost recovery is not provided would be expensed.
The amount of stranded costs ultimately recovered from utility customers, if
any, and the full impact of legislation deregulating the electric utility
industry in any of the jurisdictions in which DPL operates cannot be
predicted. Also, the quantification of stranded costs under existing generally
accepted accounting principles (GAAP) differs from methods used in regulatory
filings. Among other differences, GAAP precludes recognition of the gains on
plants (or purchased power contracts) not impaired, but requires write down of
the plants that are impaired. Due to these considerations, market conditions,
timing, and other factors, DPL's management currently cannot predict the
ultimate effects that electric utility industry deregulation may have on the
financial statements of DPL, although deregulation may have a material adverse
effect on DPL's results of operations.
Delaware
The Alliance for Fair Electric Competition Today, which includes DPL, worked
with Delaware executive branch representatives and representatives of the
Delaware Public Service Commission (DPSC) Staff to develop consensus
restructuring legislation. House Bill No. 10, with several amendments, passed
the Delaware House of Representatives, and the Delaware Senate. The Governor
of Delaware is expected to sign the legislation.
House Bill No. 10 would allow DPL's Delaware customers to choose their
electricity suppliers beginning on October 1, 1999 (for customers with peak
demands of 1,000 kilowatts or more), January 15, 2000 (for customers with peak
demands of 300 kilowatts or more), and 18 months after the legislation is
enacted (for all other customers). House Bill No. 10 also provides for a
residential rate reduction of 7.5% beginning October 1, 1999. Thereafter,
except for a deferred fuel balance "true-up" and increases for extraordinary
costs, residential rates may not be changed for four years; rates for
customers in commercial and industrial rate classes may not be changed for
three years. Under House Bill No. 10, certain low-income energy assistance and
environmental programs are funded at an annual level of about $1.6 million by
a charge in electric rates.
Among other matters, unbundled rates to be charged by DPL during these "rate
freeze" periods have been agreed upon by a number of participants in the
restructuring plan proceeding contemplated by House Bill No. 10. Included
within the agreement on unbundled rates, DPL would recover $16 million
(Delaware retail basis) of stranded costs, and electric rates would not be
changed in the event DPL sells or transfers generating assets.
Maryland
In 1997, the Maryland Public Service Commission (MPSC) issued two orders
which provide for retail electric competition to begin July 3, 2000, and be
phased-in over a three-year period (one-third of the customers per year).
Enabling legislation and resolution of complex issues such as stranded costs
and utility taxation will be necessary for implementation of retail
competition in Maryland.
On July 1, 1998, DPL filed with the MPSC its quantification of stranded
costs and computation of unbundled rates, which are being considered in Case
No. 8795. Stranded costs were estimated to be $217 million on a DPL system-
wide basis ($69 million Maryland retail portion), including $123 million
attributable to generating units, $54 million associated with purchased power
contracts, $21 million related to fuel inventory financing costs, and $19
million of regulatory assets. DPL proposed full recovery of the Maryland
portion of the stranded costs over a three-year period, starting with the
commencement of retail competition on July 3, 2000.
The MPSC Staff and other parties contend that the market value of DPL's
generating assets exceeds their book value and thus that DPL has negative
stranded costs, or so-called "stranded benefits." Proposals for rate
II-4
<PAGE>
reductions based on a sharing of these alleged benefits and other factors have
been submitted to the MPSC in Case No. 8795. The proposed rate reductions vary
widely, from 3% up to levels which, if adopted, would have a material adverse
impact on DPL's results of operations.
Maryland's electric utilities, including DPL, continue to meet with the MPSC
Staff and others to develop consensus enabling restructuring and related tax
legislation for possible passage in the 1999 legislative session.
The MPSC is expected to issue its order on DPL's stranded cost recovery and
unbundled rates by October 1, 1999.
Virginia
Comprehensive electric utility restructuring legislation has been introduced
in the Virginia General Assembly. Senate Bill No. 1269 and identical House
Bill No. 2615, introduced on January 21, 1999, were drafted by a joint House-
Senate study committee created in 1996 to consider restructuring issues.
Significant provisions of these Bills provide for:
. Phase-in of retail electric competition beginning January 1, 2002
. Rates in effect on January 1, 2001 to become "capped rates" to continue
in effect through July 1, 2007, except for adjustments for changes in
fuel costs and state tax rates
. Customers choosing an electricity supplier other than their incumbent
utility continue to pay capped transmission and distribution rates but,
instead of the capped generation rate, they would pay a "wires" charge
which would be the difference between the capped generation rate and
projected market prices for electricity
. Just and reasonable net stranded costs, are to be recovered through
capped rates and wires charges during the period January 1, 2001 through
July 1, 2007
Price Regulation of Energy Revenues
Through 1998, customer rates for non-energy costs have been established in
past base rate proceedings before utility regulatory commissions. Changes in
non-energy (or base rate) revenues due to volume, or rate changes, generally
affect the earnings of DPL.
Energy costs, including fuel and purchased energy, are currently billed to
rate-regulated customers under regulated energy adjustment clause rates. These
energy rates are adjusted periodically for cost changes and are subject to
review by regulatory commissions. "Energy revenues," or energy costs billed to
customers, do not generally affect net income, because the amount of under- or
over-recovered energy costs is generally deferred until it is subsequently
recovered from or returned to utility customers.
Energy adjustment clauses are expected to be eliminated under electric
utility industry restructuring initiatives. Based on existing restructuring
initiatives, profits or losses on the energy portion of electricity sales may
affect DPL's earnings, after restructuring becomes effective.
Electric revenues also include interchange delivery revenues, which result
primarily from the sale of electricity to other electricity suppliers in the
Pennsylvania-New Jersey-Maryland Interconnection (PJM Interconnection), which
is an electric power pool. Interchange delivery revenues are currently
reflected in the calculation of rates charged to customers under energy
adjustment clauses and, thus, do not affect net income. Margins from
interchange delivery revenues may impact earnings after deregulation due to
elimination of energy adjustment clauses.
Revenues are also earned from sales not subject to price regulation. These
sales include off-system bulk commodity sales and retail energy sales.
II-5
<PAGE>
Electric Revenues and Sales
DPL's sources of electric revenues as a percentage of total electric
revenues are shown in the table below. The percentage of DPL's consolidated
electric revenues earned from sales not subject to price regulation has
increased as DPL's participation in unregulated electricity markets has grown.
Gross margin percentages earned in markets not subject to price regulation are
generally lower than the gross margin percentages earned in regulated retail
markets due to product differences, greater volume per customer, and
unregulated pricing. However, incremental amounts of gross margin earned from
sales not subject to price regulation enhance DPL's profitability.
Sources of Consolidated Electric Revenues
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Regulated retail revenues.................................. 66.9% 81.0% 85.7%
Resale revenues............................................ 5.0% 6.3% 6.7%
Interchange delivery revenues.............................. 7.5% 3.3% 7.6%
Revenues from sales not subject to price regulation........ 20.6% 9.4% --
</TABLE>
Details of the changes in the various components of electric revenues are
shown below.
Comparative Increase (Decrease) from Prior Year in Electric Revenues
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
Retail and Resale Revenues
Non-Energy (Base Rate) Revenues ................. $ 18.4 $ 8.9
Energy Revenues.................................. (16.1) 32.7
Interchange Delivery Revenues...................... 62.8 (38.8)
Revenues from sales not subject to price
regulation........................................ 172.1 102.4
---------- ----------
$ 237.2 $ 105.2
========== ==========
</TABLE>
Non-energy revenues increased $18.4 million in 1998 primarily due to a 2.5%
retail kWh sales increase which was attributed to favorable economic
conditions and 1.6% customer growth. The retail kWh sales increase was reduced
by milder winter weather's unfavorable effect on residential heating sales.
The increase in non-energy electric revenues in 1998 was reduced by $10.7
million due to Merger-related customer base rate decreases.
For 1997 compared to 1996, electric non-energy revenues increased $8.9
million due to a 2.6% retail kWh sales increase, mainly attributed to
favorable economic conditions and a 1.4% increase in the number of regulated
retail customers. Milder weather limited the sales increase.
In 1998 and 1997, revenues from electric sales not subject to price
regulation increased $172.1 million and $102.4 million, respectively, mainly
because DPL sold more output off-system through the Merchant business. DPL
actively participates in the wholesale energy markets to support wholesale
utility and competitive retail marketing activities. Energy market
participation results in exposure to commodity market risk when, at times, net
open energy commodity positions are created or allowed to continue. To the
extent that DPL has net open positions, controls are in place that are
intended to keep risk exposures within certain management approved risk
tolerance levels.
As discussed under "Price Regulation of Energy Revenues," energy and
interchange delivery revenues generally do not affect net income
II-6
<PAGE>
Electric Resale Business
The ability of electric resale customers to choose their electric supplier
has created a competitive electric resale market. If an electric resale
customer selects a supplier other than the local utility, then the local
utility receives a fee for delivering the electricity to the resale customer.
DPL's contract with its largest electric resale customer, Old Dominion
Electric Cooperative (ODEC), is discussed below. Other electric resale
customers of DPL have electricity supply contracts with DPL which expire in
2001 to 2004.
Under notice provisions in its electricity supply contract, ODEC reduced its
load by 60 megawatts (MW) on September 1, 1998, from approximately 200 MW to
140 MW. ODEC has also notified DPL that it will reduce its load to zero on
September 1, 2001. The annualized reduction in DPL's net income expected to
result from ODEC's 60 MW load reduction is approximately $2 to $3 million. If
ODEC further reduces its load to zero on September 1, 2001, then annualized
net income would decrease by approximately an additional $7 to $8 million.
These projected earnings decreases are net of the expected savings from
avoided capacity costs.
Gas Revenues, Sales and Transportation
DPL earns gas revenues from on-system sales which generally are subject to
price regulation, off-system sales which are not subject to price regulation,
and from the transportation of gas for customers. Transportation customers may
purchase gas from DPL or other suppliers.
Details of the changes in the various components of gas revenues are shown
below.
Comparative Increase (Decrease) from Prior Year in Gas Revenues
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(Dollars in Millions)
<S> <C> <C>
Non-Energy (Base Rate) Revenues................... $ (4.0) $ (1.2)
Energy Revenues................................... (6.0) 8.8
Revenues from sales not subject to price regula-
tion............................................. 341.0 82.2
----------- ----------
$ 331.0 $ 89.8
=========== ==========
</TABLE>
As shown in the above table, total gas revenues increased $331.0 million in
1998 and $89.8 million in 1997 primarily due to higher volumes of gas sold in
markets not subject to price regulation. The margin earned from non-price
regulated gas sales in excess of related purchased gas costs is relatively
small due to the competitive nature of bulk commodity sales.
The decreases in non-energy (base rate) gas revenues for 1998 and 1997 were
primarily due to milder weather during the heating seasons of both years,
which resulted in lower residential gas sales (based on cubic feet sold) of
13.2% and 9.8%, respectively. The weather-related gas revenue decrease was
partly offset by additional gas revenues from new customers. The number of
regulated gas customers served increased 2.4% in 1998 and 2.3% in 1997.
As discussed under "Price Regulation of Energy Revenues," energy revenues
generally do not affect net income.
II-7
<PAGE>
Other Services Revenues
Other service revenues were comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------
(Dollars in millions)
<S> <C> <C> <C>
HVAC (1).............................................. $ 14.6 $ 62.8 $ 7.1
Operation of power plants............................. 2.9 23.5 21.5
Landfill and waste hauling............................ -- 12.7 14.1
Other (2)............................................. 17.9 20.2 24.8
------ ------- ------
Total............................................... $ 35.4 $ 119.2 $ 67.5
====== ======= ======
</TABLE>
- --------
(1) Heating, ventilation, and air conditioning (HVAC).
(2) Other includes real estate activities, value-added (energy-related)
services, leveraged leasing, telecommunications and other
miscellaneous services.
Total revenues from "Other Services" decreased $83.8 million in 1998,
primarily due to the transfer of DPL's nonutility subsidiaries to Conectiv on
March 1, 1998, and the loss of revenue attributed to the sale of a landfill
and waste-hauling operation in the fourth quarter of 1997.
In 1997, other services revenues increased to $119.2 million from $67.5
million in 1996, mainly due to HVAC business acquisitions.
Electric Fuel and Purchased Energy Expenses
In 1998, electric fuel and purchased energy increased $204.4 million
compared to 1997 primarily due to more energy supplied for greater volumes of
electricity sold off-system and within DPL's service territory. In 1997,
electric fuel and purchased energy expenses increased $89.2 million compared
to 1996 primarily due to greater volumes of energy sold off-system and lower
amounts of energy expenses deferred under energy adjustment clauses.
For information concerning the Salem outage's impact on electric fuel and
purchased energy expenses, see Note 18 to the Consolidated Financial
Statements.
The kWh output required to serve load within DPL's service territory is
substantially equivalent to total output less interchange deliveries and off-
system sales. In 1998, DPL's output for load within its service territory was
provided by 34% coal generation, 32% net purchased power, 18% oil and gas
generation, and 16% nuclear generation.
Gas Purchased
Primarily due to larger volumes of gas purchased for resale off-system, gas
purchased increased $333.4 million in 1998 and $91.8 million in 1997.
Other Services' Cost of Sales
Other services' cost of sales decreased $59.1 million in 1998 primarily due
to the transfer of DPL's nonutility subsidiaries to Conectiv on March 1, 1998,
and the sale of a landfill and waste-hauling operation in the fourth quarter
of 1997. Other services' cost of sales increased by $29.9 million in 1997
primarily due to acquisitions of HVAC service companies.
Purchased Electric Capacity
Purchased electric capacity costs increased $10.3 million in 1998 due to a
greater capacity obligation to the PJM Interconnection and a higher average
cost per megawatt of purchased capacity.
II-8
<PAGE>
Operation and Maintenance Expenses
Operation and maintenance expenses decreased to $264.6 million in 1998 from
$331.8 million in 1997. The $67.2 million decrease was primarily due to fewer
employees, the transfer of the nonutility subsidiaries to Conectiv on March 1,
1998, and the absence of last year's re-start activities at the Salem nuclear
power plant.
In 1997 operation and maintenance expenses increased $53.9 million mainly
due to the start-up of the HVAC, telecommunications, retail energy, and
merchant businesses, and costs associated with establishing the Conectiv brand
name and gaining new customers. Lower pension cost and Salem outage expenses
mitigated the total increase in operation and maintenance expenses.
Depreciation Expense
Depreciation expense decreased $4.4 million in 1998 due to the transfer of
the nonutility subsidiaries to Conectiv on March 1, 1998, and the sale of a
landfill and waste-hauling operation in the fourth quarter of 1997. These
decreases were partially offset by higher utility depreciation expenses due to
the completion of on-going construction projects. Depreciation expense
increased $7.8 million in 1997 due to completion of on-going construction
projects and installation of new systems.
Other Income
Other Income includes amounts for the nonutility subsidiaries transferred to
Conectiv of $0.1 million in 1998, $33.3 million in 1997, and $8.9 million in
1996. Other income for 1997 includes a $22.9 million pre-tax gain on the sale
of the Pine Grove landfill and related waste-hauling operations.
Financing Costs
Financing costs reflected in the consolidated income statement include
interest charges, allowance for funds used during construction (AFUDC),
dividends on preferred securities of a subsidiary trust, and dividends on
preferred stock. Financing costs decreased $0.8 million in 1998 and increased
$9.9 million in 1997. The increase for 1997 was mainly due to long-term
financing requirements associated with DPL's utility business.
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 during and beyond the year 1999, which could cause a system
failure or other computer errors, leading to disruption of operations. A
project team, originally started in 1996 by ACE, is assisting line management
in addressing the issue of computer programs and embedded systems not properly
recognizing the Year 2000. A Conectiv corporate officer, reporting directly to
the Chief Executive Officer, is coordinating all Year 2000 activities. There
are substantial challenges in identifying and correcting the many computer and
embedded systems critical to generating and delivering power, delivering
natural gas and providing other services to customers.
The project team is using a phased approach to managing its activities. The
first phase is inventory and assessment of all systems, equipment, and
processes. Each identified item is given a criticality rating of high, medium
or low. Those items rated as high or medium are then subject to the second
phase of the project. The second phase is determining and implementing
corrective action for the systems, equipment and processes, and concludes with
a test of the unit being remediated. The third phase is system testing and
compliance certification. Additionally, the project team will be updating
existing outage contingency plans to address Year 2000 issues.
Overall, Conectiv's Year 2000 Project covers approximately 140 different
systems (some with numerous components) that had been originally identified as
high or medium in criticality. However, only 21 of those 140 systems are
essential for Conectiv to provide electric and gas service to its customers.
The Year 2000 Project team will be focusing on these 21 systems, with
additional work on the other systems continuing based on their relative
importance to Conectiv's businesses.
II-9
<PAGE>
The following chart sets forth the current estimated completion percentage
of the 140 different systems in the Year 2000 Project by major business group,
and for the information technology systems used in managing Conectiv's
business. Conectiv expects significant progress in remediation and testing
over the next quarter based on work that is in process and material that is
being ordered.
<TABLE>
<CAPTION>
Inventory and Corrective Action/ System Testing/
Business Group Assessment Unit Testing Compliance
-------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Business systems........... 95% 85% 65%
Power production........... 95% 30% 30%
Electricity distribution... 95% 10% 5%
Gas delivery............... 95% 60% 60%
Competitive services....... 90%-95% 30%-80% 30%-80%
</TABLE>
DPL is also contacting vendors and service providers to review remediation
of their Year 2000 issues. Many aspects of DPL's businesses are dependent on
third parties. For example, fuel suppliers must be able to provide coal or gas
to allow DPL to generate electricity.
Distribution of electricity is dependent on the overall reliability of the
electric grid. DPL is cooperating with the North American Electric Reliability
Council (NERC) and the PJM Interconnection in Year 2000 remediation and
remediation planning efforts, and has accelerated its Year 2000 Project
timeline to be generally in-line with the recommendations of those groups. At
this time, a few generating units are scheduled for remediation and testing in
September to coincide with previously scheduled outages. Recent reports issued
by NERC indicate a diminished risk of disruption to the electric grid caused
by Year 2000 issues.
Conectiv has incurred approximately $3 million in costs for the Year 2000
Project. Current estimates of the costs for the Year 2000 Project range from
$10 million to $15 million. These estimates could change significantly as the
Year 2000 Project progresses. The costs set forth above do not include several
significant expenditures covering new systems, such as Conectiv's SAP
business, financial and human resources management system and an Energy
Control System. While the introduction of these new systems effectively
remediated Year 2000 problems in the systems they replaced, Conectiv has not
previously reported the expenditures on these systems in its costs for the
Year 2000 Project.
Since the project team is still in the process of assessing and correcting
impacted systems, equipment and processes, DPL cannot with certainty determine
whether the Year 2000 issue might cause disruptions to its operations and have
impacts on related costs and revenues. DPL assesses the status of the Year
2000 Project on at least a monthly basis to determine the likelihood of
business disruptions. Based on its own Year 2000 program, as well as reports
from NERC and other utilities, DPL's management believes it is unlikely that
significant Year 2000 related disruptions will occur. However, any substantial
disruption to DPL's operations could negatively impact DPL's revenues,
significantly impact its customers and could generate legal claims against
DPL. DPL'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.
Liquidity and Capital Resources
DPL's primary sources of capital are internally generated funds (net cash
provided by operating activities less common and preferred dividends) and
external financings. These resources provide capital for utility construction
expenditures and other capital requirements, such as repayment of debt and
capital lease obligations. In the foreseeable future, DPL expects that
incremental demand for electricity will be supplied with purchased power.
Net cash inflows from operating activities increased to $246.2 million in
1998 from $221.3 million in 1997, mainly due to lower operation and
maintenance expenses and higher electric revenues, net of amounts paid for
electric fuel and purchased energy. Cash inflows from operating activities in
1997 remained at about the same level as in 1996. In 1997, cash used by new
businesses offset higher cash flows from regulated energy revenues, net of
amounts paid for energy.
II-10
<PAGE>
Capital expenditures decreased $42.1 million in 1998 and $8.8 million in
1997. The 1998 decrease was primarily due to the transfer of the nonutility
subsidiaries to Conectiv on March 1, 1998, and lower utility construction
expenditures. The 1997 decrease was principally due to a $40.5 million
decrease in utility construction expenditures, partly offset by $35.2 million
of capital expenditures for expansion of Conectiv Communications, Inc.'s fiber
optic network.
DPL's cash expenditures for business acquisitions of $9.0 million, $32.0
million, and $8.3 million, in 1998, 1997, and 1996, respectively, were
primarily due to the acquisition of HVAC and related businesses and direct
Merger costs.
After deducting common and preferred dividend payments of $99.2 million in
1998, $98.0 million in 1997, and $102.4 million in 1996, internally generated
funds were $147.0 million in 1998, $123.2 million in 1997, and $120.3 million
in 1996. Internally generated funds provided 129%, 107%, and 77% of the cash
required for utility construction in 1998, 1997, and 1996, respectively.
"Sales of nonutility assets" under cash flows from investing activities
includes $33.4 million of pre-tax proceeds from the 1997 sale of Pine Grove
Inc.'s landfill and waste-hauling operations.
During 1996-1998, short-term debt used $43.1 million of funds, and long-term
financing activities (debt, preferred equity, and common equity) provided net
cash of $128.9 million ($287.5 million of issuances net of $158.6 million of
redemptions).
Long-term debt issued during 1996 to 1998 amounted to $199.2 million, which
consisted entirely of Medium Term Notes with interest rates ranging from 6.6%
to 7.72% and maturities ranging from 5 to 30 years. Redemptions of long-term
debt during 1996 to 1998 amounted to $62.2 million, which included $25.0
million of 5.69% Medium Term Notes, $25.0 million of 6 3/8% First Mortgage
Bonds, and $12.2 million of other debt.
Scheduled maturities of long-term debt over the next five years are as
follows: 1999--$31.3 million; 2000--$1.5 million; 2001--$2.3 million; 2002--
$48.1 million; 2003--$92.3 million.
In October 1996, a subsidiary trust of DPL issued $70.0 million of 8.125%
DPL obligated mandatorily redeemable preferred securities and loaned the
proceeds to DPL. On a consolidated basis, these preferred securities provide a
tax benefit equivalent to the tax effect of a deduction for distributions on
the preferred securities. The proceeds from issuance of the preferred
securities and additional short-term debt were used to retire $78.4 million of
DPL's preferred stock, which had an average dividend rate of 6.9%.
DPL's capital structure as of December 31, 1998 and 1997, expressed as a
percentage of total capitalization is shown below.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Long-term debt and variable rate demand bonds.................... 50.3% 48.6%
Preferred stock and securities................................... 7.8% 7.4%
Common stockholder's equity...................................... 41.9% 44.0%
</TABLE>
DPL's estimated requirements during 1999 for capital expenditures are $138
million. The uncertainty of the impact of electric utility industry
restructuring, and the extent to which DPL retains or divests certain of its
assets, including generating plants, will affect the ultimate amount of
capital expenditures and the amount of external funds required in excess of
internally generated funds. DPL's management expects that external funds will
be derived from the sale of long-term debt, as required.
Quantitative and Qualitative Disclosures About Market Risks
The following discussion contains "forward looking statements." These
projected results have been prepared based upon certain assumptions considered
reasonable given the information currently available to
II-11
<PAGE>
DPL. Nevertheless, because of the inherent unpredictability of interest rates,
equity market prices, and energy commodity prices as well as other factors,
actual results could differ materially from those projected in such forward-
looking information. For a description of DPL's significant accounting
policies associated with these activities see Notes 1 and 7 to the
Consolidated Financial Statements.
Interest Rate Risk
DPL is subject to the risk of fluctuating interest rates in the normal
course of business. DPL manages interest rates through the use of fixed and,
to a lesser extent, variable rate debt. As of December 31, 1998, a
hypothetical 10% change in interest rates would result in a $0.4 million
change in interest costs and earnings before taxes related to short-term and
variable rate debt.
Equity Price Risk
DPL maintains a trust fund, as required by the Nuclear Regulatory
Commission, to fund certain costs of nuclear decommissioning (See Note 8 to
the Consolidated Financial Statements). The funds are invested primarily in
domestic and international equity securities, fixed-rate, fixed income
securities, and cash and cash equivalents. By maintaining a portfolio that
includes long-term equity investments, DPL is maximizing the returns to be
utilized to fund nuclear decommissioning costs. However, the equity securities
included in DPL's portfolio are exposed to price fluctuations in equity
markets, and the fixed-rate, fixed income securities are exposed to changes in
interest rates. DPL actively monitors its portfolios by benchmarking the
performance of its investments against certain indexes and by maintaining, and
periodically reviewing, established target asset allocation percentages of the
assets in its trust. Because the accounting for nuclear decommissioning
recognizes that costs are recovered through electric rates, fluctuations in
equity prices and interest rates, while affecting the carrying value of the
invesments, are offset by the effects of regulation and therefore do not
affect the earnings of DPL.
Commodity Price Risk
DPL is exposed to the impact of market fluctuations in the price and
transportation costs of natural gas and electricity. DPL engages in commodity
hedging activities to minimize the risk of market fluctuations associated with
the purchase and sale of energy commodities (natural gas and electricity).
Some hedging activities are conducted using energy derivatives (futures,
option, and swaps). The remainder of DPL's hedging activity is conducted by
backing physical transactions with offsetting physical positions. The hedging
objectives include the assurance of stable and known minimum cash flows and
the fixing of favorable prices and margins when they become available. DPL
also engages in energy commodity trading and arbitrage activities, which
expose DPL to commodity market risk when, at times, DPL creates net open
energy commodity positions or allows net open positions to continue. To the
extent that DPL has net open positions, controls are in place that are
intended to keep risk exposures within management-approved risk tolerance
levels.
DPL uses a value-at-risk model to assess the market risk of its electricity
and gas commodity activities. The model includes fixed price sales
commitments, physical forward contracts, and commodity derivative instruments.
Value at risk represents the potential gain or loss on instruments or
portfolios due to changes in market factors, for a specified time period and
confidence level. DPL estimates value-at-risk across its power and gas
commodity business using a delta-normal variance/covariance model with a 95
percent confidence level and assuming a five-day holding period. At December
31, 1998, DPL's calculated value at risk with respect to its commodity price
exposure was approximately $0.6 million.
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
II-12
<PAGE>
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; future litigation results; costs of
construction; operating restrictions; increased costs and construction delays
attributable to environmental regulations; nuclear decommissioning and the
availability of reprocessing and storage facilities for spent nuclear fuel;
and credit market concerns. DPL 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 DPL prior to the
effective date of the Litigation Reform Act.
II-13
<PAGE>
DELMARVA POWER & LIGHT COMPANY
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
Management is responsible for the information and representations contained
in the consolidated financial statements of Delmarva Power & Light Company
(DPL). Our consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, based upon currently available
facts and circumstances and management's best estimates and judgments of the
expected effects of events and transactions.
DPL and its subsidiary companies maintain a system of internal controls
designed to provide reasonable, but not absolute, assurance of the reliability
of the financial records and the protection of assets. The internal control
system is supported by written administrative policies, a program of internal
audits, and procedures to assure the selection and training of qualified
personnel.
PricewaterhouseCoopers LLP, independent accountants, are engaged to audit
the financial statements and express their opinion thereon. Their audits are
conducted in accordance with generally accepted auditing standards which
include a review of selected internal controls to determine the nature,
timing, and extent of audit tests to be applied.
Conectiv's Audit Committee of the Board of Directors, composed of outside
directors only, meets with management, internal auditors, and independent
accountants to review accounting, auditing, and financial reporting matters.
The independent accountants are appointed by the Board on recommendation of
the Audit Committee, subject to stockholder approval.
/s/ Howard E. Cosgrove /s/ John C. van Roden
- ----------------------- -----------------------
Howard E. Cosgrove John C. van Roden
Chairman of the Board Senior Vice President
and Chief Executive Officer and Chief Financial Officer
February 5, 1999
II-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Delmarva Power & Light Company
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in common stockholder's equity and
of cash flows present fairly, in all material respects, the financial position
of Delmarva Power & Light Company (DPL) and subsidiary companies as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of DPL's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 5, 1999
II-15
<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Operating Revenues
Electric.................................. $1,329,393 $1,092,144 $ 986,921
Gas....................................... 535,082 204,057 114,284
Other services............................ 35,424 119,166 67,459
---------- ---------- ---------
1,899,899 1,415,367 1,168,664
---------- ---------- ---------
Operating Expenses
Electric fuel and purchased power......... 621,002 416,640 327,464
Gas purchased............................. 486,411 153,027 61,208
Other services' cost of sales............. 26,069 85,192 55,276
Purchased electric capacity............... 38,782 28,470 32,126
Employee separation and other merger-
related costs............................ 27,418 -- --
Operation and maintenance................. 264,581 331,770 277,893
Depreciation.............................. 131,919 136,340 128,571
Taxes other than income taxes............. 38,290 37,634 35,737
---------- ---------- ---------
1,634,472 1,189,073 918,275
---------- ---------- ---------
Operating Income............................ 265,427 226,294 250,389
---------- ---------- ---------
Other Income
Allowance for equity funds used during
construction............................. 2,134 1,337 1,338
Other income.............................. 3,321 36,322 14,506
---------- ---------- ---------
5,455 37,659 15,844
---------- ---------- ---------
Interest Expense
Interest charges.......................... 82,527 83,398 74,242
Allowance for borrowed funds used during
construction and capitalized interest.... (2,019) (2,996) (3,926)
---------- ---------- ---------
80,508 80,402 70,316
---------- ---------- ---------
Dividends on Preferred Securities of a
Subsidiary Trust........................... 5,688 5,687 1,390
---------- ---------- ---------
Income Before Income Taxes.................. 184,686 177,864 194,527
Income Taxes................................ 72,276 72,155 78,340
---------- ---------- ---------
Net Income.................................. 112,410 105,709 116,187
Dividends on Preferred Stock................ 4,352 4,491 8,936
---------- ---------- ---------
Earnings Applicable to Common Stock......... $ 108,058 $ 101,218 $ 107,251
========== ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
II-16
<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income..................................... $112,410 $105,709 $116,187
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 141,669 142,734 134,109
Allowance for equity funds used during
construction................................ (2,135) (1,337) (1,338)
Investment tax credit adjustments, net....... (2,560) (2,560) (2,560)
Deferred income taxes, net................... 5,796 7,169 33,218
Net change in:
Accounts receivable........................ (74,321) (53,911) (5,030)
Inventories................................ (6,803) 4,763 (4,489)
Accounts payable........................... 76,910 16,394 18,418
Other current assets & liabilities (1)..... 38,815 43,450 (48,383)
Gains on sales of assets..................... (1,549) (22,896) (380)
Other, net................................... (42,027) (18,250) (17,100)
-------- -------- --------
Net cash provided by operating activities........ 246,205 221,265 222,652
-------- -------- --------
Cash Flows From Investing Activities
Acquisition of businesses, net of cash
acquired...................................... (8,970) (31,994) (8,301)
Capital expenditures........................... (114,663) (156,808) (165,595)
Investment in partnerships..................... -- (1,800) --
Net cash of nonutility subsidiaries transferred
to Conectiv................................... (18,138) -- --
Sales of nonutility assets..................... 3,805 34,880 793
Deposits to nuclear decommissioning trust
funds......................................... (4,238) (4,240) (4,238)
Other, net..................................... (360) 3,189 3,478
-------- -------- --------
Net cash used by investing activities............ (142,564) (156,773) (173,863)
-------- -------- --------
Cash Flows From Financing Activities
Common dividends paid.......................... (94,700) (93,811) (93,290)
Preferred dividends paid....................... (4,512) (4,233) (9,102)
Issuances: Long-term debt.................... 33,000 166,200 --
Common stock...................... 63 17,807 486
Preferred securities (2).......... -- -- 70,000
Redemptions: Long-term debt.................... (32,129) (28,540) (1,504)
Variable rate demand bonds........ -- (1,800) (1,500)
Common stock...................... (1,983) (7,323) (5,466)
Preferred stock................... -- -- (78,383)
Principal portion of capital lease payments.... (9,724) (6,813) (5,538)
Net change in short-term debt.................. (26,975) (102,671) 86,498
Cost of issuances and refinancings............. (259) (4,502) (3,408)
-------- -------- --------
Net cash used by financing activities............ (137,219) (65,686) (41,207)
-------- -------- --------
Net change in cash and cash equivalents.......... (33,578) (1,194) 7,582
Cash and cash equivalents at beginning of
period.......................................... 35,339 36,533 28,951
-------- -------- --------
Cash and cash equivalents at end of period....... $ 1,761 $ 35,339 $ 36,533
======== ======== ========
</TABLE>
- --------
(1) Other than debt and deferred income taxes classified as current.
(2) DPL obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely DPL debentures.
See accompanying Notes to Consolidated Financial Statements.
II-17
<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
Thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 1,761 $ 35,339
Accounts receivable.................................... 273,531 197,561
Accounts receivable from associated companies.......... 2,325 --
Inventories, at average costs
Fuel (coal, oil and gas)............................. 44,212 37,425
Materials and supplies............................... 39,323 40,518
Prepayments............................................ 10,735 11,255
Deferred energy costs.................................. -- 18,017
Deferred income taxes, net............................. 13,061 776
---------- ----------
384,948 340,891
---------- ----------
Investments
Investment in leveraged leases......................... -- 46,375
Funds held by trustee.................................. 60,208 48,086
Other investments...................................... 1,103 9,500
---------- ----------
61,311 103,961
---------- ----------
Property, Plant and Equipment
Electric utility plant................................. 3,049,099 3,010,060
Gas utility plant...................................... 249,383 241,580
Common utility plant................................... 158,109 154,791
---------- ----------
3,456,591 3,406,431
Less : Accumulated depreciation........................ 1,492,182 1,373,676
---------- ----------
Net utility plant in service........................... 1,964,409 2,032,755
Utility construction work-in-progress.................. 138,496 93,017
Leased nuclear fuel, at amortized cost................. 28,325 31,031
Nonutility property, net............................... 4,560 74,811
Goodwill, net.......................................... 71,914 92,602
---------- ----------
2,207,704 2,324,216
---------- ----------
Deferred Charges and Other Assets
Prepaid employee benefits costs........................ 94,354 58,111
Unamortized debt expense............................... 12,140 12,911
Deferred debt refinancing costs........................ 16,180 18,760
Deferred recoverable income taxes...................... 82,211 88,683
Other.................................................. 46,003 67,948
---------- ----------
250,888 246,413
---------- ----------
Total Assets............................................. $2,904,851 $3,015,481
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
II-18
<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
Thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt....................................... $ 21,700 $ 23,254
Long-term debt due within one year.................... 31,287 33,318
Variable rate demand bonds............................ 71,500 71,500
Accounts payable...................................... 177,859 103,607
Taxes accrued......................................... 16,257 10,723
Interest accrued...................................... 20,604 19,902
Dividends payable..................................... 23,615 23,775
Current capital lease obligation...................... 12,481 12,516
Deferred energy costs................................. 413 --
Accrued employee separation and other merger related
costs................................................ 2,509 --
Other................................................. 27,586 35,819
---------- ----------
405,811 334,414
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes, net............................ 461,800 492,792
Deferred investment tax credits....................... 37,382 39,942
Long-term capital lease obligation.................... 17,003 19,877
Other................................................. 19,747 30,585
---------- ----------
535,932 583,196
---------- ----------
Capitalization
Common stock, $2.25 par value
shares authorized : 1998--1,000,000; 1997--
90,000,000
shares outstanding: 1998--1,000; 1997-- 61,210,262... 2 139,116
Additional paid-in-capital............................ 528,893 526,812
Retained earnings..................................... 322,599 300,757
---------- ----------
851,494 966,685
Treasury shares, at cost: 1997--619,237............... -- (11,687)
Unearned compensation................................. -- (502)
---------- ----------
Total common stockholder's equity................... 851,494 954,496
Cumulative preferred stock............................ 89,703 89,703
DPL obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely DPL
debentures........................................... 70,000 70,000
Long-term debt........................................ 951,911 983,672
---------- ----------
1,963,108 2,097,871
---------- ----------
Commitments and Contingencies (Notes 16 and 19)
---------- ----------
Total Capitalization and Liabilities.................... $2,904,851 $3,015,481
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
II-19
<PAGE>
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Additional Unearned
Shares Par Paid-in Retained Treasury Compen-
Outstanding Value Capital Earnings Stock sation Total
----------- -------- ---------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996.......... 60,759,365 $136,713 $506,328 $281,862 $ (30) $(1,433) $923,440
Net income............................. -- -- -- 116,187 -- -- 116,187
Cash dividends declared
Common stock.......................... -- -- -- (93,294) -- -- (93,294)
Preferred stock....................... -- -- -- (8,936) -- -- (8,936)
Issuance of common stock
Business acquisitions................. 212,350 -- -- -- 4,396 -- 4,396
DRIP (1).............................. 21,465 47 388 -- -- -- 435
Stock options......................... 2,400 5 45 -- -- -- 50
Expenses.............................. -- -- (72) -- -- -- (72)
Reacquired common stock................ (312,861) -- 532 -- (6,504) 363 (5,609)
Amortization of unearned compensation.. -- -- 687 -- -- (548) 139
Refinancing of preferred stock......... -- -- 392 (2,215) -- -- (1,823)
----------- -------- -------- -------- ------- ------- --------
Balance as of December 31, 1996........ 60,682,719 136,765 508,300 293,604 (2,138) (1,618) 934,913
Net income............................. -- -- -- 105,709 -- -- 105,709
Cash dividends declared
Common stock.......................... -- -- -- (94,065) -- -- (94,065)
Preferred stock....................... -- -- -- (4,491) -- -- (4,491)
Issuance of common stock
DRIP (1).............................. 965,655 2,173 15,485 -- -- -- 17,658
LTIP (2).............................. 71,103 160 1,200 -- -- (1,360) --
Stock options......................... 5,450 12 88 -- -- -- 100
Other issuance........................ 2,741 6 47 -- -- -- 53
Reacquired common stock................ (517,406) -- 230 -- (9,549) 2,162 (7,157)
Amortization of unearned compensation.. -- -- 1,462 -- -- 314 1,776
----------- -------- -------- -------- ------- ------- --------
Balance as of December 31, 1997........ 61,210,262 139,116 526,812 300,757 (11,687) (502) 954,496
Net income............................. -- -- -- 112,410 -- -- 112,410
Cash dividends declared
Common stock.......................... -- -- -- (94,860) -- -- (94,860)
Preferred stock....................... -- -- -- (4,352) -- -- (4,352)
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 (2)............................... -- -- -- -- -- (41) (41)
Transfer of nonutility subsidiaries
(3)................................... -- -- (132,023) 8,644 -- -- (123,379)
Change in shares outstanding due
to Merger (4)......................... (61,831,699) (139,121) 139,121 -- -- -- --
Transfer of treasury shares to Conectiv
due to Merger (5)..................... 221,528 -- (4,580) -- 4,580 -- --
Transfer of unearned compensation to
Conectiv due to the Merger (5)........ -- -- (543) -- -- 543 --
----------- -------- -------- -------- ------- ------- --------
Balance as of December 31, 1998........ 1,000 $ 2 $528,893 $322,599 $ -- $ -- $851,494
=========== ======== ======== ======== ======= ======= ========
</TABLE>
- --------
(1) Dividend Reinvestment and Common Share Purchase Plan (DRIP)--As part of the
Merger, DPL's DRIP was transferred to Conectiv.
(2) Long-term incentive plan (LTIP).
(3) On March 1, 1998, DPL's nonutility subsidiaries were transferred to
Conectiv.
(4) As part of the Merger, all of DPL's outstanding shares of stock were
exchanged for Conectiv shares of stock on a one to one basis. Effective
March 1, 1998, DPL had 1,000 shares of stock outstanding, $2.25 par value,
held by Conectiv.
(5) DPL's treasury shares and unearned compensation were transferred to
Conectiv in conjunction with the Merger.
See accompanying Notes to Consolidated Financial Statements.
II-20
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Business
Effective March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic
Energy, Inc. (Atlantic) consummated a series of merger transactions (the
Merger) by which DPL and Atlantic City Electric Company (ACE) became wholly-
owned subsidiaries of Conectiv. As a result of the Merger, Conectiv owns DPL's
former nonutility subsidiaries. DPL's former nonutility subsidiaries included
Conectiv Services, Inc. (heating, ventilation, and air conditioning
construction and services), Conectiv Communications, Inc. (local and long-
distance phone service), and Delmarva Capital Investments, Inc. (various
nonutility businesses). Refer to Note 4 to the Consolidated Financial
Statements for additional information concerning the Merger.
DPL provides regulated electric service (supply and delivery) to
approximately 455,300 customers located on the Delmarva Peninsula, which
includes Delaware, ten primarily Eastern Shore counties in Maryland, and the
Eastern Shore of Virginia, encompassing an area consisting of about 6,000
square miles with a population of approximately 1.2 million. DPL also sells
electricity outside its service territory (off-system) and in markets that are
not subject to price regulation.
DPL provides regulated gas service (supply and/or transportation) to
approximately 105,700 customers located in a service territory that covers
about 275 square miles with a population of approximately 485,000 in northern
Delaware, including the City of Wilmington. DPL also sells gas off-system and
in markets which are not subject to price regulation.
Regulation of Utility Operations
DPL's utility business is subject to regulation with respect to its retail
utility sales by the Delaware and Maryland Public Service Commissions (DPSC
and MPSC, respectively) and the Virginia State Corporation Commission (VSCC),
which have authority over rate matters, accounting, and terms of service.
Retail gas sales are subject to regulation by the DPSC. The Federal Energy
Regulatory Commission (FERC) also has regulatory authority over certain
aspects of DPL's utility business, including the transmission of electricity
and gas, the sale of electricity to municipalities and electric cooperatives,
and interchange and other purchases and sales of electricity involving other
utilities. Excluding off-system sales not subject to price regulation, the
percentage of electric and gas utility operating revenues regulated by each
regulatory commission for the year ended December 31, 1998, was as follows:
DPSC, 67.0%; MPSC, 25.0%; VSCC, 2.3%; and FERC, 5.7%.
DPL is subject to the requirements of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71). Regulatory commissions occasionally provide for
future recovery from customers of current period expenses. When this happens,
the expenses are deferred as regulatory assets and subsequently recognized in
the Consolidated Statement of Income during the period the expenses are
recovered from customers. Similarly, regulatory liabilities may also be
created due to the economic impact of an action taken by regulatory
commissions.
Refer to Note 10 to the Consolidated Financial Statements for a discussion
of regulatory assets arising from the financial effects of rate regulation,
and Note 6 to the Consolidated Financial Statements for a discussion of the
impact and current status of electric utility industry restructuring.
II-21
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Statement Presentation
Due to the Merger-related restructuring discussed above, Delmarva Power
Financing I (a financing subsidiary) became the only significant remaining
wholly-owned subsidiary of DPL as of March 1, 1998. Accordingly, only the
January and February 1998 operating results of DPL's former nonutility
subsidiaries are included in the 1998 Consolidated Statement of Income. A full
year's operating results of DPL's former nonutility subsidiaries are included
in the 1997 and 1996 Consolidated Statements of Income.
The consolidated financial statements include the accounts of DPL's wholly-
owned subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Ownership interests of 20% to 50% in other entities are accounted for by the
equity method of accounting. Investments in entities accounted for under the
equity method are included in "Other investments" on the Consolidated Balance
Sheets. Earnings from equity method investees are included in "Other income"
in the Consolidated Statements of Income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
Revenue Recognition
At the end of each month, there is an amount of electric and gas service
rendered from the last meter reading to the month-end which has not yet been
billed to customers. The non-energy (base rate) revenues associated with such
unbilled services are accrued by DPL.
When interim rates are placed in effect subject to refund, DPL recognizes
revenues based on expected final rates.
Revenues from "Other Services" are recognized when services are performed or
products are delivered.
Deferred Energy Costs
Energy costs charged to DPL's results of operations generally are adjusted
to match energy costs billed to customers (energy revenues) under tariffs for
regulated energy sales. The difference between energy revenues and actual
energy costs incurred is reported on the Consolidated Balance Sheets as
"Deferred energy costs." The deferred balance is subsequently recovered from
or returned to utility customers.
Nuclear Fuel
DPL's share of nuclear fuel at the Peach Bottom Atomic Power Station (Peach
Bottom) and the Salem Nuclear Generating Station (Salem) is financed through a
contract which is accounted for as a capital lease. Nuclear fuel costs,
including a provision for the future disposal of spent nuclear fuel, are
charged to fuel expense on a unit-of-production basis.
II-22
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Energy Trading and Risk Management Activities
In December 1998, the Emerging Issues Task Force (EITF), which evaluates
accounting issues under the direction of the Financial Accounting Standards
Board (FASB), concluded that, effective for financial statements issued for
fiscal years beginning after December 15, 1998, contracts entered into in
connection with energy trading activities should be marked to market, with
gains and losses (unrealized and realized) included in earnings (EITF No. 98-
10).
DPL uses futures, options, and swap agreements to hedge firm commitments or
anticipated transactions of energy commodities and also creates net open
energy commodity positions. DPL used "hedge accounting" as subsequently
described, to account for certain energy trading activities during 1996 to
1998. As discussed above, beginning January 1, 1999, EITF No. 98-10 requires
mark to market accounting for energy trading contracts, including derivatives.
DPL currently uses derivatives mainly in conjunction with energy trading
activities.
Under hedge accounting, a derivative, at its inception and on an ongoing
basis, is expected to substantially offset adverse price movements in the firm
commitment or anticipated transaction that it is hedging. Gains and losses
related to qualifying hedges are deferred and are recognized in income when
the underlying transaction occurs. If subsequent to being hedged, underlying
transactions are no longer likely to occur or the hedge is no longer
effective, the related derivatives gains or losses are recognized currently in
earnings. Gains and losses on derivatives that do not qualify for hedge
accounting are recognized currently in revenues.
Premiums paid for options are included as current assets in the consolidated
balance sheet until they are exercised or expire. Margin requirements for
futures contracts are also recorded as current assets. Under hedge accounting,
unrealized gains and losses on all futures contracts are deferred on the
consolidated balance sheet as either current assets or deferred credits. The
cash flows from derivatives are included in the cash flows from operations
section of the cash flow statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective in the first
quarter of fiscal years beginning after June 15, 1999, unless early adoption
is elected. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that all
derivatives be recognized as assets or liabilities in the balance sheet and be
measured at fair value. Under specified conditions, a derivative may be
designated as a hedge. The change in the fair value of derivatives, which are
not designated as hedges, is recognized in earnings. For derivatives
designated as hedges of changes in the fair value of an asset or liability, or
as a hedge of exposure to variable cash flows of a forecasted transaction,
earnings are affected to the extent the hedge does not match offsetting
changes in the hedged item.
DPL currently cannot determine the effect that SFAS No. 133 will have on its
financial statements. However, the adoption of EITF 98-10 prior to the
implementation of SFAS No. 133 is expected to reduce the impact of SFAS No.
133.
Depreciation Expense
The annual provision for depreciation on utility property is computed on the
straight-line basis using composite rates by classes of depreciable property.
Accumulated depreciation is charged with the cost of depreciable property
retired including removal costs less salvage and other recoveries. The
relationship of the annual provision for depreciation for financial accounting
purposes to average depreciable property was 3.6% for 1998, 3.7% for 1997, and
3.6% for 1996. Depreciation expense includes a provision for DPL's share of
the estimated cost of decommissioning nuclear power plant reactors based on
amounts billed to customers for such costs. Refer to Note 8 to the
Consolidated Financial Statements for additional information on nuclear
decommissioning.
II-23
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nonutility property is generally depreciated on a straight-line basis over
the useful lives of the assets.
Income Taxes
The consolidated financial statements include two categories of income
taxes--current and deferred. Current income taxes represent the amounts of tax
expected to be reported on DPL's federal and state income tax returns.
Deferred income taxes are discussed below.
Deferred income tax assets and liabilities represent the tax effects of
temporary differences between the financial statement and tax bases of
existing assets and liabilities and are measured using presently enacted tax
rates. The portion of DPL's deferred tax liability applicable to utility
operations that has not been recovered from utility customers represents
income taxes recoverable in the future and is shown on the Consolidated
Balance Sheets as "Deferred recoverable income taxes." Deferred recoverable
income taxes were $82.2 million and $88.7 million as of December 31, 1998, and
1997, respectively.
Deferred income tax expense represents the net change during the reporting
period in the net deferred tax liability and deferred recoverable income
taxes.
Investment tax credits from utility plant purchased in prior years are
reported on the Consolidated Balance Sheets as "Deferred investment tax
credits." These investment tax credits are being amortized to income over the
useful lives of the related utility plant.
Debt Refinancing Costs
Costs of refinancing debt are deferred and amortized over the period during
which the refinancing costs are recovered in utility rates.
Interest Expense
The amortization of debt discount, premium, and expense, including
refinancing expenses, is included in interest expense.
Utility Plant and Allowance for Funds Used During Construction
Utility plant is stated at original cost, including property additions.
Generally, utility plant is subject to a First Mortgage lien. Allowance for
Funds Used During Construction (AFUDC) is included in the cost of utility
plant and represents the cost of borrowed and equity funds used to finance
construction of new utility facilities. In the Consolidated Statements of
Income, the borrowed funds component of AFUDC is reported as a reduction of
interest expense and the equity funds component of AFUDC is reported as other
income. AFUDC was capitalized on utility plant construction at the rates of
8.9% in 1998, 7.5% in 1997, and 6.7% in 1996.
Cash Equivalents
In the consolidated financial statements, DPL considers highly liquid
marketable securities and debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Funds Held By Trustee
Funds held by trustee are stated at fair market value and primarily include
deposits in DPL's external nuclear decommissioning trusts and unexpended,
restricted, tax-exempt bond proceeds.
II-24
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
DPL amortizes goodwill arising from business acquisitions over the shorter
of the estimated useful life or 40 years.
2. Supplemental Cash Flow Information
In conjunction with the Merger, ownership of DPL's former nonutility
subsidiaries was transferred to Conectiv. The assets held by the subsidiaries
transferred were primarily leveraged leases, nonutility property, and
goodwill. The common stockholder's equity of these nonutility subsidiaries was
$123.4 million as of the Merger.
Cash Paid During the Year
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest, net of capitalized amount................. $76,314 $73,211 $67,596
Income taxes, net of refunds........................ $62,351 $53,550 $56,582
</TABLE>
3. Income Taxes
DPL, as a subsidiary of Conectiv, is included in the consolidated federal
income tax return of Conectiv. Income taxes are allocated to DPL based upon
its taxable income or loss, determined on a separate return basis.
Components of Consolidated Income Tax Expense
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal:Current................................... $57,533 $58,737 $40,953
Deferred...................................... 4,485 6,589 26,131
State:Current..................................... 11,504 8,810 6,729
Deferred...................................... 1,314 579 7,087
Investment tax credit adjustments, net............ (2,560) (2,560) (2,560)
------- ------- -------
$72,276 $72,155 $78,340
======= ======= =======
</TABLE>
Reconciliation of Effective Income Tax Rate
The amount computed by multiplying income before tax by the federal
statutory rate is reconciled below to the total income tax expense.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax
expense........................... $64,640 35% $62,252 35% $68,084 35%
Increase due to state income taxes,
net of federal tax benefit........ 8,330 4 6,102 4 8,980 5
Other, net......................... (694) 3,801 2 1,276 --
------- --- ------- --- ------- ---
Total income tax expense......... $72,276 39% $72,155 41% $78,340 40%
======= === ======= === ======= ===
</TABLE>
II-25
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of Deferred Income Taxes
The tax effects of temporary differences that give rise to DPL's net
deferred tax liability are shown below.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax liabilities
Plant basis differences.............................. $ 396,543 $ 409,861
Leveraged leases..................................... -- 38,288
Deferred recoverable income taxes.................... 36,504 41,061
Deferred energy costs................................ (5,459) 7,054
Other................................................ 71,756 81,482
----------- -----------
Total deferred tax liabilities....................... 499,344 577,746
----------- -----------
Deferred tax assets
Deferred investment tax credits...................... 13,745 14,815
Other................................................ 36,860 70,915
----------- -----------
Total deferred tax assets............................ 50,605 85,730
----------- -----------
Total deferred taxes, net............................. $ 448,739 $ 492,016
=========== ===========
</TABLE>
Valuation allowances for deferred tax assets were not material as of
December 31, 1998 and 1997.
4. Merger with Atlantic
On March 1, 1998, DPL and ACE became wholly-owned subsidiaries of Conectiv.
Before the Merger, Atlantic owned ACE, an electric utility serving the
southern one-third of New Jersey, and nonutility subsidiaries. As a result of
the Merger, Atlantic no longer exists and Conectiv owns, (directly or
indirectly), DPL, ACE and nonutility subsidiaries formerly held separately by
DPL and Atlantic. Conectiv holds the common stock of DPL and is a registered
holding company under the Public Utility Holding Company Act of 1935.
In connection with the Merger, each outstanding share of DPL'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. Also, DPL's Board of Directors declared that
a dividend consisting of the common stock of its nonutility subsidiaries be
paid to Conectiv. These nonutility subsidiaries had common stockholder's
equity of $123.4 million as of February 28, 1998 and net losses of $3.5
million for January 1 to February 28, 1998.
DPL recorded a $27.4 million charge ($16.6 million after taxes) in 1998 for
costs of employee separation programs utilized to reduce the workforce by 421
employees and other Merger-related costs. The charge to expense was reduced by
a net $45.5 million gain from curtailment and settlements of pension and
postretirement health care benefits. Of the $27.4 million of costs discussed
above, $21.2 million had been paid as of December 31, 1998, $3.7 million will
not require the use of operating funds, and $2.5 million remains to be paid
from operating funds.
5. Sale of Pine Grove Landfill and Waste Hauling Companies
In the fourth quarter 1997, a subsidiary of DPL sold the Pine Grove Landfill
and its related waste-hauling company. The subsidiaries which were sold had a
net book value of approximately $11.3 million and reported revenues in 1997 of
approximately $12.7 million. Pre-tax proceeds received from the sale were
$34.2 million ($33.4 million net of cash sold), resulting in a pre-tax gain of
$22.9 million ($13.7 million after income taxes).
II-26
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Rate Matters
Merger Rate Decrease
DPL is sharing a portion of the net cost savings expected to result from the
Merger with its customers through reduced electric and gas retail customer
base rates. DPL's total Merger-related base rate decrease of $13.0 million is
being phased-in as follows: (1) $11.5 million effective March 1, 1998, (2)
$1.1 million effective March 1, 1999, and (3) $0.4 million effective March 1,
2000.
Electric Utility Industry Restructuring
As discussed below, restructuring of the electric utility industry is
underway in Delaware, Maryland, and Virginia. Generally with restructuring,
the supply component of the price charged to a customer for electricity will
be deregulated, and electric suppliers would compete to supply electricity to
customers. Customers will continue to pay the local utility a regulated price
for the delivery of the electricity over the transmission and distribution
system.
Stranded costs are costs which may not be recoverable in a competitive
energy supply market due to lower prices or customers choosing a different
supplier. Stranded costs generally include above-market costs associated with
generation facilities or long-term purchased power agreements, and regulatory
assets.
When a specific plan that deregulates electricity supply becomes final, DPL
would cease applying SFAS No. 71 to its electricity supply business in the
regulatory jurisdiction to which the plan applies. To the extent that a
deregulation transition plan provides for recovery of stranded costs through
cash flows from the regulated transmission and distribution business, the
stranded costs would continue to be recognized as assets under SFAS No. 71.
Any stranded costs (including regulatory assets) for which cost recovery is
not provided would be expensed.
The amount of stranded costs ultimately recovered from utility customers, if
any, and the full impact of legislation deregulating the electric utility
industry in Delaware, Maryland and Virginia cannot be predicted. Also, the
quantification of stranded costs under existing generally accepted accounting
principles (GAAP) differs from methods used in regulatory filings. Among other
differences, GAAP precludes recognition of the gains on plants (or purchased
power contracts) not impaired, but requires write down of the plants that are
impaired. Due to these considerations, market conditions, timing and other
factors, DPL currently cannot predict the ultimate effects that electric
utility industry deregulation may have on its financial statements, although
deregulation may have a material adverse effect on DPL's results of
operations.
Delaware
The Alliance for Fair Electric Competition Today, which includes DPL, worked
with Delaware executive branch representatives and representatives of DPSC
Staff to develop consensus restructuring legislation. House Bill No. 10, with
several amendments, passed the Delaware House of Representatives, and the
Delaware Senate. The Governor of Delaware is expected to sign the legislation.
House Bill No. 10 would allow DPL's Delaware customers to choose their
electricity suppliers beginning on October 1, 1999 (for customers with peak
demands of 1,000 kilowatts or more), January 15, 2000 (for customers with peak
demands of 300 kilowatts or more), and 18 months after the legislation is
enacted (for all other customers). House Bill No. 10 also provides for a
residential rate reduction of 7.5% beginning October 1, 1999. Thereafter,
except for a deferred fuel balance "true-up" and increases for extraordinary
costs, residential rates may not be changed for four years; rates for
customers in commercial and industrial rate classes may not be changed for
three years. Under House Bill No. 10, certain low-income energy assistance and
environmental programs are funded at an annual level of about $1.6 million by
a charge in electric rates.
II-27
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Among other matters, unbundled rates to be charged by DPL during these "rate
freeze" periods have been agreed upon by a number of participants in the
restructuring plan proceeding contemplated by House Bill No. 10. Included
within the agreement on unbundled rates, DPL would recover $16 million
(Delaware retail basis) of stranded costs, and electric rates would not be
changed in the event DPL sells or transfers generating assets.
Maryland
In 1997, the MPSC issued two orders which provide for retail electric
competition to begin July 3, 2000, and be phased-in over a three-year period
(one-third of the customers per year). Enabling legislation and resolution of
complex issues such as stranded costs and utility taxation will be necessary
for implementation of retail competition in Maryland.
On July 1, 1998, DPL filed with the MPSC its quantification of stranded
costs and computation of unbundled rates, which are being considered in Case
No. 8795. The MPSC is expected to issue its order on DPL's stranded cost
recovery and unbundled rates by October 1, 1999. DPL estimated stranded costs
to be $217 million on a DPL system-wide basis ($69 million Maryland retail
portion), including $123 million attributable to generating units, $54 million
associated with purchased power contracts, $21 million related to fuel
inventory financing costs, and $19 million of regulatory assets. DPL proposed
full recovery of the Maryland portion of the stranded costs over a three-year
period, starting with the commencement of retail competition on July 3, 2000.
The MPSC Staff and other parties contend that the market value of DPL's
generating assets exceeds their book value and thus that DPL has negative
stranded costs, or so-called "stranded benefits." Proposals for rate
reductions based on a sharing of these alleged benefits and other factors have
been submitted to the MPSC in Case No. 8795. The proposed rate reductions vary
widely, from 3% up to levels which, if adopted, would have a material adverse
impact on DPL's results of operations.
Maryland's electric utilities, including DPL, continue to meet with the MPSC
Staff and others to develop consensus enabling restructuring and related tax
legislation for possible passage in the 1999 legislative session.
Virginia
Comprehensive electric utility restructuring legislation has been introduced
in the Virginia General Assembly. Senate Bill No. 1269 and identical House
Bill No. 2615, introduced on January 21, 1999, were drafted by a joint House-
Senate study committee created in 1996 to consider restructuring issues.
Significant provisions of these Bills provide for:
. Phase-in of retail electric competition beginning January 1, 2002
. Rates in effect on January 1, 2001 to become "capped rates" to continue
in effect through July 1, 2007, except for adjustments for changes in
fuel costs and state tax rates
. Customers choosing an electricity supplier other than their incumbent
utility continue to pay capped transmission and distribution rates but,
instead of the capped generation rate, they would pay a "wires" charge
which would be the difference between the capped generation rate and
projected market prices for electricity
. Just and reasonable net stranded costs are to be recovered through
capped rates and wires charges during the period January 1, 2001 through
July 1, 2007
7. Energy Hedging and Trading Activities
DPL actively participates in the wholesale energy markets to support its
wholesale utility and competitive retail marketing activities. DPL engages in
commodity hedging activities to minimize the risk of market fluctuations
associated with the purchase and sale of energy commodities (natural gas and
electricity). Some
II-28
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
hedging activities are conducted using energy derivatives. The remainder of
DPL's hedging activity is conducted by backing physical transactions with
offsetting physical positions. The hedging objectives include the assurance of
stable and known minimum cash flows and the fixing of favorable prices and
margins when they become available. DPL also engages in energy commodity
trading and arbitrage activities, which expose DPL to commodity market risk
when, at times, DPL creates net open energy commodity positions or allows net
open positions to continue. To the extent that DPL has net open positions,
controls are in place that are intended to keep risk exposures within
management-approved risk tolerance levels.
DPL utilizes futures, options, and swap agreements to manage risk. Futures
help manage commodity price risk by fixing purchase or sales prices. Options
provide a floor or ceiling on future purchases or sales prices while allowing
DPL to benefit from favorable price movements. Swaps are structured to provide
the same risk protection as futures and options. Basis swaps are used to
manage risk by fixing the basis differential that exists between a delivery
location index and the commodity futures price.
Exposed commodity positions may be "long" or "short." A long position
indicates that DPL has an excess of the commodity available for sale. A short
position means DPL will have to obtain additional commodity to fulfill its
sales requirements. A "delta" position is the conversion of an option into
futures contract equivalents. The option delta is dependent upon the strike
price, volatility, current market price and time-value of the option.
Natural Gas Activities
At December 31, 1998, there were 1,314 (2,697 long, 1,383 short) net open
futures contracts, representing a notional quantity of 13.1 billion cubic feet
(Bcf) through February of 2001. In addition, DPL had a net long commodity swap
position equivalent to 459 futures contracts (4.6 Bcf) and a net long basis
swap position equivalent to 531 futures contracts (5.3 Bcf).
DPL entered into 1,474 of the net long open futures contracts in order to
hedge the gas marketing activities of various business units. Other gas
commodity hedges at December 31, 1998 included a net long commodity swap
position equivalent to 262 futures contracts and a net long basis swap
position equivalent to 471 futures contracts. During the year ended December
31, 1998, $4.0 million of losses were recognized on the settlement of natural
gas futures, swaps and options hedging contracts for the unregulated business
units. These losses were offset by gains on the physical commodity
transactions being hedged. A total of $8.6 million of unrealized losses were
deferred in the Consolidated Balance Sheet as of December 31, 1998. These
losses are offset by gains on the physical commodity being hedged.
During the year ended December 31, 1998, a trading gain of $0.2 million was
realized on natural gas financial derivative activities that were not
classified as hedges. Unrealized gains in forward gas trading positions
(physical and financial) totaled $0.8 million at December 31, 1998.
The annual average unrealized loss on trading activities, based on month-end
averages, was $0.1 million.
At December 31, 1997, there were 220 open futures contracts and 30 open
options contracts to purchase natural gas, representing a notional quantity of
2.5 Bcf through October of 1999 and 60 open options contracts, to sell natural
gas, representing a notional quantity of 0.6 Bcf through July of 1998. A total
of $0.5 million of unrealized losses were deferred in the Consolidated Balance
Sheet as of December 31, 1997.
Electricity Activities
At December 31, 1998, DPL had a total short exposure of 102,400 megawatt-
hours (MWH) (84,700 on peak, 17,700 off-peak) through December 1999. The
overall position included a long option delta exposure of 2,300 MWH. The
remaining exposure was comprised of forward contracts.
II-29
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998, a net-gain of $0.1 million was
recognized on the settlement of electric hedging options and swaps. This gain
was offset by losses on the physical commodity transactions being hedged. A
total of $0.3 million of unrealized losses were deferred in the Consolidated
Balance Sheet as of December 31, 1998. During the year ended December 31, 1998
realized gains of $10.2 million were recorded on power trading activities
(physical and financial) not classified as hedges. At December 31, 1998
unrealized gains on power trading activities amounted to $1.2 million. The
annual average unrealized gain on trading activities, based on month-end
averages, was $1.3 million.
At December 31, 1997, there was one swap contract to sell electricity,
representing a notional quantity of 68,000 MWH, through August of 1998. A
total of $0.2 million of unrealized losses were deferred on the Consolidated
Balance Sheet as of December 31, 1997.
Credit Exposure
Counterparties to its various hedging and trading contracts expose DPL to
credit losses in the event of nonperformance. Management has evaluated such
risk and implemented credit checks and has established reserves for credit
losses. A large portion of the hedging and trading activities are conducted on
national exchanges backed by exchange clearinghouses. Management believes that
the overall business risk is minimized as a result of these procedures.
8. Nuclear Decommissioning
DPL records a liability for its share of the estimated cost of
decommissioning the Peach Bottom and Salem nuclear reactors over the remaining
lives of the plants based on amounts collected in rates charged to electric
customers. For utility rate-setting purposes, DPL estimates its share of
future nuclear decommissioning costs ($157 million) based on Nuclear
Regulatory Commission (NRC) regulations concerning the minimum financial
assurance amount for nuclear decommissioning.
DPL's accrued nuclear decommissioning liability, which is reflected in the
accumulated reserve for depreciation, was $69.5 million as of December 31,
1998. The provision reflected in depreciation expense for nuclear
decommissioning was $4.2 million in 1998, $4.2 million in 1997, and $4.2
million in 1996. External trust funds established by DPL for the purpose of
funding nuclear decommissioning costs had an aggregate book balance (stated at
fair market value) of $57.7 million as of December 31, 1998.
Earnings on the trust funds are recorded as an increase to the accrued
nuclear decommissioning liability, which, in effect, reduces the expense
recorded for nuclear decommissioning.
The ultimate cost of nuclear decommissioning for the Peach Bottom and Salem
reactors may exceed the current estimates which are updated periodically.
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry,
including DPL, regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations in the financial
statements of electric utilities. In February 1996, the FASB issued the
Exposure Draft, "Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets," which proposed changes in the accounting for
closure and removal costs of long-lived assets, including the recognition,
measurement, and classification of decommissioning costs for nuclear
generating stations. If the proposed changes were adopted: (1) annual
provisions for decommissioning would increase, (2) the estimated cost for
decommissioning would be recorded as a liability rather than as accumulated
depreciation, and (3) trust fund income from the external decommissioning
trusts would be reported as investment income rather than as a reduction of
decommissioning expense. The FASB is expected to issue a revised Exposure
Draft in the second quarter of 1999.
II-30
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Jointly Owned Plant
DPL's Consolidated Balance Sheets include its proportionate share of assets
and liabilities related to jointly owned plant. DPL's share of operating and
maintenance expenses of the jointly owned plant is included in the
corresponding expenses in the Consolidated Statements of Income. DPL is
responsible for providing its share of financing for the jointly-owned
facilities.
Information with respect to DPL's share of jointly owned plant as of
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Megawatt Construction
Ownership Capability Plant in Accumulated Work in
Share Owned Service Depreciation Progress
--------- ---------- -------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nuclear
Peach Bottom.......... 7.51% 164 MW $136,044 $ 63,040* $13,950
Salem................. 7.41% 164 MW 247,095 89,025* 5,050
Coal-Fired
Keystone.............. 3.70% 63 MW 20,781 9,245 18
Conemaugh............. 3.72% 63 MW 33,207 11,710 245
Transmission
Facilities............. Various 4,567 2,407 --
Other Facilities........ Various 2,159 295 4,340
-------- -------- -------
Total................... $443,853 $175,722 $23,603
======== ======== =======
- --------
</TABLE>
* Excludes nuclear decommissioning reserve.
10. Regulatory Assets
In conformity with generally accepted accounting principles, DPL's
accounting policies reflect the financial effects of rate regulation and
decisions issued by regulatory commissions having jurisdiction over DPL's
utility business. In accordance with the provisions of SFAS No. 71, DPL defers
expense recognition of certain costs and records an asset, a result of the
effects of rate regulation. Except for deferred energy costs, which are
classified as a current asset or liability, these "regulatory assets" are
included on DPL's Consolidated Balance Sheets under "Deferred Charges and
Other Assets." The costs of these assets are either being recovered or are
probable of being recovered through customer rates. Generally, the costs of
these assets are recognized in operating expenses over the period the cost is
recovered from customers. See Note 6 to the Consolidated Financial Statements
for information about the impact of electric utility restructuring on the
accounting for regulatory assets.
DPL's regulatory assets and liabilities as of December 31, 1998 and 1997 are
shown in the following table:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Dollars in millions)
<S> <C> <C>
Deferred energy costs.................................. $ (0.4) $ 18.0
Deferred debt refinancing costs........................ 16.2 18.8
Deferred recoverable income taxes...................... 82.2 88.7
Deferred recoverable plant costs....................... 7.6 7.8
Deferred costs for nuclear
decontamination/decommissioning....................... 5.7 6.3
Deferred demand-side management costs.................. 5.6 6.2
Other.................................................. 2.2 1.9
---------- ----------
Total.................................................. $ 119.1 $ 147.7
========== ==========
</TABLE>
II-31
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Energy Costs: Represents the difference between fuel revenues and
actual fuel costs incurred. The deferred balance is generally recovered from
or returned to utility customers within one year.
Deferred Debt Refinancing Costs: Represents the costs of refinancing debt of
the utility business which are deferred and amortized over the period
recovered in customer rates, which is generally the life of the new debt.
Deferred Recoverable Income Taxes: Represents the portion of DPL's deferred
tax liability applicable to utility operations that has not been recovered
from utility customers and is recoverable in the future. As temporary
differences between the financial statement and tax bases of assets reverse,
deferred recoverable income taxes are amortized.
Deferred Recoverable Plant Costs: Represents utility plant construction
costs excluded from plant in-service which are being recovered over 21
remaining years.
Deferred Costs for Nuclear Decontamination/Decommissioning: Represents
amounts being recovered through fuel adjustment clause revenues for DPL's
liability under the Energy Policy Act of 1992 for clean-up of gaseous
diffusion enrichment facilities of the U.S. government.
Deferred Demand-Side Management Costs: Represents deferred costs of programs
that allow DPL to reduce the peak demand for power. These costs are being
recovered over 5 years.
11. Common Stock
The public holders of DPL's common stock prior to the Merger exchanged each
share of DPL's common stock for one share of Conectiv common stock. Effective
with the Merger, Conectiv owns all 1,000 outstanding shares of DPL's common
stock ($2.25 par value per share). See Note 4 to the Consolidated Financial
Statements for additional information concerning the Merger. Also see the
Statement of Changes in Common Stockholder's Equity for information about
changes in common stock during 1998, 1997, and 1996.
DPL's certificate of incorporation requires payment of all preferred
dividends in arrears (if any) prior to payment of common dividends to
Conectiv.
12. Cumulative Preferred Stock
DPL has $1, $25 and $100 par value per share preferred stock for which
10,000,000, 3,000,000 and 1,800,000 shares are authorized, respectively. No
shares of the $1 par value per share preferred stock are outstanding. Shares
outstanding for each series of the $25 and $100 par value per share preferred
stock are listed below. Redemptions of preferred stock in 1996 are discussed
in Note 13 to the Consolidated Financial Statements.
II-32
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Shares
Outstanding Amount
--------------- -----------------------
Current
Redemption
Series Price 1998 1997 1998 1997
- ------ ---------- ------- ------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
$25 per share par value 7
3/4%..................... (1) 316,500 316,500 $ 7,913 $ 7,913
$100 per share par value
3.70%-5%................ $103-$105 181,698 181,698 18,170 18,170
6 3/4%.................. (2) 35,000 35,000 3,500 3,500
Adjustable rate(3)...... $100 151,200 151,200 15,120 15,120
Auction rate(4)......... $100 450,000 450,000 45,000 45,000
----------- -----------
$ 89,703 $ 89,703
=========== ===========
</TABLE>
- --------
(1) Redeemable beginning September 30, 2002, at $25 per share.
(2) Redeemable beginning November 1, 2003, at $100 per share.
(3) Average dividend rates were 5.5 % during 1998 and 1997.
(4) Average dividend rates were 4.2 % during 1998 and 1997.
13. DPL Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely DPL Debentures
A wholly owned subsidiary trust (Delmarva Power Financing I) was established
in 1996 as a financing subsidiary of DPL for the purposes of issuing common
and preferred trust securities and holding 8.125% Junior Subordinated
Debentures (the Debentures). The Debentures held by the trust are its only
assets. The trust uses interest payments received on the Debentures it holds
to make cash distributions on the trust securities. The combination of the
obligations of DPL pursuant to the Debentures, and DPL's guarantee of
distributions with respect to trust securities, to the extent the trust has
funds available therefor, constitute a full and unconditional guarantee by DPL
of the obligations of the trust under the trust securities the trust has
issued. DPL is the owner of all of the common securities of the trust, which
constitute approximately 3% of the liquidation amount of all of the trust
securities issued by the trust.
In October 1996, the trust issued $70 million in aggregate liquidation
amount of 8.125% Cumulative Trust Preferred Capital Securities (representing
2,800,000 preferred securities at $25 per security). At the same time, $72.165
million in aggregate principal amount of 8.125% Junior Subordinated
Debentures, Series I, due 2036 were issued to the trust. For consolidated
financial reporting purposes, the Debentures are eliminated in consolidation
against the trust's investment in the Debentures. The preferred trust
securities are subject to mandatory redemption upon payment of the Debentures
at maturity or upon redemption. The Debentures are subject to redemption, in
whole or in part at the option of DPL, at 100% of their principal amount plus
accrued interest, after an initial period during which they may not be
redeemed and at any time upon the occurrence of certain events.
In October 1996, DPL used part of the proceeds received from the trust to
purchase and retire $32.1 million of its $25 par value, 7.75% series preferred
stock, and $31.3 million of various series of its $100 par value preferred
stock which had an average dividend rate of 5.68%. In December 1996, DPL
redeemed its entire 7.52% preferred stock series which had a total par value
of $15.0 million.
II-33
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Debt
Substantially all utility plant of DPL is subject to the lien of the
Mortgage and Deed of Trust collateralizing DPL's First Mortgage Bonds.
DPL funds its interim financing requirements by issuing commercial paper and
borrowing against bank credit lines (at December 31, 1998, total borrowing
capacity under these facilities was $225 million, and $203.3 million was
available for borrowing). The weighted average interest rates on short-term
debt outstanding as of December 31, 1998 and 1997 were 5.2% and 6.6%,
respectively.
Maturities of long-term debt and sinking fund requirements during the next
five years are as follows: 1999--$31.3 million; 2000--$1.5 million; 2001--$2.3
million; 2002--$48.1 million; 2003--$92.3 million.
In December 1998, DPL redeemed $6.0 million of 5.75% Pollution Control Bonds
at maturity.
In June 1998, DPL repaid at maturity $25.0 million of 5.69% Medium-Term
Notes and $1.0 million of 6.95% Amortizing First Mortgage Bonds.
In January 1998, DPL issued $33.0 million of 6.81% unsecured Medium-Term
Notes which mature in 20 years. DPL 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 the fourth quarter of 1997, DPL issued $42.0 million of unsecured Medium-
Term Notes with maturities of 5 to 9 years and interest rates of 6.6% to 6.8%.
The proceeds were used to refinance short-term debt.
In September 1997, DPL redeemed $25.0 million of 6 3/8% First Mortgage Bonds
at maturity through the issuance of short-term debt.
In February 1997, DPL issued $124.2 million of unsecured Medium-Term Notes
with maturities of 10 to 30 years and interest rates of 7.06% to 7.72%. The
proceeds were used to refinance short-term debt.
II-34
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt outstanding as of December 31, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
Interest Rates Due 1998 1997
-------------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
First Mortgage Bonds 6.95% 2002 $ 30,000 $ 30,000
6.40% 2003 90,000 90,000
7.15%-8.15% 2011-2015 115,500 115,500
5.90%-7.60% 2017-2021 163,200 163,200
6.85%-8.50% 2022-2025 165,000 165,000
6.05% 2032 15,000 15,000
Amortizing First Mortgage
Bonds 6.95% 1998-2008 24,149 25,103
----------- --------- ---------- ----------
Total First Mortgage Bonds 602,849 603,803
Pollution Control Notes:
Series 1973 5.75% 1998 -- 6,000
Series 1976 7.125%-7.25% 1999-2006 2,800 2,900
Medium-Term Notes: 5.69% 1998 -- 25,000
7.50% 1999 30,000 30,000
6.59%-9.29% 2002 16,000 16,000
8.30% 2004 35,000 35,000
6.94% 2005 10,000 10,000
6.84% 2006 20,000 20,000
7.06%-8.125% 2007 91,500 91,500
7.54%-7.62% 2017 40,700 40,700
6.81% 2018 33,000 25,430
7.61%-9.95% 2019-2021 73,000 73,000
7.72% 2027 30,000 30,000
Other Obligations: 6.00%-9.50% (1) -- 232
8.00% (1) -- 3,660
9.65% (1) -- 5,354
Unamortized premium and
discount, net (1,651) (1,589)
Current maturities of
long-term debt (31,287) (33,318)
---------- ----------
Total long-term debt 951,911 983,672
Variable Rate Demand Bonds
(2) 71,500 71,500
---------- ----------
Total long-term debt and
Variable Rate Demand
Bonds $1,023,411 $1,055,172
========== ==========
</TABLE>
- --------
(1) Debt of former subsidiaries which was transferred to Conectiv in the
Merger.
(2) DPL's debt obligations included Variable Rate Demand Bonds (VRDB) in the
amount of $71.5 million as of December 31, 1998 and 1997. The VRDB are
classified as current liabilities because the VRDB are due on demand by
the bondholder. However, bonds submitted to DPL for purchase are
remarketed by a remarketing agent on a best efforts basis. DPL expects
that bonds submitted for purchase will continue to be remarketed
successfully due to DPL's credit worthiness and the bonds' interest rates
being set at market. DPL also may utilize one of the fixed rate/fixed term
conversion options of the bonds. Thus, DPL considers the VRDB to be a
source of long-term financing. The $71.5 million balance of VRDB
outstanding as of December 31, 1998, matures in 2017 ($26.0 million), 2028
($15.5 million), and 2029 ($30.0 million). Average annual interest rates
on the VRDB were 3.5% in 1998 and 3.8% in 1997.
II-35
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Value of Financial Instruments
The year-end fair values of certain financial instruments are listed below.
The fair values were based on quoted market prices of DPL's securities or
securities with similar characteristics.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Funds held by trustee................. $ 60,208 $ 60,208 $ 48,086 $ 48,086
DBL Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely DPL
Debentures........................... $ 70,000 $ 71,764 $ 70,000 $ 72,464
Long-Term Debt........................ $951,911 $1,041,895 $983,672 $1,053,810
</TABLE>
16. Commitments
DPL's expected capital and acquisition expenditures are estimated to be
approximately $138 million in 1999.
As of December 31, 1998, DPL's commitments under long-term purchased power
contracts included 237 megawatts (MW) of capacity and 100 MW of energy.
Historical information is presented below for these contracts and a 48 MW
capacity contract which was suspended in October 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Percent of system capacity................................. 6.7% 6.4% 6.4%
Percent of energy output................................... 18.5% 12.1% 10.6%
Capacity charges ($ in millions)........................... $38.8 $28.5 $32.1
Energy charges ($ in millions)............................. $57.7 $38.1 $32.5
</TABLE>
Based on existing contacts as of December 31, 1998, DPL's future commitments
for capacity and energy under long-term purchased power contracts are
estimated to be $84.2 million in 1999; $91.1 million in 2000; $94.1 million in
2001; $97.7 million in 2002, and $99.3 million in 2003. Due to the
uncertainties surrounding restructuring of the electric utility industry, DPL
has not forecasted its long-term purchased power commitments beyond 2003.
DPL's share of nuclear fuel at Peach Bottom and Salem is financed through a
nuclear fuel energy contract, which is accounted for as a capital lease.
Payments under the contract are based on the quantity of nuclear fuel burned
by the plants. DPL's obligation under the contract is generally the net book
value of the nuclear fuel financed, which was $28.3 million as of December 31,
1998.
DPL leases an 11.9% interest in the Merrill Creek Reservoir. The lease is
considered an operating lease and payments over the remaining lease term,
which ends in 2032, are $150.5 million in aggregate. DPL also has long-term
leases for certain other facilities and equipment. Minimum commitments as of
December 31, 1998 under the Merrill Creek Reservoir lease and all other
noncancelable lease agreements (excluding payments under the nuclear fuel
energy contract which cannot be reasonably estimated) are as follows: 1999--
$6.2 million; 2000--$5.1 million; 2001--$5.2 million; 2002--$4.5 million;
2003--$6.5 million; after 2003--$131.2 million; total--$158.7 million.
Approximately 95% of the minimum lease commitments shown above are payments
due under the Merrill Creek Reservoir lease.
II-36
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rentals Charged To Operating Expenses
The following amounts were charged to operating expenses for rental payments
under both capital and operating leases.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest on capital leases............................. $ 1,467 $ 1,548 $ 1,628
Amortization of capital leases......................... 9,838 6,499 5,653
Operating leases....................................... 13,190 11,590 13,795
------- ------- -------
$24,495 $19,637 $21,076
======= ======= =======
</TABLE>
17. Pension and Other Postretirement Benefits
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Assumptions
Discount rates used to determine projected benefit
obligation as of December 31............................... 6.75% 7.00% 7.50%
Expected long-term rates of return on assets................ 9.00% 9.00% 9.00%
Rates of increase in compensation levels.................... 4.50% 5.00% 5.00%
Health care cost trend rate on covered charges.............. 7.00% 7.50% 8.00%
</TABLE>
The health-care cost trend rate, or the expected rate of increase in health-
care costs, is assumed to gradually decrease to 5.0% by 2002. Increasing the
health-care cost trend rates of future years by one percentage point would
increase the accumulated postretirement benefit obligation by $8.5 million and
would increase annual aggregate service and interest costs by $0.5 million.
Decreasing the health-care cost trend rates of future years by one percentage
point would decrease the accumulated postretirement benefit obligation by $7.5
million and would decrease annual aggregate service and interest costs by $0.5
million.
The following schedules reconcile the beginning and ending balances of the
pension and other postretirement benefit obligations and related plan assets.
Other postretirement benefits include medical benefits for retirees and their
spouses and retiree life insurance.
Change in Benefit Obligation
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------- ----------------
1998 1997 1998 1997
--------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of
year.................................. $ 515,590 $450,640 $80,500 $73,841
Service cost........................... 12,635 12,779 2,185 2,393
Interest cost.......................... 31,138 34,173 6,289 5,547
Plan participants' contributions....... -- -- 497 304
Plan amendments........................ (10,770) -- -- --
Actuarial (gain) loss.................. 45,884 40,492 3,960 4,781
Special termination benefits........... 47,764 -- 1,412 --
Curtailment (gain) loss................ (6,373) -- 17 --
Settlement (gain) loss................. (45,609) -- 6,457 --
Benefits paid.......................... (142,510) (22,494) (4,278) (6,366)
--------- -------- ------- -------
Benefit obligation at end of year...... $ 447,749 $515,590 $97,039 $80,500
========= ======== ======= =======
</TABLE>
II-37
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Change in Plan Assets
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------- ----------------
1998 1997 1998 1997
--------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fair value of assets at beginning of
year.................................. $ 771,257 $676,189 $48,591 $36,075
Actual return on plan assets........... 107,887 117,562 5,551 9,984
Employer contributions................. -- -- 14,598 8,594
Plan participant contributions......... -- -- 497 304
Benefits paid.......................... (142,510) (22,494) (4,278) (6,366)
--------- -------- ------- -------
Fair value of assets at end of year.... $ 736,634 $771,257 $64,959 $48,591
========= ======== ======= =======
</TABLE>
Reconciliation of Funded Status of the Plans
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Funded status at end of year........ $ 288,885 $ 255,667 $(32,080) $(31,909)
Unrecognized net actuarial gain..... (196,927) (205,732) (5,992) (18,238)
Unrecognized prior service cost..... 12,204 26,945 248 317
Unrecognized net transition (asset)
obligation......................... (15,773) (23,199) 43,787 54,259
--------- --------- -------- --------
Net amount recognized at end of
year............................... $ 88,389 $ 53,681 $ 5,963 $ 4,429
========= ========= ======== ========
</TABLE>
Based on fair values as of December 31, 1998, the pension plan assets were
comprised of publicly traded equity securities ($493.5 million or 67%) and
fixed income obligations ($243.1 million or 33%). Based on fair values as of
December 31, 1998, the other postretirement benefit plan assets included
equity securities ($43.4 million or 67%) and fixed income obligations ($21.6
million or 33%).
Components of Net Periodic Benefit Cost
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------- -------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 12,635 $ 12,779 $ 13,172 $ 2,185 $ 2,393 $ 2,512
Interest cost........... 31,138 34,173 32,531 6,289 5,547 5,213
Expected return on
assets................. (64,247) (60,020) (54,485) (4,000) (2,580) (1,722)
Amortization of:
Transition obligation
(asset).............. (2,764) (3,314) (3,314) 3,244 3,617 3,617
Prior service cost.... 1,911 2,035 2,048 50 53 53
Actuarial gain........ (9,163) (7,814) (4,573) (566) (712) (500)
-------- -------- -------- ------- ------- -------
Cost before items
below.............. $(30,490) $(22,161) $(14,621) $ 7,202 $ 8,318 $ 9,173
Special termination
benefits............... 47,764 -- -- 1,412 -- --
Curtailment (gain)
loss................... (6,373) -- -- 17 -- --
Settlement (gain) loss.. (45,609) -- -- 6,457 -- --
-------- -------- -------- ------- ------- -------
Total net periodic
benefit cost......... $(34,708) $(22,161) $(14,621) $15,088 $ 8,318 $ 9,173
======== ======== ======== ======= ======= =======
Portion of net periodic
benefit cost
included in results of
operations............. $(26,996) $(16,621) $(10,966) $14,368 $ 6,239 $ 6,880
======== ======== ======== ======= ======= =======
</TABLE>
II-38
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The special termination benefits and curtailment and settlement gains and
losses shown in the preceeding table for 1998 resulted from Merger-related
employee separation programs discussed in Note 4 to the Consolidated Financial
Statements.
Effective January 1, 1999, DPL's covered employees began participating in a
"cash balance" pension plan adopted by Conectiv. Contributions, which vary
based on the employee's age and years of service, are made to individual
employee accounts provided for under the plan. The "cash balance" of each
employee's account increases based on employer contributions and interest
income credited to the accounts. The aggregate of the employee's accounts will
be DPL's pension obligation.
Conectiv maintains 401(k) savings plans for covered employees. Prior to the
Merger, DPL provided 401(k) plans with benefit levels similar to the Conectiv
401(k) plans. Conectiv contributes to the plans, in the form of Conectiv
stock, at varying levels up to $0.50 for each dollar contributed by covered
employees, for up to 6% of employee base pay. The amount expensed for
Conectiv's matching contributions was $2.7 million in 1998, $3.0 million in
1997, and $2.4 million in 1996.
18. Salem Nuclear Generating Station
DPL owns 7.41% of Salem, which consists of two pressurized water nuclear
reactors operated by Public Service Electric & Gas Company (PSE&G). Salem
Units 1 and 2 were removed from operation by PSE&G in the second quarter of
1995 due to operational problems, and maintenance and safety concerns. After
receiving NRC authorization, PSE&G returned Unit 2 to service on August 30,
1997, and returned Unit 1 to service on April 17, 1998. The net increase in
fuel expenses due to unrecovered replacement power and other costs, net of the
benefit of lawsuit settlement proceeds received in 1997 was $2.4 million in
1998, $3.1 million in 1997, and $10.1 million in 1996. The outages also caused
increases in operation and maintenance costs of approximately $4 million in
1997 and $9 million in 1996.
As previously reported, on February 27, 1996, the co-owners of Salem,
including DPL, filed a complaint in the United States District Court for New
Jersey against Westinghouse Electric Corporation (Westinghouse), the designer
and manufacturer of the Salem steam generators. The complaint, which sought to
recover from Westinghouse the costs associated with and resulting from the
cracks discovered in Salem's steam generators and with replacing such steam
generators, alleges violations of federal and New Jersey Racketeer Influenced
and Corrupt Organizations Acts, fraud, negligent misrepresentation and breach
of contract. On November 4, 1998, the Court granted Westinghouse's motion for
summary judgement with regard to the federal Racketeer Influenced and Corrupt
Organizations Act claim, and dismissed the remaining state law claims without
prejudice. On November 18, 1998, the co-owners re-filed their state law claims
against Westinghouse in the Superior Court of New Jersey. The co-owners also
filed an appeal of the District Court's dismissal with the United States Court
of Appeals for the Third Circuit.
19. Contingencies
Environmental Matters
DPL 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. DPL 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. DPL also has two former coal gasification sites in Delaware and one
former coal gasification site in Maryland, each of which is a state superfund
site. In addition, on August 11, 1998, the Delaware Department of Natural
Resources and Environmental Control notified DPL that it is a potentially
responsible party liable for clean-up of the Wilmington Public Works Yard as a
former owner of the property. There is $2 million included
II-39
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in DPL's current liabilities as of December 31, 1998 and 1997, for clean-up
and other potential costs related to these sites. DPL does not expect such
future costs to have a material effect on the financial position or results of
their operations.
Nuclear Insurance
In conjunction with DPL's ownership interests in Peach Bottom and Salem, DPL
could be assessed for a portion of any third-party claims associated with an
incident at any commercial nuclear power plant in the United States. Under the
provisions of the Price Anderson Act, if third-party claims relating to such
an incident exceed $200 million (the amount of primary insurance), DPL could
be assessed up to $26.3 million on an aggregate basis for such third-party
claims. In addition, Congress could impose a revenue-raising measure on the
nuclear industry to pay such claims.
The co-owners of Peach Bottom and Salem maintain property insurance coverage
of approximately $2.8 billion for each unit for loss or damage to the units,
including coverage for decontamination expense and premature decommissioning.
In addition, DPL is a member of an industry mutual insurance company, which
provides replacement power cost coverage in the event of a major accidental
outage at a nuclear power plant. Under these coverages, DPL is subject to
potential retrospective loss experience assessments of up to $4.0 million on
an aggregate basis.
20. Quarterly Financial Information (unaudited)
The quarterly data presented below reflect all adjustments necessary in the
opinion of DPL for a fair presentation of the interim results. Quarterly data
normally vary seasonally because of temperature variations, differences
between summer and winter rates, the timing of rate orders, and the scheduled
downtime and maintenance of electric generating units.
<TABLE>
<CAPTION>
Net Applicable
Quarter Operating Operating Income to Common
Ended Revenue Income (Loss) Stock
- ------- ---------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1998
March 31.............................. $ 416,110 $ 13,089 $ (4,856) $ (5,942)
June 30............................... 362,378 78,337 33,075 31,989
September 30.......................... 598,888 129,076 66,737 65,650
December 31........................... 522,523 44,925 17,454 16,361
---------- -------- -------- --------
$1,899,899 $265,427 $112,410 $108,058
========== ======== ======== ========
1997
March 31.............................. $ 346,079 $ 63,150 $ 25,793 $ 24,578
June 30............................... 310,968 51,376 17,997 16,913
September 30.......................... 400,502 85,509 39,411 38,319
December 31........................... 357,818 26,259 22,508 21,408
---------- -------- -------- --------
$1,415,367 $226,294 $105,709 $101,218
========== ======== ======== ========
</TABLE>
II-40
<PAGE>
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee separation programs for DPL employees and other Merger-related
costs expensed in 1998 (as discussed in Note 4 to the Consolidated Financial
Statements) had the effects shown below on 1998 quarterly operating results.
<TABLE>
<CAPTION>
1998 Quarter Operating Net
Ended Income Income
- ------------ --------- ------
(Dollars in
Millions)
<S> <C> <C>
March 31...................................................... $(40.3) $(24.4)
June 30....................................................... 14.3 8.6
September 30.................................................. (0.7) (0.4)
December 31................................................... (0.7) (0.4)
------ ------
$(27.4) $(16.6)
====== ======
</TABLE>
As discussed in Note 5 to the Consolidated Financial Statements, in the
fourth quarter of 1997, net income was increased by $13.7 million due to the
sale of the Pine Grove Landfill and its related waste-hauling company.
21. Segment Information
Conectiv's organizational structure and management reporting information is
aligned with Conectiv's business segments, irrespective of which subsidiary,
or subsidiaries, a business is conducted through. Businesses are managed based
on lines of business, not based on legal entity. Business segment information
is not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a
Conectiv subsidiary, no business segment information (as defined by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information") is
available for DPL on a stand-alone basis.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
II-41
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
<TABLE>
<CAPTION>
Directors Business Experience during Past 5 Years
--------- ---------------------------------------
<S> <C>
As of December 31, 1998
Howard E. Cosgrove, 55,.......... Elected 1998 as Chairman of the Board and Chief
Chairman of the Board Executive Officer of Conectiv, Delmarva Power &
Light Company, and Atlantic City Electric
Company. Elected 1992 as Chairman of the Board,
President and Chief Executive Officer and
Director of Delmarva Power & Light Company.
Meredith I. Harlacher, Jr., 56,.. Elected 1998 as President and Chief Operating
Director Officer of Conectiv, and President and Chief
Operating Officer and Director of Delmarva Power
& Light Company and Atlantic City Electric
Company. Elected 1993 as Senior Vice President
of Atlantic Energy, Inc.
Thomas S. Shaw, 51,.............. Elected 1998 as Executive Vice President of
Director Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1992 as
Senior Vice President, Delmarva Power & Light
Company.
Barry R. Elson, 57,.............. Elected 1998 as Executive Vice President of
Director Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1997 as
Executive Vice President, Delmarva Power & Light
Company. Executive Vice President, Cox
Communications, Inc., Atlanta, Georgia, from
1995 to 1996. Senior Vice President, Cox
Enterprises/Cox Communications, Inc., Atlanta,
Georgia, from 1984 to 1995.
Barbara S. Graham, 50,........... Elected 1998 as Senior Vice President and Chief
Director Financial Officer of Conectiv, and Senior Vice
President and Chief Financial Officer and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1994 as
Senior Vice President, Treasurer, and Chief
Financial Officer, Delmarva Power & Light
Company. Vice President and Chief Financial
Officer from 1992 to 1994.
Audrey K. Doberstein, 66,........ Director of Delmarva Power & Light Company since
Director 1992. Elected 1998, Director of Conectiv.
President of Wilmington College, New Castle,
Delaware. Dr. Doberstein also serves as a member
of the Board of Directors of Blue Cross/Blue
Shield of Delaware and Mellon Bank Delaware
(N.A.), Wilmington, Delaware.
Jerrold L. Jacobs, 59,........... Elected 1998, Director of Conectiv and Delmarva
Director Power & Light Company. Director of Atlantic
Energy since 1990. Retired, Chairman of the
Board and Chief Executive Officer of Atlantic
Energy and of Atlantic City Electric Company.
</TABLE>
Executives
Information about DPL's executive officers is included under Item 1.
III-1
<PAGE>
Item 11. Executive Compensation
As previously noted, DPL is a wholly owned electric utility subsidiary of
Conectiv. The Chief Executive Officer and the four most highly compensated
executive officers of Conectiv maintain the same position at both DPL and ACE.
In 1998, the salaries and other compensation awarded to the Chief Executive
Officer and the four most highly compensated executive officers of DPL were
paid by Conectiv for their service as executive officers of Conectiv, DPL and
ACE. The Board Personnel & Compensation Committee Report was provided
initially in the Conectiv Proxy Statement and is enclosed herein for the
purpose of providing additional informational. The following tables show
information concerning the total compensation paid or awarded to DPL's Chief
Executive Officer and each of the four most highly compensated executive
officers for the fiscal year ended December 31, 1998.
BOARD PERSONNEL & COMPENSATION COMMITTEE REPORT
Principles of Executive Compensation Program
The Personnel & Compensation Committee of the Board of Directors is
comprised of four non-employee Directors. The Committee provides an
independent review of the Company's performance objectives and executive
compensation.
Overall Objectives
The Company's philosophy is to link compensation to business strategies and
results, to align total compensation of executives with the long-term
interests of stockholders, to motivate its senior executives to meet the
challenging objectives established for the Company and to create an urgency
for success in the newly-formed Company. The Company's executive compensation
program is designed to:
.provide total compensation that emphasizes long-term performance which
creates stockholder value;
. facilitate the rapid transition to a competitive business environment;
. reflect the market conditions for attracting and retaining high-quality
executives and ensure that such executives have a continuing stake in
the long-term success of the Company; and
. create significant levels of stock ownership.
The elements of the executive compensation program are:
. total compensation levels that are competitive with those provided by
the competitive market, defined as a blend of companies in the utility
and industrial markets;
. base compensation levels related to responsibility level and individual
performance;
. annual variable compensation that varies based on corporate, unit and
individual performance; and,
. long-term variable compensation based on long-term increases in
stockholder value.
Total Compensation
Total compensation opportunities are developed for Company executives by
Watson Wyatt, the firm that provides executive compensation consulting
services to the Company. This is done using several published compensation
survey sources and public proxy data to define the competitive market.
Overall, the total compensation structure for executives is targeted at the
median for similar positions at companies of similar size, including both
utilities and industrial companies (Compensation Comparison Group)/1/.
Individual reward levels
- --------
1. The Compensation Comparison Group does not include all of the same
companies as the published industry indices in the Comparison of 10 Month
Cumulative Total Return chart included in this Proxy Statement. However, 34
of the 85 companies included in the EEI Executive Compensation Report,
which is one element of the Compensation Comparison Group, are also part of
either the Dow Jones Electric Utilities Index or the S&P 500 Index.
III-2
<PAGE>
vary based on individual contributions and performance. Total compensation
includes three components: base compensation, annual variable compensation and
long-term variable compensation. The targets for each component of the
executive compensation program are reviewed on an annual basis to ensure
alignment with the Company's compensation philosophy and a proper balance
between short-and long-term objectives.
Base Compensation
Base compensation for executive officers is determined by evaluating the
responsibilities of the positions held and the experience of the individuals,
coupled with a review of compensation for comparable positions at other
companies. Base compensation is reviewed on an annual basis and adjustments
are based on the performance of the Company and each executive officer. Annual
base compensation increases reflect the individual's performance and
contribution over several years in addition to the results for a single year.
Following the 1998 increases, the overall base compensation level for the five
named executive officers was slightly below the median of the base
compensation targeted levels defined by the surveys and proxies.
Annual Variable Compensation
The Company's annual variable compensation is designed to motivate
participants to accomplish stretch financial and individual goals and to
increase the sense of urgency to deliver significant results on an annual
basis. Annual variable compensation target opportunities are designed to be at
or above the median of the blended utility and industrial market and for the
named executive officers vary from 40% to 50% of base compensation, with
maximum awards of 60% to 75% of base compensation.
Annual variable compensation is paid in a combination of cash (80%) and
restricted stock units (20%) and is based on the achievement of predetermined
corporate and individual goals. The plan for 1998 provides that payouts will
occur only after a specified earnings target is achieved.
For 1998, each individual covered by the plan was eligible to earn a
variable compensation award between 0% and 150% of target. The portion of each
individual award attributable to corporate, line of business, and group
performance were determined and specific measures were developed at the
beginning of the year. These measures were primarily financial for 1998 to
accelerate the transition of the Company to a more competitive environment and
included corporate measures of earnings, cash flow return on capital employed
and cash flow. Each business group and line of business also developed
specific financial measures to support their business plans.
The Management Stock Purchase Program (MSPP) was designed as a means to
promote significant executive stock ownership in the new company and to help
meet stock ownership guidelines. The program requires that 20% of the
individual's earned annual variable compensation must be used to acquire
restricted stock units (RSUs). Individuals may also voluntarily use up to an
additional 30% (for a total of 50%) of their earned annual variable
compensation to acquire RSUs. All RSUs are acquired at a 20% discount from
Fair Market Value on the date paid. Each RSU is a proxy for one share of
Common Stock, has a value equal to one share and earns at the rate of the
Common Stock dividend. RSUs are restricted from sale or use for a 3-year
period and are distributed in shares of Common Stock.
Long-Term Variable Compensation
The Company's long-term variable compensation reinforces the importance of
providing stockholders with a competitive return on their investment. Long-
term variable compensation awards also strengthen the ability of the Company
to attract, motivate and retain executives of superior capability and more
closely align the interests of management with those of stockholders.
Long-term grants for Conectiv executives are determined by setting a target
percentage of base compensation based on median data in the Compensation
Comparison Group and converting the target amounts to actual grants using the
"Black-Scholes Model" for options and time and forfeiture discount methods for
the other elements of the long-term grants.
III-3
<PAGE>
Long-term awards granted in 1998 consisted of non-qualified stock options,
dividend equivalent units and performance accelerated restricted stock. Non-
qualified stock options and dividend equivalent units were awarded to provide
approximately two-thirds of the targeted value of the grant while the other
one-third of the targeted value was provided through performance accelerated
restricted stock. This stock vests as unrestricted Common Stock seven years
from the award date. However, vesting may be accelerated if the price of
Common Stock reaches certain predetermined levels prior to the seven years.
All stock options were granted with exercise prices equal to the fair market
value of Common Stock at the time of the grant.
Performance accelerated restricted stock granted to the CEO and three other
named executive officers is also subject to an additional condition tied to
Total Shareholder Return over the seven year period. Failure to meet a
predetermined Total Shareholder Return level over the restriction period will
result in total forfeiture of their shares granted.
The CEO and three other named executive officers also were given a special
grant of performance accelerated stock options to increase emphasis on
creating long-term shareholder value. All performance accelerated stock
options were granted with exercise prices equal to the fair market value of
Common Stock at the time of grant. These options do not vest and cannot be
exercised for 9-1/2 years from the date of their grant unless the stock price
increases to predetermined levels. Absent accelerated vesting at these
predetermined stock prices, the shares will become exercisable in 9-1/2 years
with expiration occurring at 10 years. This special grant resulted in the
long-term variable compensation component and total compensation exceeding the
targeted median values for these four executives for 1998 using the Black-
Scholes valuation methodology.
Stock Ownership Guidelines
To further reinforce the interests of stockholders, stock ownership
guidelines have been established for the Board of Directors, Company officers,
and other Company management. These guidelines require the individuals covered
by the guidelines to have beneficial ownership of Common Stock, or securities
convertible into Common Stock, with an aggregate value equal to certain
multiples of each individual's salary (or annual retainers in the case of
outside directors). Multiples range from five times to one times salary. The
Chief Executive Officer's multiple is set at five times salary and outside
Directors' multiples are set at three times the annual retainer.
Internal Revenue Code Section 162(m)
The Committee considers the tax deductibility of compensation paid to
executive officers and the impact of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), on the Company. This provision limits
the amount of compensation that the Company may deduct from its taxable income
for any year to $1 million for any of its five most highly compensated
executive officers, unless certain requirements are met.
The Committee has taken actions to limit the impact of the Code in the event
that compensation paid to a named executive officer might otherwise not be
deductible. The Committee will continue to seek ways to limit the impact of
the Code; however, the Committee believes that the tax deduction limitation
should not compromise the Company's ability to create incentive programs that
support the business strategy and also attract and retain the executive talent
required to compete successfully. Accordingly, achieving the desired
flexibility in the design and delivery of compensation may periodically result
in some compensation that is not deductible for federal income tax purposes.
Summary of Actions Taken by the Personnel & Compensation Committee
The Personnel & Compensation Committee, consisting entirely of outside
directors, provides direction and oversight to the Company's executive
compensation plans, establishes the Company's compensation philosophy and
assesses the effectiveness of the program as a whole. This includes activities
such as reviewing the design of various plans and assessing the reasonableness
of the total program consistent with the total compensation philosophy.
III-4
<PAGE>
The Committee also assists in administering key aspects of the Company's
annual compensation program and variable compensation plan, such as reviewing
annual compensation budgets and setting targets and corporate performance
measures for the annual and long-term variable compensation plans.
Finally, the Committee specifically implements the Company's executive
compensation program as it directly pertains to the Chief Executive Officer
and the Company's four other most highly compensated executives, i.e., the
five "named executive officers."
The Committee has determined that in an environment where competition is
increasing, it is essential that the Company have the ability to attract,
motivate and retain high quality executives from within and outside the
utility industry.
Because of the extremely competitive market for executive talent, the
Personnel & Compensation Committee has adopted a compensation structure based
on a blend of utility and general competitive industry markets. The structure
is also flexible to allow setting salaries at pure general industry levels
where that may be necessary to attract certain specific skills and experience.
Consistent with this approach, the total compensation program relies on
competitive base compensation generally at or below the median of the market
with annual and long-term variable compensation opportunities generally above
the median of the market. This places a much greater emphasis on variable
compensation that aligns executive and stockholder interests.
This total compensation philosophy is important to the success of the
Company because the Company is facing increasing competition and related
risks. The Company is not simply a utility anymore, but is rapidly becoming
part of the general competitive industry market and, therefore, just as
strategies for success must change, the compensation to drive success must
also change. Prior to the Merger involving Atlantic Energy and Delmarva and
during 1998, this compensation philosophy enabled the Company to attract
several key executives with experience and skills critical to the emerging
competitive environment. These executives would not have been available under
a traditional utility compensation philosophy.
Significant actions by the Committee for fiscal year 1998 included adoption
of the new Conectiv executive plans (Conectiv Variable Compensation Plan,
Deferred Compensation Plan, Supplemental Executive Retirement Plan [SERP], and
Change In Control Agreements) and other compensation and benefit plans for
Conectiv employees. The Committee also sets base compensation, annual variable
targets and performance measures and long-term grants under the various
executive programs, including special awards of performance accelerated stock
options to the CEO and the three other named executive officers described
above.
Chief Executive Officer Compensation
Mr. Cosgrove's compensation reflects Conectiv's compensation philosophy. His
base compensation, annual and regular long-term variable compensation place
him at total compensation levels consistent with the median level of other
CEO's at similarly-sized utility and manufacturing companies represented in
the Compensation Comparison Group. Additional emphasis on achieving increased
stockholder value has been created with a special grant of performance
accelerated stock options. This special grant will cause his long term
compensation and total compensation to exceed the median targets for 1998.
Base Compensation Action
Conectiv was formed by a Merger involving Delmarva and Atlantic Energy in
early 1998. Mr. Cosgrove's base compensation was set during the Merger process
to reflect the size of Conectiv and the increasing competitive environment in
which Conectiv does business. His 1998 base compensation is at the median
target level developed through a comparison of other Chief Executive Officers
of similarly-sized corporations using a blend of utilities and general
industry. His salary for 1999 will remain the same as in 1998.
III-5
<PAGE>
Annual Variable Compensation
To provide clear focus on increasing stockholder value through the
successful completion of the Merger and growing the new Conectiv businesses,
Mr. Cosgrove received additional levels of long-term awards in place of an
annual variable opportunity for 1997. Therefore, there is no annual variable
pay for 1997 reflected in 1998 compensation.
Mr. Cosgrove's annual variable compensation target opportunity for 1998 was
set at 50% of base compensation, with a minimum payout of 0% and a maximum
payout of 75% of base compensation. Payment of any award requires achieving a
predetermined level of 1998 earnings established by this Committee.
Performance measures for 1998, predetermined by this Committee, included
earnings available for common stock, cash flow return on capital employed and
cash flow. Awards for 1998 for Mr. Cosgrove and the four other named executive
officers have not been determined.
Long-Term Variable Compensation
Long-term incentive grants are a critical component of the Conectiv
executive compensation philosophy, since they align executive interests very
clearly with increased stockholder value. For 1998, Mr. Cosgrove received
grants of non-qualified stock options, dividend equivalent units, performance
accelerated restricted stock, and performance accelerated stock options
(reflected in the Compensation Tables). The regular grants of non-qualified
stock options, dividend equivalent units and performance accelerated
restricted stock provided a long-term variable compensation opportunity
approximately at the median of the defined competitive market.
The special, non-recurring grant of performance accelerated stock options
was awarded to create additional emphasis on achieving higher levels of
stockholder value. In order for Mr. Cosgrove to receive any value from this
grant prior to vesting at nine and one-half years, there must be a significant
increase in stockholder value. Such increases prior to nine and one-half years
will result in accelerated vesting of this grant in increments of one-third.
The first third would vest when stockholder value increases by $400,000,000,
at which time Mr. Cosgrove's options would vest at a value of $1,200,000, or
.3% of the increase in stockholder value. The entire grant would vest if
stockholder value increases by $800,000,000, at which time Mr. Cosgrove's
options would vest at a value of $2,400,000 or .3% of the increase in
stockholder value. Only under results that yield increases in stockholder
value and trigger accelerated vesting of this grant would Mr. Cosgrove's 1998
compensation exceed the median target compensation level.
Personnel & Compensation Committee
<TABLE>
<S> <C>
S.I. Gore, Chairperson R.B. McGlynn
M.B. Emery B.J. Morgan
</TABLE>
III-6
<PAGE>
Personnel & Compensation Committee Interlocks and Insider Participation
The Personnel & Compensation Committee is comprised solely of non-officer
directors. Logical Business Solutions, which is owned by Mr. Emery's son-in-
law, Paul Kleiman, had contracts with Conectiv Resource Partners, Inc., a
subsidiary of the Company, with a gross value of $227,000 during 1998 for
information technology consulting services. Except as described in the
preceding sentence, there are no Personnel & Compensation Committee
interlocks.
Table 1 -- Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------
Annual Compensation Awards Payouts
------------------------- ------------ -----------
Variable Securities LTIP All Other
Annualized Compensation Other Annual Restricted Underlying Payouts Compensation
Name and Principal Position Year (1) Salary (Bonus)(2) Compensation Stock Options (3) (4)
- ---------------------------- -------- ---------- ------------ ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
H.E. Cosgrove,........ 1998 $ 600,000 0 0 0 360,000 $ 572,134 $12,329
Chairman of the Board 1997 $ 400,000 0 0 0 0 0 $18,981
and Chief
Executive 1996 $ 400,000 0 0 0 0 0 $18,115
Officer
M.I. Harlacher,....... 1998 $340,000 0 0 0 0 0 $ 3,742
President
B.R. Elson,........... 1998 $ 325,000 0 0 0 170,000 $ 21,560 $ 4,074
Executive Vice
President
T.S. Shaw,............ 1998 $ 325,000 0 0 0 170,000 $ 155,267 $ 9,478
Executive Vice 1997 $ 219,249 $27,100 0 0 0 0 $ 6,563
President 1996 $ 180,000 $52,300 0 0 0 0 $ 6,333
B.S. Graham,.......... 1998 $ 250,000 0 0 0 170,000 $ 155,267 $ 5,308
Senior Vice President 1997 $ 184,000 $27,100 0 0 0 0 $ 3,390
1996 $ 180,000 $92,300 0 0 0 0 $ 5,529
</TABLE>
- --------
(1) Base salary is shown as an annualized amount. Other items of compensation
reflect the full calendar 1998 compensation received from Conectiv and
either Delmarva or Atlantic City Electric Company.
(2) The 1998 bonus, which is an annual variable award, has not yet been
determined. The target award is 50% of annualized salary for Mr. Cosgrove
and 40% for Messrs. Harlacher, Elson and Shaw and Mrs. Graham.
(3) During 1998 all restrictions lapsed on the performance-based restricted
stock granted in 1995 and 1996 under the Delmarva LTIP due to the Merger
involving Delmarva and Atlantic Energy. Under the "change in control"
provisions, the awards fully vested resulting in a payout to Mr. Cosgrove
of 21,160 shares (11,570 for 1995 and 9,590 for 1996) valued at $454,940;
to Mr. Shaw of 5,450 shares (2,870 for 1995 and 2,580 for 1996) valued at
$117,175; and to Mrs. Graham of 5,450 shares (2,870 for 1995 and 2,580 for
1996) valued at $117,175. Shares were valued at $21.50 at the time of
payout. Dividends on shares of restricted stock and dividend equivalents
are accrued at the same rate as that paid to all holders of Common Stock.
As of December 31, 1998; Mr. Cosgrove held 45,520 shares of restricted
stock (35,520 for 1997 and 10,000 for 1998) and 30,000 Dividend Equivalent
Units ("DEU's"); Mr. Elson held 4,000 shares of restricted stock for 1998
and 10,000 DEU's; Mr. Shaw held 12,010 shares of restricted stock (8,010
for 1997 and 4,000 for 1998) and 10,000 DEU's; Mrs. Graham held 12,010
shares of restricted stock (8,010 for 1997 and 4,000 for 1998) and 10,000
DEU's. Holders of restricted stock are entitled to receive dividends as
declared.
(4) The amount of All Other Compensation for each of the named executive
officers for fiscal year 1998 include the following: Mr. Cosgrove, $2,125
in Company matching contributions to the Company's Savings and Investment
Plan, $10,000 in Company matching contributions to the Company's Deferred
Compensation Plan and $204 in term life insurance premiums paid by the
Company; for Mr. Shaw, $2,630 in Company
III-7
<PAGE>
matching contributions to the Company's Savings and Investment Plan, $6,644
in Company matching contributions to the Company's Deferred Compensation
Plan and $204 in term life insurance premiums paid by the Company; for Mrs.
Graham, $2,604 in Company matching contributions to the Company's Savings
and Investment Plan, $2,500 in Company matching contributions to the
Company's Deferred Compensation Plan and $204 in term life insurance
premiums paid by the Company; for Mr. Elson, $2,969 in Company matching
contributions to the Company's Savings and Investment Plan and $1,105 in
term life insurance premiums paid by the Company; and for Mr. Harlacher,
$3,300 in Company matching contributions to the Company's Savings and
Investment Plan and $442 in term life insurance premiums paid by the
Company.
Table 2 -- Option Grants in Last Fiscal Year (1)
<TABLE>
<CAPTION>
% of Total
Number of Options Granted Exercise
Securities Underlying to Employees in Price Expiration Grant Date
Name Options Granted (#) Fiscal Year ($/Sh) Date Present Value(4)
- ---- --------------------- ---------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
H.E. Cosgrove........... 300,000(2) 29% $22.84375 1/2/08 $385,831
60,000(3) 6% $22.84375 1/2/08 $137,063
M.I. Harlacher.......... -- 0% -- -- --
-- 0% -- -- --
B.R. Elson.............. 150,000(2) 14% $22.84375 1/2/08 $192,915
20,000(3) 2% $22.84375 1/2/08 $ 45,688
T.S. Shaw............... 150,000(2) 14% $22.84375 1/2/08 $192,915
20,000(3) 2% $22.84375 1/2/08 $ 45,688
B.S. Graham............. 150,000(2) 14% $22.84375 1/2/08 $192,915
20,000(3) 2% $22.84375 1/2/08 $ 45,688
</TABLE>
- --------
(1) Currently, Delmarva does not grant stock appreciation rights. The options
reflected in this table are for payouts in shares of Conectiv Common
Stock.
(2) Denotes Performance Accelerated Stock Options ("PASO's") which were
granted on a one-time basis. PASO's have a ten-year term and vest and are
first exercisable 9 and 1/2 years from date of grant without regard to
stock price performance. Exercise date will accelerate for favorable stock
price performance (i.e., first 1/3, second 1/3 and third 1/3 of PASO's
vest after stock trades at $26, $28 or $30 per share, respectively, for
ten consecutive trading days). There is a minimum holding period of three
years from date of grant during which these options are not exercisable.
(3) Denotes Nonqualified Stock Options. One-half of such Options vest and are
exercisable at end of second year from date of grant. Second one-half vest
and are exercisable at end of third year from date of grant.
(4) Determined using the Black-Scholes model, incorporating the following
material assumptions and adjustments: (a) exercise price of $22.84375,
equal to the Fair Market Value ("FMV") as of date of grant; (b) an option
term of ten years; (c) risk-free rate of return of 6.00%; (d) volatility
of 20.00%; and (e) dividend yield of 7.00%. For valuation purposes, PASO's
are valued as a premium-priced stock option as of the date of grant with
an exercise price of $30 on a FMV of $22.84375.
III-8
<PAGE>
Table 3 -- Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Shares Value Unexercised Options In-the-Money
Acquired Realized at FY-End(2) Options at FY-
Name on Exercise ($)(1) Exercisable/Unexercisable End(1)
- ---- ----------- -------- ------------------------- ----------------
<S> <C> <C> <C> <C>
H. E. Cosgrove.......... 0 0 14,400/360,000 $51,225/$596,250
M. I. Harlacher......... 0 0 -- $ --
B. R. Elson............. 0 0 0/170,000 $ 0/$281,563
T. S. Shaw.............. 0 0 0/170,000 $ 0/$281,563
B. S. Graham............ 0 0 0/170,000 $ 0/$281,563
</TABLE>
- --------
(1) The closing price for Conectiv's common stock as reported by the New York
Stock Exchange on December 31, 1998 was $24.50. Any value in the options
would be based on the difference between the exercise price of the options
and the value at the time of the exercise (e.g., $24.50 as of close of
business on 12/31/98), which difference would be multiplied by the number
of options exercised.
(2) Only 14,400 stock options of Mr. Cosgrove are currently exercisable. None
of the remaining options may be exercised earlier than two years from date
of grant for regular, non-performance based options and nine and one half
years from date of grant for performance based options (subject to
accelerated vesting for favorable stock price performance).
Table 4 -- Long-Term Incentive Plans--Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Performance
Period
Number of Restricted Until
Shares/Dividend Maturation
Name Equivalent Units (#)(1) or Payout(2)
- ---- ----------------------- -----------
<S> <C> <C>
H. E. Cosgrove............................ 10,000 shs/30,000 units 3/2/05
M. I. Harlacher........................... -- --
B. R. Elson............................... 4,000 shs/10,000 units 3/2/05
T. S. Shaw................................ 4,000 shs/10,000 units 3/2/05
B. S. Graham.............................. 4,000 shs/10,000 units 3/2/05
</TABLE>
- --------
(1) In addition, Mr. Cosgrove held 35,520 performance shares (valued at
$870,240) and Mr. Shaw and Mrs. Graham held 8,010 performance shares
(valued at $196,245) from a 1997 award with a four year performance cycle
under the Delmarva Power Long Term Incentive Plan.
(2) Awards of Restricted Shares (Performance Accelerated Restricted Stock or
"PARS") and Dividend Equivalent Units ("DEU's") were made to four of the
named executive officers. The payout of shares of PARS may potentially be
"performance accelerated." Restrictions may lapse any time after 3 years
(i.e., after March 1, 2001) upon on achievement of favorable stock price
performance goals. In the absence of such favorable performance,
restrictions lapse after 7 years (i.e., March 2, 2005) provided that at
least a defined level of average, total return to shareholders is
achieved. As of December 31, 1998, Mr. Cosgrove's 10,000 Restricted Shares
were valued at $245,000 and Messrs. Elson and Shaw and Mrs. Graham's 4,000
PARS were valued at $98,000. These values for both Restricted Shares and
performance shares are based on the December 31, 1998 closing stock price
of $24.50. For Dividend Equivalent Units, one DEU is equal in value to the
regular quarterly dividend paid on one share of Conectiv common stock. The
Dividend Equivalent Units shown are payable in cash for twelve quarters
over a three year period ending with the quarterly dividend equivalent
payable January 31, 2001. At that point, the 1998 DEU award lapses.
III-9
<PAGE>
Pension Plan
The Conectiv Retirement Plan includes the Cash Balance Pension Plan and
grandfathered provisions relating to the Delmarva Retirement Plan and the
Atlantic Retirement Plan that apply to employees who had either 20 years of
service or were age 50 on the effective date of the Cash Balance Pension Plan
(January 1, 1999). Certain executives whose benefits from the Conectiv
Retirement Plan are limited by the application of Federal tax laws also
receive benefits from the Supplemental Executive Retirement Plan.
Cash Balance Pension Plan
The named executive officers participate in the Conectiv Retirement Plan and
earn benefits that generally become vested after five years of service. On an
annual basis, a recordkeeping account in a participant's name is credited with
an amount equal to a percentage of the participant's total pay, including base
salary, overtime and bonuses, depending on the employee's age at the end of
the plan year, as follows:
<TABLE>
<CAPTION>
% of
Age at end of Plan Year Pay
----------------------- ----
<S> <C>
Under 30.............................................................. 5
30 to 34.............................................................. 6
35 to 39.............................................................. 7
40 to 44.............................................................. 8
45 to 49.............................................................. 9
50 and over........................................................... 10
</TABLE>
These accounts also receive interest credits based on average U.S. Treasury
Bill rates for the year. In addition, certain annuity benefits earned by
participants under the former Delmarva and Atlantic Retirement Plans are fully
protected as of December 31, 1998, and will be converted to an equivalent cash
amount and included in each employee's initial cash balance account. When an
employee terminates employment, the amount credited to his or her account is
converted into an annuity or paid in a lump sum.
Supplemental Retirement Benefits
Supplemental retirement benefits are provided to certain employees,
including each executive officer, whose benefits under the Conectiv Retirement
Plan are limited by type of compensation or amount under applicable Federal
tax laws and regulations. Designated employees may also receive an annual
benefit at retirement equal to a percentage of final average compensation
multiplied by years of service reduced by the amount of all benefits received
under the Conectiv Retirement Plan and other nonqualified arrangements.
III-10
<PAGE>
Estimated Retirement Benefits Payable to Named Executive Officers
The following table shows the estimated retirement benefits, including
supplemental retirement benefits under the plans applicable to the named
executive officers, which would be payable if he or she were to retire at
normal retirement age, which is age 65, at 1998 compensation, expressed in the
form of a lump sum payment. Years of service credited to each named executive
officer as of his or her normal retirement date are as follows: Mr. Cosgove,
42; Ms. Graham, 30; Mr. Shaw, 40; Mr. Elson, 16 (8 of which are additional
years of service for purposes of the supplemental retirement benefits), and
Mr. Harlacher, 43.
Estimated Retirement Benefits
<TABLE>
<CAPTION>
Name Year of 65th Birthday Lump Sum Value
---- --------------------- --------------
<S> <C> <C>
H. E. Cosgrove......................... 2008 $2,993,000(2)
B. S. Graham........................... 2013 1,540,000(1)
T. S. Shaw............................. 2012 1,789,000(2)
B. R. Elson............................ 2006 1,213,000(2)
M. I. Harlacher........................ 2007 2,323,000(2)
</TABLE>
- --------
(1) Amounts include (i) interest credits for cash balances projected to be
5.01% per annum on annual salary credits and prior service balances, if
any, and (ii) accrued benefits as of December 31, 1998 under retirement
plans then applicable to the named executive officer. Benefits are not
subject to any offset for Social Security payments or other offset amounts
and assume no future increases in base salary or total pay.
(2) Under the Conectiv Retirement Plan's grandfather provisions, employees who
participated in the Delmarva or Atlantic Retirement Plans and who met
certain age and service requirements as of December 31, 1998, will have
retirement benefits for all years of service up to retirement calculated
according to their original final pay formula benefit. This benefit will
be compared to the cash balance account and the employee will receive
whichever is greater. Estimated benefits are based on the Delmarva
Retirement Plan for Messrs. Cosgrove, Shaw and Elson, the Cash Balance
Pension Plan for Mrs. Graham and the Atlantic Retirement Plan for Mr.
Harlacher. The amount of benefit under such grandfathering is illustrated
in the following tables applicable to the Delmarva and Atlantic Retirement
Plans, respectively:
Delmarva Retirement Plan
Pension Plan Table
Annual Retirement Benefits in Specified Remuneration and Years of Service
Classifications
<TABLE>
<CAPTION>
Average Annual Earnings
for the
5 Consecutive Years of
Earnings that
Result in the Highest
Average 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
----------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000................ 28,599 38,132 47,665 57,198 66,732
200,000(1)............. 46,599 62,132 77,665 93,198 108,732
300,000(1)............. 70,599 94,132 117,665 141,198(2) 164,732(2)
400,000(1)............. 94,599 126,132 157,665(2) 189,198(2) 220,732(2)
500,000(1)............. 118,599 158,132(2) 197,665(2) 237,198(2) 276,732(2)
</TABLE>
- --------
(1) Effective January 1, 1998, annual compensation recognized may not exceed
$160,000.
(2) For 1998, the limit on annual benefits is $130,000.
III-11
<PAGE>
Benefits are payable in the form of a 50% joint and surviving spouse annuity
or lump sum and earnings include base salary, overtime and bonus.
Atlantic Retirement Plan Pension Plan Table
Annual Retirement Benefits in Specified Remuneration and Years of Service
Classifications
<TABLE>
<CAPTION>
Average Annual Earnings
for the
5 Consecutive Years of
Earnings that
result in the Highest
Average 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
----------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000................ 30,000 40,000 50,000 60,000 70,000
200,000(1)............. 48,000 64,000 80,000 96,000 112,000
300,000(1)............. 72,000 96,000 120,000 144,000(2) 168,000(2)
400,000(1)............. 96,000 128,000 160,000(2) 192,000(2) 224,000(2)
500,000(1)............. 120,000 160,000(2) 200,000(2) 240,000(2) 280,000(2)
</TABLE>
- --------
(1) Effective January 1, 1998, annual compensation recognized may not exceed
$160,000.
(2) For 1998, the limit on annual benefits is $130,000.
Benefits are paid in the form of a life annuity or lump sum and earnings
include base salary and bonus.
Change in Control Severance Agreements And Other Provisions Relating to
Possible Change in Control
Conectiv has entered into change in control severance agreements with
Messrs. Cosgrove, Elson and Shaw and Mrs. Graham and two other senior
executives. The agreements are intended to encourage the continued dedication
of members of Conectiv's senior management team. These agreements provide
potential benefits for such executives upon actual or constructive termination
of employment (other than for cause) following a change in control of
Conectiv, as defined in such agreements. Each affected executive would receive
a severance payment equal to three times Base Salary and Bonus and Conectiv-
paid medical, dental, vision, group life and disability benefits during the
three years after termination of employment, and a cash payment equal to the
actuarial equivalent of accrued retirement pension credits equal to 36 months
of additional service.
In the event of a change in control, the Variable Compensation Plan provides
that outstanding options become exercisable in full immediately, all
conditions to the vesting of PARS are deemed satisfied and shares will be
fully vested and nonforfeitable, DEU's will become fully vested and be
immediately payable, variable compensation deferred under the Management Stock
Purchase Program will be immediately distributed, and payment of variable
compensation, if any, for the current year will be decided by the Board's
Personnel & Compensation Committee. For the Deferred Compensation Plan, the
Committee may decide to distribute all deferrals in cash immediately or
continue the deferral elections of participants in which event Conectiv will
fully fund a "springing rabbi trust" to satisfy the obligations. An
independent institutional trustee will maintain any such trust established by
reason of this provision.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All shares of DPL's common stock are owned by Conectiv, DPL's parent
company.
Item 13. Certain Relationships and Related Transactions
None.
III-12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements--The following financial statements are contained
in Item 8 of Part II.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants................................. II-15
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.............................................. II-16
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997, and 1996......................................... II-17
Consolidated Balance Sheets as of December 31, 1998 and 1997...... II-18
Consolidated Statements of Changes in Common Stockholder's Equity
for the years ended December 31, 1998, 1997, and 1996............ II-20
Notes to Consolidated Financial Statements........................ II-21
</TABLE>
2. Financial Statement Schedules--No financial statement schedules have
been filed since the required information is not present in amounts
sufficient to require submission of the schedule or because the information
required is included in the respective financial statements or the notes
thereto.
3. Schedule of Operating Statistics for the three years ended December
31, 1998 can be found on pages IV-4 and IV-5 of this report.
4. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
2 Amended and Restated Agreement and Plan of Merger, dated as of
December 26, 1996, between DPL, Atlantic Energy, Inc., Conectiv, Inc.
and DS Sub, Inc. (Filed with Registration Statement No. 333-18843.)
3-A Copy of the Restated Certificate and Articles of Incorporation
effective as of April 12, 1990. (Filed with Registration Statement No.
33-50453.)
3-B Copy of DPL's Certificate of Designation and Articles of Amendment
establishing the 7 3/4% Preferred Stock--$25 Par. (Filed with
Registration Statement No. 33-50453.)
3-C Copy of DPL's Certificate of Designation and Articles of Amendment
establishing the 6 3/4% Preferred Stock. (Filed with Registration
Statement No. 33-53855.)
3-D A copy of DPL's Certificate of Amendment of Restated Certificate and
Articles of Incorporation, filed with the Delaware Secretary of State,
effective as of June 7, 1996. (Filed with Registration No. 333-07281.)
3-E A copy of DPL's Articles of Amendment of Restated Certificate and
Articles of Incorporation, filed with the Virginia State Corporation
Commission, effective as of June 7, 1996. (Filed with Registration No.
333-07281.)
3-F A copy of DPL's Certificate and Articles of Amendment of Restated
Certificate and Articles of Incorporation, filed with the Delaware
Secretary of State, effective as of March 2, 1998 (filed with DPL's
Current Report on Form 8-K dated March 4, 1998; File No. 1-1405).
3-G A copy of DPL's Articles of Amendment of Restated Certificate and
Articles of Incorporation, filed with the Virginia State Corporation
Commission, effective as of March 2, 1998 (filed with DPL's Current
Report on Form 8-K dated March 4, 1998; File No. 1-1405).
</TABLE>
IV-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
3-H Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and
into DPL, filed with the Delaware Secretary of State, effective as of
March 1, 1998 (filed with DPL's Current Report on Form 8-K dated March
4, 1998; File No. 1-1405).
3-I Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and
into DPL, filed with the Virginia State Corporation Commission,
effective as of March 1, 1998 (filed with DPL's Current Report on Form
8-K dated March 4, 1998; File No. 1-1405).
3-J Copy of DPL's By-Laws as amended March 2, 1998 (filed with DPL's
Current Report on Form 8-K dated March 4, 1998; File No. 1-1405).
4-A Copy of the Mortgage and Deed of Trust of Delaware Power & Light
Company to the New York Trust Company, Trustee, (the Chase Manhattan
Bank, successor Trustee) dated as of October 1, 1943 and copies of the
First through Sixty-Eighth Supplemental Indentures thereto. (Filed
with Registration Statement No. 33-1763.)
4-B Copy of the Sixty-Ninth Supplemental Indenture. (Filed with
Registration Statement No. 33-39756.)
4-C Copies of the Seventieth through Seventy-Fourth Supplemental
Indentures. (Filed with Registration Statement No. 33-24955.)
4-D Copies of the Seventy-Fifth through the Seventy-Seventh Supplemental
Indentures. (Filed with Registration Statement No. 33-39756.)
4-E Copies of the Seventy-Eighth and Seventy-Ninth Supplemental
Indentures. (Filed with Registration Statement No. 33-46892.)
4-F Copy of the Eightieth Supplemental Indenture. (Filed with Registration
Statement No. 33-49750.)
4-G Copy of the Eighty-First Supplemental Indenture. (Filed with
Registration Statement No. 33-57652.)
4-H Copy of the Eighty-Second Supplemental Indenture. (Filed with
Registration Statement No. 33-63582.)
4-I Copy of the Eighty-Third Supplemental Indenture. (Filed with
Registration Statement No. 33-50453.)
4-J Copies of the Eighty-Fourth through Eighty-Eighth Supplemental
Indentures. (Filed with Registration Statement No. 33-53855.)
4-K Copies of the Eighty-Ninth and Ninetieth Supplemental Indentures.
(Filed with Registration Statement No. 333-00505.)
4-L A copy of the Indenture between DPL and The Chase Manhattan Bank
(ultimate successor to Manufacturers Hanover Trust Company), as
Trustee, dated as of November 1, 1988. (Filed with Registration
Statement No. 33-46892.)
4-M A copy of the Indenture (for Unsecured Subordinated Debt Securities
relating to Trust Securities) between DPL and Wilmington Trust
Company, as Trustee, dated as of October 1, 1996. (Filed with
Registration Statement No. 333-20715.)
4-N A copy of the Officer's Certificate dated October 3, 1996,
establishing the 8.125% Junior Subordinated Debentures, Series I, Due
2036. (Filed with Registration Statement No. 333-20715.)
4-O A copy of the Guarantee Agreement between DPL, as Guarantor, and
Wilmington Trust Company, as Trustee, dated as of October 1, 1996.
(Filed with Registration Statement No. 333-20715.)
4-P A copy of the Amended and Restated Trust Agreement between DPL, as
Depositor, and Wilmington Trust Company, Barbara S. Graham, Edric R.
Mason and Donald P. Connelly, as Trustees, dated as of October 1,
1996. (Filed with Registration Statement No. 333-20715.)
4-Q A copy of the Agreement as to Expenses and Liabilities dated as of
October 1, 1996, between DPL and Delmarva Power Financing I. (Filed
with Registration Statement No. 333-20715.)
10-A Copy of the Supplemental Executive Retirement Plan, revised as of
October 29, 1991. (Filed with Form 10-K for the year ended December
31, 1992, File No. 1-1405.)
</TABLE>
IV-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10-B Copies of amendments to the Supplemental Executive Retirement Plan,
effective June 15, 1994, and November 1, 1994. (Filed with Form 10-K
for the year ended December 31, 1994, File No. 1-1405.)
10-C Copy of the Long Term Incentive Plan amended and restated as of
January 1, 1996. (Filed with Form 10-K for the year ended December 31,
1996, File No. 1-1405.)
10-D Copies of amendments to the Long Term Incentive Plan, effective
January 1, 1997, and January 30, 1997. (Filed with Form 10-K for the
year ended December 31, 1996, File No. 1-1405.)
10-E Copy of the severance agreement with members of management. (Filed
with Form 10-K for the year ended December 31, 1994, File No. 1-1405.)
10-F Copy of the current listing of members of management who have signed
the severance agreement. (Filed with Form 10-K for the year ended
December 31, 1996, File No. 1-1405.)
10-G Copy of the Management Life Insurance Plan amended and restated as of
January 1, 1992. (Filed with Form 10-K for the year ended December 31,
1996, File No. 1-1405.)
10-H Copy of the Deferred Compensation Plan, effective as of January 1,
1996. (Filed with the Form 10-K for the year ended December 31, 1995,
File No. 1-1405.)
12-A Computation of ratio of earnings to fixed charges.
12-B Computation of ratio of earnings to fixed charges and preferred
dividends.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
(b) No Reports on Form 8-K were filed during the fourth quarter of 1998.
On January 26, 1999, DPL filed a Report on Form 8-K under Item 5, Other
Events, concerning proposed legislation in Delaware to restructure the
electric utility industry.
IV-3
<PAGE>
DELMARVA POWER & LIGHT COMPANY
SCHEDULE OF OPERATING STATISTICS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
The table below sets forth selected financial and operating statistics for
DPL's electric and gas businesses for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
ELECTRIC:
Electricity generated and purchased
(MWH):
Generated............................. 9,657,472 9,067,236 10,307,299
Purchased............................. 6,510,738 5,908,796 6,195,720
Interchange deliveries................ (1,968,200) (1,078,471) (2,855,109)
----------- ----------- -----------
Total system output for load......... 14,200,010 13,897,561 13,647,910
Nonregulated purchases............... 7,324,399 4,201,619 --
----------- ----------- -----------
Total output........................... 21,524,409 18,099,180 13,647,910
=========== =========== ===========
Electric sales (MWH):
Residential........................... 4,183,854 4,097,773 4,262,710
Commercial............................ 4,288,876 4,091,636 4,018,120
Industrial............................ 3,645,901 3,598,006 3,331,175
Resale................................ 1,236,489 1,335,226 1,333,268
Other sales (1)....................... 73,983 109,124 (19,557)
----------- ----------- -----------
Total service territory sales........ 13,429,103 13,231,765 12,925,716
Merchant sales (2).................... 7,713,418 4,201,619 --
----------- ----------- -----------
Total sales excluding interchange.... 21,142,521 17,433,384 12,925,716
Losses and miscellaneous system uses... 381,888 665,796 722,194
----------- ----------- -----------
Total disposition of energy.......... 21,524,409 18,099,180 13,647,910
=========== =========== ===========
Operating revenue (thousands):
Residential........................... $ 378,515 $ 377,528 $ 378,520
Commercial............................ 304,477 299,649 286,438
Industrial............................ 169,174 173,413 156,329
Resale................................ 67,104 68,315 65,989
Miscellaneous revenues (3)............ 36,478 34,451 24,344
----------- ----------- -----------
Total service territory.............. 955,748 953,356 911,620
Interchange deliveries................ 99,182 36,430 75,301
Merchant revenues (2)................. 274,463 102,358 --
----------- ----------- -----------
Total revenues....................... $ 1,329,393 $ 1,092,144 $ 986,921
=========== =========== ===========
Number of customers (end of period):
Residential........................... 402,536 396,798 391,611
Commercial............................ 51,454 50,216 49,165
Industrial............................ 657 672 683
Resale................................ 12 12 12
Other................................. 647 624 645
----------- ----------- -----------
Total customers (4).................. 455,306 448,322 442,116
=========== =========== ===========
</TABLE>
(Table continued on next page)
IV-4
<PAGE>
DELMARVA POWER & LIGHT COMPANY
SCHEDULE OF OPERATING STATISTICS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
GAS:
Gas sales and gas transported (Mcf):
Residential....................................... 6,812 7,844 8,692
Commercial........................................ 4,705 5,313 5,724
Industrial........................................ 2,751 2,772 2,696
Interruptible, transportation and other........... 7,319 6,926 5,312
-------- -------- --------
Total service territory.......................... 21,587 22,855 22,424
Merchant sales.................................... 156,741 27,216 1,733
-------- -------- --------
Total............................................ 178,328 50,071 24,157
======== ======== ========
Operating revenue (thousands):
Residential....................................... $ 57,809 $ 63,937 $ 60,017
Commercial........................................ 31,954 34,895 32,191
Industrial........................................ 11,311 12,582 12,349
Interruptible, transportation and other........... 6,113 5,776 5,085
-------- -------- --------
Total service territory.......................... 107,187 117,190 109,642
Merchant revenues................................. 427,895 86,867 4,642
-------- -------- --------
Total............................................ $535,082 $204,057 $114,284
======== ======== ========
Number of customers (end of period):
Residential....................................... 97,558 95,295 93,149
Commercial........................................ 7,975 7,793 7,615
Industrial........................................ 123 128 139
Interruptible, transportation and other........... -- -- 1
-------- -------- --------
Total customers (4).............................. 105,656 103,216 100,904
======== ======== ========
</TABLE>
- --------
(1) Includes unbilled sales.
(2) Offsystem, competitive sales and other services.
(3) Includes unbilled revenues and other miscellaneous revenues.
(4) Service territory only.
IV-5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 26,
1999.
Delmarva Power & Light Company
(Registrant)
/s/ John C. van Roden
By: _________________________________
(John C. van Roden, Senior Vice
President
and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on March 26, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Howard E. Cosgrove Chairman of the Board and
...................................... Chief Executive Officer
(Howard E. Cosgrove)
/s/ John C. van Roden Senior Vice President and
...................................... Chief Financial Officer
(John C. van Roden)
/s/ James P. Lavin Controller and Chief
...................................... Accounting Officer
(James P. Lavin)
/s/ Meredith I. Harlacher, Jr. Director
......................................
(Meredith I. Harlacher, Jr.)
/s/ Thomas S. Shaw Director
......................................
(Thomas S. Shaw)
/s/ Barry R. Elson Director
......................................
(Barry R. Elson)
/s/ Barbara S. Graham Director
......................................
(Barbara S. Graham)
/s/ Audrey K. Doberstein Director
......................................
(Audrey K. Doberstein)
/s/ Jerrold L. Jacobs Director
......................................
(Jerrold L. Jacobs)
</TABLE>
IV-6
<PAGE>
EXHIBIT 12-A
------------
Ratio of Earnings to Fixed Charges
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 112,410 $ 105,709 $ 116,187 $ 117,488 $ 108,310
---------- ---------- ---------- ---------- ----------
Income taxes 72,276 72,155 78,340 75,540 67,613
---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 81,132 78,350 69,329 65,572 61,128
Other interest 9,328 12,835 12,516 10,353 9,336
Preferred dividend require-
ments of a subsidiary
trust 5,688 5,687 1,390 - -
---------- ---------- ---------- ---------- ----------
Total fixed charges 96,148 96,872 83,235 75,925 70,464
---------- ---------- ---------- ---------- ----------
Nonutility capitalized interest - (208) (311) (304) (256)
---------- ---------- ---------- ---------- ----------
Earnings before income taxes
and fixed charges $ 280,834 $ 274,528 $ 277,451 $ 268,649 $ 246,131
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 2.92 2.83 3.33 3.54 3.49
</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 DPL's major leases, and one-third of
the remaining annual rentals.
<PAGE>
EXHIBIT 12-B
------------
Ratio of Earnings to Fixed Charges and Preferred Dividends
<PAGE>
Exhibit 12-B
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges and Preferred Dividends
----------------------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 112,410 $ 105,709 $ 116,187 $ 117,488 $ 108,310
---------- ---------- ---------- ---------- ----------
Income taxes 72,276 72,155 78,340 75,540 67,613
---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 81,132 78,350 69,329 65,572 61,128
Other interest 9,328 12,835 12,516 10,353 9,336
Preferred dividend require-
ments of a subsidiary
trust 5,688 5,687 1,390 - -
---------- ---------- ---------- ---------- ----------
Total fixed charges 96,148 96,872 83,235 75,925 70,464
---------- ---------- ---------- ---------- ----------
Nonutility capitalized interest - (208) (311) (304) (256)
---------- ---------- ---------- ---------- ----------
Earnings before income taxes
and fixed charges $ 280,834 $ 274,528 $ 277,451 $ 268,649 $ 246,131
---------- ---------- ---------- ---------- ----------
Fixed charges $ 96,148 $ 96,872 $ 83,235 $ 75,925 $ 70,464
Preferred dividend requirements 7,150 7,556 14,961 16,185 15,948
---------- ---------- ---------- ---------- ----------
$ 103,298 $ 104,428 $ 98,196 $ 92,110 $ 86,412
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred dividends 2.72 2.63 2.83 2.92 2.85
</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 DPL's major leases, and one-third of
the remaining annual rentals. Preferred dividend requirements represent
preferred dividend requirements multiplied by the ratio that pre-tax income
bears to net income.
<PAGE>
EXHIBIT 23
----------
Consent of Independent Accountants
<PAGE>
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement of
Delmarva Power & Light Company on Form S-3 (File No. 333-24059), and the
Registration Statements of Conectiv on Form S-3 (File Nos. 333-72251 and 333-
44219) and Form S-8 (File No. 333-50063), of our report dated February 5, 1999,
on our audits of the consolidated financial statements of Delmarva Power & Light
Company as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, which report is included in this Form 10-K.
/s/ Pricewaterhouse Coopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELMARVA
POWER & LIGHT'S 1998 REPORT ON FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,964,409
<OTHER-PROPERTY-AND-INVEST> 65,871
<TOTAL-CURRENT-ASSETS> 384,948
<TOTAL-DEFERRED-CHARGES> 250,888
<OTHER-ASSETS> 238,735
<TOTAL-ASSETS> 2,904,851
<COMMON> 2
<CAPITAL-SURPLUS-PAID-IN> 528,893
<RETAINED-EARNINGS> 322,599
<TOTAL-COMMON-STOCKHOLDERS-EQ> 851,494
70,000
89,703
<LONG-TERM-DEBT-NET> 951,911
<SHORT-TERM-NOTES> 21,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 31,287
0
<CAPITAL-LEASE-OBLIGATIONS> 17,003
<LEASES-CURRENT> 12,481
<OTHER-ITEMS-CAPITAL-AND-LIAB> 859,272
<TOT-CAPITALIZATION-AND-LIAB> 2,904,851
<GROSS-OPERATING-REVENUE> 1,899,899
<INCOME-TAX-EXPENSE> 72,276
<OTHER-OPERATING-EXPENSES> 1,634,472
<TOTAL-OPERATING-EXPENSES> 1,706,748
<OPERATING-INCOME-LOSS> 193,151
<OTHER-INCOME-NET> 5,455
<INCOME-BEFORE-INTEREST-EXPEN> 198,606
<TOTAL-INTEREST-EXPENSE> 86,196
<NET-INCOME> 112,410
4,352
<EARNINGS-AVAILABLE-FOR-COMM> 108,058
<COMMON-STOCK-DIVIDENDS> 94,860
<TOTAL-INTEREST-ON-BONDS> 82,527
<CASH-FLOW-OPERATIONS> 246,205
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
