SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----------------------------------------
Commission file number 1-1405
Delmarva Power & Light Company
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(Exact name of registrant as specified in its charter)
Delaware and Virginia 51-0084283
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(States of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231, Wilmington, Delaware 19899
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3527
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
----------------------------- -----------------------------
Common Stock, $2.25 par value 60,972,957 Shares
DELMARVA POWER & LIGHT COMPANY
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Table of Contents
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Page No.
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Part I. Financial Information:
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 1-2
Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Part II. Other Information and Signature 15-21
i
PART I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $42,859 $36,533
Accounts receivable 158,044 142,431
Inventories, at average cost:
Fuel (coal, oil, and gas) 31,009 36,584
Materials and supplies 43,324 41,292
Prepayments 12,512 20,233
Deferred energy costs 24,230 31,127
----------- ------------
311,978 308,200
----------- ------------
NONUTILITY PROPERTY AND INVESTMENTS
Nonutility property, net 79,076 63,023
Investment in leveraged leases 46,897 46,961
Funds held by trustee 35,604 34,735
Other investments 4,204 4,155
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165,781 148,874
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UTILITY PLANT, AT ORIGINAL COST
Electric 3,043,239 3,037,830
Gas 229,655 229,362
Common 170,383 136,897
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3,443,277 3,404,089
Less: Accumulated depreciation 1,322,252 1,292,325
----------- ------------
Net utility plant in service 2,121,025 2,111,764
Construction work-in-progress 106,568 118,208
Leased nuclear fuel, at amortized cost 30,480 31,513
----------- ------------
2,258,073 2,261,485
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DEFERRED CHARGES AND OTHER ASSETS
Prepaid employee benefit costs 35,966 35,146
Unamortized debt expense 13,708 13,858
Deferred debt refinancing costs 20,715 21,366
Deferred recoverable income taxes 134,138 137,561
Other 54,930 52,663
----------- ------------
259,457 260,594
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TOTAL ASSETS $2,995,289 $2,979,153
=========== ============
See accompanying Notes to Consolidated Financial Statements.
- 1 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES
Short-term debt $33,077 $74,355
Long-term debt due within one year 27,547 27,676
Variable rate demand bonds 85,000 85,000
Accounts payable 76,495 81,628
Taxes accrued 9,847 -
Interest accrued 22,497 16,193
Dividends declared 23,763 23,265
Current capital lease obligation 12,623 12,598
Deferred income taxes, net 5,431 7,276
Other 31,756 31,489
----------- ------------
328,036 359,480
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 522,906 526,449
Deferred investment tax credits 41,861 42,501
Long-term capital lease obligation 19,546 20,552
Other 30,081 31,522
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614,394 621,024
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CAPITALIZATION
Common stock, $2.25 par value; 90,000,000
shares authorized; shares outstanding:
1997--60,972,957, 1996--60,682,719 137,665 136,765
Additional paid-in capital 515,283 508,300
Retained earnings 294,794 293,604
----------- ------------
947,742 938,669
Treasury shares, at cost:
1997--211,447 shares, 1996--101,831 shares (4,387) (2,138)
Unearned compensation (358) (1,618)
----------- ------------
Total common stockholders' equity 942,997 934,913
Cumulative preferred stock 89,703 89,703
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Company debentures 70,000 70,000
Long-term debt 950,159 904,033
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2,052,859 1,998,649
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TOTAL CAPITALIZATION AND LIABILITIES $2,995,289 $2,979,153
=========== ============
See accompanying Notes to Consolidated Financial Statements.
- 2 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31
--------------------
1997 1996
-------- --------
OPERATING REVENUES
Electric $262,603 $248,149
Gas 56,117 45,691
Other services 27,359 14,779
-------- --------
346,079 308,619
-------- --------
OPERATING EXPENSES
Electric fuel and purchased energy 102,842 81,719
Gas purchased 35,753 23,743
Purchased electric capacity 6,977 9,521
Operation and maintenance 94,740 78,265
Depreciation 33,395 30,969
Taxes other than income taxes 9,222 8,782
-------- --------
282,929 232,999
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OPERATING INCOME 63,150 75,620
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OTHER INCOME
Allowance for equity funds used
during construction - 225
Other income 1,531 856
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1,531 1,081
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INTEREST EXPENSE
Interest charges 20,621 18,590
Allowance for borrowed funds used
during construction and capitalized interest (1,120) (683)
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19,501 17,907
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DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 -
-------- --------
INCOME BEFORE INCOME TAXES 43,758 58,794
INCOME TAXES 17,965 23,651
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NET INCOME 25,793 35,143
DIVIDENDS ON PREFERRED STOCK 1,215 2,440
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EARNINGS APPLICABLE TO COMMON STOCK $24,578 $32,703
======== ========
COMMON STOCK
Average shares outstanding (000) 60,856 60,759
Earnings per average share $0.40 $0.54
Dividends declared per share $0.38 1/2 $0.38 1/2
See accompanying Notes to Consolidated Financial Statements.
-3-
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31
------------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $25,793 $35,143
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 34,870 32,472
Allowance for equity funds used during construction - (225)
Investment tax credit adjustments, net (640) (640)
Deferred income taxes, net (1,966) 8,534
Net change in:
Accounts receivable (13,555) (5,926)
Inventories 3,753 7,761
Accounts payable (6,229) 3,695
Other current assets & liabilities 30,637 379
Other, net (630) (1,594)
--------- ---------
Net cash provided by operating activities 72,033 79,599
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and acquisition expenditures (48,631) (29,371)
Decrease in bond proceeds held in trust funds 565 4,263
Deposits to nuclear decommissioning trust funds (1,060) (1,060)
Other, net (432) (1,691)
--------- ---------
Net cash used by investing activities (49,558) (27,859)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends:Common (23,329) (23,325)
Preferred (875) (2,495)
Issuances:Long-term debt 124,200 -
Common stock 6,362 56
Redemptions:Long-term debt (696) (308)
Common stock (23) (1,200)
Principal portion of capital lease payments (1,475) (1,503)
Net change in short-term debt (118,278) (10,539)
Cost of issuances and refinancings (2,035) (70)
--------- ---------
Net cash used by financing activities (16,149) (39,384)
--------- ---------
Net change in cash and cash equivalents 6,326 12,356
Cash and cash equivalents at beginning of period 36,533 28,951
--------- ---------
Cash and cash equivalents at end of period $42,859 $41,307
========= =========
See accompanying Notes to Consolidated Financial Statements.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Financial Statement Presentation
--------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The statements reflect all adjustments
necessary in the opinion of the Company for a fair presentation of interim
results. They should be read in conjunction with the Company's 1996 Annual
Report to Stockholders and Part II of this Report on Form
10-Q for additional relevant information.
Certain reclassifications, not affecting net income, have been made to
amounts reported for the three months ended March 31, 1996 to conform to
the current presentation. Primarily, the operating results of nonutility
subsidiaries were reclassified from "other income" into other
classifications within the income statement. Revenues of the nonutility
subsidiaries are included in revenues from "Other services," which also
includes revenues from the parent company's nonutility activities. Refer
to "Nonutility Business" on page I-3 of the Company's 1996 report on Form
10-K for additional information concerning these activities.
2. Supplemental Cash Flow Information
----------------------------------
Three Months Ended
March 31,
--------------------
Cash paid for 1997 1996
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(Dollars in thousands)
Interest, net of amounts
capitalized $12,335 $12,241
Income taxes, net of refunds $4,558 $5,387
3. Debt
----
In February 1997, the Company issued $124.2 million of unsecured Medium-
Term Notes with maturities of 10 to 30 years and interest rates of 7.06% to
7.72%. The proceeds were used to refinance short-term debt. On the
consolidated balance sheet as of December 31, 1996, $77.0 million of short-
term debt was reclassified to long-term debt in order to recognize the
amount of short-term debt which had been refinanced with Medium-Term Notes
as of February 7, 1997.
-5-
4. Contingencies
-------------
Salem Nuclear Generating Station
- --------------------------------
The Company owns 7.41% of Salem Nuclear Generating Station (Salem), which
consists of two pressurized water nuclear reactors and is operated by
Public Service Electric & Gas Company (PSE&G). As of March 31, 1997, the
Company's net investment in plant in service for Salem was approximately
$55 million for Unit 1 and $62 million for Unit 2, including common plant
allocated between the two units. Each unit represents approximately 2% of
the Company's total assets and approximately 2.6% of the Company's
installed electric generating capacity.
Salem Units 1 and 2 were removed from operation by PSE&G on May 16, 1995,
and June 7, 1995, respectively, due to operational problems, and
maintenance and safety concerns. Due to degradation of a significant
number of tubes in the Unit 1 steam generators, PSE&G is replacing the Unit
1 steam generators and expects Unit 1 to return to service in late-1997.
The Company's share of costs to be capitalized for the steam generators,
including installation, and the cost of disposal of the old steam
generators, will range from approximately $13 million to $14 million.
PSE&G has advised the Company that Unit 2 is expected to return to service
in the third quarter of 1997. The units' return dates are subject to
completion of the requirements of their respective restart plans to the
satisfaction of PSE&G and the Nuclear Regulatory Commission (NRC), which
encompasses a substantial review and improvement of personnel, process, and
equipment issues.
The Company incurs replacement power costs while the units are out of
service of approximately $750,000 per month, per unit. Such amounts vary
based on the cost and availability of other Company-owned generation and
the cost of purchased energy. Replacement power costs typically are not
incurred for routine refueling and maintenance outages, and the recovery of
replacement power costs is subject to approval by the regulatory
commissions having jurisdiction over the Company. From the inception of the
Salem unit outages through March 31, 1997, approximately one-half of the
estimated replacement power costs of $24.4 million has been expensed ($4.1
million in 1995, $6.1 million in 1996, and $2.0 million for the first
quarter of 1997) and the remaining $12.2 million has been deferred on the
Company's Consolidated Balance Sheet in expectation of future recovery.
The actual costs ultimately incurred by the Company may differ from the
foregoing estimates, since the periods projected by PSE&G during which the
Salem units will be out of service, the extent of the maintenance that will
be required, and the costs of replacement power and the extent of its
recovery may be different from those set forth above.
As previously reported, in March 1996, the Company and PECO Energy Company
(PECO) filed a complaint in the United States District Court for the
Eastern District of Pennsylvania against Public Service Enterprise Group,
Inc. (Enterprise) and PSE&G seeking damages for breach of contract and
negligence respecting Salem operations. The suit asks for compensatory
damages for breach of contract and negligence and unspecified punitive
damages.
-6-
On May 12, 1997, it was announced that PSE&G settled the suit with the
Company and PECO. Under the settlement, PSE&G will pay the Company
approximately $12 million in settlement of all claims related to the
lawsuit. Based on discussions between the Company and the staff of the
Delaware Public Service Commission concerning a sharing of the settlement
payment and the Salem outage costs between the Company's stockholders and
utility customers, the Company does not expect the payment to have a
material impact on net income.
Also under the settlement, PSE&G would be obligated to pay the Company
approximately $0.2 million for each reactor unit month that the outage
continues beyond an aggregate outage of 64 reactor unit months, up to a
maximum of approximately $2.5 million. The Salem station has been out of
service for approximately 47 reactor unit months, through April 30, 1997.
The parties to the settlement also agreed to an operating performance
standard through December 31, 2011 for Salem, and a similar standard
through December 31, 2007 for the Peach Bottom Atomic Power Station
operated by PECO. Under this standard, the Company is entitled to receive
payments from the nuclear plant operator as follows: (a) if the three-year
capacity factor determined annually falls below 40 percent but is equal or
above 20 percent, the operator will pay the Company $1.5 million for each
year that the historical capacity factor is below 40 percent; and (b) if
the historical capacity factor is below 20 percent, the operator will pay
the Company $3.7 to $3.8 million for each such year. The initial three-
year period begins on January 1, 1998.
The parties have further agreed to forego litigation in the future, except
for very limited cases in which the operator would be responsible for no
more than $5 million per year.
Environmental Matters
- ---------------------
The Company is subject to regulation with respect to the environmental
effects of its operations, including air and water quality control, solid
and hazardous waste disposal, and limitation on land use by various
federal, regional, state, and local authorities. The disposal of Company-
generated hazardous substances can result in costs to clean up facilities
found to be contaminated due to past disposal practices. Federal and state
statutes authorize governmental agencies to compel responsible parties to
clean up certain abandoned or uncontrolled hazardous waste sites. The
Company is currently a potentially responsible party (PRP) at three federal
superfund sites and is alleged to be a third-party contributor at three
other federal superfund sites. The Company also has two former coal
gasification sites in Delaware and one former coal gasification site in
Maryland, each of which is a state superfund site. There is $2 million
included in the Company's current liabilities as of December 31, 1996 and
March 31, 1997 for clean-up and other potential costs related to the
federal and state superfund sites. The Company does not expect such future
costs to have a material effect on the Company's financial position or
results of operations.
-7-
Nuclear Insurance
- -----------------
In the event of an incident at any commercial nuclear power plant in the
United States, the Company could be assessed for a portion of any third-
party claims associated with the incident. Under the provisions of the
Price Anderson Act, if third-party claims relating to such an incident
exceed $200 million (the amount of primary insurance), the Company could be
assessed up to $23.7 million for such third-party claims. In addition,
Congress could impose a revenue-raising measure on the nuclear industry to
pay such claims.
The co-owners of Peach Bottom and Salem maintain property insurance
coverage in the aggregate amount of $2.8 billion for each unit for loss or
damage to the units, including coverage for decontamination expense and
premature decommissioning. The Company is self-insured, to the extent of
its ownership interest, for its share of property losses in excess of
insurance coverages. Under the terms of the various insurance agreements,
the Company could be assessed up to $3.7 million in any policy year for
losses incurred at nuclear plants insured by the insurance companies.
The Company is a member of an industry mutual insurance company, which
provides replacement power cost coverage in the event of a major accidental
outage at a nuclear power plant. The premium for this coverage is subject
to retrospective assessment for adverse loss experience. The Company's
present maximum share of any assessment is $1.3 million per year.
Other
- -----
On February 6, 1997, a major customer of the Company filed a lawsuit in the
Delaware Superior Court alleging negligence and breach of contract against
the Company in relation to electric system outages that occurred on March
28, 1996 and May 14, 1996. The complaint asks for actual damages in excess
of $41 million and for special and punitive damages in unspecified amounts.
The Company believes that its insurance will cover any amounts awarded in
this lawsuit in excess of $1 million for each outage. There is $2 million
included in the Company's current liabilities as of December 31, 1996 and
March 31, 1997 for claims related to the outages. The Company cannot
predict the outcome of this lawsuit.
5. Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share,"
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 simplifies the standards for computation
of earnings per share and makes them comparable to international earnings
per share standards. The Company expects that its earnings per share will
not change materially due to SFAS No. 128.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Earnings Summary
- ----------------
Earnings per share were $0.40 for the three months ended March 31, 1997,
compared to $0.54 for the three months ended March 31, 1996. The earnings
decline was due primarily to lower electric and gas revenues, net of fuel
costs. Heating degree days were 15% below last year, reflecting one of the
mildest winter heating seasons in recent history. As a result, electric
and gas sales in the weather-sensitive residential customer class were
adversely impacted. Sales to residential electric and gas customers
decreased by 11% and 14%, respectively. Earnings also were reduced by
marketing, branding, and other costs related to activities intended to
strategically position the Company for competition in retail energy
markets. The earnings decrease was mitigated by lower costs for the
outages of the two units at Salem; however, the outages reduced earnings in
both reporting periods. The Salem outages decreased earnings per share by
approximately $0.03 in the first quarter of 1997 compared to $0.08 in the
first quarter of 1996.
Refer to "Salem Nuclear Generating Station" in Note 4 to the Consolidated
Financial Statements for information concerning a settlement of the
Company's lawsuit against Public Service Enterprise Group, Inc. and PSE&G.
Electric Revenues
- -----------------
Details of the changes in the various components of electric revenues for
the three months ended March 31, 1997, as compared to the same period in
1996 are shown below (dollars in millions):
Non-fuel (Base Rate) Revenues $(9.5)
Fuel Revenues 9.3
Interchange Delivery Revenues 2.6
Merchant Revenues 12.1
-----
Total $14.5
=====
Non-fuel revenues decreased $9.5 million primarily due to the 11% decrease
in residential electric kilowatt-hour (kWh) sales attributed to milder
winter weather. Additional sales from a 1.2% increase in the number of
electric customers partially mitigated the non-fuel revenue decrease.
Fuel revenues increased $9.3 million because retail electric fuel rates
were increased to recover previous under-collections of fuel costs. Fuel
revenues, or electric fuel costs billed to customers, generally do not
affect net income, since the expense recognized as fuel costs is adjusted
to match the fuel revenues. The amount of under- or over-recovered fuel
costs is deferred until it is subsequently recovered from or returned to
utility customers.
Interchange delivery revenues increased $2.6 million mainly due to lower
sales demand in the Company's service territory, which made more of the
Company's kWh output available
-9-
for sale to other utilities in the PJM Interconnection. Interchange
delivery revenues reduce the rates charged to customers under fuel
adjustment clauses and, thus, generally do not affect net income.
Electric merchant revenues, which are not subject to price-regulation,
increased $12.1 million due to efforts of the Company's new merchant group
to sell power in competitive markets. The margin provided by electric
merchant revenues in excess of related energy costs is relatively small due
to the competitive nature of bulk commodity sales.
Gas Revenues
- ------------
Total gas revenues increased $10.4 million due to a $7.1 million increase
in merchant revenues and a $5.3 million increase in fuel revenues, partly
offset by a $2.0 million decrease in non-fuel revenues. Gas merchant
revenues include off-system gas sales, fees earned for release of pipeline
capacity, and other services. Under the Company's gas tariffs, 80% of the
margin (revenues net of fuel costs) earned from merchant revenues reduces
fuel rates for firm customers.
Gas fuel revenues increased $5.3 million because fuel rates were raised to
recoup previous under-recoveries of fuel costs.
Non-fuel revenues decreased $2.0 million mainly due to a 14% decline in
residential gas sales which resulted from significantly milder winter
weather than last year's colder than normal winter. The non-fuel revenue
decrease was partly offset by additional sales from a 2.6% increase in the
number of gas customers.
Other Services Revenues
- -----------------------
Total revenues from "other services" (as discussed in Note 1 to the
Consolidated Financial Statements) increased from $14.8 million to $27.4
million principally due to acquisitions in late-1996 and the first quarter
of 1997 of companies which provide heating, ventilation and air
conditioning (HVAC) and plumbing services. The acquired companies are part
of Conectiv Services, Inc., a new subsidiary named after Conectiv--the
holding company which will own Delmarva Power and Atlantic Energy, Inc.
upon consummation of the merger. The companies which Conectiv Services,
Inc. acquired are located in Delaware, Maryland, and Pennsylvania. The
Company expects that the services marketed by Conectiv Services, Inc. will
help build customer relationships and brand recognition, leading customers
to choose the Company as their energy supplier when such choice is
available.
As discussed under "Additional Regulatory Matters" in Item 5 of Part II,
legislation has been introduced in Delaware which would prohibit the
Company from actively engaging in HVAC and certain other activities. If
the legislation becomes law it could have a material adverse impact on the
Company's growth strategy. However, should the Company be required to exit
HVAC and other activities addressed by the legislation, the Company
believes that exit costs would not materially affect the Company's
financial position. While the Company cannot predict whether this
legislation actually will become law, the Company actively opposes the
proposed legislation.
-10-
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Electric fuel and purchased energy expenses increased $21.1 million, net of
a $1.8 million decrease from lower fuel-related costs associated with the
Salem outages. The increase in electric fuel and purchased energy expenses
was due primarily to variances in energy costs deferred and subsequently
recovered or expensed under the Company's fuel adjustment clauses.
Electric fuel and purchased energy expenses also reflect a decrease from
lower purchased energy prices which was offset by an increase from greater
volumes of energy purchased for subsequent resale off-system.
The kWh output required to serve load within the Company's service
territory is substantially equivalent to total output less interchange
deliveries. For the three months ended March 31, 1997, the Company's
output for load within its service territory was provided by 34.7% coal
generation, 27.4% net purchased power, 28.1% oil and gas generation, and
9.8% nuclear generation.
Gas Purchased
- -------------
Gas purchased increased $12.0 million primarily due to higher average
prices and also due to variances in energy costs deferred and subsequently
recovered or expensed under the Company's fuel adjustment clauses.
Operation and Maintenance Expenses
- ----------------------------------
Excluding a $3.4 million decrease in expenses related to the Salem outages,
operation and maintenance expenses increased $19.9 million. Acquired HVAC
service companies, which generated the increase in revenues from "other
services," comprised most of the operation and maintenance expense
increase. Also, start-up costs related to the Company's plans to provide
retail phone service and sell energy in deregulated retail markets, and
other miscellaneous expenses, contributed to the operation and maintenance
expense increase.
Financing Costs
- ---------------
Financing costs reflected in the consolidated income statement include
interest charges, allowance for funds used during construction, dividends
on preferred securities of a subsidiary trust, and dividends on preferred
stock. Financing costs increased $2.0 million mainly due to higher
interest charges from the issuance of $124.2 million of Medium-Term Notes
in February 1997 and higher miscellaneous interest expenses. On an after-
tax basis, the increase was partly offset by $0.4 million of savings from
the refinancing of $78.4 million of preferred stock in late-1996.
-11-
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities decreased from $79.6 million to
$72.0 million primarily due to the timing of payment of operating expenses
and lower residential energy sales. The decrease in cash from operations
was mitigated by higher fuel revenues.
Capital and acquisition expenditures increased from $29.4 million to $48.6
million principally due to expenditures for the acquisition of HVAC
service companies and construction of telecommunication assets. The
telecommunication assets under construction include a network operations
center and a five-mile fiber optic ring that will be accessible to 35 of
the largest office buildings in the City of Wilmington, Delaware. The
HVAC and telecommunication expenditures are classified as "nonutility
property, net" on the consolidated balance sheet.
In February 1997, the Company issued $124.2 million of unsecured Medium-
Term Notes with maturities of 10 to 30 years and interest rates of 7.06%
to 7.72%. The proceeds were used to refinance short-term debt. On the
consolidated balance sheet as of December 31, 1996, $77.0 million of
short-term debt was reclassified to long-term debt in order to recognize
the amount of short-term debt which had been refinanced with Medium-Term
Notes as of February 7, 1997. Thus, balances as of March 31, 1997 compared
to balances as of December 31, 1996 reflect a $47.2 million increase in
long-term debt and a like decrease in short-term debt for the portion of
the refinancing which occurred after February 7, 1997.
Primarily due to the issuance of the Medium-Term Notes, long-term debt and
variable rate demand bonds as a percent of total capitalization including
variable rate demand bonds increased from 47.5% as of December 31, 1996 to
48.4% as of March 31, 1997.
In the first quarter of 1997, the Company raised $6.4 million by issuing
shares of common stock through the Dividend Reinvestment and Common Share
Purchase Plan (DRIP). In contrast, the Company did not raise cash through
the DRIP during the first quarter of 1996 since shares were purchased in
the open market to satisfy the plan's needs.
On March 31, 1997, the Company filed a shelf registration with the
Securities and Exchange Commission (SEC). The shelf registration is for
the issuance of up to $250 million, in the aggregate, of common stock,
preferred stock, Medium-Term Notes, and First Mortgage Bonds. The
proceeds primarily will be used for financing the capital requirements of
the Company, including capital and acquisition expenditures, and
refinancing or redeeming the Company's outstanding long- and short-term
securities.
-12-
Ratio of Earnings to Fixed Charges
- ----------------------------------
The Company's ratios of earnings to fixed charges and earnings to fixed
charges and preferred stock dividends under the SEC Method are shown
below:
12 Months
Ended
March 31, Year Ended December 31,
------------------------------------
1997 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
Ratio of Earnings to:
Fixed Charges 3.06 3.33 3.54 3.49 3.47 3.03
Fixed Charges, as Adjusted (1) - - - 3.74 - 2.78
Fixed Charges and Preferred
Stock Dividends 2.67 2.83 2.92 2.85 2.88 2.51
Fixed Charges and Preferred
Stock Dividends, as Adjusted (1) - - - 3.05 - 2.30
(1) Adjusted ratios reflect the following pre-tax amounts: for 1994, the
exclusion of an early retirement offer charge of $17.5 million; and for
1992, the exclusion of the gain from the Company's share of the settlement
reached in a lawsuit of $18.5 million.
Under the SEC Method, earnings, including Allowance for Funds Used 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.
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (Litigation Reform
Act) provides a "safe harbor" for forward-looking statements to encourage
such disclosures without the threat of litigation, provided those
statements are identified as forward-looking and are accompanied by
meaningful, cautionary statements identifying important factors that could
cause the actual results to differ materially from those projected in the
statement. Forward-looking statements have been made in this report.
Such statements are based on management's beliefs as well as assumptions
made by and information currently available to management. When used
herein, the words "will," "anticipate," "estimate," "expect," "objective,"
and similar expressions are intended to identify forward-looking
statements. In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, factors
that could cause actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following: deregulation and the unbundling of energy supplies and
services; an increasingly competitive energy marketplace; sales retention
and growth; federal and state regulatory actions; costs of construction;
operating restrictions; increased costs and construction delays
attributable to environmental regulations; nuclear
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decommissioning and the availability of reprocessing and storage
facilities for spent nuclear fuel; and credit market concerns. The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events
or otherwise. The foregoing review of factors pursuant to the Litigation
Reform Act should not be construed as exhaustive or as any admission
regarding the adequacy of disclosures made by the Company prior to the
effective date of the Litigation Reform Act.
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PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- -------------------------
Refer to "Salem Nuclear Generating Station" in Note 4 to the Consolidated
Financial Statements for updated information concerning the Company's
lawsuit against Public Service Enterprise Group, Inc. and PSE&G.
Refer to "Other" in Note 4 to the Consolidated Financial Statements for
information concerning a lawsuit filed against the Company by a major
customer.
Item 5. Other Information
- -------------------------
Delaware Depreciation Filing
- ----------------------------
As previously reported, the Company requested an increase in electric
depreciation rates of $868,499 or an 0.18% revenue increase on a Delaware
retail basis while the staff of the Delaware Public Service Commission
(DPSC) requested an $18 million decrease in system electric depreciation
expense from current rates. On April 28, 1997, the DPSC approved a
settlement effective July 1, 1997, which resulted in no net change in the
total amount of depreciation expense for the Delaware electric retail
jurisdiction.
Additional Regulatory Matters
- -----------------------------
As previously reported, as a result of the Company's entry into certain
other services, or "competitive activities," in the jurisdictions in which
it provides utility service, certain interested trade groups have raised
questions concerning whether cross-subsidization is occurring between the
Company's regulated utility activities and these competitive activities,
and whether the Company is benefiting from an unfair competitive advantage
due to its involvement in both competitive and regulated utility
activities. The Company has cost allocation and direct charging mechanisms
in place to ensure that there is no cross-subsidization of its competitive
activities by regulated utility activities. At the end of February, the
Company filed an application requesting the DPSC to approve a Cost
Accounting Manual (CAM), which describes these accounting procedures. The
Company's CAM filing also includes a proposed Code of Conduct governing the
Company's regulated utility activities and its competitive activities. The
Company believes that the proposed CAM and the Code of Conduct are fair and
reasonable approaches to addressing concerns regarding any apparent
opportunity for unfair competitive advantage.
Additionally, legislation was introduced in the Delaware General Assembly
in April 1997 which would bar the Company (and any affiliate) from
controlling, acquiring control or continuing to control any "Unregulated
Energy Services Subsidiary," defined to include heating, ventilation and
air conditioning (HVAC) installation and maintenance, certain
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electrical connection services, plumbing, pipefitting, propane sales,
petroleum sales, mechanical contracting and appliance sales and service.
Under the proposed legislation, while the Company would be permitted to own
or hold voting securities or other equity interests, it would not be
permitted to perform management services under contract with a subsidiary
or share resources, employees, overhead, administrative or support costs.
If the legislation becomes law, it could have a material adverse impact on the
Company's growth strategy. However, should the Company be required to exit
HVAC and other activities addressed by the legislation, the Company
believes that exit costs would not materially affect the Company's
financial position. While the Company cannot predict whether this
legislation actually will become law, the Company actively opposes the
proposed legislation.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibits
- --------
Exhibit 12-A, Computation of Ratio of Earnings to Fixed Charges
Exhibit 12-B, Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
A Report on Form 8-K dated January 28, 1997, which updated matters related
to Salem Units 1 and 2 previously reported, was filed with the SEC.
A Report on Form 8-K dated January 31, 1997, which (a) reported the
results of the vote by the stockholders of the Company and Atlantic
Energy, Inc. on the planned merger of the two companies, and (b) updated
matters related to Salem Units 1 and 2 previously reported, was filed with
the SEC.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delmarva Power & Light Company
------------------------------
(Registrant)
Date: May 14, 1997 /s/ B. S. Graham
------------------- ------------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Page
Number Number
------- ------
Computation of ratio of earnings to fixed charges 12-A 19
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 20
Financial Data Schedule 27 21
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